Europe’s New Threat Within its Most Beneficiary Policies
Electrical power lines in Germany, many which are decades old and failing to accommodate an energy transition. Photo: REUTERS
On Sept. 6th 2023, Spain, which will hold the European Union’s presidency until this December, took a major step in restructuring the bloc’s electricity market. The amendment proposed to the bloc’s energy legislation targets the use of state aid through subsidies and its impact on industrial competitiveness within the EU. Aside from current legislative procedures, it is necessary to examine the complex journey the EU has taken in facilitating a green energy transition.
The EU has undoubtedly become one of the greatest investors and developers of renewable energy. This economic power has invested billions in the energy transformation, with the bloc ranked as a top solar energy producer. In addition, the actual energy consumption that derives from renewable sources is among the highest, with 22.5%. The EU has set ambitious targets for an increase to 42.5% by 2030. While many see the EU as one of the few political and economic coalitions that can hold true to its targets, they are projected to fail unless the EU revitalizes its energy grid and infrastructure.
With the introduction of the Renewables Directive in 2009, the EU has set ambitious targets for all its member states, requiring a 20% share of energy from renewable sources by 2020. While the bloc's biggest economies have met this target through heavy investments and subsidies that drove down the price of renewables, more consumption of energy through clean sources is needed to thoroughly address climate change. The EU’s biggest electrical industry association, Eurelectric, stated that grids between now and 2050 need to be 84% higher than they were in 2021. This astounding target will revitalize the entire energy grid system of the EU, which in its current state, cannot possibly sustain a green revolution. Currently, 40% of Europe’s power distribution grids are over 40 years old, most of which are designed around large centralized power plants.
In addition to capital costs, legislative collaboration among the EU’s leading nations has proved difficult. While Spain’s newly proposed energy amendment is meant to increase the inclusivity of all E.U. nations participating in an energy transition, big players are skeptical about signing on. Specifically, the debate concerns France, which is expected to benefit unfairly from state fixed-price power contracts due to its nuclear energy plants. This would result in France being able to sell the cheapest electricity to industrial units and effectively dominate the energy market.
Historically, fixed price power contracts have allowed the EU to drive down the price of renewables and further development as these contracts have kept a specified price for electricity even when market price is volatile. However, as renewable energies further enter the market, there is the risk that energy providers may be overcompensated by these fixed prices, unbalancing the market and affecting competition. In order to facilitate competition within the EU and allow all member states to benefit from subsidies, Spain proposed an amendment that would limit under and over compensation by setting limits to distribution of revenue to customers when necessary. Essentially, the European Commission would be able to intervene whenever there is a distortion to the balance of the market. Naturally, big players such as France see this amendment as a threat to their sovereignty and influence over the bloc.
But while the drive and investment for a green energy future is present, time is not on the EU’s side. Even if legislative challenges are solved and a continental grid can be approved, the installation time period for an improved grid would take decades. This is a major obstacle in a country's renewable energy transition. Such costs could only be endured by developed economies with stable government backing. While the EU has cooperated efficiently regarding various obstacles, the question of a member's sovereignty always arises in new pieces of legislation. This has often hindered critical legislation from passing.
As EU member states attempt to unite under one common energy transition path, the bloc faces encroachment from China and its increased presence in the European electrical vehicle (EV) market. EV company Nio has come under EU investigation as politicians believe that EV manufacturers in China have received a substantial government subsidy, leading to much cheaper EV cars that could take over the European market.
While the EU could impose tariffs, such protectionist policies against the world's biggest supply chain and electric vehicle producer could be costly. The situation highlights how far behind the West really is when compared to Chinese renewable energy. In the meantime, it can do little to halt Chinese expansion as the substantial government backing received by Chinese companies will only further their presence into European markets.
A NIO Sedan bound for the German car market. When compared to similar German models, the cost is 35% less. Photo: ELECTREK