2021 witnessed a record increase in wholesale energy prices (in Poland, by almost 100%) and prices for EU ETS emission allowances (by about 105% compared to 2020). Additionally, a sharp increase in natural gas market prices (in Poland, by 470% compared to 2020) has made energy poverty a common phenomenon in Europe. The European Union has presented a set of tools to temporarily mitigate the effects of rising energy prices. However, the events of recent months, in particular Russia’s full-scale invasion on Ukraine, have shown that alongside the green transition, the EU’s priority should be to become less dependent on Russian fossil fuels.
As European Commission President Ursula von der Leyen pointed out in a statement: “We must become independent from Russian oil, coal and gas. We simply cannot rely on a supplier who explicitly threatens us. We need to act now to mitigate the impact of rising energy prices, diversify our gas supply for next winter and accelerate the clean energy transition.” To this end, the Commission has proposed a long-term strategy to meet energy needs without importing gas from Russia (in 2021, Russian gas accounted for about 45% of gas consumed in the EU).
On 8 March 2022, the Commission published the communication “REPowerEU: Joint European action for secure, sustainable and affordable energy,” outlining the strategy of actions for making Europe less dependent on Russian gas supplies by 2030. On 18 May 2022, this communication was reflected in the full REPowerEU plan.
REPowerEU is a plan that ultimately aims to make the EU independent of fossil fuel supplies from Russia before 2030. The basic assumptions of REPowerEU presented in the Commission communication conceptually correspond to those indicated in the “Fit for 55” package, except that the new plan envisages them to be implemented to a greater extent and at a faster pace. The effect is to make the EU completely independent from Russian gas supplies.
The details of the REPowerEU plan were outlined in the Commission communication of 18 May 2022. REPowerEU is the “Fit for 55” package supplemented by four specific objectives:
- Promotion of energy savings
- Diversification of supplies of energy carriers
- Moving away from fossil fuels through an accelerated energy transition in Europe
- Increased support for smart investments.
In doing so, the Commission has confirmed its earlier announcements that some existing coal-fired power plants will be allowed to operate longer than previously planned. It highlighted the role of nuclear power and domestic gas resources. The Commission has also noted that becoming independent from Russian supplies must be a joint effort of the entire EU, as no single country can manage it alone.
Promotion of energy savings
According to the Commission’s plans, implementation of the “Fit for 55” package should lower gas consumption by 30% by 2030. In turn, becoming independent of supplies from Russia will enable an increase to 13% of the binding target in the Energy Efficiency Directive. Following analyses by the International Energy Agency, the Commission predicts that short-term energy-saving measures will enable reduction of gas demand by 13 billion m3 and oil demand by 16 million tonnes of oil equivalent. The Commission urged the member states to apply preferential tax rates to materials and equipment to be used for the purpose of increasing energy efficiency. It also announced that as early as this year, it will provide guidance to member states on updating their national energy and climate plans in 2024.
Diversification of supplies of energy carriers
According to the REPowerEU plan, to diversify the supply of energy carriers, gas diversification should be increased and the use of green hydrogen should be accelerated. According to the assumptions, this will make the EU independent of gas supplies from Russia before 2030.
To diversify supplies and reduce rising energy prices, the European Commission has developed the EU Energy Platform for voluntary common purchase of gas, LNG and hydrogen. This should aggregate the demand for these commodities and make available a safe and friendly system enabling optimal use of supplies on a transparent and non-discriminatory basis. One of the targets for creating the platform is to improve the transparency of infrastructure bookings by, among other things, indicating remaining availability, rerouting transmission, and eliminating bottlenecks. The exchange of all information is to be compliant with antitrust laws. The Energy Platform will be open to members of the Energy Community, i.e. besides the EU member states also the Western Balkan countries, Ukraine, Moldova, and Georgia. Through the platform, participants will be able to make international connections focused on establishing long-term collaboration with trusted partners supporting the development of clean energy projects.
As a next step, the Commission will consider developing a voluntary “joint purchasing mechanism” responsible for purchasing commodities for aggregate gas demand on behalf of the participating member states.
Additionally, gas supplies from Russia could be replaced by energy imports from Ukraine through emergency synchronisation of grids. The Commission noted that as soon as the necessary investments in the transmission network are made, Ukraine will be able to start exporting energy to EU countries.
Also, diversification of supplies of energy carriers is to be promoted by doubling the production of biomethane in the EU. The “Fit for 55” legislative package provides for production of 17 billion m3 of biomethane by 2030, but the REPowerEU plan aims to produce as much as 35 billion m3 of biomethane by 2030. As indicated in the Commission communication, doubling of biomethane production will be made possible by allocating the funding provided for in the Strategic Plans for the Common Agricultural Policy to production of biomethane from sustainable sources (in particular, agricultural waste and residues).
