Energy transition in Portugal: current status and post-pandemic trends

Manuel Andrade Neves

Abreu Advogados, Lisbon

manuel.a.neves@abreuadvogados.com

José Eduardo Martins

Abreu Advogados, Lisbon

jose.e.martins@abreuadvogados.com

Manuel Santos Vitor

Abreu Advogados, Lisbon

manuel.s.vitor@abreuadvogados.com

Telmo Coutinho Rodrigues

Abreu Advogados, Lisbon

telmo.c.rodrigues@abreuadvogados.com

The current status

Since the 1997 Kyoto Agreement, Portugal has often been quoted as a worldwide example in energy transition, especially concerning generating electricity from renewable sources. ​​​​​​​

Portugal’s strategy initially focused on the progressive replacement of fossil fuels in electricity generation with hydro and wind sources. At the time, solar was not a ripe, competitive alternative.

Overshadowed by the European debt crisis, the strategy to fight climate change and promote energy transition regained momentum in Portuguese politics with the signing of the Paris Agreement in 2015. Subsequently, in 2019, the European Union, under the von der Leyen Commission, set in motion the new EU policy to combat climate change, known as the European Green Deal.

Prior to 2019, Portugal already had a considerable amount of installed capacity in hydro and wind power; while as of 2018, its installed capacity of solar generated power accounted for a mere three per cent of the total electricity consumption generated from renewable energy sources, in spite of the country’s obvious natural sunny conditions. It is only very recently that there been a new national strategy focused on solar technology, due to the drastic reduction in the cost of solar power technology.

Facing growing market pressure, the Portuguese government decided to launch the first grid capacity auction for solar power in 2019. The auction was aimed at awarding a grid capacity of 1.15 GW, and resulted in an average feed-in-tariff of €20/MWh. Based on this success, the government soon scheduled a second auction that occurred during the following year.

The sudden outbreak of the Covid-19 pandemic could have slowed Portugal’s progress to becoming a carbon neutral economy by 2050. Nevertheless, the second auction took place as scheduled during the pandemic, achieving an award of 650 MW.[1]

The awarded projects of 2019 and 2020 are expected to start generating power in 2023-2024, with forecasts suggesting that solar power installed capacity in Portugal in 2025 should be six times greater than that of 2018.

The state-driven initiatives in promoting solar power have not discouraged other private and independent hydro, wind, or even solar projects. In fact, alongside the auctions, the law allows for the proposal of such projects although subject to a strict procedure, to secure connection to and prevent technical failures in the grid.              

It is also noteworthy to mention that since 2019, Portugal has enacted a legal framework allowing for the hybridisation of technologies connected to the same grid interconnection spot.[2]

Post-pandemic trends

In the summer of 2020, the Portuguese government enacted three pivotal plans to outline its energy transition strategy following the Covid-19 pandemic. These are the National Plan Energy and Climate 2030,[3] the National Strategy for Hydrogen,[4] and the Global Revision of the Natural Gas Act, which is a necessary condition for the execution of the hydrogen strategy.[5]

The National Plan Energy and Climate 2030 reiterates the intention to promote solar power as a key driver in achieving a carbon neutral economy based on generating electricity from renewable sources. The major innovation comes from the combination of the latter two pieces of legislation which establish a strong commitment to hydrogen-based power, especially green hydrogen.

Under the hydrogen strategy, Portugal will invest in the production of green hydrogen which is defined as hydrogen obtained exclusively from processes which only use energy from renewable sources, mainly water electrolysis. Portugal has therefore entered a decarbonisation model which includes hydrogen, similar to that obtainable in the Netherlands, Germany, Norway and France.

Portugal’s intention is to create the conditions for a complete electrification of the energy mix based on renewable sources, to achieve carbon neutrality by 2050.

The National Strategy for Hydrogen establishes the following targets for incorporating this technology by 2030:

• ten to 15 per cent of the gas injected into the grid;
• two to five per cent of industrial energy consumption;
• one to five per cent of energy consumption in the road transport sector;
• three to five per cent of energy consumption in the domestic maritime transport sector;
• 1.5 to two per cent in final energy consumption;
• two to 2.5 GW of installed capacity in electrolysers;
• 50 to 100 hydrogen filling stations.

These are ambitious goals, but the main challenge to setting the strategy in motion is the pressure between adequately remunerating for the projects and the progressive decrease of the tariff deficit. The hydrogen-based projects are expected to be financed by national and EU funds, with an expected global support of around €10bn.

The principal project of this hydrogen strategy seems to be the conversion of a former coal-fired power station in Sines in the Alentejo region to a hydrogen driven one. This power station stopped its coal operations in 2019. This project, worth around €1.5bn, is now set to produce hydrogen with around 1 GW of installed capacity. Working within the industry, the remaining projects will be decentralised in a circular economy logic, considering that about one per cent of waste water will be used for electrolysis.

The hydrogen project will be executed on a gradual basis: the first projects are to be in place by 2023 and the complete legal framework enacted; then, by 2030 a consolidation and rollout of projects at national level is expected. Finally, the government envisages full development of the Portugal’s hydrogen market from 2030 to 2050.

The hydrogen production will be targeted at domestic consumption and exported by land and sea. This export strategy greatly relies on gas pipelines which connect the Iberian Peninsula to the rest of mainland Europe.

Conclusion

Portugal is a leading EU country in energy transition. The consolidation of a hydro and wind power market allows for a new chapter in the strategy to achieve a neutral carbon economy by 2050. The first lines of this chapter are yet to be written. These involve the hybridisation of technologies, the strong commitment to a solar power market and the creation of a fully functional Portuguese hydrogen market which are the main trends forecast post-pandemic.

All of these strategic steps point to a dynamic, competitive and keen renewable energy market, open to foreign and domestic investment to assure self-sufficiency and deliver a contribution to the global agenda of tackling climate change.​​​​​​​