Thursday, 19 May 2022
Russia's invasion of Ukraine has further highlighted Europe's overdependence on Russian gas, oil and coal imports. These disruptions in energy imports have caused European gas and electricity prices to soar having an annual €100 billion impact on European taxpayer's wallets while increasing energy security concerns within the region.
In 2020, the EU imported around 57.5% of its energy consumption. While this decreased by almost 3% when compared to the historically high levels witnessed in 2019 (60.5%) this was mainly attributed to reductions in primary production and electricity consumption linked to the COVID-19 pandemic lockdown restrictions and economic crisis.
In terms of energy dependency by fuel source mainly oil and petroleum products and natural gas had the higher share of 34.5% and 23.7% respectively. Energy dependency among the EU Member States differs as energy mixes vary across countries. Many countries in Central Western Europe (CWE) like Belgium, Spain and Germany have energy import dependencies well above 60%.
The approach taken within the REPowerEU plan reflects these differences and proposes a variety of balanced responses corresponding to the specific Member States' needs whilst steering the EU towards 2050 climate neutrality.
In response to this threat, EU leaders agreed in the European Council in March 2022 to phase out Europe's dependency on Russian energy imports as fast as possible. This gave rise to the REPowerEU plan that builds upon the Fit-for-55 proposals and sets out a detailed pathway to a fast clean energy transition with the hopes of being independent of Russian fossil fuels as early as this year.
The main four pillars of REPowerEU are as follows:
Energy savings
Diversification of energy sources
Acceleration of Europe's clean energy transition
Smart investments to realise the objectives in the Fit-for-55 proposals
These four pillars combined will be key in transforming the EU's energy system. According to the EC, the success of these objectives will rely on effective coordination between European regulatory measures and national investments and reforms. The supply side will require a rapid increase in renewable capacity deployment across Europe while the demand side will require an increase in energy efficiency and reduction in fossil fuel reliance, especially in the industrial sectors that have long greatly contributed to GHG emissions.
To deliver the REPowerEU objectives, the Commission will require Member States to update their National Energy and Climate Plans (NECPs) which will also require hasty implementation. The EC will publish guidance later this year for Member States to use when updating their NECPs in 2024 and will also report on progress on REPowerEU through the State of the Energy Union and Climate Action reports.
According to the EC, energy savings are the quickest and cheapest way to address the current energy crisis and provide some electricity price relief to citizens. This will be done through increasing energy efficiency thereby reducing energy consumption and thus allowing for sustainable and more lasting use of energy supplies.
As such the Commission has proposed to increase the binding target in the Energy Efficiency Directive under the Fit-for-55 package from 9% to 13%.
According to the EC, short term behavioural changes could reduce gas and oil demand by 5%. The Commission further encourages Member States to start specific communication campaigns targeting households and industries while they were also encouraged to make full use of supporting measures like reduced VAT rates for high-efficiency heating systems and appliances.
Following mandates by the European Council in March, the "EU Energy Platform" was created to enable voluntary common purchases of gas, LNG and hydrogen by pooling demand, optimising infrastructure use and coordinating international outreach to suppliers.
The Commission will consider developing a joint purchasing mechanism platform which will negotiate and contract gas and renewable gas purchases on behalf of Member States. The EU Energy Platform will also be open to Energy Community Contracting Parties (Western Balkans, Ukraine, Moldova, Georgia) many of which also have a high reliance on energy imports and vulnerable security of supply.
In terms of diversification, the EU will work with international partners to secure alternative sources of uranium while boosting the conversion, enrichment and fuel fabrication capacities available in Europe. Additionally, while the EU works on diversifying natural gas suppliers the bloc will continue domestic gas production where possible to strengthen security of supply.
The scaling up of renewable energy use in power generation, industry, transportation and buildings will accelerate Europe's independence from Russian fossil fuels. The EC predicts that overtime this will result in lower electricity prices and reduced fossil fuel imports.
Proposed steps towards increasing renewable energy:
The Commission is proposing to increase the renewable energy target in the Renewable Energy Directive from 40% to 45% by 2030.
This increase in target would result in total renewable energy generation capacities reaching 1236 GW by 2030 compared to the 1067 GW by 2030 under the Fit-for-55 proposal.
Solar photovoltaics (PV) have been targeted as the fastest technology to roll out. Under the EU solar strategy:
a REPowerEU double solar PV target of 320 GW new installations by 2025 is set and almost 600 GW is set by 2030.
