Europe is well underway with its decarbonisation journey. From 2019 to 2024, a slew of legislation has been adopted to set Europe on course to reduce emissions by 55% compared to 1990 levels by 2030. As part of Ursula von der Leyen’s renewal of her mandate as the European Commission’s President on 18 June 2024, she promised to propose a 90% emissions reduction target for 2040 as the final stepping stone to carbon neutrality by 2050. Meanwhile, the power sector is on track to be carbon neutral by 2040, according to Power Barometer 2024.
While the power sector keeps decarbonising at an astonishing pace, however, Europe’s economy is not electrifying fast enough. Eurelectric’s latest data report shows that the electrification rate of our continent has reached a worrying plateau, as it has been stagnating at 23% for the past ten years, when it should make half of EU final energy consumption by 2040 according to the European Commission’s Impact Assessment on 2040 targets. This is broadly in line with the electricity industry’s own decarbonisation scenarios which also call for 50% electrification by 2040 and between 66% and 70% by 2050. Meanwhile, China grew its rate by 7 percentage points since 2015.
What it is even more concerning is the insufficient demand for clean and renewable power. Between 2022 and 2023, the EU electricity demand declined by 7.5% mainly due to industries shutting down and relocating abroad during the energy crisis.
Here, industry can play a big role. Industrial customers represent a third of current power demand with only 4% of industrial high-emission heating processes being electrified. The sector yields a massive untapped potential to bolster power demand while decarbonising their industrial processes. This electric switch will thus incentivise greater investment in clean generation, driving up the rate of electrification across the economy and decarbonising the continent in the process.
This article dives into just exactly how this might work.
The State of European electricity
A decarbonised economy would be impossible without decarbonised electricity so we first need to reduce emissions when generating power before we can electrify the end-use sectors. Such effort in Europe is already a success story.
Cleanest power ever
In 2023, the EU power sector cut emissions by 50% compared to 2008, marking the largest reduction ever achieved by the sector and putting the electricity industry well on track to reach carbon neutrality by 2040. This is thanks to a growing share of clean power generation.
In the first half of 2024, figures from our electricity data platform, Elda, showed that Europe had the greenest electricity ever with 74% of electricity generation coming from either renewables, which constituted 50% alone, and nuclear which made up another 24%. This means that three quarters of the electricity consumed in Europe was decarbonised. Just one year before, this figure was at 68%.
But despite the good news, electricity is not being used nearly as much as it should be.
Electrification rates
For the past 15 years, the rate of electrification in Europe has been stagnant at around 23% shows Eurelectric’s Electrification Action Plan. That is, only 23% of the energy needs for the EU are served by electricity. This means that while we are working hard to decarbonise the power sector, much of Europe is still running on fossil fuels.
This is plain to see when we break it down by sector. Power Barometer 2024 shows that transportation is the most egregious example with only 1.96% of electricity in the sector’s final energy consumption. Meanwhile, buildings electrification is suffering a downturn, with heat pump sales decreasing by 5% in 2023 – a reversal of the previously increasing trend. Industry is currently 33% electrified but still count on fossil fuels for a majority of their energy needs – namely to produce heat.
We need to put more effort into reversing Europe’s stagnating trend. The electricity industry has thus called on policymakers to come up with an Electrification Action Plan within the first 100 days of the new Commission’s 2024-2029 mandate. The plan should set an indicative electrification target of 35% across the EU by 2030 to be complemented by an electrification indicator in member states’ national energy and climate plans (NECPs) to monitor and deliver progress.
Our voices were heard.
In September 2024, the European Commissions acknowledged the need to boost Europe’s electrification rate and tasked the designate-Commissioner for Energy and Housing Dan Jorgensen to propose an Electrification Action Plan “to ensure that Europe’s industrial transition towards net zero is power by an energy system with homegrown, clean electricity.
To drive up the electrification rate, though, customers need to demand electricity. As of late, this is the opposite of what has been going on.