To free the EU from Russian gas supplies, the REPowerEU plan also foresees an increase in hydrogen production and imports to around 20 million tonnes before 2030 (the original “Fit for 55” package envisaged production and import of 5.6 million tonnes of hydrogen). An additional 10 million tonnes of renewable hydrogen would be imported, while another 10 million tonnes would be produced within the EU.
This target is to be achieved by doubling the number of “hydrogen valleys,” through complementing the hydrogen technology investments under the “Horizon Europe” programme. The Commission also plans to complete the evaluation of the first Important Projects of Common European Interest (IPCEI) for hydrogen. Additionally, from 2025 onwards, acting in close cooperation with member states, the Commission will regularly present reports on progress in the diffusion of hydrogen and the use of hydrogen in industry and transport.
The number of LNG suppliers is to be increased through investments in gas infrastructure and above all through the development of interconnections also adapted to hydrogen.
Rapidly reducing dependence on fossil fuels
The problem of becoming independent of fossil fuel supplies from Russia should be viewed holistically in the context of the green energy transition already being implemented. The current geopolitical situation provides an additional impetus to accelerate the goal of carbon neutrality by 2050.
To increase energy production from renewable sources, the European Commission plans to:
- Increase the RES target included in the Renewable Energy II Directive (RED II) from 40% to 45% in 2030, which corresponds to an increase in installed capacity in 2030 from 1067 GW to 1236 GW
- Double the plans for photovoltaic capacity to 320 GW in 2025 and 600 GW in 2030
- Present the EU solar strategy
- Introduce the European Solar Rooftop Initiative, under which certain categories of buildings will be mandatorily covered with photovoltaic panels
- Double the rate of installing heat pumps to 10 million units in the next five years
- Enhance the regulatory framework to support a sustainable product life cycle (introducing ecodesign standards for photovoltaics in the first quarter of 2023 and reviewing existing requirements for heat pumps).
According to the assumptions of the Commission communication, to reduce Europe’s dependence on fossil fuels it is necessary to simplify and shorten the procedures for issuing administrative permits necessary to implement investments in RES technology. Full transposition of RED II and introduction of necessary improvements at the national level are supposed to streamline the procedures.
The development of RES technologies also requires the strengthening of supply chains. To this end, in the first quarter of 2023, the Commission intends to put forward ecodesign and energy labelling requirements for photovoltaics and to revise the existing requirements for heat pumps. Additionally, the Commission declares support for member states in their efforts to pool public resources towards IPCEI projects focused on breakthrough solutions along the photovoltaic, wind, and heat-pump energy value chains.
The Commission also plans to double the rate of annual heat pump deployment (10 million heat pumps over the next five years). This will require not only increasing the scale of supply, but also accelerating renovation and upgrade of building heating systems. Among other things, the development of RES is to be accelerated by making money available from the InvestEU fund and through the possibility of obtaining financial assistance from member states.
The REPowerEU plan is to accelerate the deployment of renewable sources of energy in industry sectors particularly vulnerable to unstable energy supplies. The Commission foresees early implementation of an innovation fund to allocate resources to support industrial electrification and the deployment of hydrogen technologies.
The EU’s system of carbon contracts for difference is indicated as one form of support. It is also planned to increase the EU’s manufacturing capacity for innovative zero- and low-carbon equipment (in particular, electrolysers and new-generation solar and wind power production equipment).
The more ambitious targets outlined in the REPowerEU plan entail additional investment. They are estimated to be worth around EUR 210 billion (between now and 2027 on top of what is needed to realise the “Fit for 55” objectives). In the long term, these investments are expected to lead to savings of nearly EUR 95 billion each year: EUR 80 billion in gas import expenditures, EUR 12 billion in oil import expenditures, and EUR 1.7 billion in coal import expenditures.
Development of the Trans-European Energy Networks (TEN-E) has helped establish European gas infrastructure enabling diversified supply. Once the ongoing projects are completed, all member states and neighbouring countries will have access to at least three gas sources or the opportunity to participate in the global LNG market.
According to the REPowerEU plan, by 2030, additional investments in the power grid are necessary to accommodate the increased use and production of electricity. This is expected to cost EUR 29 billion. The EU has already taken steps to synchronise the Baltic States’ electricity grids with the continental European grid. Upon completion, no later than 2025, the region is expected to achieve energy security that is not threatened by either turmoil on the electricity market or system disruptions.
Originally, the European Union’s energy transition was to be much less dynamic than the changes now announced under the REPowerEU strategy. However, rising energy prices and Russia’s aggression against Ukraine are a signal to Europe that only reducing dependence on fossil fuels will ensure energy security. Expedited implementation of these changes will require adequate financial support and procedural streamlining of RES investments. In the near future, we should watch for further actions announced by the European Commission and look forward to their implementation.
Rafał Pytko, Jagna Krotoska, Energy practice, Wardyński & Partners