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Jan 11, 20226 min read

Charged Up: The EU’s Ambitious Green Energy Transition

Authors: Ashwin Vijay Srinivasan & Jacob Tran Vu Son Tung

Editor: Harsh Didwania


The European Union (EU) has not only been the exemplary flagbearer of economic integration since its inception, but has also consistently maintained a strong presence in the vanguard to combat various global issues. The most notable among these, especially in the past two decades, is climate change.


With the long-term goals of achieving carbon neutrality by 2050 and ensuring that economic growth is independent of the amount of resources used, the EU established measurements of progress along the way by setting targets for 2020 and 2030. The 2020 milestone was marketed as the “3 x 20” policy, which included reducing greenhouse gas emissions by 20% from 1990, increasing the composition of renewable energy in the final energy consumption mix to 20%, and improving energy efficiency by 20%; by 2019, the EU had successfully decreased greenhouse gas emissions by 24% from 1990 levels (McGrath, 2021). This milestone was modeled around the EU’s pillars of enhancing the bloc’s energy sustainability, competitiveness, affordability, and security (Deloitte, 2015). Building on their success thus far and living up to their reputation of setting ambitious objectives, the EU raised the target for the reduction of greenhouse gas emissions by 2030 to 55% from 1990 levels, up from the original 32%, and increased the desired share of renewables in the region’s energy mix to 40% within the same period (The Straits Times, 2021).


The EU addresses the existential threat of climate change with the European Green Deal, which maintains a long-term focus on transitioning into a resource-efficient and green economy, while the pathway to achieving the 2030 targets is laid out by a 10-year integrated national energy and climate plan (NECP) for each member country (European Commission, 2019). The NECPs were submitted to the European Commission by the end of 2019, and upon approval, became binding agreements that will hold each nation responsible for their individual approaches to five crucial areas: energy efficiency, renewables, greenhouse gas emissions reduction, interconnections, and research and innovation. Citizens, businesses, and regional authorities were consulted in the drafting of these NECPs, which was mandated by the European Commission in order to ensure that key stakeholders’ concerns were accounted for and that constructive feedback was built on. Meanwhile, the all-encompassing European Green Deal focuses on eight key sectors[1]; however, since “the production and use of energy account for more than 75% of the EU’s greenhouse gas emissions” (European Commission, n.d.), the urgency underlining the impending transformation of the energy sector is significantly more consequential for decarbonising the EU and attaining carbon neutrality by 2050.


The EU maintains energy equality as an important tenet of the Green Deal, and we believe that in the long run, the adoption of renewable energy will make energy significantly more secure and affordable for European citizens.


Let’s take a look at the European heating system, which will be a decisive factor in the decarbonisation process. Building heating and hot water production accounts for half of the EU’s annual energy consumption, and around 78% of all household energy use (European Commission, 2021). For heating, the EU relies heavily on imported gas from Russia, and this is a concern for their energy security. This year has witnessed record gas prices in Europe, with an undersupply of gas from Russia pushing prices up by 250%, threatening supplies as Europe moves to winter (Rankin, 2021). Debates have been ensuing on whether this was a strategic squeeze by Russia to receive approval for the Nord Stream 2 pipeline, but it is obvious that as long as the dependence continues, the EU’s energy security future will be uncertain. It is clear that the intensive adoption of renewables will alleviate this reliance, as member states will have more sources of energy at their disposal and be able to rely more on EU-produced energy.


After the transition, it is also expected that the low cost of renewable energy will make energy a lot more affordable for households. Costs of renewable energy, especially solar power, has been rapidly falling over the last decade (Chrobak, 2021). The expanding and increasingly competitive renewable market landscape will also point to more affordable prices in the long run.. With this switch, renewables companies are expected to exhibit great growth in the next decade. Europe is currently leading in the global renewables sector, with major companies like Iberdrola, Enel and Orsted.


However, the transition will not be without friction. Two main causes of concern are the resistance to reducing gas consumption, and the lack of effective incentives for renewables.