Electricity demand
An electric society is hard to attain when the demand for electricity is falling. The absolute level of electricity demand should grow as more and more solutions are connected but this is not the case. Of course, there are many reasons for this. One explanation is that electric solutions are increasingly more energy efficient, requiring less and less power. Overall milder temperatures and more behind-the-meter generation also partially explain the lack of power demand. Other reasons refer to the high electricity/gas price ratio and the fact that several electricity-based technologies such as heat pumps and electric vehicles still demand high upfront costs.
However, in recent years our data points to another phenomenon as the primary culprit: industrial slowdown….
Alarmingly, Europe has been facing a stubborn bout of de-industrialisation, brought on by several considerations but coming down simply to competitiveness. Europe faces fierce competition from heavily subsidised markets like America and China, which have attracted many energy intensives industries such as steel, chemicals, and cement to relocate.
We will get into the specifics of this de-industrialisation, but first, what is important to note is that it has led to 100 terawatt-hours (TWh) of electricity demand drying up. This corresponds to the energy demand of nearly the entire EU steel-making industry. Such an evaporation of demand is the opposite signal needed for investors to go ahead with putting their capital in new generation capacities across the continent and could have serious implications for our ability to decarbonise at the rate needed to reach net zero.
So, what has gone wrong with Europe’s industry and why is it hampering our decarbonisation efforts?
The State of European industry
It may be counterintuitive to say that we need strong industry to decarbonise…but that is the case. Due to its large share of demand, industry can signal investment needs and boasts a strong bargaining power to assert what needs to be invested in.
For example, industrial consumers mostly require heat for their processes, accounting for roughly 63% of their overall energy consumption. However, only about 4% of that is electrified, with most of it still being delivered by means of burning fossil fuels. This signals that Europe’s industry needs cheap fossil fuel to be competitive, but there is also another way.
Before we unpack that, let’s try to understand the current plight of Europe’s industry.
Permacrisis
The 2020s have been a disruptive decade with several challenges baring their teeth. The COVID-19 pandemic opened the decade with a massive closing. As people were forced to stay home, massive layoffs ensued and industrial activity ground to a halt. For two years of on-and-off lockdowns, industrial growth was slow.
Just as it seemed the pandemic was fading into the rearview mirror in 2022, another crisis hit the continent with Russia’s full-scale invasion of Ukraine. With it, Russia’s President, Vladimir Putin, weaponised crucial gas supply to Europe and withheld deliveries as blackmail against the EU to dissuade its support for Ukraine. This resulted in a global energy shock and skyrocketing gas prices, which had an even greater impact on electricity prices as well.
Energy intensives could not compete with the cost of energy and were forced to close shop. 35-45% of EU aluminium, zinc and silicon production was taken offline with a risk of permanent closure in 2022, according to Power Barometer 2023. This impact is still being felt today.
Europe’s industry today
Looking at the figures today, power demand shows no sign of recovery. Battling the crises, European industry is now also facing strong competition from elsewhere. China and America are working hard on protectionist policies to bolster their own industry. In China, this comes in the form of the “Made In China 2025” strategy where Chinese President, Xi Jinping, wants the country to be self-reliant in all “strategic sectors”.
Meanwhile, America’s President, Joe Biden, passed two crucial laws – the CHIPS and Science Act and the Inflation Reduction Act (IRA) – which aim to shore up their semiconductor manufacturing and innovation sectors, as well as become a global player in the clean energy technology space.
Compared to the EU where most of the recent Green Deal legislation comes in the form of regulation – stick – the American and Chinese governments are subsidising – carrot – their industries. With costs already extraordinarily high in Europe, the business case is simply becoming untenable for Europe’s energy intensives.
What to do?
Competitiveness through decarbonised electrification
The EU Green Deal is not meant to hamper industrial competitiveness in Europe. But climate and energy targets alone are not sufficient to boost Europe’s industrial competitiveness. That’s why Ursula von der Leyen promised a Clean Industry Deal as a top off to the Green within the first 100 days of the new Commission’s mandate. Eurelectric believes that electrification should be put at the heart of the Deal to help restore demand, drive industrial electrification and with it, decarbonisation.
“The missing piece between going green and staying competitive is electrifying.” – says Eurelectric’s Secretary General Kristian Ruby.
