Power play: Europe’s energy transition and ownership structures | The Pulse by GRESB

In this episode of The Pulse by GRESB, we bring you an in-depth conversation on the latest analysis by Asset Impact into the EU power sector. This discussion kicks off by looking at a landmark report released by the European Central Bank, which identified the power sector as a key driver of misalignment between banks’ financing and EU climate goals. Our expert guests this week are Noemie Klein, Chief Impact Officer at GRESB, and Alex Clark, Research Director at Asset Impact. They delve into who ultimately owns power assets in the EU, emission trajectories, and the outlook for the sector until 2030, revealing some surprising results. Tune in for a comprehensive analysis and gain valuable insights into dynamics at play as the EU power sector decarbonizes. Watch the episode below.

To dive into the full analysis, access the report here.

Can’t listen? Read the full transcript below. Please note that edits have been made for readability.

Noémie: Hello everyone. This is Noémie Klein and I’m Chief Impact Officer at GRESB. Today on The Pulse by GRESB, Alex Clark, our Asset Impact Research Director, and I are going to discuss the alignment or rather the misalignment of European banks with the decarbonization targets set out under the Paris Agreement.

Alex: Thank you, Noémie It’s a pleasure to be here. Before we dive into the analysis that we did with our own data, can you just walk us through what’s new and interesting about the ECB’s recent report?

Noémie: Sure. So in this report, it’s the first time that the ECB has assessed the gap between European banks credit portfolios and the Paris Agreement. The analysis itself is new, but the report really marks the continuation of the ECB getting tougher on European banks, in relation to financing the net zero transition.

What did the ECB do in this report? Using our data, so the asset impact data, they found that 90 percent of European banks are misaligned with the Paris Agreement over the next five years — 90%. This means that companies that EU banks supply credits to do not transition fast enough towards low carbon production.

And this in turn means that this company’s competitiveness might suffer and simply put, they might struggle to pay back their loans. And in addition to this increase in default risk, it can lead to other significant risks such as legal risk and reputation risk for the banks. Especially to banks that publicly committed to net zero, which is many of them.

Alex: So clearly these findings are quite significant. What does the ECB identify as the main call to action for the banks that are called out in this report?

Noémie: The ECB calling on the banks to manage the transition risk they face, just as they do for any other material risk. And this goes hand in hand with the ECB’s role to assess banks compliance with, Pillar 3 disclosures requirements, for example, including on finance emissions and on, alignments. And for the disclosure of the alignment of banks credit portfolio, the ECB stated, in its report that the methods set out in this report, provide a concrete approach for banks to follow in meeting these requirements.

And this is timely as these requirements will kick in at the end the year.

Alex: So, just finally, before we move into the analysis that we did on our end, what would you say are the biggest challenges that banks in the EU face in addressing the recommendations of the report?

Noémie: So I guess it applies to banks in the EU, but also banks more globally, when they wish to assess the alignment of their portfolio with low carbon trajectories, it’s really to access forward looking data that is reliable, consistent and comparable for all the companies across their portfolio, so that they can have an accurate picture of how their portfolio and the associated carbon profile will evolve over the next few years.

And at the moment, it’s hard for the banks to know where they stand. It’s not new, but it comes up time and time again, and the way the ECB decided to address this issue, when they looked at the bank they supervise in the EU, is to use Asset Impact’s forward-looking, bottom-up, production based data. So that’s a lot of words, but we’ll look into what that means.

Combined with the PACTA alignment methodology, which is managed by the think tank RMI. And they use the data and this methodology to compare the projected production of the companies in the portfolio over the next five years, or the emissions intensity, depending on the sectors that is being assessed, and the required rate of change to meet climate objectives.

And our data is well suited for that because it’s bottom up. And it uses asset-level CAPEX plans, as opposed to top down companies self reported plans or ambition. And the ECB deemed this data to help prevent greenwashing, as we only include CAPEX plans backed by strong and published evidence. And we do this work for each and every physical asset of the companies in the portfolio of the banks, of course, the assets that we include in our database.

As you said before, our data can be used for a lot of use cases. And, today you’re going to walk us through an analysis that we did for the power generation sector in the EU. And this is one of the many analysis that we can do with our, data. So my turn to ask you some questions.

And first for you to tell us what you did with our data in this new analysis.

Alex: Thank you very much Noémie for the overview of the ECB report. So, as you pointed out, we have a database that not only identifies physical assets and where they are, but also who owns them, not just directly, but all the way up the company-ownership tree. So, what we thought we would do as a sort of companion to the ECB analysis is to, undertake an analysis of the EU power sector, that I want to stress is complementary.

