In July, EPICO published a strategy paper on the priorities for EU industrial and climate policy, following the European Parliament’s elections. The paper recommends using the new policy cycle to overhaul the Green Deal, focusing on competitiveness. Since Mario Draghi’s report on the future of EU competitiveness was already looming at that time, the paper aimed to insert EPICO in the EU-wide debate on the future of competitiveness.
After an initial flurry of reactions to some of Draghi’s most contentious proposals, such as more joint borrowing, the work has now begun to deep dive into Draghi’s recommendations for different policy areas. In this Blog Post, we compare his recommendations to ours and explore the way forward. We focus on energy and climate policies and how they benefit industrial competitiveness, as we did in our strategy paper. Moreover, we reflect on both the European and German level.
Measures on electricity markets, energy infrastructure, and gas markets to push decarbonisation and industrial competitiveness
A “joint decarbonisation and competitiveness agenda” for Europe’s industry is a central tenet of Draghi’s report. He identifies high energy prices vis-a-vis other world regions as one of the main obstacles to realising this agenda. We share this broad assessment, with many of our recommendations focusing on ensuring a successful energy transformation. This ranges from reforms to the electricity market to scaling up the hydrogen economy and exploring innovative financing for future energy infrastructure.
Let’s begin with infrastructure: Draghi highlights the importance of increasing interconnected infrastructure for strengthening European power systems, their resilience, and Europe’s competitiveness. His plans include the creation of a 28th regime, streamlining interconnection procedures for Important Projects of Common European Interest (IPCEIs) by replacing national processes with a unified EU framework. Draghi suggests simplifying access to the Connecting Europe Facility (CEF), establishing regional entities for offshore grid development, and disbursing funds directly to projects rather than through Member States. He also recommends using financial instruments via the EIB Group and through public guarantees to de-risk long-term loans for private capital investors.
These elements are widely welcomed and should direct more political and financial capital to this crucial part of the clean energy transition, making the European Energy Union more resilient.
At the same time, his recommendations leave ample room for Member States to independently come up with proposals on how to finance the purely domestic parts of energy infrastructure. For example, in our paper we highlighted current plans to finance Germany’s future hydrogen grid. There, it is foreseen that network charges will be capped until 2035, with the deficit covered by state support. After 2035, the system is expected to shift to user-based funding as infrastructure usage increases, e.g. via an inter-temporal Amortisationskonto. While it is understandable that Draghi's report cannot cover all aspects of energy policy, it would have been interesting to get his assessment on this chicken-and-egg issue that is inherent to the hydrogen economy.
Moving on to other parts of the energy agenda, Draghi puts strong emphasis on reforms to gas markets, identifying its close ties to electricity price formation as one of the drivers of high power prices.
The report proposes developing an EU-wide strategy, coordinated with Member States, to secure natural gas supplies for the next 20 years and assessing a common vision on sources, volumes, and conditions. To boost market transparency and lower prices, Draghi proposes expanding beyond the current gas demand aggregator by introducing joint gas purchases for the EU through a single purchasing entity. This could significantly increase the EU's bargaining power in negotiations with third country gas suppliers. However, this seems unlikely to garner the support of the EU27, since countries like Belgium, Spain, Austria, and Hungary are still relying on Russian gas. The EU or the Weimar Triangle countries could therefore stir a coalition of the willing to try to gather as much support as possible without aiming for unanimity.
Next, focusing on electricity markets, Draghi issues a comprehensive set of recommendations. Some mirror our own, some diverge, while others are more controversial and unclear.
Implementing Contracts for Difference
Draghi views the roll-out of Contract for Difference (CfD) to finance the renumeration of Renewable Energy Systems (RES) as key to accelerating the decarbonisation of the energy sector. EPICO shares this assessment. However, Draghi also argues that this is key “…to lower the cost of energy for end users by transferring the benefits of the decarbonisation”. In other instances, he speaks about the need to decouple the remuneration of RES from fossil-fuel generation via CfDs.
