Energy transition is the biggest change that the world is undergoing right now. The EU is taking significant steps to position itself at the forefront of the global race to net zero.
The EU has a legally binding target to achieve net zero by 2050. EU countries also already have very advanced plans for achieving net zero and energy security, accompanied by financial state support packages on an unprecedented scale. These measures have just been taken to the next level, making the EU an even more attractive market for investors in the energy transition.
- Regulations and Planning
- Financing the energy transition
- Global Cooperation and Trade
- Other key measures: Competitive bidding process for hydrogen
On 1 February 2023, the European Commission (“Commission“) released its communication on a “Green Deal Industrial Plan for the Net-Zero Age” (“Communication“). This Communication outlines the actions that the Commission intends to take to stimulate investment in the “net-zero industry” within the EU. The Communication is a response to recent increases in state support outside the EU, most notably the United States Inflation Reduction Act (“IRA“). The IRA was signed into law in August 2022 and provides significant tax incentives for energy and climate change measures which have been argued to widen the competitiveness gap between Europe and the US.
The Communication is based on four “pillars”: (i) a “predictable and simplified regulatory environment”, (ii) “faster access to sufficient funding”, (iii) “enhancing skills” and (iv) “open trade for resilient supply chains”.
Regulations and Planning
The Commission has announced that it will propose a number of regulatory changes, including:
- Net-Zero Industry Act: Legislation that is intended to introduce a simplified regulatory framework (including simplifying and speeding up the permitting process) for production capacity of a number of “net-zero” products such as batteries, windmills, heat pumps, solar, electrolysers, and carbon capture and storage technologies. This act is also expected to define the criteria for net-zero supply chain projects of “strategic interest” (including multi-country projects) which could benefit from accelerated permitting procedures, EU and national public funding and other incentives.
- Critical Raw Materials Act: A regulatory framework that aims to secure the EU’s access to minerals and metals critical for net-zero technologies, including by strengthening international engagement, facilitating extraction, processing and recycling.
- Electricity Market Design Reform: Regulatory changes to “better shield households and businesses from high energy prices, to increase resilience, and to accelerate the transition set out in the European Green Deal and REPowerEU Plan” (a public consultation for which is currently ongoing).
The timeline for the Net-Zero Industry Act and the Critical Minerals Acts is currently not clear, but the Commission committed to introducing a reform of the electricity market design in March 2023.
Financing the energy transition
In terms of financing the energy transition, the Communication envisages changes to the EU state aid rules to unlock the public national financing needed and increase the volume of EU funding for net-zero technologies:
- National/EU Member State Funding: The EU Commission is currently consulting with the EU member states on adapting temporary state aid rules to further promote investments in renewable energy and industrial decarbonization projects, including transforming the State Aid Temporary Crisis Framework into the “Temporary Crisis and Transition Framework” for state aid (TCTF). The TCTF would simplify state aid rules for renewable energy deployments and rules for granting aid for decarbonizing industrial processes. It will also support targeted aid for major new production projects in “strategic net-zero value chains”. This would effectively make it possible for member states to match IRA-level subsidies subject to certain conditions. Furthermore, the TCTF provisions would make it easier for EU member states to “support new investments in production facilities” in these sectors, “including via tax benefits”. Member states would be permitted to “align their national fiscal incentives along a common scheme that the Commission stands ready to prepare”. Finally, the Commission commits to removing some EU-level red tape when financing certain net-zero projects and/or technologies.
- EU Funding: The Communication emphasizes the importance of stepping up EU funding. It highlights the EU funding already available worth hundreds of billions of euros, including grants and loans under the Recovery and Resilience Facility and guarantees under the InvestEU Programme (the EU’s instrument for catalyzing private investments in EU priority areas). It also confirms that the Commission is assessing how overall EU funding could be increased. Most notably, it mentions the creation of a “European Sovereignty Fund”, a “structural instrument” with the aim of “preserving a European edge on critical and emerging technologies, from computing-related technologies, including microelectronics, quantum computing, and artificial intelligence to biotechnology and biomanufacturing and clean technologies”, although very little detail on the structure of such fund has been provided.
- Private funding: The Communication acknowledges that the greater part of the investments needed for the energy transition will have to come from private funding and (in addition to amending the state aid rules to unlock private financing) reaffirms its commitment to developing a Capital Markets Union in the EU to further facilitate financing raised through capital markets.
The Commission recognizes the importance of enhancing the skills necessary for the development of net-zero technologies and related infrastructure and makes a number of proposals in this regard, including introducing Net-Zero Industry Academies to upskill or re-skill the workforce and facilitating the access of third-country nationals to EU labor markets in priority sectors.
Global Cooperation and Trade
The final pillar of the Green Deal Industrial Plan focuses on “global cooperation and making trade work for the clean transition” and includes a commitment to develop the EU’s Free Trade Agreements and other forms of international cooperation, protect the EU market from unfair trade, and explore the creation of Clean Tech/Net-Zero Industrial Partnerships and a “Critical Raw Materials Club”, bringing together raw material consumers and resource-rich countries.
Other key measures: Competitive bidding process for hydrogen
In autumn 2023, the Commission will launch an EU-funded competitive bidding process for the production of renewable hydrogen (funded through the ETS Innovation Fund).
The competitive bidding process will take the form of a fixed premium for each kg of renewable hydrogen produced over a period of 10 years (not a variable premium/contracts for difference, as previously considered). The first pilot auction will have an indicative budget of EUR 800 million, with terms and conditions to be announced in June 2023.
This pilot auction will be followed by further auctions or other forms of support for hydrogen production and use that contribute towards the REPowerEU hydrogen targets, “covering the EU domestic part of the Hydrogen Bank”. Based on this experience, the Commission will consider extending the new competitive bidding mechanism to scale up the manufacturing of components for solar and wind energy, batteries and electrolyzers.
The competitive bidding process is designed to “have a similar impact as the production tax credit in the US IRA”.
Overall, the measures proposed in the Communication are intended to respond to the impact of the US IRA. The EU measures are structured very differently to the US ones, and some may argue that the IRA framework is wider and easier to access and navigate. However, whether or not the EU managed to “level the playing field” with the US, the implementation of its plan will certainly make the EU an even more attractive market for investors in the energy transition.