At the beginning of the year, Germany’s BASF, the world’s largest chemicals company, announced it was bundling all its activities relating to renewable energy under a new subsidiary, BASF Renewable Energy. To support the chemicals giant’s pledge to be net zero by 2050, the new business would focus on supplying the BASF Group in Europe with electricity from renewable energies, electricity trading activities in Europe and global renewables consulting for BASF’s wider group companies. Energy Monitor caught up with BASF Renewable Energy’s CEO, Horatio Evers, to find out how the organisation’s debut year has gone so far, amid unprecedented energy market volatility.
BASF created BASF Renewable Energy at the beginning of 2022 to incorporate all the group’s renewable energy activities. Can you explain the thinking behind that move?
The initiator for shifting to renewable energy is driven by our overall corporate strategy for the chemical business. We have an ambitious commitment to achieve the targets of the Paris Climate Agreement, and at BASF, we want to reduce CO2 emissions by 25% by 2030 compared with 2018, and in 2050 we want to become net zero. BASF will electrify chemical processes and use clean electricity instead of natural gas in the future. We will double or even triple our demand for power until 2040. Logically, this only makes sense if we use renewable electricity. With this in mind, renewable power has turned into a strategic feedstock for BASF. Therefore, we decided to bundle our activities in renewable energies into a subsidiary, BASF Renewable Energy, which takes care of sourcing and investments in renewable energy.
We take care of the majority of power and renewable power-related issues: we do the sourcing for BASF, we invest in assets, we conclude PPA [power purchase agreement] contracts, and we do operations such as trading, billing and risk management. We also work closely with our production sites who are, for example, operating their own cogeneration power plants and optimise these in collaboration with BASF Renewable Energy. That gives BASF as a whole the power and expertise needed to achieve its targets. BASF Renewable Energy is both a global centre of expertise for renewable power in regions including the Americas and Asia, and an operating unit in Europe, with the main task of supplying BASF in Europe with renewable power at competitive prices.
Almost one year on, how has it gone for the new entity?
BASF is pursuing a so-called ‘make and buy’ strategy, meaning that we invest in renewable power assets (i.e. ‘make’) and close long-term PPAs (‘buy’). We acquired, for example, a stake in the biggest offshore wind park in Europe, Hollandse Kust Zuid (HKZ) in the Netherlands, with 11MW turbines. We are also participating in the Hollandse Kust West Site 6 tender and hopefully this month [December], we will win the tender together with our partner Vattenfall. The site is located close to our existing joint venture operations for HKZ with Vattenfall, and accommodates 700 megawatt-hours of offshore wind power capacity.
We’ve also signed large PPAs with Ørsted and Engie for quite huge amounts [of renewable power] over a duration of 25 years for our European consumption, and in the US, BASF has signed virtual PPAs for several hundred megawatt-hours of green power for our sites. BASF has also made progress in China and signed a 25-year framework agreement with State Power Investment Corporation to supply our brand-new site in Zhanjiang, which will be 100% green in the future. So I would say we have already made good progress.
How has the 2022 energy crisis affected BASF’s decarbonisation plans?
It has been – of course, not only for us – a very challenging year. Especially after the pandemic and now with a terrible war in eastern Europe, with the resulting impact on the energy market. Nevertheless, climate protection and energy transition continue to have top priority for BASF, and one of the ways to become less dependent on gas supplies from Russia is to accelerate the expansion of renewable energies. That is not only relevant for us but counts for the whole industry, and in this regard, BASF has taken a leading role in recent years, and we definitely want to maintain and expand that. The founding of a renewable energy company is proof we will stick to that path.
BASF is looking to downsize in Europe because of the high energy costs. Can you tell us a bit more about that, and how it will affect your operations at BASF Renewable Energy?
The European chemical market has been growing weakly in recent years and, in 2022, we saw a significant increase in natural gas and power prices. This is putting pressure on chemical value chains. Our management has therefore announced a cost-saving programme as a response to deteriorating earnings development in Europe and Germany to ensure competitiveness in the long term. Switching to renewable energy helps us to reduce our consumption of natural gas. The faster we develop the capacity for generation and transport of renewable electricity in Europe, the more it will help us with the transformation.
As the largest chemical producer in the world, what are the main challenges to decarbonising the chemicals industry?
We are advocating for a new way of thinking and working together within the industry, and that can only be delivered if two conditions are fulfilled. One is that we need the right infrastructure where we want to invest. We need expansion of renewable energies in Europe. For example, in Germany, we are talking about the buildout of offshore wind to 30GW by 2030 and 70GW by 2045. This is totally supported from our side and the focus will now be to deliver these amounts, but we have barriers preventing several BASF sites sourcing this green power because, for example, the interconnector capacities between European countries are insufficient. We support the development of the European energy market and not a nationalistic approach.
