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EU Energy and Climate policy in 2023

With the European Parliament elections in the horizon, EU policymakers have sped up their activity to set ambitious targets and implement measures that can support the green transition. The political elections taking place throughout the current European Parliament mandate inter alia in France, Italy, Germany, and Sweden show that mainstream parties, mostly belonging to EPP and S&D, are gradually losing consensus. This hints to an increase of slightly more extreme political groups, such as the ECR group. According to the Poll of Polls by Politico, for example, in Italy (the third most populated country in the EU), far right-wing party Fratelli d’Italia (FdI) has the consensus of one third of the electorate. Whereas the last European elections located the importance of climate for the electorate, ‘mainstreaming’ the topic across parties, parties that are more climate-friendly seem to lose support at the national level, e.g., in Germany, where the polls show a slow but steady decline of the Green party in the last few months.

From January 2023 onwards, Sweden will hold the Presidency of the Council of the European Union. Their political agenda in June 2022 showed five general headings, “Speeding up the climate transition” being one of these. The Swedish Council Presidency is also expected to move forward with the implementation of the Fitfor55 package. Key dossiers will be the Electricity market reform, the Renewable Energy Directive (RED), Energy Efficiency Directive (EED), and the Energy Performance of Buildings Directive (EPBD). Spain will take over from July, beginning a new Presidency Trio, consisting of Spain, Belgium, and Hungary.

On 14 November, the Parliament and the Council reached an agreement on the budget for 2023. Focus areas are reducing energy prices, the war, and recovery from the pandemic. Just like in the working Programme of the Commission, energy infrastructure will play a vital role. Funds are reserved for the Connecting Europe Facility, which focuses on a high-quality and sustainable trans-European transport and energy networks. This had already been announced in the Parliaments’ Guidelines for 2023, but is now also confirmed in the budget deal.

At the global level, the EU sees a considerable level of challenges alike. The unprovoked Russian war on Ukraine speeded up the implementation of activities in the field of energy. The war put the spotlight specifically on the need to both further diversify the energy mix and supply. From introducing short-term measures in the energy market design, to opting for a wider range of energy sources, including renewables (including green hydrogen), nuclear, and in some cases coal, the 2023 Commission working programme is set to introduce more long-term reforms to the energy market design.

The recently implemented Inflation Reduction Act (IRA) in the US also raises important questions on how to maintain the level of competitiveness of EU industry. Allegedly, the Commission is in ‘emergency mode’ to find ways to react to the IRA and boost its efforts to meet climate targets. The US’ IRA credit system offers alternative ways of scaling up innovation, through parsimony and pragmatism. In 2022, the Commission has announced a massive roll out of Carbon Contracts for Difference Scheme (CCfD), as a way to promote renewable energy.

In this blogpost, EPICO provides its analysis on key developments in its energy and climate focus areas, which will take place in 2023.

  • Hydrogen

As announced at the State of the Union 2022, The Commission plans to create a new European Hydrogen Bank to kick-start a hydrogen market in the EU. EUR 3 billion is reserved for the bank that should kick-start the hydrogen market by matching supply and demand. Part of the European Hydrogen Bank initiative are CCfDs, a measure previously mentioned in the REPowerEU plan to switch to green hydrogen by 2030. EPICO to release a publication on the topic by end of January 2023.

The hydrogen European Funding Compass will provide parts of the investment money and will also go to dedicated hydrogen projects in the EU. The Clean Hydrogen Joint Undertaking, a R&I supporting programme undertaken by the European Partnership for hydrogen, will continue with support for hydrogen development in specific regions. “Up to 15 shortlisted regions will be selected to receive targeted support from dedicated hydrogen consultants” according to the Clean Hydrogen partnership.

With the amendments to the EU RED II approved last September, the definition of renewable hydrogen was adapted. The amendment made it possible to produce ‘green’ hydrogen not fully based on renewable green energy projects anymore. In practice, this means that hydrogen produced by fossil fuels could now also be defined as ‘renewable’. This makes it possible to scale up the hydrogen market and allow it to be more flexible in 2023. Criticisms say that this is greenwashing of renewable energy, as it allows for electrolysers to run on fossil fuels, thus causing delays to meet the climate and energy security goals of the EU

2023 will show if and how this debate will get a follow up in the European Parliament. There is already a political debate going on shifting the certification of the different types of hydrogen into percentages instead of colours. The example is set by the US IRA hydrogen tax cut approach. Although the EU is keen on producing fully green hydrogen only, potential partner countries that the EU needs to set up a viable hydrogen market are more focused on the production of blue hydrogen (e,g, the MENA region). Instead of talking about either ‘green’ or ‘blue’ hydrogen, policymakers suggest talking about the percentage of the produced hydrogen coming from fossil versus the percentage coming from renewables. This allows to expand partnerships with hydrogen producing countries and is probably more successful when implementing carbon taxation that wants to target only the use of fossils. As long as the percentage coming from renewables will increase in the next years, hydrogen can still be of great contribution to the energy transition and contribute to the EU climate goals.

