The increased economic and military influence of non-Western countries is creating a tectonic shift in traditional power structures. The outcome of this shift is uncertain, but it will have far-reaching consequences for international security, economic stability and resource distribution.
The Russian invasion of Ukraine and Putin’s imperialistic vision, alongside economic and political tensions between the US and China exemplify this changing balance of power. China’s peaceful rise and policy of “hide your strength and bide your time” has given way to a more assertive demeanor, reflective of the country’s growing industrial and military power and readiness to question the Western-based international order.
Gas supply shocks. External volatility. Staggering inflationary pressure. Europe is at a crossroad: it must build up its energy sovereignty or face the prospect of a struggle in global industrial competitiveness.
Where does Europe stand?
The “old continent” is used to thinking of itself as the centre of the world. Yet, Europe represents only 2% of Earth’s surface and barely 6% of the world’s population, with negative demographic trends in several European countries. Once the champion of multilateralism, Europe is now coming to terms with the reality of a more multipolar and fragmented world order, where economic ties, if not carefully balanced, risk degenerating into dependencies.
Against this background, the EU is getting ready to hold new elections. While it’s too soon to make predictions on what the new Parliament will consist of, one thing is clear: industrial competitiveness is becoming deeply connected to Europe’s decarbonisation and energy transition.
Is Europe’s net-zero industrial competitiveness at risk?
Europe is at a crossroad: it must build up its energy sovereignty or face the prospect of a struggle in global industrial competitiveness at a time when gas supply shocks, external market volatility and staggering inflationary pressures are challenging European industries now more than ever.
The energy transition as a weapon to combat climate change involves a shift from fuel-intensive to raw-material-intensive economies. Today most of the equipment used for clean and renewable technologies comes from China. In particular, the EU imports from China around 96% of the solar wafers used to build solar photovoltaics, 84% of the wind blades employed in the EU offshore industry and 75% of batteries for electric vehicles. This concentration of supply chain control and the dependence on said supply chains, as Russia’s energy blackmail showed, can be a dangerous predicament to be in.
China has truly emerged as an industrial powerhouse with a dominant positions in the net-zero industry and supply chain. The days of Deng Xiao Ping foreign policy strategy of “hide your strength, bide your time” have been forgone for a more assertive role in foreign policy.
At the same time, the United States – once a champion of the free world – is ramping up efforts to re-shore its industries to keep up with increased competition from foreign powers, who are now challenging its previously undisputed hegemonic role in the international order. The release of its Inflation Reduction Act in 2022 was the epitome of the American shift towards protectionism.
The American IRA, however, is just one example of a more general inward looking trend to international trade. In the last 3 years, 100 countries have adopted trade restrictions. The WTO regime has stagnated for years and is being replaced by strategic regional agreements such as China’s Belt and Road Initiative. The US has banned Huawei sales in different areas, a measure to which China reached by banning export of gallium and germanium, metals needed for semiconductors.
Beyond the US-Cina chip war, India has banned nickel exports, a lithium “OPEC” is forming in South America, and China is mulling an export ban on silicon wafers. The latter measure would have a massive impact on the EU as 97% of solar panels are imported from China.
How is Europe defending its industrial competitiveness in clean energy technologies?
As a reaction to the US Inflation Reduction Act, the EU presented the Green Deal Industrial Plan (GDIP) to strengthen the competitiveness of Europe’s net-zero industry while accelerating the transition to climate neutrality.
The Plan represents the first integrated European approach to industrial policy and was welcomed by the electricity industry for its instrumental role in accelerating Europe’s economy decarbonisation while reducing exposure to geopolitical perils.
The GDIP was then translated into the Critical Raw Material Act and the Net-Zero Industry Act.
The Critical Raw Materials Act
This Act aims at ensuring safe supply chains of critical raw materials needed to manufacture clean energy technologies with a key focus on lithium, cobalt and nickel. Last week a political agreement between the European Parliament and the Council was reached on the Critical raw materials act.
According to the proposed deal, the EU should have the capacity to extract 10%, process 40%, and recycle 25% of its annual consumption of strategic raw materials by 2030. While boosting homegrown resources and processing capacity, the EU should also commit to diversify its imports of strategic raw materials, so that it does not rely on a single source of supply for more than 65% of its consumption.
Beyond targets, the proposal also wishes to bring clarity over the supply shortages of raw materials which may be suffered by European industries. Large companies exposed to shortages of raw materials in strategic technologies – including battery manufacturers, hydrogen producers, renewable energy generators, data transmission and storage, or aircraft production – will have to regularly carry out a risk assessment of their supply chains of strategic raw materials. These plan will have to map where the materials come from, which causes can affect their procurement and specific vulnerabilities to supply disruptions.
