Burdensome bureaucracy, inflation, high energy prices and the increased cost of capital have slowed down Europe’s economic growth, causing industry to shut down or relocate, and investors to look into more lucrative opportunities abroad.
That being said, abroad is not necessarily a friendly place anymore. Russia’s weaponisation of oil and gas, fierce competition from China and Trump’s renewed push for protectionism have made clear that the much worshipped model of free trade is a memory of the past. This has forced the EU to come to terms with its structural dependencies to rescue its industries and ensure energy security while staying the course on its climate ambition.
It is no surprise Brussels’ prevailing narrative today is that we can only achieve decarbonisation through growth, innovation and energy security, not de-industrialisation. We believe this is possible by channelling the benefits of decarbonisation towards European households and businesses through an enabling framework.
At the FT International Energy Policy Forum we discussed how this framework should look like.
Learning from past mistakes
Learning from past mistakes
Fatih Birol – President of Internation Energy Agency (IEA) – explained Europe’s current struggle for competitiveness as the result of three strategic mistakes:
- Overreliance on a single country for a single commodity. Europe is still bearing the consequences of putting all its eggs in Russia’s basket for cheap natural gas. While energy prices have come down since the 2022 crisis, they remain structurally higher compared to China and the US. Narrowing this gap is possible, but it must be done in a smart forward-looking manner to avoid fragmenting the EU internal market with myopic short term interventions.
- Abandoning nuclear power. At the end of 1990s, nuclear power made up 35% of power generation in Europe. Today this percentage has gone down to 24% and is projected to decline further. This represents a loss in clean power generation, emission reduction and competitiveness according to the IEA. Although the choice over the energy mix structure is up to individual member states, the electricity industry flagged the need for massive firm and flexible capacity to balance a future renewable-led energy system and ensure security of supply. Nuclear is one of such options, along with pumped hydro storage, batteries and consumers’ demand-side response.
- Giving up the battle for solar manufacturing. Twenty years ago, the EU was the undoubted leader in solar manufacturing, until China took over and became the number one exporter and manufacturer of solar PVs – the fastest growing technology in the world today. We must avoid repeating the same mistake with other emerging clean energy technologies such as electric vehicles and storage.
Such mistakes are now challenging energy intensives, where energy costs represent a large share of their balance sheet, and clean energy technologies that struggle to scale in Europe. For both industrial segments, electricity is a common denominator. An enabling framework must therefore enable clean electrification.
Doubling down on electrification
The sectors in which China is doubling down today to gain a competitive hedge are the big clean industries: batteries, solar panels, EVs, etc.
“If we want to be part of that race and tilt toward the future which is becoming an Electro-State rather than going back to being a Petrol State as the US is doing, we need to stick to the course we plotted.”
This means boosting the electrification of our economy, and investing in new clean power technologies while incentivising traditional manufactures to switch to more energy-efficient electric solutions.
Yet, while China is massively electrifying, Europe’s electrification has been stagnating at 23% for the past ten years shows Eurelectric’s 2024 Power Barometer. Boosting our electrification rates is therefore the first step towards long-term competitiveness.
Antonio Hernandez, Partner at EY Spain, argues that Europe should start with electrifying industrial heating processes as they represent 50% of industries’ annual energy demand:
“We are convinced it is possible to decarbonise huge parts of industries’ heat use, mainly for industrial processes below 500 °C by investing around €50 billion.”
A way to pool this money for Hernandez would be by allocating part of the ETS revenues, which total around €44 billion when it comes to decarbonising industry. This would make Europe much more energy independent and competitive.
But how can we convince industry to electrify if power prices remain high?
Affordable energy comes with fair taxation and an integrated market
“If you want to be more competitive you need to find efficiency savings which can only come by working together” – said Mark Copley CEO at Europe Energy Traders.
This means deepening market integration. The benefits of having an integrated energy market are not always clear to consumers.
“Europe would have bene survived Putin’s energy shock as we did without the level of integration we had in the market” – said Simone Tagliapietra, Senior Fellow at Bruegel.
During the energy crisis, having an interconnected market allowed France to secure its power supply while its nuclear plants were under maintenance by importing power from Germany. We managed to minimise impacts thanks to integration; without it we would have had shortages and blackouts. Integrating our market therefore brings security in addition to affordability.
ACER quantified the benefits to consumers coming from an integrated market to €34 billion per year.
“Further integration could raise such benefits up to €40 billion by 2030. The potential is enormous.” – stated Commissioner for Energy and Housing Dan Jorgensen, who promised to exploit “every tool and explore every avenue to lower energy costs in the short term” while also making long-term structural decisions that will make Europe ready for the future.
For Eurelectric, these structural decisions should first and foremost target our unfair energy taxation, incentivise access to long-term contracting tools such as PPAs and develop our cross-border interconnection capacity.
Ensuring seamless flow of electrons from country to country not only depends on an integrated market, but also on a resilient interconnected infrastructure.
Grids baby Grids
The EU is deploying great amounts of renewables, with solar adding an impressive 60 GW. For the first time last year renewables made 48% of the EU’s final power generation mix. Yet, much of this added capacity is waiting to be connected to the power grid, a delay that Birol argued is “economic suicide”.
Eurelectric can only echo the IEA’s call. Expanding Europe’s distribution grid comes at €67 billion per year in annual investments, all the way to €100 billion including transmission – a daunting figure indeed- but the cost of inaction is much higher. While this investment will mostly come from private investors, it is national authorities that regulate the amounts allowed.
This brings us to the last component of our enabling framework: public support.
A threefold public support
According to industry, public support must be threefold:
- Simplification
- De-risking
- Financing
Too much regulation and too many layers of governance makes it difficult to invest in Europe. That’s why the Commission’s simplification initiative under the Omnibus regulation is perhaps one of the most awaited proposals for industry. Ignacio Galan, CEO at Iberdrola, observed that simplification not only means de-regulating processes and accelerating licencing, but also limiting many levels of litigation as it further delays projects.
Another point of consensus among energy experts was the need for the European Investment Bank (EIB) to play a bigger role in de-risking investments. The EIB agrees:
“I think we can play an important role in lowering the cost of capital of these technologies, derisking investment and therefore attracting private sector investments including with EU budget. This is critical not only for emerging technologies but also for those projects with high upfront costs with returns spread across several years such as energy efficiency or grid reinforcements – two fields in desperate need for investments.” – said Thomas Östros, Vice-President at the EIB Group.
Moving forward, boosting private and public partnerships will be critical for attracting private investments where they are most needed. Public institutions can de-risk private investment through guarantees, concessional loans and equity participation. The EIB for instance helped catalyse public funds to unlock private capital in offshore wind projects.
To boost innovation, R&D funds could be combined with private sector expertise to deploy large equity support to those European tech companies, with the potential to scale and become leaders in the field. Lastly, public funds will be crucial in re-skilling and upskilling the workforce to also ensure public support for the transition.
Mistakes were made, new challenges have arisen, but the solutions to navigate them are many. It’s only a matter of putting them into action.