Adapting Europe’s Energy Sector to a Less Globalized World without Hurting Consumers

The European Union (EU) is facing the dual challenge of achieving its climate neutrality goal by 2050 and maintaining its competitiveness in the global market. To do both, it needs to ensure a secure, affordable, and sustainable supply of energy and raw materials for its industries and consumers. However, the recent energy crisis triggered by high gas prices and geopolitical tensions has exposed some vulnerabilities and gaps in the EU’s current policies and regulations. In response, the European Commission (EC) has proposed a package of measures to reform the EU electricity market, scale up the manufacturing of clean technologies, and secure access to critical raw materials.

Reforming the EU Electricity Market

The EU electricity market was designed to promote competition, integration, and efficiency across member states. It relies on a marginal pricing system where cheap renewables and nuclear power are called in first to meet consumer demand, followed by more expensive fossil fuels. However, this system has been challenged by several factors, such as:

• The increasing share of variable renewable energy sources (such as wind and solar) that depend on weather conditions and require more flexibility and balancing services.
• Rising dependence on gas imports from third countries (mainly Russia, until 2022) that affects price volatility and supply security.
• Lack of sufficient investment in new generation capacity, transmission infrastructure, and demand-side response.
• The social impacts of high electricity bills on vulnerable consumers.

To address these issues, the EC has proposed a targeted reform of the electricity market that aims to:

• Enhance consumer protection by introducing dynamic pricing contracts that reflect real-time market conditions; capping gas prices for electricity generation with a financial mechanism that would partly use the excess profits of energy companies; and strengthening national energy poverty indicators and measures.
• Boost renewable energy deployment by simplifying administrative procedures; facilitating cross-border cooperation; and supporting innovative technologies (such as offshore wind, hydrogen electrolyzers, and fuel cells) with contracts for difference that guarantee stable revenues for producers regardless of market fluctuations.
• Support demand-side flexibility by enabling consumers to participate in energy markets through aggregators or community energy projects; promoting smart metering and digitalization; and incentivizing energy efficiency measures.
• Strengthen cross-border trade and cooperation by improving interconnection capacity; harmonizing network codes and rules; and enhancing regional coordination among transmission system operators, regulators, and governments.

Scaling Up Clean Technologies with the Net-Zero Industry Act

At the same time, the EU is committed to becoming a global leader in clean technologies that can reduce greenhouse gas emissions across various sectors. That leadership position has been called into question in recent years by proactive Chinese state investments in renewable energy technologies and the industrial base, and more recently by the introduction of protectionist measures in the US such as the Inflation Reduction Act. In addition, the EU faces several challenges in scaling up its manufacturing capacity for clean technologies, including:

• High upfront costs and risks associated with developing new products and processes.
• Lack of access to financing and markets for innovative startups and small and medium-sized enterprises.
• Competition from third countries that provide subsidies for their industries.
• The fragmentation and complexity of regulatory frameworks at national and EU levels.

To overcome these barriers, the EC has proposed the Net-Zero Industry Act, which aims to establish a framework for identifying strategic net-zero technology products (SNZTPs) that are essential to achieving climate neutrality—such as batteries, hydrogen electrolyzers, fuel cells, biomass boilers, and heat pumps—and provide support for scaling up SNZTP manufacturing capacity through grants, loans, guarantees, public procurement preferences, and other funding mechanisms.

In parallel, the EU aims to create an enabling environment for innovation and competitiveness by streamlining standards, certification schemes, labeling requirements, and intellectual property rights protections, and to foster cooperation among stakeholders along value chains by creating platforms for dialogue, exchange of best practices, and joint projects.

Securing Critical Raw Materials with the Critical Raw Materials Act

Finally, the EU depends on imports of critical raw materials (CRM) that are essential for many industrial and clean technology sectors, such as renewable energy, digital technologies, defense, and aerospace. The EC recently proposed the CRM Act to establish a framework for ensuring a secure and sustainable supply of raw materials that are important economically and present a high supply risk.

The CRM Act aims to address several challenges that the EU faces in relation to its dependence on external sources of CRM, like low diversification of EU supply sources, untapped potential of EU supply, weak monitoring and risk management capacity, adverse social and environmental impacts, insufficient support for circularity, and insufficient research and innovation. The regulation proposes a set of measures to tackle these challenges, such as:

• Establishing a list of CRM based on economic importance and supply risk criteria.
• Setting up an early warning system to detect potential supply disruptions.
• Creating an EU observatory on CRM to monitor demand and supply trends.
• Developing strategic partnerships with third countries to diversify sources.
• Supporting domestic production through streamlined permitting procedures.
• Promoting responsible sourcing practices through due diligence obligations.
• Enhancing circularity through product design requirements.
• Boosting research and innovation through funding programs.

Too Much 2050 and Too Little 2023?

There is no question that the EU has shown tremendous ambition over the last 3 years in regard to the energy transition. Fit for 55, REPowerEU, the Net-Zero Industry Act, the CRM Act, and, to a lesser extent, the electricity market reform all demonstrate the EU’s commitment to achieving net-zero by 2050 and potentially even earlier. However, these measures offer little certainty to a manufacturer considering where to build a new inverter or battery plant in 2023, or to a developer with a multi-gigawatt project pipeline stuck in the interconnection process. Europe might end up falling behind not for lack of vision or ambition, but because of the lag between articulating its vision and implementing it on the ground. It is time for member states to act quickly if they want to stay in the race.