It’s not exactly the same for reasons I’ll explain in a second. That helps us take a closer look at what power generation and emissions trajectories in particular within the EU look like. So the scope of the analysis that I’ll describe is power plants that are physically located in the 27 countries of the EU.

Most of these are owned by EU-domiciled companies, but not all of them. We do include some companies that hold shares in EU assets that are not based within the EU. We look at generations and emissions separately, and whenever I’m talking about a company in the next few minutes, I’ll be talking about the company right at the top of the corporate ownership tree.

To illustrate, a typical power plant can be owned by one corporate entity, but in turn that entity can be owned by another, and so on and so forth, all the way up to, for example, a major public company. . Whenever I’m talking about the portfolio of assets owned by a company, I’m talking about not just those it owns directly, but all of the assets it owns through its subsidiaries, and its affiliates as well.

So we decided to look at the power sector in particular because, in the ECB’s report, it stands out as one of the main culprits behind misalignment of bank lending.

And this is mostly due to a lag in phasing out carbon intensive technologies, as well as insufficient lending for building out renewable energy. So while we don’t have access to banks lending portfolios, at least as an initial entry point, we thought the power sector would be a very interesting, subject to look at.

Noémie: Thank you, Alex, for introducing this analysis. And what did you find out in this assessment of the power sector?

Alex: So we looked at the large electricity generators, based on the ultimate owners of underlying power plants, as well as the largest emitters. And I want to stress that these are often not the same companies, or at least not in the same order. First thing to say is that just 100 electricity generators in total produced 60 percent of all of the electricity generated in the EU, which is about 1, 500 terawatt hours this year.

And then the largest 100 emitters are expected this year to produce about 360 million tons of carbon dioxide equivalent, which is 62 percent of the total.

We also use generation figures because power capacity in terms of megawatts, gigawatts, etc. is not a reliable indicator of actual electricity produced, given that, you know, a gas plant will typically operate 80 percent of the time, while a solar farm is not very likely to produce its maximum power output more than about 20 percent of the time.

So whenever I’m talking about generation, I’m talking about actual electricity. And, in our analysis, we looked at this year, 2024, but we also track how things change between now and the end of this decade. As I think you mentioned earlier, Noémie our database is designed to be forward looking and conservative as well, such that if a company has said it will build, certain renewable energy plants, we won’t consider those as worthy of inclusion in our data set until we have a clear start date for the operations of that plant, which typically happens after the close of financing and several other major steps have been taken.

I’d say some of the higher level findings that we’ve got are that power generation assets that are physically located within the 27 countries of the EU will generate in total just under 600 million tons of carbon dioxide in direct emissions, so scope one emissions only this year, and that this falls by about a third to 400 million tons in 2030, which actually matches external estimates by the non-profit EMBER as well as being consistent with the projections of the International Energy Agency from a couple of years ago.

And the average emissions intensity that we find across power assets in Europe is about 230 grams a kilowatt hour. Which again compares to EMBER’s estimate of 240 from last year. And given this, emissions are already on a downward trend, that suggests our data is remarkably close to published external figures.

When we’re looking at geographic concentration, about a third of the emissions from power plants in the EU are attributed to companies that are based in just four large countries: Germany, Italy, Poland and France. Although these countries do constitute about half of the EU population.

So, that does suggest that companies based in those countries do actually produce cleaner electricity per capita than the EU as a whole. And then when you add companies based in Spain, Czechia, the US, the UK, and Bulgaria, you’re now looking at half of all emissions. So it’s relatively, concentrated.

And what we can also say from our data is that at least two-thirds of EU emissions are linked to companies based in Europe, and potentially quite a lot more than that, and the only reason I say that is because we have a fairly large share of renewable capacity that’s tagged as unknown.

And while we, of course, don’t know exactly who owns this capacity, it’s very likely to be small-scale-distributed rooftop solar, for example, that at scale is quite a large contributor, but doesn’t have corporate owners per se..

Noémie: Sticking with this top 20 for a moment, what can you tell us about where they’re generating their electricity from?

Alex: Well, unsurprisingly, nearly all of those governments in the top 20 generate most of their electricity in 2024 at least, from low carbon sources. And I say this is unsurprising because, particularly the large sources of, zero or low carbon electricity such as hydroelectricity and nuclear are very capital intensive and very often needs government support or intervention or ownership to be viable in the first place.

