Developments within society and the energy market
Geopolitics and the energy transition
The energy transition is currently in full swing. At the same time, the geopolitical situation is placing the affordability and availability of all forms of energy under considerable pressure. The limited availability of natural gas and other raw materials and the high energy prices are eroding the very foundations of our existing energy system. Security of supply, affordability and indeed sustainability are all under pressure. To compensate for the fall in purchasing power, the government established a ceiling for gas and electricity prices.
The limited availability of natural gas also has an accelerating effect on the energy transition. We are currently witnessing an increase in demand for electrification of industrial business processes and heat. For example, in 2022 we saw a factor 4 increase in the number of potentially interested customers for electrification, and a factor 2.5 increase in electrification capacity demand, relative to the same period in 2021. In addition, total capacity of solar panels on the roofs of residential properties in the Stedin area increased by 34% in 2022.
Sufficient grid capacity
The challenge of ensuring sufficient capacity on the electricity grid is growing and becoming more and more visible. Gird capacity influences discussions about financing, heat grids, zoning issues and regional development plans. In 2022, the capacity limits of TenneT’s high-voltage grid came into view. The shortage of transmission capacity on that grid also affected heavy-use electricity consumers in Stedin’s service area. Pending the outcome of TenneT’s congestion management study, new requests from customers in the Port of Rotterdam area, on Goeree-Overflakkee and in the province of Utrecht are placed on a waiting list. Stedin did not announce a new congestion area for its own regional grid in 2022. The new congestion management code creates extra opportunities for grid managers in sections where the grid has reached full capacity to respond flexibly to electricity demand and supply until the grid has been expanded.
In its analysis of the coalition agreement, Netbeheer Nederland emphasised that in order to ensure effective grid capacity management in the years ahead, central government policy on programming and prioritising sustainability improvements will have to be worked out in further detail. It will also remain essential to take account of system and infrastructure costs right at the start of planning for sustainability projects. This applies both to subsidy applications and property development projects.
In order to create more room in the grid, in late December the grid managers, the ACM, public authorities, market parties and the Ministry of Economic Affairs and Climate Policy, led by special coordinator Ben Voorhorst, presented the National Grid Congestion Programme (LAN). The measures proposed to provide the required additional room in the grid include speeding up grid reinforcement, introducing new regulations to stimulate the smart use of the electricity grid and promoting flexibility in energy consumption patterns. These steps, as proposed in the LAN, are not new to Stedin; indeed, we have already incorporated them in our new strategy. While it is great to see that the national approach and our own largely overlap, following up on the actions set out in the LAN remains quite a challenge and we will prepare for that in 2023.
Progress in the energy transition
Large-scale and sustainable generation largely depends on wind and solar farms. On-shore generation of energy remains quite controversial, especially as plans become more concrete. The Regional Energy Strategies (RES), which are important for the planning of large-scale generation by region, strongly favour rooftop solar projects over large solar projects on land. As rooftop solar projects can be carried out without a permit being required, they are rather difficult to predict for Stedin.
The built environment is and will remain a complex playing field, given the diversity of buildings and stakeholders, as well as the often high costs of enhancing sustainability. We are working on a method to calculate the impact of such new plans on our grids. Practically all municipalities now have a Heat Transition Vision (Transitievisie Warmte). Some have now begun to implement them on a local neighbourhood scale, but their number is still quite limited. At the same time the electrification of industry has really taken off, driven in part by high fuel prices. Likewise, various developments in greenhouse horticulture are having an impact on the electricity grid. More and more commercial growers are placing solar panels on the roofs of their greenhouses, are installing electric boilers, have decided to discontinue their cultivation activities or are using their CHPs to feed electricity into the grid. In terms of mobility, the continuing increase in electric transport is very much in evidence. Private car sales are breaking one record after another, but small-scale electric goods transport is also on the rise. While the EU agreed to ban the sale of new petrol and diesel cars effective 2035, the Netherlands actually advanced the deadline to 2030. We are also seeing an increase in the electrification of public and other bus transport. The charging infrastructure is growing rapidly, and in several locations we are successfully utilising smart charging to avoid or postpone grid reinforcements.
After the EU had further raised the bar of its climate ambitions in 2021 and the European Commission (EC) had presented its Fit for 55 package of measures, in 2022 several measures were drawn up to reduce dependence on Russian fossil fuels as quickly as possible. For example, through its REPowerEU proposal the EC has raised the energy saving ambitions in the Fit for 55 package from 9% to 13% by 2030, and the sustainable energy generation ambitions from 40% to 45% by 2030.
