EU energy: Will 2021 be decisive?

The European Commission is putting forward many pieces of legislation with the aim of stimulating investments in energy transition, and the measures go beyond the proposed EU climate neutrality law.

Considering the need to support the entire economy, it looks like a Herculean task. The proposals of the European Commission and the EU Parliament's stance on green issues allow for some cautious optimism. The bloc's 27 member states, which are the ultimate decision-makers when it comes to energy policy, can give rise to some skepticism, though.

"Objectives are set at the European level to give room for national ambitions, so governments can decide their ambitions, and the Commission can encapsulate them in a European frame. The Commission can then step in if national plans are not respected," Jean-Michel Glachant, director of the Florence School of Regulation (FSR), told DW.

Glachant says that EU institutions are called upon to increase fair competition in the energy sector, especially for innovation. In an ideal world, small yet dynamic companies from peripheral EU countries should be able to revolutionize the EU energy landscape. Digitalization is key.

According to the FSR director, these political processes and investments require time, particularly in light of the unprecedented social and political changes.

Financing

Finance will play a central role in where climate action will be headed. European institutions are negotiating the sustainable finance taxonomy, a set of rules to define which investments are "green." The aim is to allow investors to take informed decisions.

The finance world, which has grown more aware of sustainability issues during the pandemic, has showed some interest. US investment giant BlackRock, for instance, has claimed that energy transition presents "a historic investment opportunity." Despite (or because of) the opportunities, there is no shortage of political divergences between EU member states and the EU Parliament on the taxonomy file.

European banks

The direction set by the European Commission and Parliament is helping certain stakeholders make their climate contribution. First and foremost, there are the two European multilateral banks — the European Investment Bank (EIB) and the European Bank for Reconstruction and Development (EBRD).

"The two European banks are the ones doing policies," says Glachant, explaining they apply quantitative measures to take their investment decision, normally avoiding near-term stranded assets.

This does not mean there have not been lending mistakes at the EU level. British-American NGO Global Witness wrote that since 2013 nearly 10% of EU gas subsidies "has been wasted."

The criticism seems not to have fallen on deaf ears. By 2025, the EIB wants to deliver more than 50% of its financing for climate action and environmental sustainability. John Sinner, energy economist at the EIB, told DW that energy investments currently in development will still be out there in 2030 and possibly in 2050. A similar long-term strategy is pursued by the London-based EBRD.

Energy efficiency

The EU's deep transition requires a new approach to energy investments. As things stand, energy efficiency is the most solid long-term strategy.

In 2020, the EIB invested more than half of all its energy lending in energy efficiency. "Some 10 years ago, this was only 10%," Sinner said, stressing that "heating in buildings makes up 40% of energy consumption in Europe."

This focus on energy efficiency is in line with the work of the European Commission, which recently proposed a strategy to increase the energy performance of buildings and introduced new EU labels to promote energy-efficient appliances. Even the EU's member states tend to be on the same page there.

Electrification

EU investments in transnational infrastructure is very sensitive to political wrangling, but joint electricity networks are the least debatable. 

ENTSOE — the 12-year old association of European grid operators (electricity TSO) — underlines the importance of new transmission infrastructure and storage facilities in all European regions. Academics, including Glachant, haven't refrained from criticizing electricity TSOs for low engagement, but developments seem positively rational.

Jean-Baptiste Paquel, system planning manager at ENTSOE, told DW that the ongoing wave of investments "largely corresponds to new cross-continental renewable energy flows," and cited some of the projects including "taking Northern Sea's offshore wind electricity to more densely populated areas with the North-South Interconnectors or bringing Mediterranean sun and wind energy to all of Europe with new connections to the Italian, Iberian or Balkan peninsulas." 

Electrification also requires national electricity companies to invest in smart systems, and private companies from several fields to promote batteries and green hydrogen. Smart meters could still be faced with national hurdles.

Gas

Pipelines such as TAP and Nord Stream 2 could be the last major gas infrastructure projects in the EU, as the window of opportunities for new mega gas pipelines is closing.

At the same time, the decrease in the EU's hydrocarbon production requires investments in renewable gas, and transmission infrastructure, eventually to import hydrogen from non-EU countries.

The most energy-vulnerable member states should be able to deal with intermittent sources and geopolitical risks. Without a lot of batteries, gas is needed.

ENTSOG — the European association of gas TSOs — has said that new interconnections might be required, but mostly regionally, like in the Iberian peninsula or in the Balkans. This would allow phasing out coal.

The gas sector is also trying to create synergies with the electricity sector. "We need some kind of regulation that facilitates this cooperation and optimization," ENTSOG General Director Jan Ingwersen told DW, citing hydrogen as an example.

Political and technical considerations aside, European institutions are shaping a self-reinforcing plan, which requires time. Apart from early investments in energy efficiency, more tangible results will hardly be visible before 2023.