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2018: A Landmark Year for the EU Energy Policy

Wed, 02/28/2018

Shaping the future of European energy and climate policies for the next decades.

By Leonardo Sforza, Managing Director and Public Affairs Practice Leader EMEA, and Laure Botella, Consultant, Brussels

2018 is set to be a crucial year for the completion of the “Energy Union” rule book, the first pan-European Strategy on energy policies launched by the EU in 2015. New rules setting up binding targets for the reduction of CO2 emissions for industrial and non-industrial sectors will enter into force later in the year. Meanwhile the European Parliament and the Council will be busy trying to reach an agreement on several new draft laws still on the table of EU negotiators. If agreed, they will contribute to shape the future of European energy and climate policies for the next decades.  

The EU imports 54% of all the energy it consumes, at a cost of more than €1 billion per day. Energy also makes up more than 20% of total EU imports. It has been estimated that the completion of the Energy Union will bring a potential gain for the European economy of 250Bn€ per year.  Beyond its positive economic and environmental impact for business and citizens in Europe, a coherent and effective external EU energy strategy could contribute to upgrade the role of the EU political and industrial leadership on the global scene. On the contrary, the lack of action and common direction in global environmental governance and climate diplomacy may reduce the EU role in the new geopolitics of energy that will emerge as a result of changes in markets, consumer behaviours, energy-mix, and technologies.

World Energy Production by Region

World Energy Production
*excluding China

Source: European Commission, EU Energy in Figures 2017

The EU strategy is articulated around three overarching objectives with a view to address Europe’s biggest challenges:

  • Improve the security of supply,
  • Foster competitiveness to guarantee affordable prices for consumers and industries,
  • Make energy policies sustainable.

The most important EU decisions that will enter into force in March-April 2018 are all directed to reduce CO2 emissions.  Power stations and energy-intensive sectors, such as oil refineries, chemical, steel, metal, paper or glass industries, covered by the newly reformed EU emissions trading system (EU ETS), will have to reduce their emissions by 43% compared to 2005.  For sectors not included in the previous category, such as construction, agriculture and transport, together accounting for almost 60% of total EU emissions, each member state will be obliged to respect a binding annual target, depending on its GDP, towards an overall EU- reduction of 30%. Separate rules will be introduced for the activities related to the use of land and forestry as they can both emit and remove CO2. Harvesting of trees will have to be coupled with improved sustainable management practices to respect climate targets.  

Reactions from key stakeholders have been mixed. The chemical industry see these decisions as fairly balanced between climate targets and business imperatives.  While the European Steel Association fear that the constraints imposed by the new rules will not guarantee EU competitiveness vis-à-vis non EU countries where emissions are not capped. Most of environmental NGOs, however, consider the measures as not ambitious enough. For Carbon Market Watch these fall short of meeting the Paris Climate Agreement’s  goals and will need to be strengthened by bolder national actions.

World CO2 Emission by Region

world CO2 emissions by region
**excluding China

Source: European Commission, EU Energy in Figures 2017

Tough negotiations will continue for the months ahead on pending legislative proposals. They span from the promotion of renewables to the reorganisation of the electricity market. Below is a snapshot of the most important proposed legislations that will affect businesses and national governmental decision for the whole energy value chain: from infrastructure building to production, from industry to household consumption, from cross-border trade to energy trade.  

  1. The draft directive on the promotion of renewable energy sources sets a target of 27% in the total energy mix of the EU by 2030.  The proposal sets out specific targets for the most energy intensive sectors: Member states shall increase the share of renewable by 1%  every year in heating and cooling supply, and reach the target of 6% of renewables (including a minimum share of advanced biofuels) in the transport sector by 2030.
  2. The directive on energy efficiency aims to increase energy savings by 30% in 2030 at the EU level. It requires energy suppliers and distributors to increase their energy savings by 1.5% per year and introduce specific energy-efficient measures for buildings which account for more than 40% of the total energy consumption of the EU. This proposal is expected to improve EU industries competitiveness by keeping their cost down with the reduction of electricity prices from 161 to 157 €/MWh.
  3. The regulation establishing a governance framework for the Energy Union ensures that member states adopt national energy and climate plans consistent with the objectives of the strategy.
  4. The directive and regulation aiming at reorganising the European electricity markets adapts current rules to new market realities, such as the increasing share of electricity generated from renewable sources (up to 50% in 2050). The law will introduce flexible prices based on market trends to reflect the variable aspect of electricity coming from renewable sources and ensure that new investments are made where needed. It will also secure provision of energy through better cooperation between member states to address the energy supply challenge. Strong resistance and divergences among member states about the new proposal are still far from being solved.
  5. The regulation on risk-preparedness in the electricity sector will introduce EU wide tools to ensure that member states can better tackle major electricity supply crisis and a regulation on the European Union Agency for the Cooperation of Energy Regulators with a view to strengthen regional cooperation.
  6. Security of supply will also continue to be on top of the EU agenda throughout the year as member states will have to agree on the very controversial Nord Stream 2 project that would double the number of underwater pipelines carrying gas from Russia to Germany, from where it can be transported to other EU member states.  The project would fall under the scope of a new legal framework proposed by the Commission to ensure that EU rules are applicable to gas infrastructures linking EU member states to non-EU countries. This framework will apply also to future relationships between the EU and the United Kingdom for cross-border energy projects after Brexit. 

All these legislative proposals are complemented by a number of initiatives targeting specific sectors or products such as new requirements for the design of households’ products or labelling of energy-driven products.

The OECD, in a new report assessing the patterns of energy taxation in 42 OECD and G20 countries, advocates for a better reliance on energy taxation to tackle the principal source of both greenhouse gas emissions and air pollution. According to OECD Secretary-General Angel Gurría, “progress towards the more effective use of taxes to cut harmful emissions is slow and piecemeal. Governments should do more and better.”

Both from an internal and external EU perspective, energy policy is a cornerstone of the agenda on  the Future of Europe. There, the European Commission explicitly states that “Europe is committed to an ambitious decarbonisation of its economy (…) We will have to continue adapting the growing climate and environmental pressures. Our industries, cities and households will need to change the way they operate and are powered”.

This will remain a core priority for the Commission and the Parliament until their terms of  office are over in the middle of next year and will continue to attract most of the attention of business representatives, national authorities and NGOs directly concerned by the outcome of the  market reforms under way. It is likely to be also a central theme of the political campaign of the next European electoral round in May 2019 that will renew the two EU bodies.  

A more clairvoyant, forward looking engagement and less parochial stance will be needed to reach a greater convergence of fair rules, and to translate policy statements and behaviours into timely organisational change, daily operations and practices.

Leonardo Sforza leads the Brussels office and the Public Affairs practice for EMEA. He advises public and private organizations on EU policy developments and multi-stakeholders engagement.
Laure Botella is a consultant based in Brussels with experience in EU public affairs.
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