Member states show significant differences in their ambition to produce green or blue hydrogen. National policies differences can be noticed or are not very self-evident on this topic. Whereas the Netherlands are quite far in investments and research, Italy and Sweden will probably face capacity problems in producing and importing enough hydrogen to meet the demand.

International cooperation on hydrogen will also top 2023 agendas. It is unlikely that the EU will produce its own hydrogen, thus it will need international partnerships to secure enough hydrogen imports (target of 10 million tonnes of H2). At COP27, on 16 November, the EU and Egypt signed an MoU on a strategic partnership on renewable hydrogen, which is seen as an important step towards an EU-Mediterranean Renewable Hydrogen Partnership. After having agreed with Canada on a hydrogen partnership earlier this year, German Vice chancellor Robert Habeck is visiting currently in Namibia to settle new partnerships for hydrogen imports for Germany. Related talks mention a EUR 10billion investment plan, equal to Namibia’s GDP. The EU will hence try to reconcile national differences in H2 imports through the Hydrogen Bank.

  • Carbon Pricing

On 14 July, 2022, the Commission made a proposal to reform the EU Emissions Trading System (EU-ETS) including the introduction of a Carbon Border Adjustment Mechanism (CBAM). This proposal is currently being discussed in the trilogue meetings in the second half of December 2022, and it is expected to be finalised in 2023. Some of the topics being deliberated include:

  • the timing of the inclusion of the maritime sector in the EU-ETS
  • the timing and conditions for the phase-out of the free allocation of allowances
  • the timing and scope of the introduction of a separate new ETS for buildings and road transport
  • the utilisation of EU-ETS revenues, particularly for the Innovation Fund, the Modernisation Fund and the Social Climate Fund

Legislation to implement the concluded EU-ETS reform can be expected to form a focus area in 2023. In particular, the execution of the CBAM, and the phase-out of free allocations with consequent changes for the Innovation Fund and Modernisation Fund as well as the setting up of the Social Climate Fund will be important topics.

Even after the conclusion of the ongoing phase of the EU-ETS reform, the development of a strong price signal in the EU-ETS will continue play an important role for investment in clean technologies, more so as Europe tries to compete with the United States in the aftermath of the Inflation Reduction Act. The establishment of a carbon price floor, suggested in 2022 by the German government, could be of great relevance in this context. A policy paper published by EPICO with Cleantech for Europe and Jacques Delores Institute on the topic highlights the importance of a carbon price floor for the EU-ETS with reference to the uptake of breakthrough technologies.

  • Energy market

A comprehensive reform of the EU electricity market is expected in Q1 2023, and it will stay high on the agenda of the European Parliament, which is expected to take part in related decision-making, unlike in the case of the 2022 short-term measures adopted. The currently discussed design of the Market Correction Mechanism is a way of putting a halt to the discussion on caps on wholesale gas prices, and protect consumers from never unseen extreme situations from taking place in 2023. New reforms will tackle the question of decoupling the effect of gas prices on electricity prices. The goal of this reform is to ensure affordable energy prices, and to better navigate future energy price volatility. The Commission is already pushing to start discussions on mid-term reforms on the energy market design in December 2022, in view of its aim of delivering by Q1 2023. The main measures chiefly orbit around the ‘europeanisation’ of three main models, i.e. the Iberian model, the Greek model, and preserving the merit order while decoupling gas prices from power costs. EPICO to publish a policy brief on this by the end of 2022.

In addition, to preserve a level playing field in the single market of the EU, the Commission is planning to boost the REPowerEU with additional financing. By looking into complementary sources of funding for REPowerEU and preparing for proposing further steps, they will continue with applying the principles of proportionality and necessity to prevent fragmentation in the EU.

In September 2022, Ursula von der Leyen presented a five-step plan as a response to the critical energy infrastructure in Europe. In the ‘Proposal for a Council Recommendation on a coordinated approach by the Union to strengthen the resilience of critical infrastructure’, released on 18 October 2022, preparedness, response and international cooperation on critical infrastructure started to be addressed. As per the proposal, it can be expected to put into force late 2022 or early 2023. Also, first recommendations on the infrastructure as well as a risk assessment are expected to come from the Network and Information Systems (NIS) cooperation Group in early 2023. This will be used to identify potential threats, risks and needs in the critical infrastructure, including the energy infrastructure.