In addition, European supply chains are extremely burdened. Bottlenecks are expected if supply chain companies will not invest in further capacities. We need vessels, we need turbines, we need grids to bring offshore electricity to the continent.
The second condition is a regulatory framework. We see a tendency towards intense market interventions that often stop the access of industrial offtakers to renewable power. For example, the auction regimes with two-way contracts for difference (CfDs), where governments are skimming the profits from offshore wind parks, mean that power cannot be used by industry because wind park operators have hedged their wind parks via CfDs and consequently have no intention of signing PPAs. That is something we definitely do not support. It’s extremely risky for our climate protection targets.
We are advocating for liberal power markets because we see that these projects don't need state support to succeed. The market is working, the industry is willing to invest and to take risks, but we need to be able to benefit from the rewards when we invest without any subsidies in these kinds of projects.
What can the EU do to help?
We need access to clean power. The two-way CfDs are strongly promoted by some utilities and lobby associations because they provide a government guarantee for predictable cash flows without the need to conclude PPAs. In the end, CfDs are blocking access to renewable power via PPAs – but PPAs are the way to supply the industry with competitive prices to support the [energy] transition.[With CfDs,] the producer must sell their power to the power exchange because they must reimburse the government if prices are above strike prices; as a result, neither PPAs nor offtake agreements are possible. That is unacceptable to the chemicals industry. [Conversely,] if prices fall below the strike price, the corresponding losses generate a need for large subsidies, which we’ve already seen in Germany, based on the so-called EEG, which is the German Renewable Energy Sources Act. That is another burden for the industry [because we pay for those subsidies via a levy on our energy bills].
Much better would be giving the industry direct access to renewable power and investment possibilities. Price stability can be organised privately via PPAs and the government need not be involved. The more assets receive support via CfDs, the fewer assets are available for PPAs, with or without equity participation from the industry.
Does the EU need a new electricity market design?
The power market design in Europe follows the usual logic of a commodity market. We have been operating based on that model since we liberalised the energy markets more than 20 years ago. Due to the current high energy prices, some perceived disadvantages of the model have been under discussion. Very high natural gas prices can lead to very high power prices, and price volatility will increase with the growing share of renewables. The current high prices are clearly a sign of [resource] scarcity and not a flaw in the market design. Alternative liberalised market designs such as 'pay as bid' or 'nodal pricing' would not lead to lower prices.
For BASF, important elements of any market design are competitive prices and high security of supply for energy-intensive manufacturing. Investments in new, low[-running] cost capacities such as offshore wind must be incentivised and high price volatility must be possible to support the business case, for example, of batteries, demand-side flexibility and hydrogen-fuelled 'peaker' plants.
[Keep up with Energy Monitor: Subscribe to our weekly newsletter]
Finally, entrepreneurial actions like PPAs and equity participations must be clearly supported, with no interference into past decisions. You can imagine that if we decide on financial commitments of up to €1.6bn, such as for HKZ, we need to make sure that we have a certain security over the next decades for our investment. If you change certain elements in these systems, you prevent private money going into the energy transition because no bank, no guarantee-giver, will take over these kinds of risks.
We are open to improvements of the current market design provided it fulfills the aforementioned conditions. That could include improved incentives for demand-side flexibility, including systematic, transparent tenders for flexibility management. That is already used in some EU countries like Italy.
At the recent RE-Source 2022 conference in Amsterdam, there was a lot of talk about how the renewable PPA market has become a seller's market, with many corporate buyers looking to tie in long-term deals against a backdrop of high spot prices. How has that affected your operations and plans, and do you foresee the market swinging back in favour of buyers anytime soon?
My answer is that if there is this big pull for PPAs from the industry, why do you [still] need CfDs? If we are talking about PPAs, that means the industry is willing to commit. From my perspective, it doesn't make sense: on the one hand, some utilities and financial investors are asking for CfDs because they say somebody needs to take the risk, otherwise they will not invest; on the other hand, you are telling me there is a strong pull from the industry for PPAs.
For that reason, I’m asking for industry collaboration between the energy sector and other sectors, like steel and chemicals. We can use this market environment to support the energy transition. Industry is ready to do so, but please do not destroy market development with regulation.
How much of your renewable electricity needs are you planning to meet with your own production in the coming years?
I cannot give you a specific answer or a ratio, but we are using all the tools we can find in a certain market environment. When we go to China, the US or European countries, you always need to find all the tools in the toolbox and then you can create the best renewable sourcing strategy. Sometimes we use 'make' and sometimes we use 'buy'. In Europe, for example, we are implementing a mix of both. In the end, we want to become 100% green and we are currently on a good path to achieving that target.