And so it is with the portfolios owned by the governments of France, of Sweden, Finland, Czechia, Bulgaria, Romania, and so on and so forth. There are a couple of exceptions though, which are much more carbon intensive in terms of the government owned portfolios. And these are Poland, which is about 80 percent coal at the moment.

Germany, which is about a third coal and half gas. And perhaps surprisingly, Ireland, which is a fifth coal and about half gas as well. And one of the other interesting findings and one that’s, a little bit worrying is that renewable power, and what I mean by that is mostly solar and wind, is only a major contributor to the generation portfolios owned by the governments of Sweden, Denmark and Ireland, and also the Chinese government, which does own power generating assets within the EU as well.

But one of the key distinctions that is important to make and that our data shows very clearly is that the largest generators are not necessarily the largest emitters. So, in the case of the government of France, the major, entity that actually owns all of the power assets is Electricite de France, EDF.

Which has an enormous nuclear fleet, but a carbon intensity of only about 50 grams per kilowatt hour, which is less than a quarter of the EU average owing to the centrality of nuclear in its operations. Whereas in Poland, the state-owned enterprise PGE has a coal heavy fleet, which averages closer to four times the average at almost one kilogram per kilowatt hour generated.

And there are other firms which kind of lie between those two extremes, but, this just illustrates that, you do see a huge amount of variation just within this small sample way at the top.

Noémie: You’ve made clear how central governments have a key participation in the European power sector. Do you see any private actor that is also playing an important role?

Alex: Well, actually, yes. So among the top 20 emitters that don’t feature among the largest generators, we actually found two large private equity firms, which are PPF Investments, based in the UK, and Riverstone Holdings, which is based in the US. And when you dig down into the asset-level data, you see that both of these firms own power plant fleets with emissions intensities that actually exceed a kilogram per kilowatt hour, and they are both dominated by coal, over 90 percent in both cases. In Riverstone’s case, most of these emissions come from coal plants in Germany and the Netherlands, and for PPF investments, it’s almost all coal plants in Germany.

When we looked at PPF’s holdings in other sectors across our database, we also found that they own interests in German lignite mines as well.

Noémie: How do you see this picture changing from now to 2030?

Alex: So when we look at the evolution of the EU power sector over the next six years, we see that generation increases by about 3 percent which makes sense. It’s there to meet increasing demand. But at the same time, average emissions intensity falls from about 230 grams per kilowatt hour this year to about 150 in 2030, and at the same time we see a third, less absolute emissions per year.

And if you look at the technologies underlying this, coal generation declines by almost 60 percent, with the total EU fleet falling from about 95 gigawatts at present to 40 gigawatts, and then gas generation remains roughly the same, and unsurprisingly renewable generation increases by almost 50 percent.

These sound like exciting and positive figures, but as the ECB’s report underlines and an analysis elsewhere really backs up, this is nowhere near enough. Several independent sources have said that the EU must phase out coal entirely by 2030, not simply reduce it by just over half, and to fully decarbonise this electricity sector by the middle of the 2030s.

Based on the data that we’ve got, we’re making progress in the right direction. But, it’s, clearly, nowhere fast enough, which is reflected in the ECB’s own analysis.

Noémie: Thank you, Alex, for taking us through the intricacy of the European power sector. And we started this episode with the ECB report, so coming back to this, what does your analysis mean for the banks assessed in the ECB report?

Alex: I think it’s clear from our analysis, which is consistent with the ECB’s own findings, that there is still a significant degree of misalignment between where the power sector is heading and where it needs to be heading.

And since banks are a major enabler of new financing, of refinancing of existing assets through their lending portfolios, not only do they have exposure to this misalignment, but they also have a significant task ahead of them in enabling the decarbonization of the power sector. Something that our analysis has highlighted is the role of governments, and that’s not something that typically makes its way into popular discourse, and that certainly introduces some additional complications, because lending to governments is quite different from lending to individual companies.

But having said that, one of the difficulties that banks have faced to date and they still face now is that it’s very, very difficult to get hold of the detailed asset based data that you need to understand what your exposures are as a lender. Even before they’re in a position to start managing them appropriately and making sure that they are aligned with the climate policy requirements of the EU.

So I think if anything, this analysis makes even more clear how important it is to be able to access asset-based, internally consistent, forward looking, and most importantly transparent data, if you’re a bank trying to figure out how to decarbonize your lending portfolio.

Noémie: And with that, that’s about all the time we have for today’s episode of The Pulse. Thank you, Alex, for taking the time to join me and sharing your expertise about the ECB report and the misalignment of banks with low-carbon trajectories.