In our estimation, this recommendation is very much open to interpretation. Implementing CfDs is a responsibility of the Member States, following last year’s reform of the European electricity market design (EMD). It’s true that, with the introduction of CfDs, RES operators will have to give up their occasionally high profits. However, it is not quite clear how exactly the “transfer” of gains should materialise. Draghi may have purposefully left this question open for Member States to respond to during the implementation phase. If so, the EMD contains an interesting provision that Member States might use: governments can redistribute funds generated by CfDs to final consumers. What is more, the EMD even allows a certain “selectivity” when redistributing CfD revenues. For example, it explicitly states that funds might be earmarked for industry.
Strengthening PPAs
Multiple recommendations are dedicated to bringing down energy prices for industry via Power Purchase Agreements (PPAs). For example, Mario Draghi recommends using public guarantees – offered by the EIB and National Promotional Banks – to foster the uptake of PPAs by energy-intensive industries. This is a policy proposal that has been advocated for by EPICO for a long time. Another suggestion is to create national market platforms to contract resources and pool demand between generators and offtakers. PPA guarantees and market platforms find their legal foundation in the EMD.
Other recommendations about PPAs in Draghi’s report are more controversial. Notably, in a little-regarded section of his report, Draghi calls for a requirement upon suppliers to offer a “minor” share of their publicly subsidised RES production via PPAs at ‘production cost plus mark-up’ to specific industries. This raises many questions: how should Member States decide which industries should receive this allotment? What does it imply for overall price formulation in the electricity market if some shares of electricity are ‘diverted’ this way? Overall, the implications of this recommendation are reminiscent of Germany’s recent discussion about an industrial power price.
Developing a flexibility agenda
Rounding up his proposals on the electricity market, Draghi’s report also makes several recommendations regarding pushing demand-side flexibility in the electricity market. Again, this is an area where Member States and the EU will need to act. EPICO has recently published a paper on the need for a technology-neutral flexibility strategy for the German electricity market. Strengthening industrial flexibility is crucial, as it will allow industry to gain lower electricity prices. The German government has recently announced its intention to develop a flexibility agenda that will incorporate industrial flexibility. Consequently, Germany’s national regulatory body has begun a consultation for reforming industrial grid fees, with a view of incentivising flexibility.
Here, Draghi’s recommendations are somewhat mixed. He argues that there is the need for a (purportedly European) standard compensation mechanism for industrial demand flexibility. However, he does not go into details, and it is not clear, for example, if a specific ‘compensation mechanism' is actually needed; rather, as the consultation by Germany’s regulatory body highlights, it might simply be enough to remove regulatory burdens for industrial flexibility, such as a grid fee structure that rewards ‘round the clock’ consumption of electricity.
In other respects, Draghi’s recommendations point in the right direction. For example, he suggests developing a map of EU flexibility needs. There is certainly an appetite for this as the EMD obliges Member States to start reporting on the need for flexibility in the electricity system as of 2026. This new, periodic report should be based on input of transmission and distribution system operators and a common European methodology, subject to public consultation and approval by the EU’s Agency for the Cooperation of Energy Regulators (ACER).
Going forward
This Blog Post only explores certain parts of Draghi’s proposals. We could not, for example, cover recommendations from adjacent fields, such as supporting clean tech. We questioned some of Draghi’s proposals – for example, channelling certain ‘quotas’ of PPA towards industry. We also pointed out that, in some cases, Draghi remains surprisingly vague on implementation, for example on how exactly to decouple the remuneration of RES from fossil-fuel generation via CfDs. By and large, however, his call for a joint decarbonisation and competitiveness agenda and many of its components are very similar to our recommendations.
Diving deeper into Draghi’s recommendations showcases that several policies he advocates for must be implemented by Member States directly, or at least require close cooperation between Member States and the European levels. In other words, his recommendations often cannot be implemented at the EU level alone.
But this should not surprise us. The report’s overarching narrative focuses on the need to coordinate better to regain competitiveness. This relates to policy as it makes sure that not only energy and climate policy, but also taxation, education, trade, and other areas are geared towards a common goal. Draghi’s recommendations for collaboration also mean finding synergies between Member States’ activities and between the European and the Member State levels. We hope that Europe will be able to find a common message on competitiveness.
This Blog Post was written by EPICO's Senior Policy Specialist, Joachim Schmitz-Brieber, and EU Policy Specialist, Julian Parodi.