European “energy union”: anatomy of growth and challenges

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Two years ago the EU launched the European Green Deal, which included the clean energy transition as a major component of the Union’s “energy union”, alongside five other energy directions. That means, greater efforts will be required by the member states in reaching on one side, for a goal of cutting net emissions by at least 55% by 2030 and, on another side, achieving climate neutrality by 2050. Thus, the progress in implementing the European Green Deal is closely connected to energy and climate policy issues…

Present year’s European energy analysis is concentrated on measures dealing with combating climate change, biodiversity loss and pollution, driven by natural resources depletion. It also marks an important passage from the Covid-19 crisis to a perspective economic recovery in the member states. The Eurobarometer survey this summer has shown that European citizens believe climate change is the single most serious problem facing both the EU and the world. More than nine out of ten people surveyed consider climate change to be a serious problem (93%), with almost eight out of ten (78%) considering it to be very serious. Key moments in this regard were the adoption by the EU institutions of the Climate Law this June and the presentation of the “Delivering the European Green Deal” (so-called ‘fit for 55’) package in July 2021.

State of the Energy Union report

The State of the European Energy Union report-2021 reflects the work of the European institutions and the member states in cooperation with the international bodies on the EU’s response to the double challenge, i.e. achieving fast and sustained recovery from the impacts of the COVID-19 crisis, and combating climate change. Hence, investing in transformation of the European energy system has become an integral part of the solution concerning climate neutrality and socio-economic recovery. The Commission proposed to raise the EU 2030 target for renewables from the current about 32 % to at least 40 % of the Union’s gross final consumption of energy while setting up a complete framework for renewable energy deployment, addressing all sectors of the economy. The Commission also proposed raising energy efficiency targets at the EU-27 level and making them binding, so as to ensure overall reductions of 36% for final energy consumption and of 39% for primary energy consumption by 2030.

In line with these ambitious goals, the EU budget for 2021-27 provides significant support to implement the European Green Deal and the energy transition measures in the member states; in particular, the European Regional Development Fund (ERDF) and the Cohesion Fund will allocate at least 30% and 37% respectively of the EU funding for the achievement of the Union’s climate objectives.

For example, the Just Transition Mechanism, JTM will allocate its support to the achievement of the Union’s climate objectives and will alleviate the socio-economic situation in the EU’ regions most affected by the transition to climate neutrality. InvestEU program focuses primarily on supporting the green transition with its € 9.9 billion Sustainable Infrastructure facilities. The Commission has also supported the states in the development and implementation of reforms in view of the achievement of EU energy and climate goals in 2021 through more than 65 technical support projects. The Just Transition Mechanism comprises the Just Transition Fund, the Invest EU Just Transition scheme and a Public Sector Loan Facility. In total, the Just Transition Mechanism is expected to mobilize at least € 150 billion of public and private investment during 2021-2027. As shown by the International Energy Agency’s (IEA) World Energy Outlook 20215, combating climate change requires urgent action during the current decade and will require a profound transformation of consumption and production patterns, notably the way energy is produced, transported and consumed. The IEA has, however noted that about half of the solutions for the transformation on the path to climate neutrality are already available and the others are at pilot or development stage.

More in: https://iea.blob.core.windows.net/assets/beceb956-0dcf-4d73-89fe-1310e3046d68

The planned combined climate-related investment is around € 177 billion, representing 40% out of a total of € 445 billion of RRF funds allocated to the EU states. Almost € 76 billion is allocated to investments and reforms in energy efficiency and clean energy. Nearly all EU states are using the Union’s RRF funds for investments in building renovation and clean transport, and many are using it to invest in renewable energy. Thus, the national allocations are the following: R&I -7%, renewable energy & networks -15%, sustainable mobility -35%, energy efficiency -28%, climate adaptation -7%, and other climate effect investments -7 %. Source: https://ec.europa.eu/energy/sites/default/files/state_of_the_energy_union_report_2021.pdf (Report, p.9)

Increasing ambition and delivering on decarbonisation is also about achieving the existing 2020 target for renewables. As regards the overall EU target for 2020 (20.6 %), the EU had already reached a 19.7% share of renewable energy sources in energy consumed in 2019; this includes 34.1% for electricity generation (out of this: hydro 35%, wind 35%, solar 13%, solid biofuels 8%, and all other renewables 9%), 22.1 % for heating and cooling (biomass accounts for around 75% of heating and cooling) and 8.9 % in the transport sector. 14 EU states were above their 2020 national binding targets and 7 still fell relatively far short. See also https://ec.europa.eu/eurostat/web/energy/data/shares. 