In 2022, the Dutch government converted part of the EU’s Fit for 55 package into a draft national policy for various different sectors. This national policy will be definitively adopted once all discussions about the package have been finalised, also at the European level. In its 2021 coalition agreement, the Dutch government stated its intention to raise the Climate Act CO2 reduction target for 2030 to at least 55% relative to 1990 and expressed the ambition to focus its policy on an even higher reduction target of 60%. Together with the joint grid managers, we incorporated these ambitions into energy scenarios, which serve as the basis for our investment plan. As the extent of the impact will become clear in the course of 2023, we will also be able to calculate the acceleration required in the expansion of our grid. In its 2022 Climate and Energy Outlook, the Netherlands Environmental Assessment Agency pointed out that the Netherlands is not going to achieve these targets. Based on existing and proposed policies, by 2030 the Netherlands will have achieved a 39% to 50% reduction in CO2 emissions relative to 1990.
Grid managers Alliander, Enexis and Stedin, their respective shareholders and the State have held intensive consultations about the financial and other consequences of all the investments required. Together with Alliander and Enexis and in close collaboration with our shareholders, we have drawn up an agreements framework with the State covering further reaching and more detailed agreements with the State. Within the context of this agreements framework, Stedin called for a capital contribution in the amount of €500 million. The Ministry of Economic Affairs and Climate Policy set aside this amount of €500 million in its budget for 2022. 2023 will see further talks on the exact conditions governing financial support between Stedin, the Ministry of Economic Affairs and Climate Policy, the Ministry of Finance and Stedin’s shareholders. This financial backing will enable us to finance our investments at socially acceptable costs.
In addition, Stedin and the Shareholders’ Committee are in dialogue with the municipal and provincial authorities within Stedin’s service area to explore ways for them to contribute as (new) shareholders.
Laws and regulations, and the political context
In 2022 the Rutte IV government launched an ambitious climate and energy agenda and installed a Minister for Climate and Energy Policy. A Climate Fund of €35 billion, the intention to raise the ambitions in the Climate Act and efforts to double the offshore wind energy generation ambition all help to accelerate the energy transition. The Housing and Construction Agenda is also quite ambitious, with the government intending to build a million homes over the next decade. In addition, the government has designated the municipality of Borssele, situated in Stedin’s service area, as the location for two new nuclear power plants to be built. With an accelerated construction project agenda, these two nuclear plants could be completed in 2035.
Crucially, legal support for the ambitious climate and energy agenda is ensured by combining the Electricity Act and the Gas Act into the Energy Act and the Collective Heat Supply Act (Wet Collectieve Warmte, Wcw). The Energy Act is currently scheduled to be presented to the House of Representatives in 2023. The Wcw is likewise expected to be submitted to the House in 2023. The most far-reaching change as regards the Wcw concerns market organisation: the manner in which heating companies are selected and the role of public grid companies in this arrangement. In this context, the Minister for Energy and Climate has ruled that in principle, the heat-related infrastructure in the Netherlands should for the most part be held by public authorities. Many municipalities have included heat grids as a realistic component of their Heat Transition Visions. They are envisaging a future with a highly integrated energy landscape with heat grids being run by public authorities, more or less in line with the management of the electricity and gas grids. Stedin sees these heat grids as an important alternative to heating based on natural gas and also expects increasing convergence of the critical energy infrastructures in the longer term. The central government has asked the regional grid companies to play a major role in the roll-out of these heat grids. In consultation with the Association of Netherlands Municipalities, these companies have pointed out that they can fulfil that role provided that a number of preconditions are met. In the course of 2023, these preconditions will be formulated in further detail in collaboration with the central government. This development has an impact on Stedin Group and may also potentially affect our investment plans.
The decision to adopt standards for new heating plants in 2026 such that only (hybrid) heat pumps are permitted to replace high-efficiency boilers will significantly increase the rate at which existing buildings can be made more sustainable. Combined with additional subsidies for building insulation, the government offers both a collective route towards sustainability via heat grids and an individual route via (hybrid) heat pumps.
The new government is aware that lengthy permitting procedures slow down the realisation of large-scale infrastructure projects. Grid managers - and the energy transition itself - will benefit greatly from efforts to accelerate or shorten existing permitting procedures. This will impact the pace at which we can build the infrastructure required for the energy transition. In its review of the coalition agreement, Netbeheer Nederland has called for seven interventions, one of which is the acceleration of spatial planning processes.
