Introduction to the European legislative puzzle for renewables

The European Union has embarked on a frantic legislative race related to energy and renewables. In recent weeks we have seen proposals related to renewable targets, the renewable industry, the electricity market and even raw materials. In this article we will try to review the most important proposals along with the key issues that could affect the renewable sector.

 

Why this legislative avalanche?

Before getting into the arid world of legislation, a bit of geopolitical context. Since its creation, the European Union has been an example of free trade and economic liberalism. Its objective has been to eliminate barriers to internal trade by creating a common space, but also to facilitate external trade by avoiding protectionist policies. And as the world advanced along the same lines of globalisation, everything went reasonably well. But the winds of protectionism have arrived, driven by the US which, in its struggle with China to maintain global hegemony, has promoted highly protectionist measures, such as the Inflation Reduction Act or IRA.

On the other side, China continues to increase its dominance of the renewable industry through a planned industry and market: solar, batteries and now wind. Europe is currently dependent on China to achieve its decarbonisation goals and this, in an unstable geopolitical scenario, is not acceptable.

Therefore, the EU has been caught between US protectionism and dependence on China and, albeit late, has had to react and has come up with a whole battery of measures to counteract the above.

 

When will we see these measures implemented?

One of the EU’s main problems is its bureaucratic and legislative slowness. While in China the laws are almost immediately applicable (for obvious reasons) and in the USA, the IRA will be 100% operational only 9 months after its approval, in Europe things are going much slower. Roughly speaking, after the commission’s proposals, the laws are discussed in parliament and in the commission and once agreed, they are finally published. Once in force, they are transposed into the national laws of the member states. As can be easily imagined, this process is neither easy nor quick.

 

Renewable Energy Directive (RED)

We begin with the last one, but one that can influence the others, as it is the one that sets the renewable energy target for the EU. Specifically, the target for the share of renewables in total energy consumption in 2030 has been increased to 42.5%, with an additional 2.5% as an indicative supplement, which could reach 45%. This is a very ambitious target:

– The current target is 32%.

– The share of total energy consumption, i.e. not only electricity but also transport, industry or heating among others.

– The target is for 2030 which, in terms of infrastructure, is just around the corner.

 

Consequences for the renewable industry

 

1) In the short term, national plans such as the PNIEC will need to be updated with even more ambitious targets.

2) Permitting of renewable projects will have to be accelerated. Member countries should establish “Renewable Priority Deployment Zones” with simplified procedures.

3) Binding targets for transport, industry and heating will be a boost for sectors such as green hydrogen or heat pumps.

See the full proposal.

 

Net Zero Industry Act (NZIA)

It is the misnamed “European IRA” as it tries to establish the conditions for the European renewable industry to strengthen and grow. I say misnamed because it creates expectations of clear and direct aid to manufacturing that do not exist in this proposal. As Isabel Blanco points out in her excellent linkedin post, the equivalent of the IRA in Europe would be the Recovery and Resilience Facility. Let’s look at some characteristics of the proposal:

– 8 net-zero strategic industries are defined.

– The overall objective is that 40% of the net-zero technology needs in 2030 should be locally manufactured. Clearly this is an aggregate target that falls far short for some industries and is very ambitious for others. In the first filtered draft there were targets per technology but in the final proposal it has been decided to add.

– Simplification of permits to establish net-zero industries, with maximum deadlines for the processing of permits for new factories.

– The door is opened for European production to be taken into account in public procurement processes, with a weighting of up to 30% in the award criteria.

– Special regulatory zones are established for testing net-zero technologies. This opens the door to more flexible and dynamic legislative schemes to promote certain technologies.

 

And where is the financial support? is what everyone is asking. The NZIA does not have its own budget, but relies on existing funds such as the Innovation Fund or InvestEU. In the Commission’s own explanatory document, the instruments currently available are detailed.

 

The NZIA has very ambitious goals, especially in industries such as solar and batteries, where Chinese dominance is overwhelming. But it is far from being an IRA-type legislation, as it does not have direct aid for the manufacture or purchase of European products. The dimensions of the challenge can be clearly seen in the following table where it is shown that in industries such as solar, the current capacity must be multiplied by 22, in batteries where the growth should be x6 or in electrolysers x12, with a total required investment of 89 bn€.

 

 

Consequences for the renewable industry

– Well, I am afraid there will be no quick effects as seen in the IRA. It will depend on how each state implements the guidelines and distributes the available support.

– The public procurement part could have a lot of scope and be a way to modify the current renewable auctions.

See the full proposal

 

Electricity Market Reform

It was one of the most eagerly awaited, especially in Spain, which was the member state that had pushed hardest for reform, but in the end it was left halfway between those in favour of complete reform and the pro-marginalists, as explained in the graph from Aurora Research:

 

Consequences for the renewables industry

1) PPAs and “two-way CFDs” are encouraged, i.e. guaranteeing a price but not receiving the extra when the market is higher.

2) Capacity markets for storage will be created and the integration of renewables will be monitored. This will be a great boost for batteries, as Juan Barandiaran pointed out in this post.

See the complete proposal

 

Critical Raw Materials Act

This is a proposal that indirectly affects the renewable industry as it tries to promote a local supply chain for the main strategic elements. The targets for the strategic elements are:

– At least 10% of annual EU consumption for extraction,

– At least 40% of annual EU consumption for transformation,

– At least 15% of annual EU consumption for recycling,

– No more than 65% of annual EU consumption of each strategic raw material at any relevant stage of processing from a single third country.

The strategic feedstocks are the following: Bismuth, Boron – metallurgical grade, Cobalt, Copper, Gallium, Germanium, Lithium – battery grade, Magnesium metal, Manganese for batteries, Natural graphite – for batteries, Nickel – for batteries, Platinum group metals, Rare earth elements for magnets (Nd, Pr, Tb, Dy, Gd, Sm and Ce), Silicon metal, Titanium metal and Wolfram.

 

See the full proposal

 

Final analysis

Although this was not intended to be an exhaustive analysis of the proposals, I think some conclusions can be drawn. The main one is that the EU has finally decided to boost the local renewable industry, but there are more

1) The misalignment between institutional targets and the reality of the industry is deepening. While the EU continues to increase targets, the European wind and solar industry is increasingly struggling and reducing its capacity.

2) In all the proposals, concrete measures to encourage the consumption of “made in Europe” products are missing. And they do not have to be only economic incentives but could be of other types such as preference in permits, access to grid connection points, priority for hiring students, more points in public procurement processes, etc. I think this is something that is well implemented in the IRA and should be copied andeven improved in Europe.

3) The complexity of European regulation is evident. When you read the IRA you can build the business case immediately. Here, you have to read and understand a multitude of cross-legislation, wait for it to be published and for member states to implement it… and all this is difficult to bring to a business case.

4) It seems that the measures are very much aimed at creating new industry or expanding existing industry but forget the existing industry, which in many cases is struggling to stay afloat and could perhaps benefit from specific support.

5) Finally, due to the design of the European Union, this type of legislation can lead to competition between member states trying to attract industry to their territory, with the danger of member states being left out of the major industrial hubs.