According to the EU directive from 2009 (effective from 2012), the states had to achieve binding targets to raise the share of renewable energy in their energy consumption by 2020. The national targets taken together would enable the EU as a whole to reach 20.6 percent of renewable energy target for 2020.

Energy Union: main accounts
– In 2020, EU greenhouse gas (GHG) emissions (including international aviation) were down 31 percent compared to 1990 due to the impact of the pandemic on energy consumption but also due to continued decarbonisation trends;
· In 2020, for the first time, renewables overtook fossil fuels as the EU’s main power source: with 38 percent for the EU’s electricity, 37 percent for fossil fuels, and 25 percent for nuclear energy. The share of renewable energy sources in the overall EU energy mix is expected to reach at least 22 percent, though some member states are at risk of failing to meet their national targets;
· The EU primary energy consumption declined by about 2 percent and final energy consumption by 0.6 percent in 2019 compared to 2018;
· The EU net energy import dependency reached 60.6 percent in 2019 compared to 58.2 percent in 2018 and 56 percent in 2000, which is the highest level in the past 30 years;
· While fossil fuel subsidies fell slightly in 2020, down to € 52 billion from € 56 billion in 2019, this was due to falling consumption amid the COVID-19-related restrictions. Without the states action, fossil fuel subsidies are likely to rebound as economic activity picks up;
· Presently, nine EU states have phased out coal, 13 have made national commitments to do so by a certain date, 4 states are considering possible dates and only one has not yet started national discussions on a phase-out;
· Energy prices have been volatile during two years, as national economies contracted due to the pandemic crisis; as it often happens, due to cheaper fuels, subdued demand and rapidly
expanding renewable generation, wholesale energy prices fell sharply in 2019. Negative electricity prices became widespread in 2020; however, this downtrend was abruptly reversed: wholesale electricity prices have increased by 230 % on a yearly basis with a more moderate impact on retail prices until September 2021 (+11 % in EU average). This was largely driven by rising gas prices which had an effect on the electricity price nine times bigger than the effect of the observed carbon price increase over the same period;
· More than 98.6% of EU electricity consumption is coupled; traded volumes on
natural gas hubs rose to an all-time high in 2019; this trend continued into 2020;
· Public clean energy research and investment (R&I) spending in the states continues to be lower than in 2010, but national and EU recovery funding that targets clean energy R&I can
partially compensate this;
· Energy poverty affects up to 31 million people in the EU (data for 2019), with
persisting differences across the EU states and income levels. This underlines the
importance of shielding the vulnerable population from the current price spike and ensures a just
transition towards climate neutrality;
· Most energy union’s trends have been positive; though still fall short of what is needed to drive the required transformation to achieve the EU’s objectives: thus, an acceleration is required both to achieve a socially fair transition to climate neutrality by 2050 and reach the social insurance against (un)expected price shocks as happened presently in the EU states;
· The adoption of the European Climate Law and of the “Delivering the European Green Deal” package (proposed by the Commission in mid-2021) marked two major steps towards putting in place a credible framework to ensure feasible transition; · The EU member states’ Recovery and Resilience Plans are expected to provide a boost to
climate-related investments by at least € 177 billion and to foster necessary reforms to support the climate and energy transition. Reference to: https://ec.europa.eu/energy/sites/default/files/state_of_the_energy_union_report_2021.pdf

It is important to coordinate these actions in the member states to ensure the proper functioning and benefits of the European common energy market. But the EU states vary widely in terms of their energy mix, tax policies and social situation, which means there is no ‘one-tool-fits-all’ solution available. The driver of the current price hike, which was generally caused by the extraordinary global gas demand, has not appeared from the EU-energy market design. State of the Energy Union report-2021 has shown that in 2020 renewables overtook fossil fuels for the first time as the EU’s top power source for electricity generation. When electricity, gas and carbon markets work well, they guarantee that the needs of consumers are met and that the states are moving towards a greener, better integrated and more flexible energy system. The only lasting solution to price volatility and EU’s strategic independence in fossil fuels is towards more renewable energy and energy efficiency.

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