In November 2022, in its ruling on the ‘Porthos’ case, the Council of State ruled that the construction exemption may not be applied because it violates European nature conservation law. The construction exemption had removed the requirement to examine how much nitrogen deposition will be caused during demolition or construction work. Now that the exemption may no longer be applied, Stedin will first have to provide data on the expected nitrogen deposition effects of every project that requires a permit under the Environment and Planning Act. This potentially adds another two years to permitting and environmental procedures, causing delays in grid investments and in connections for onshore wind and solar farms. Moreover, electric equipment will have to be used to prevent nitrogen emissions during construction. We expect that this will result in an increase in temporary heavy-use electric charging connections on building sites. The ruling of the Council of State also has consequences for infrastructure projects in the Multi-year Programme for Energy & Climate Infrastructure (MIEK) that are necessary for sustainability improvements in the industrial sector.
In addition to geopolitical developments, society - including Stedin - is having to deal with further challenges, such as shortages of staff and materials. The shortage of staff is felt particularly in operations and IT. At the same time, the number of additional FTEs required will increase considerably in 2023, to nearly 400, compared with 163 in 2022. Global supply chains have been confronted by a series of disruptions, including the closure of ports and factories due to the COVID-19 pandemic, and shortages on the commodity markets due to the war in Ukraine and its ramifications. This has also impacted Stedin and has caused the supply of materials we need to shift from fairly predictable to unpredictable. This prompted us to devote a great deal of time and effort to supply management in 2022. We are doing everything within our power to prevent shortages of professional staff and materials from slowing down the energy transition.
The COVID-19 pandemic has influenced the way we work. Our hybrid approach enables us to respond flexibly to the dynamics of coronavirus and to the tightening and relaxation of nationwide public health measures.
The impact of higher energy prices
The high energy prices have an impact on our customers, employees, processes and finances. Due to the extreme increase in energy prices, low-capacity users in particular may find themselves unable to pay their energy bills. Energy suppliers are legally authorised to terminate a contract with a defaulting customer. If the customer then fails to enter into a new supply contact, the grid manager is legally obliged to disconnect them. However, as disconnection is a drastic step it is subject to a balanced process with special attention for vulnerable consumers. In the course of 2022 we observed that more and more customers with payment issues had difficulty entering into a new contract with an energy supplier. Since late October 2022, a ministerial regulation has been in force under which energy suppliers are required to do more to arrive at a debt settlement agreement with customers so that no request for disconnection needs to be sent to the grid manager. Since the start of this temporary regulation, the number of supply disconnection notices has halved. Even so, the number of non-contracted connections increased by more than 3,000 (from 51,094 in late 2021 to 54,384 in 2022). As a result, network losses due to non-contracted connections (with Stedin being unable to recover the costs from the consumer) rose slightly compared with 2021 and now account for around 5% of total network losses. In its energy purchasing, Stedin itself was confronted with soaring supply rates. The grid manager has to purchase the network losses; these costs are then factored into the grid rates. In this way, the costs are usually settled with a delay of several years (per regulation period). However, due to the exceptional increase of purchasing prices, the ACM has now given permission for an accelerated rate settlement process. For more details about network losses, see the ‘Financial results’ section.
We are seeing that various technologies are maturing and are becoming more viable for consumers and businesses in terms of pricing. Examples include solar panels, electric vehicles, hybrid and other heat pumps and smart devices in the home (domotics). The proper functioning of such technologies increasingly depends on the availability of reliable data. This requires additional investments in our electricity grids and real-time grid management.
The future lies in a smart management enabled grid and an integrated energy system. In this connection, we are of course also looking ahead to upcoming innovations in the area of system integration. The introduction of conversion and storage technologies in the energy system calls for a new approach to the design and management of our energy infrastructure. Moreover, by connecting various energy carriers, infrastructures and parties in the energy value chain we are creating new opportunities for market parties and grid managers alike. One example is the conversion of sustainable electricity generation peaks into gas or heat. System integration provides opportunities for a more efficient utilisation of existing grid capacity and allows us to ensure that all sustainable energy supplied is always used in the right form and with maximum efficiency, in the right location and at the right time.
The Intergovernmental Panel on Climate Change (IPCC) has concluded that even if further global warming remains limited to 1.5 degree Celsius, losses and damage will occur on many different fronts. The World Wildlife Fund’s Living Planet Report 2022 has demonstrated, moreover, that nature is under more pressure than ever before. Stedin is aware not only that climate change must be prevented where possible, but that it is crucial to prepare for its effects on our energy infrastructure. We are specifically incorporating this in policies for enhancing the sustainability and promoting the biodiversity of and around our infrastructure, for instance. Measures to improve biodiversity have been shown to also help solve technical challenges. For example, the construction of green roofs helps us to prevent excessive heat in our stations.