To reinforce such supply chains and address potential disruptions, the Commission, together with the Member States will identify strategic projects that will benefit from faster and more efficient permitting procedures as well as facilitated access to finance. The scope of such projects is extended to include those allowing the production of materials that substitute strategic raw materials.
The Net-Zero Industry Act
The Net-zero Industry Act (NZIA) intends to bolster Europe’s manufacturing capacity in technologies needed for decarbonisation to strengthen the EU’s strategic autonomy in areas where it currently has strong dependencies on external suppliers.
This week, Members of the European Parliament, during their Plenary meeting in Strasbourg, adopted their position on the Net-Zero Industry Act (NZIA). Lawmakers called on scaling up manufacturing capacities to domestically produce 40% of the European net-zero technologies annual deployment needs by 2030 and to capture 25% of the global market value for these technologies by the same year.
The Parliament has also extended the scope of this regulation to encompass components and machinery needed across the supply chain of net-zero technologies. But what are net-zero technologies?
What are net-zero technologies?
Net-zero technologies are those technologies commercially available and relatively easy to scale that will make a significant contribution to decarbonisation. These include:
- Solar photovoltaic and solar thermal
- Electrolysers and fuel cells
- Onshore wind and offshore renewables
- Sustainable biogas or biomethane
- Batteries and storage
- Carbon capture and storage
- Heat pumps and geothermal energy
- Grid technologies
The European Commission labels these technologies “strategic” due to their potential in enhancing the EU’s industrial competitiveness and strengthening the resilience of its energy system in its transition to net zero.
The European Parliament has extended this list and despite opposition from the environmental (ENVI) Committee, the final mandate also includes firm and flexible generation technologies such as nuclear and hydropower. Interestingly, the Parliament does not distinguish between net-zero and strategic net-zero technologies but enables all project promoters to apply for the “strategic status”.
How can Europe increase its industrial competitiveness in clean technologies?
Electrification is the most direct, efficient, and effective way to improve the competitiveness of the European manufacturing sector, while also contributing to the decarbonisation of its end-use groups. Here’s why.
The switch from fossil-based inputs to domestic carbon-neutral power generation helps cutting reliance on fossil fuel imports and improves energy efficiency. Higher efficiency translates into a lower energy use and ultimately lower energy bills.
In Eurelectric’s Policy Director Cillian O’Donoghue words: “ To reach net zero we need to do two things; firstly, industry to electrify and secondly, electricity to decarbonise. On the latter, the situation is positive and already today in Europe, two-thirds of power is carbon free. On the former, the huge potential of industrial electrification will only be realised if the regulatory framework ensures access to secure, decarbonised electricity at globally competitive prices.
Yet, the full potential of electrification is significantly untapped. 70% of the final energy demand in transport, buildings and industry still relies on polluting fossil fuels, most of which are imported from external suppliers. Electrifying these sectors with homegrown clean and renewable generation is the most reliable alternative to decarbonise Europe’s economy and ensure its fossil-fuel-free energy sovereignty. For this happen, electrification rates must triple to 60% by 2050 – reports Eurelectric’s Decarbonisation Speedways study.
With higher electrification, the pressure on Europe’s power distribution grids will significantly increase. By 2030, Europe will see around 50 to 60 million heat pumps, 65 to 70 million electric vehicles (EVs) and over 600 gigawatts of additional renewable capacity as foreseen by REPowerEU. Yet, 40% of Europe’s distribution grids are currently over 40 years old and were being planned at a time where the nature of our energy system was fundamentally different.
To deliver the power system of the future, Europe’s transmission and distribution grids must be reinforced and digitalised to use all the capacity available today, while building out new infrastructure and expanding as well as modernising the existing one. As Europe is not currently keeping up with the demand, grids are becoming a challenge akin to permitting.
“When it comes to infrastructure deployment, it is essential that policymakers continue to support those technologies that are optimal and most effective at decarbonising our economy. This requires the recognition of the electricity grid as strategic net-zero technology, as well as accelerated grid connection procedures, as part of the permitting provisions, and anticipatory grid investments.” – adds O’Donoghue – “It also means keeping political focus on direct electrification, which has proven its efficiency in emissions reduction. This also means priortisting direct electrification and not diverting European funding to less efficient technologies that require costly infrastructure deployments.”
As detailed in Eurelectric’s industry manifesto report and position paper, to effectively defend Europe’s industrial competitiveness in clean energy technologies the EU Net zero Industry Act should:
1. Ensure the equal treatment of clean and renewable mature technologies
Solar, wind, hydropower, sustainable bioenergy and nuclear are complementary in nature and thus of strategic importance for ensuring a carbon neutral, secure supply of electricity in Europe. While supply chain dependencies vary and require different levels of strengthening and support, it is essential to ensure a resilient manufacturing base for all clean and renewable sources of generation.