Our call was echoed by no other than Mario Draghi – former President at European Central bank and former Italian Prime Minister. In his Competitiveness report, Draghi sets electrification as the key strategy to continue our energy transition while reinforcing competitiveness by sourcing cheaper types of energy.
“Industrial energy demand relies on fossil fuels to provide heat and as a feedstock to produce chemicals, fertilisers and plastics. Where feasible, direct electrification is the most energy and cost-efficient way to replace fossil fuel consumption, concerning for example heating needs.” – said Draghi.
The economist also recognised the need to boost the electrification of our economy by investing in power grid infrastructure expansion and digitalisation, fixing an unbalanced taxation policy that keeps favouring gas over electricity and overcoming permitting issues.
Industrial electrification potential
As mentioned earlier, industrial processes rely on fossil fuel-based energy mostly for heat. What is often ignored, however, is that many low to medium-temperature processes can be directly electrified based on available technologies. To give some numbers, Agora Industry states that up to 92% of that process heat can be directly electrified with technologies such as electric boilers, arc furnaces, industrial heat pumps, induction heating, plasma torches, thermal storage and more.
McKinsey also reinforces this in a study showing that at least 50% of the fuels used by industries for industrial processes up to 1,000 degrees Celsius could be replaced with electricity without any structural change in the set up. Rather minor replacements of equipment can suffice. However, we cannot make this step without competitive prices for electricity to incentivise the shift from fossil fuels. At stake is 75% of industrial emissions.
Ramping up electrification
Theoretically, electricity demand would boom if industry in Europe were to electrify. But it won’t do that today with prices where they are. At €0.19 per kilowatt-hour (kWh) of electricity in 2023, electricity is nearly three times more expensive than gas at €0.07/kWh for industry, as shown in Power Barometer 2024.
One of the key ways to fix this is to address the unfair taxation of electricity compared to gas.
The share of taxes, levies and fees on the electricity bill are roughly 1.4 times more than the share on the gas bill.
Beyond that, we also need to kick fossil fuels out of the generation mix, which are price setters in the marginal price system and drive up the cost of electricity generation. Our latest data demonstrates that the EUs imports of oil and gas has been steadily decreasing these past five years. However, the fossil fuels’ import bill remains far too expensive for Europeans, reaching in 2023 €451 billion – 2.6% of EU’s total GDP.
To lower our dependence on fossil fuel imports, Europe needs to swiftly implement the Electricity Market Design reform across the EU Member States to help shield customers from volatilities seen in prices during the energy crisis, as well as provide fair remuneration to assets that help bridge the intermittency of renewable energies.
The new Clean Industrial Deal
Bringing it together, a Clean Industry Deal would need to address three components in its namesake.
- To make it “Clean” it must focus on electrification. The fate of the decarbonisation objectives set as part of the Green Deal and upcoming 2040 target both depend on greater electrification. This is where the potential to include an Electrification Action Plan in the Deal arises. And given the explicit mention of electrification in the Strategic Agenda for 2024-2029, it ought to be.
- To bring “Industry”, into this, we need to address the economic barriers facing industry today. Ensuring affordable, reliable and sustainable energy for them is a must – especially for the energy intensives. At the same time, we need to ensure that the carrot, not the stick, is being used more often to help our industry evolve with the times and help deliver our green growth objectives.
- Lastly, the “Deal” refers to the cooperation needed. Industry, the power sector, national and EU institutions and Europe’s citizens all need to work together to make a greener, cleaner, industrialised Europe happen. By doing so, we can bring back jobs. We can clean up our economy. We can drive the use of electricity and we can decarbonise the continent. We can do so by tapping the potential of industrial electrification.
This is why, in a show of support for keeping a strong, competitive, decarbonised industrial base in Europe, Eurelectric decided to sign the Antwerp Declaration in March 2024. Since then, we begun a constructive outreach with energy intensives to accelerate the electrification of industrial processes, contribute to European competitiveness, and bring everybody on board with the EU’s climate ambition.
To know more about it, feel free to reach out to us at erinaldi@eurelectric.org
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.