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Energy shortage, energy transition and network infrastructure force choices

July 7, 2022

The Rutte IV cabinet is fully committed to Climate & Energy. With Rob Jetten, a special minister has been appointed and a Climate & Transition Fund of 35 billion euros is available. This climate fund applies for the next 10 years and is complementary to the SDE++ scheme. The fund is used to build the necessary energy infrastructure (electricity, heat, hydrogen and CO2), to realize the green industrial policy and to make mobility and the built environment more sustainable.

The government wants to stimulate the supply of renewable energy sources; offshore wind, rooftop solar, geothermal, green gas and aquathermal. The production and import of hydrogen will be scaled up.

The reality of the ongoing war in Ukraine is causing formulated ambitions to come under pressure and potentially painful choices to be made.

Energy shortage, energy transition and network infrastructure force choices
Source: central government, JBR analysis. Click on image for readability.

 

War in Ukraine

On Thursday, February 24, the Russian invasion of Ukraine began, causing, in addition to much humanitarian suffering, rising energy prices (oil and gas). Due to the strong increase in demand for raw materials, energy prices had been high for some time, but the war in Ukraine has added a hefty chunk to this.

As a result of these sharply increased prices, the Dutch cabinet is forced to cushion the loss of purchasing power for Dutch citizens, among other things by reducing the excise duty on fuel, the VAT rate on energy and an extra financial injection for the lowest incomes.

Europe-wide awareness has arisen that Europe must become independent of Russia and must therefore reduce imports of Russian oil and gas. This can be done by increasing domestic production, using LNG from, for example, the United States or the Middle East, exploiting new fields (e.g. in the North Sea) and keeping existing coal-fired and nuclear power plants operational. With the current high energy prices, oil and gas fields that previously seemed unprofitable (e.g. small oil and gas fields in the southern North Sea) are nevertheless attractive to bring into production.

In the meantime, there is an agreement to phase out Russian coal and oil. In response, Russia has also taken countermeasures and reduced or stopped the supply of gas to a number of countries, including part of the Netherlands. The main reasons for this are the unwillingness to pay the gas bill in Rubles (demand set) and claimed delivery problems around essential components.

In Europe, agreements have been made on filling gas storage facilities in individual member states. By November 1, 2022, the capacity of the member states must be filled to at least 80%, although there are clauses allowing the filled capacity in individual countries to be lower. The Dutch government has decided to increase the import capacity of LNG (liquefied natural gas). Tenders have also been issued for filling the largest Dutch gas storage facility, Bergermeer, and it has been decided that the three Dutch coal-fired power stations may again operate at full power (was a maximum of 35%). Gas from the Groningen gas field is not yet being used, but it will be kept in reserve (pilot light) if the situation deteriorates and the security of supply to households, hospitals and businesses comes under serious pressure.

Energy transition

In addition to the measures mentioned above to reduce dependence on Russian energy, Europe is committed to accelerating its energy transition, making it less dependent on fossil fuels. The Dutch government wants to accelerate the insulation of houses, tighten the energy saving obligation for companies, scale up the production of green gas and accelerate the installation of solar energy and offshore wind.

On Friday, March 18, the Dutch cabinet presented a plan to double the planned wind at sea capacity, to 21 GW around 2030. To this end, three new areas have been confirmed, following two previously designated areas (a total of five areas).

However, it is questionable whether Dutch grid companies and installers have sufficient capacity to shape some of this acceleration. For example, in early June 2022, TenneT announced that there will be a temporary stop for new companies and entities seeking a connection to the electricity grid in North Brabant or Limburg.

Dutch electricity grid

Before this crisis began, the shortage in the electricity network was already considerable, due in particular to the increased transmission capacity required to feed into the network generation from renewable energy sources such as wind and solar power. The electrification of industry and transport is also demanding more and more transmission capacity.

Network companies are working hard to expand and strengthen their networks, but this is not yet happening fast enough. This is causing congestion on the grid, so that in some areas large consumers can no longer be connected.

In addition, permit procedures often take a long time, so expansion takes some time. All network companies have presented plans to make substantial investments in their regional networks over the next 10 years and to reinforce and expand them.

In order to realize the work and to accelerate it where possible, network operators need (large numbers of) technical personnel. Currently, this personnel is scarce in the Netherlands. This is partly due to the high demand for personnel, partly due to outflow (retirement) and too little inflow.

Other barriers to acceleration include lack of space, lead time for obtaining the proper permits, and scarcity of essential raw materials. The price of several commodities were already on the rise before the war in Ukraine and have only increased further due to the war.

The tightness of the labor market and the lack of technically skilled personnel are severely limiting to what can ultimately be realized.

When realizing new connections, the 'first-come first-served' principle applies; in other words, network operators have a duty to realize connections in order of arrival. When expanding the network, network operators apply priority frameworks, which also follow the 'first-come first-served' principle as much as possible.

With increasing scarcity of transport and the great demands on network operators in the coming years, the question is whether this principle can continue to be applied or whether other consideration frameworks need to be drawn up.

Conclusion

It is expected that we will continue to face higher energy prices in the coming period. Current network congestion, labor shortages and scarcity of raw materials raise the question of the extent to which the energy transition can be accelerated.

If energy prices remain structurally higher and the security of supply is threatened, there will be increased social pressure to open the Groningen gas field. In addition, pressure may eventually increase to normalize the relationship with Russia in exchange for peace and the supply of energy. There will also be a broader discussion about nuclear energy as a long-term solution.