2. Bring electricity infrastructure up to speed
Similarly, the overall electricity grid and its value chains should be considered of strategic importance. The NZIA should be an opportunity to i) develop a value chain in technologies where a heavy dependence on third countries has been identified and ii) ensure that EU keeps its competitive advantage for clean technologies for which the European value chain is already strong.
Anticipatory grid investments and accelerated grid procedures are essential to ensure a swift connection of newly installed net-zero manufacturing facilities and their access to increasingly decarbonised electricity. The EU Grid Action Plan is thus a welcomed first step in future proofing our power infrastructure.
3. Continue to prioritise a cost-effective and efficient decarbonisation of the EU economy while incentivising sustained emissions abatement efforts
Investment in electricity generation, storage and distribution infrastructure would contribute to both the climate agenda and the overall European competitiveness. As the EU opens to removals and carbon capture technologies, it is paramount to maintain the mitigation hierarchy and ensure avoidance of unintended lock-in effects.
In particular, Eurelectric believes that carbon removals will play a key role in delivering negative emissions necessary for achieving net-zero and counterbalancing the residual CO2 in hard-to-abate sectors where no other technological decarbonisation solution is currently available. Industrial carbon removals can significantly contribute to this regard and need to be ramped up.
Carbon capture and storage (CCS) for abatement, on the other hand, would at best be a bridge technology before 2050. Thus, it would be advisable to maintain political attention and funding on solutions that incentivise the pursuit of cost-effective greenhouse gas emissions abatement, like electrification, phase out of fossil fuels and accelerated deployment of clean and renewable generation capacities.
4. All funding on board
NZIA’s ambitions must be backed up by all possible means of financing, whether private or public. All technologies recognised in the NZIA must therefore be eligible for European funding.
5. Promote resilience and sustainability without hindering electrification
Securing robust supply chains is key to prevent future vulnerabilities of the green transition. The Commission’s proposal for NZIA oblige Member States and contracting authorities to assign a weighting of between 15% and 30% to sustainability and resilience in renewable energy auctions and public procurement bids to create demand for tailor-made nature-friendly renewable projects. Exceptions are only possible if they would result in disproportionately high costs (>10%) or technical difficulties.
On the positive side, non-price criteria (NPC) have the potential to promote innovation, biodiversity integration, or resilient domestic value chains. Rewarding developers and projects which can deliver long term cost-efficient value to our society and environment avoids a cost-driven race to the bottom. This enables companies to apply their engineering and project execution powers to shape an energy transition that tackles multiple challenges, from energy security over economic slowdown to the climate and biodiversity crisis.
On the other hand, the application of non-price criteria during the bidding process can be a complex, burdensome task. Launching separate tendering segments with specific prequalification criteria may be more efficient solution for accelerating scalability of such projects. If these criteria are poorly designed, implemented, assessed, and non-monitored, they risk making auctions overcomplicated, untransparent and potentially subject to legal challenge. This will ultimately lead to bidders making commitments which they cannot or will not deliver on.
There is also a risk that the use of NPC leads to a proliferation of additionalities being required of bidders, which increases overall costs and loses the primary focus: facilitating renewables deployment to meet increasingly ambitious targets. Hence, it is crucial to carry out this process in a way that does not hinder our broader decarbonisation and energy security objectives. This can be achieved by adhering to the following key principles:
- Ensure renewable energy auctions are predictable in terms of visibility and indexation;
- Consider technology-specific differences in setting non-price criteria, prequalification requirements as well as the cost-based derogations;
- Consider the principles of sustainability and resilience separately;
- Devise direct measures to support robust value chains and avoid further delays and disproportionate cost increases for renewable electrification;
- Provide early, clear, pragmatic, efficient non-price criteria, possibly in the form of pre-qualification;
- Establish a transition period.
Lastly, success at EU level hinges on performance at the national level. Aligning the national and EU industrial policy frameworks is pivotal in achieving net-zero industries and addressing the critical raw materials challenge. Coherent policies at both levels are fundamental for an effective and efficient decarbonisation of end-sectors.
National policies can be tailored to address regional disparities and unique industrial landscapes, fostering a conducive environment for the development of net-zero technologies and practices. Simultaneously, EU-level policies play a crucial role in coordinating national efforts but also providing a comprehensive framework and standardised guidelines for improving Europe’s industrial competitiveness.
In the same vein, promoting healthy competition and cooperation with like-minded non-European countries to address supply chain constraints can pave the way to ensure sustainable, diverse and reliable sourcing, as well as research, development and deployment of breakthrough technologies.
Disclaimer: This article is for informative purposes only and may not entirely reflect Eurelectric official positions. For formal positions, please consult our position papers here.