Three dimensions to finance the EU energy transition

June 14, 2024 Editor

Miguel de Terres, chief economist in the European Commission’s directorate general for energy

In this week’s edition of Smart Energy’s Power Playbook, Yusuf Latief explores three dimensions industry needs to work around when considering the not-so-insignificant number of euros necessary for Europe to finance its energy transition.

Excluding transportation, Europe’s energy system investment needs to equate to approximately €660 billion ($712.6 billion) per year.

That’s a big bill, especially considering that the sector’s investments currently equate to €300 billion ($323.9 billion) per year. Even though this is a big already, missing the target value by more than half does not inspire confidence.

And with the European Commission going through a change, the financial landscape for energy will be one to keep your eye on.

But, what do we need to watch?

For Miguel de Terres, chief economist in the European Commission’s Directorate-General for Energy (DG ENER), there are three dimensions we need to work around.

1. Gearing the public for the private

Specifically, said de Terres during European Sustainable Energy Week (EUSEW), public resources need to be geared to attract private investments and “we need to be super specific about the best practices and types of investments we want to mobilise.

“Not all investments in the transition are the same.”

To illustrate, de Terres lists the power grid as an example of an “enabling investment.

“What we cannot do is put all investments into renewables because we need the grids to connect them and EVs, heat pumps…

“But to address these investments and how the private sector can help – these are long term investments so clearly it’s not the same type of funds or instruments we need to mobilise for innovative investments.

“We need to map these needs in a cost-efficient way and match with the right financial instruments at the EU level.”

2. Granular regulation

Having covered EUSEW extensively over the last week, ‘implementation’ has been a key word in the discussions with industry executives across the sector about the next steps for the policy and regulation initiatives.

Not only implementation but competitiveness. The next Commission is entering into force and part of their success or failure will largely revolve around the mandate of ensuring the continent’s status as a powerhouse energy player in the face of competition from the likes of China and the US.

Key to doing so? Overcome barriers to investment.

Said de Terres: “We already have regulation with this mandate, such as Fit for 55, now we have to implement this regulation and makes sure that member states implement it in the right way and that we are able to provide as much certainty in an environment that is very dynamic.

“For instance, on an issue about PPAs for renewables, there are different prices offered across Member states and there are best practices on how to develop the PPAs and so on. But we also need to look into issues on permitting…

“We need to be super granular and come up with a specific regulation that can allow us to unlock new investment.

“Then there is an area of horizontal nature: the financial markets.

“When I’m asked about the policy measures that are most important to deliver the transition, I think it’s the capital markets union. We are competing with the US with a lack of liquid financial markets that can provide these investments from the private sector and this connection between the private sector and the investments on the ground are what we really need.”

3. Taxation

Staying with the presence of the US, key to the country’s success has been the Inflation Reduction Act (IRA).

We know already that the tax credits made available by the IRA have been a game changer for the US, but would the same be possible for the EU?

The two players play on incredibly different fields, although looking at such a system for the EU might be key to bringing businesses back into European territory.

“If one looks at what the US is doing with the IRA, it is very much on the taxation side. For us it’s more difficult because it’s more up to the member states,” says de Terres.

“We need unanimity and we need to work on taxation because a lot of time we are looking at the other side of the coin.

“We are looking at investments, subsidies…I believe that if we had a taxation system that was more conducive to this change we want to see in the EU, we would be able to deliver much more.”

Public for private, regulatory investment and taxation: these are three huge dimensions that need to be addressed to gear up the much-needed euros for Europe’s energy transition.

All eyes should be on Brussels in the coming months to see how the incoming Commission and Commissioner address Europe’s transition. What do you think should be on their priority list?

Reach out and let me know.

Cheers,
Yusuf Latief
Content Producer
Smart Energy International