The Gas Storage Regulation, agreed upon in June 2022, states that Member States need reach the 90% gas storage target by 1 November 2023. Preparing for the next winter will be an important priority for the EU throughout the year. For example, the EU will move forward on its efforts to successfully activate a joint procurement on Gas for next winter (2023/2024). Both Commission President and the Council President Charles Michel have been vocal about the issue.

  • Carbon Capture, Utilisation and Storage (CCUS)

On 1 December, the Commission presented the first steps on Carbon Removal Certification, which is now waiting for feedback and will get a follow-up in 2023. However, it is unlikely that a finalised Carbon Removal Certification Framework will be adopted before the end of the current European Parliament term in 2024. The proposal aims at boosting innovative industrial carbon removal technologies, such as bioenergy with carbon capture and storage (BECCS) or direct air carbon capture and storage (DACCS). It also provides certification criteria for 3 types of storage:

  • Permanent Carbon storage (including BECCS and DACCS)
  • Carbon Farming (storage in living biomass and dead organic matter)
  • Carbon Storage in products (storage in long-lasting products and materials)

CCUS also relates to the first stage of the European Hydrogen Strategy. In 2022, in a second round of large-scale calls for CCUS projects, 17 CCUS projects were selected by the Commission. In the next year the Commission is planning to use funding from the Horizon EU programme, and to double the funding available for the next large-scale call of the Innovation Fund.

Lastly, the topics of securing a CO2 infrastructure and the development of CO2 will become more important in the implementation of CCUS, which can be related to the steps that the Commission will take as part of stepping up the resilience and response capacities of critical infrastructure, announced in the 2023 Commission Working Programme.

CCS as a climate policy instrument can be understood as a downstream instrument of the EU, that is becoming increasingly important in CO2 mitigation, and will be strategically discussed at the European level in 2023. EPICO notes the key role of Denmark, which is currently in the process of setting up CCS infrastructure and creating the legal and regulatory conditions for companies to become a contact point for CO2 injection.

In Germany, too, a remarkable momentum has developed in recent days that makes a basis for CCS more likely in the coming months. The Federal Ministry for Economic Affairs and Climate Action is considering preparations for the use of CCS technology to meet climate targets. Emissions up to 73 million tonnes of CO2 would have to be exported and stored annually to be climate-neutral by 2045. In order to bring CCS technology to market in Europe, an amendment to the London Protocol is necessary.

  • Circular Economy

On 30 November, the EU adopted new packaging rules in line with the European Action plan, as an addition to a set of circular economy rules presented in March 2022. Although this shows some progress on the implementation of the new European Action Plan (CEAP), the initially promised Green Claims Initiative and a consumer initiative on the right to repair, were not put through and the Commission only focussed on Packaging and Packaging Waste Regulation and a policy framework on biobased, biodegradable and compostable plastics

This means the Green Claims Initiative and Consumer initiative are delayed and might become a topic in 2023 as well. For now, it remains unclear if and when the Commission continues to work on those initiatives.

More adoptions as part of the CEAP are planned for 2023, including:

  • legislative proposal for substantiating green claims made by companies
  • measures to reduce the impact of microplastic pollution on the environment

Moreover, in the 2023 Commission Working Programme, the Commission announced that food and textile will be the main focus within the framework of Circular Economy. These topics were identified during the Conference on the Future of Europe. Besides, the REACH framework, which stands for the registration, evaluation and authorisation of chemicals will be revised. This should contribute to Europe as a competitive and innovative market.

  • CEO’s 2 Cents

The loss of fossil energy imports from Russia and the geopolitical and economic shockwaves are a wakeup call to reset EU’s energy and climate policy.

While the US has just announced the "biggest investments ever for the climate protection” with the Inflation Reduction Act, the EU has focused on dealing with the effects of the crisis. 2023 will be the year in which Europe needs to focus on accelerating an innovation-oriented and result-driven energy and climate policy, to form the basis for sustainable economic growth after the current crises. The REPowerEU package and the culmination of the Fitfor55 reforms over the past few months have shown a way forward.

At this juncture, we have to answer many fundamental questions: What does the framework of the future competitive European energy market look like? How can we increase the pace of innovation while building lead markets for decarbonisation in cooperation and competition with other regions? How do we finance the transformation towards climate neutrality, especially in the industrial sector?

One thing is clear: There is no easy way. Transformation is complex. The good news is that the past year has partially impressively demonstrated that we are capable of setting the pace and overcoming many obstacles under enormous pressure. This demonstrated speed and pragmatism will be much needed to establish a flexible Energy Market based on renewables, kick-start a Hydrogen Economy, enable CO2-Pricing to incentivise innovation across all sectors, and implement a circular economy and develop a sound CCUS strategy.

EPICO will host its yearly symposium in Berlin in April/May 2023, including a session on the development of the price signal in the EU-ETS, on the developments in the European Energy Market Design, on the scale-up of a hydrogen strategy, and on CCUS.