Transforming Europe’s energy sector: a key driver for competitiveness

The Draghi report provides a clear and urgent message: Europe must reduce its high energy prices while continuing its efforts to decarbonise. For a considerable time, energy costs in Europe have exceeded those of its major global competitors, but the widening gap now threatens Europe’s competitiveness. Unless energy prices are lowered, other competitive factors will be insufficient to compensate. Decarbonisation should be seen as a strategic opportunity for Europe to transition towards low-cost, clean energy sources. As an early mover with a diverse energy mix, the European Union has a distinct advantage in leading this shift.

The International Energy Agency (IEA) highlights the rapid global growth of renewable electricity. Yet, global progress lags behind Europe, with carbon emissions from the global energy system continuing to rise, growing at an average rate of 0.8% annually between 2019 and 2023. Additions from low-carbon sources have not kept pace with increasing global energy demand. In 2023, fossil fuel consumption hit a record high, driven primarily by rising oil demand. Energy efficiency improvements have been underwhelming, with energy use per unit of economic output falling by only about 1% per year , far below the 4% target set at COP28. High financing costs and inadequate grid infrastructure are dampening the economic appeal of renewables, particularly in emerging and developing economies. Europe, however, has the potential to lead, benefit from and inspire global energy transitions.

EU countries are already responding to this new energy landscape with more assertive policies, but these efforts remain fragmented, which weakens collective impact. The Draghi report rightly concludes that lowering energy prices and seizing the industrial opportunities of decarbonisation require a unified European strategy. This joint plan must include leadership in the technologies that will power the future.

The single energy market is pivotal in this transformation. Only a well-connected and harmonized energy market can deliver lower consumer prices and absorb the externalities of intermittent renewable sources like wind and solar. The energy transition requires massive investments, much of which will come from state aid. While EU competition policy may limit the impact on the single market, it lacks the synergy to make the transition cost-efficient. Addressing grid infrastructure is particularly pressing, and Important Projects of Common European Interest (IPCEI), with necessary modifications, offer a promising way forward.

The governance of the EU energy union must also evolve to meet the demands of this transition. Currently, governance is centred around National Energy and Climate Plans (NECPs), which set the framework for member states’ climate and energy goals from 2021 to 2030. These plans, mandated by the Governance Regulation of December 2018, are crucial for providing investors and the European Commission with a clear view of how Europe will meet its 2030 objectives. However, as of mid-October, only 13 member states have submitted their final NECPs which were due by the end of June. NECPs alone are insufficient to attracting the necessary investment, particularly in grid infrastructure. Additional tools are urgently required.

Public support is another key challenge in achieving the Draghi report’s goals. Retaining this support will depend on policies that avoid exacerbating inequality. Over the last two decades, U.S. households have received $47bn in tax credits for clean energy technologies, but a new study shows that higher-income households have disproportionately benefited. The bottom three income quintiles received only 10% of these credits, while the top quintile captured 60%. The disparity is even starker for electric vehicle tax credits, where the top quintile received over 80%. This concentration of benefits among the wealthy persists over time. Europe must avoid similar pitfalls, ensuring that its clean energy transition is equitable. Additionally, building infrastructure requires more active engagement with the public. Streamlined permitting processes help, but without genuine community involvement, they may not succeed.

The incoming European Commission appears to embrace the Draghi report’s recommendations. The mission letter to the Commissioner-designate for Energy and Housing reflects this, outlining priorities such as reducing energy prices, accelerating clean energy production and upgrading grid infrastructure. Key deliverables include updating the governance of the energy union, developing an Electrification Action Plan, and creating a Clean Energy Investment Strategy for Europe. While these plans and strategies are important, are they enough?

On certain critical issues, the European Commission may need to go further. Firstly, it should take leadership in developing essential grid projects, such as the North Sea Offshore Wind Grid, CO2 transportation networks, and key hydrogen infrastructure. Similar initiatives have already succeeded in the Baltic region, integrating this “energy island” with the rest of the EU’s infrastructure. Secondly, the Commission must create a strong business case for clean energy investments. The current carbon pricing mechanisms, with their volatility and insufficient pricing, pose a significant challenge. Risk mitigation measures are essential to overcoming this hurdle and accelerating the clean energy transition.

The views expressed in this #CriticalThinking article reflect those of the author(s) and not of Friends of Europe.