The overwhelming reliance on gas, especially considering the current circumstances, makes it difficult for the EU to phase it out. First, the current high gas price means that the commission’s plan of taxing carbon high is increasingly unpopular. If the plans were to be passed, it is feared households won’t be able to afford the even higher gas price, and this also endangers the EU in future price shocks (Khan, 2021). Secondly, petroleum and natural gas remain a highly profitable pursuit for many companies, so their commitment to the transition to green markets is questionable. Navigating this tricky dynamic is crucial if the EU is to ensure energy security. If energy is not secured, it is unlikely that it will be affordable.


Another main obstacle to adopting renewable energy sources is the lack of effective incentives. Renewable energy systems have significant setup costs, therefore, Europe has been ardent with various financial-support renewable heat incentives like in Denmark, Germany, etc. These incentives usually include subsidized/free transition to renewable energy grids and systems, or feed-in tariff. While they can incentivize people to make the switch, there is a great concern subsidies would impose a burden on consumers, making renewables effectively more expensive (Pestel, 2019).


Ambitious targets and bold proclamations of what the future will look like does not always translate into an ideal, smooth change; the policy measures introduced and implemented over the last decade have had unintended effects on the energy sector and markets. While the “3 x 20” initiative was largely successful in terms of its three main objectives, it resulted in a distortion of electricity markets; a large contributing factor is the development of renewable energy being “driven by policy support and incentives, rather than by supply and demand adequacy, and market signals” (Deloitte, 2015). While these subsidies have driven down wholesale electricity prices due to the induced surplus, consumers have not benefited from this since retail prices have increased; the entire burden of funding the surplus is passed onto consumers. Despite criticism, this pitfall has only deepened; a prime example is the increase in renewable energy subsidies in Germany from €19.4 billion in 2013 to €30.9 billion in 2020, making it the country with the most expensive retail power costs across the EU (Parkin, 2021). Moving forward, the EU also needs to bring about the required change in its carbon pricing scheme, which has “failed to send the right price signals to promote low-carbon technologies” (Deloitte, 2015).


In general, to successfully transition, the EU will first need to find a way to weather the effects of energy price shocks to ensure energy security for consumers. Secondly, it will need to find fitting incentives to encourage the use of renewables without accidentally inflating prices. If the EU can overcome the current energy crisis, then the Green Deal will be hugely beneficial in ensuring better energy equality.


Footnote: [1] Climate, Energy, Agriculture, Industry, Environment and Oceans, Transport, Finance and Regional Development, Research and Innovation



References


1. Chrobak, U. (2021). Solar power got cheap. So why aren’t we using it more? Retrieved from https://www.popsci.com/story/environment/cheap-renewable-energy-vs-fossil-fuels/


2. Deloitte. (2015). Energy Market Reform in Europe - European Energy and Climate Policies: Achievements and Challenges to 2020 and Beyond. https://www2.deloitte.com/global/en/pages/energy-and-resources/articles/energy-market-reform-europe.html


3. EU unveils plan to increase renewables share in energy mix to 40% by 2030. (2021, July 14). The Straits Times. https://www.straitstimes.com/world/europe/eu-unveils-plan-to-increase-renewables-share-in-energy-mix-to-40-pct-by-2030


4. European Commission (2019). National energy and climate plans (NECPs) - Energy European Commission. https://ec.europa.eu/energy/topics/energy-strategy/national-energy-climate-plans_en




7. Khan, M. (2021) Energy price surge intensifies backlash against Brussels carbon tax plan. Financial Times. Retrieved from https://www.ft.com/content/76451443-d196-4b60-ae1f-95385a915e71


8. McGrath, M. (2021, July 14). EU unveils sweeping climate change plan. BBC News. https://www.bbc.com/news/world-europe-57833807


9. Parkin, B. (2021, January 13). Germany Paid Record $38 Billion for Green Power Growth in 2020. Bloomberg Green. https://www.bloomberg.com/news/articles/2021-01-12/germany-paid-record-38-billion-for-green-power-growth-in-2020


10. Pestel, N (2019). Employment effect of green energy policies. IZA World of Labor 2019. Retrieved from https://wol.iza.org/uploads/articles/519/pdfs/employment-effects-of-green-energy-policies.pdf


11. Rankin, J (2021). Energy crisis forces EU ministers to face up to reliance on natural gas. The Guardian. Retrieved from https://www.theguardian.com/business/2021/sep/21/energy-crisis-eu-ministers-debate-reliance-gas-russia

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