European Solar Rooftop Initiative was introduced with a phased-in legal obligation to install solar panels on new public and commercial buildings and new residential buildings.
Increased deployment of especially offshore wind through the strengthening of supply chains and acceleration of permitting processes.
Doubling the rate of deployment of individual heat pumps and integration of geothermal and solar thermal energy in modernised district and communal heating systems.
A Commission recommendation to tackle slow and complicated permitting processes for major renewable energy projects.
Member States are required to identify prime areas for renewable development with simplified and shorter permitting processes in lower environmental risk areas.
Proposals for the acceleration of Hydrogen uptake:
Set 10 million tonnes of domestic renewable hydrogen production target and similar target for imports by 2030 to replace fossil fuels in hard-to-decarbonize industries and transport sectors.
The Commission will publish two Delegated Acts on the definition and production of renewable hydrogen to ensure production leads to net decarbonisation.
To accelerate hydrogen projects additional funding of €200 million is set aside for research.
Proposals for the scaling up of Biomethane:
The Biomethane Action Plan sets out tools for increasing sustainable biomethane production to 35bcm by 2030, an increase of 17 bcm over the prior fit-for-55 plan.
An investment of €37 billion will be required to increase the capacity of biogas production in the EU and promote its conversion into biomethane.
Note: further details on the implementation of measures for renewable gas can be found in the commission staff working document which accompanies the overarching REPowerEU communication.
Proposals for reducing fossil fuel consumption in industry and transport:
Energy savings, efficiency, fuel substitution, electrification, and enhanced uptake of renewable hydrogen, biogas and biomethane by industry could save up to 35 bcm of natural gas by 2030 on top of what is foreseen under the Fit for 55 proposals.
The Commission will roll out carbon contracts for difference to support the uptake of green hydrogen with financing under the Innovation Fund from emission trading revenues.
The Commission will give guidance on renewable energy and power purchase agreements and develop a technical advisory facility to support PPA-financed renewable energy projects.
The Greening of Freight Package will increase the share of zero-emission vehicles in public and corporate car fleets above a certain size.
In 2023 will adopt a legislative package on greening freight transport.
The Commission’s analysis indicates that REPowerEU entails an additional investment of 210 billion Euros between now and 2027, on top of what is needed to realise the objectives of the Fit for 55 proposals which would reach 300 billion euros by the end of 2030.
Most of the financing will come from the EU's pandemic Recovery and Resilience Facility of which Member States can access the unused €225 billion in facility loans.
An additional €20 billion in grants would come from selling 250 million CO2 emission permits on the EU’s ETS system. Countries will also have the right to transfer up to 12.5% of their cohesion policy funds and 7.5% of agricultural funds to RePowerEU projects.
A Flash Eurobarometer survey in all EU Members States published earlier in May showed that 85% of Europeans believe that the EU should reduce its dependency on Russian gas and oil as soon as possible to support Ukraine while 84% believe that there is an urgent need to invest in renewable energy. Furthermore, 90% of Europeans agree that measures should be taken to limit the impact of rising energy prices on consumers and companies. 86% of survey respondents said that rising energy prices had a significant impact on their purchasing power.
As such plans like the REPowerEU would likely be welcomed by EU citizens and would be able to address their concerns through the accelerated rollout of renewables in the bloc.
Increasing the EU's 2030 renewable energy target to 45% would result in total renewable energy generation capacities reaching 1236 GW. Additionally, the aggressive expansion of solar PV and offshore wind capacities within the current decade would result in a rapid increase in the share of renewables on the European electricity grid. This could potentially see the corresponding RES-E share ambition rise from 59% to over 63%. As the proportion of renewable electricity generation increases the market could see a corresponding rise in RES-E GO issuance volumes quicker than what was expected pre-Ukraine war.
This increased supply in GO issuances could place downward pressure on GO prices. However, demand for GOs has been growing at a steady level of 12% and with more corporations being concerned with being green a continued increase in demand is expected.
Given the expected expansion of renewable gas (hydrogen, biomethane) production, we would also expect the GO gas issuances to increase greatly. Particularly in the case of biomethane as frontloaded increases are expected due to gains associated with establishing registries and trading hubs, as well as growing production capacity. Similarly to RES-E GOs, while increased supply should give rise to downward price pressures, demand is expected to grow not only due to the greening of existing usage sectors but also to newer usage sectors heading towards 2030.
A more detailed market impact will be published tomorrow.