Europe Proposes Major Electrification Plan

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Written by Martin Lynch, European News Editor for IIR News Intelligence (Sugar Land, Texas)

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Summary

The European Commission (EC) has proposed a major electrification plan and overhaul of its Emissions Trading System (ETS) to greatly reduce the region's reliance on fossil fuels by 2040.

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Major Electrification Push

Europe has announced its intention to become the world's first electro-powered continent.

The European Commission (EC) has announced an Electrification Action Plan (EAP) that sets a target for electrifying 46% of the region's energy demand by 2040, double the current figure of 23%. The goal of the EAP is to close the gap between the cost of electricity and gas for industry, transport, buildings and consumers. If it hits the 46% target it will cut the European Union's (EU's) fossil fuel import bill by 260 billion euro (US$297 billion) per year by 2040. New incentives to promote cleaner power solutions will be made available while funds from the Emissions Trading System (ETS) will be used to finance industrial decarbonisation across Europe at scale. According to Industrial Info Resources data, there are more than 13,000 power-related projects underway in Europe worth more than US$2.6 trillion in investment.

Why Electrify?

Europe is doubling down on the rapid electrification of transport, industry and buildings because its reliance on imported fossil fuels has repeatedly exposed it to geopolitical shocks - most notably the current U.S./Israeli war in Iran and the ongoing Russian invasion of Ukraine that began in 2022. The EC noted that these have "driven up energy prices for both households and companies, and dragged down our competitiveness. While 70% of EU electricity is now generated from homegrown clean energy sources, the electrification rate of energy demand has stalled at 23% over the past decade. We therefore need to accelerate the electrification of energy-using sectors, notably industry, transport and buildings."

Relaxing the ETS Targets

Launched in 2005, the ETS covers more than 10,000 industrial and power installations and airlines operating flights in and between airports across the 27 EU Member States and a few non-EU countries in Europe. It reduces emissions by pricing pollution from the power, heavy industry, aviation and maritime sectors, which together account for roughly 40% of total greenhouse gases (GHG) in the EU. Since its inception, it has generated more than 270 billion euro (US$309 billion) in revenues while cutting emissions by 50% in the sectors it covers.

A new emissions trading system, called ETS2, will also cover emissions from buildings, road transport and additional sectors when introduced in 2028. However, ETS measures will be relaxed in some cases to help struggling EU industry - a move criticised by climate and environmental groups. The EC said that "the geopolitical and economic context has changed, and EU industry is under increased pressure. The review will bring relief to industry, while preserving the essential role of the ETS in the climate and energy transition." Some heavy industries will benefit from free pollution permits for longer, while the number of permits in circulation will be reduced more slowly. Free allowances for major polluting sectors such as steel and cement will be extended to 2038, instead of 2034 - as long as they demonstrate their clean production plans in Europe.

Reacting to a Rapidly Changing World

EU Climate Commissioner Wopke Hoekstra said: "[The ETS] comes with three weaknesses we have insufficiently anticipated. First, the world has changed considerably, with key European industries facing an unlevel playing field. Heavy state subsidies, dumping, and dubious labour conditions abroad have wreaked havoc in key sectors of our economy. Second, a great deal of companies have made investments in a clean future. We also have to acknowledge that others have not done enough to decarbonise in Europe and rather invested rather outside Europe. This, in our view, cannot stand. And third, if you look at the picture of what happens with the money. Member States receive about 80% of all ETS revenues. But of that 80%, less than 10% has been spent on industrial decarbonisation. Industry rightly demands that more should flow back to decarbonise these sectors."

Big Funding For Decarbonisation

Going forward, the ETS is to become the EU's key innovation and investment engine. The Industrial Decarbonisation Bank will have 100 billion euro (US$114 billion) in funding going towards industrial decarbonisation across Europe at scale. The first phase of this will be the ETS Investment Booster, which will provide 30 billion euro (US$34 billion) before 2030. Member States will now be required to spend 50% of their national ETS revenues on investments to decarbonise ETS sectors. This adds up to more than 100 billion euro (US$114 billion) in investments before 2030, according to the Commission.

Ursula von der Leyen, president of the European Commission, said: "The best way to reduce Europe's fossil energy dependency is to power our economy with electricity from clean, homegrown sources. Today we are proposing to make Europe the world's first electro-powered continent. From lowering electricity prices to adapting our carbon market to the changing global realities, this is also an investment and independence plan. To keep the clean transition on track, bring relief to our industry, and support decarbonisation. Let's switch it on."

Industry Reaction

There was positive support from the cement industry, with caveats. "Cement Europe supports the measures, particularly the focus on market stability, the funding of the Industrial Decarbonisation Bank via ETS revenues, and the inclusion of CO2 infrastructure in the regulatory framework. While welcoming waste incineration coverage, the group noted potential complexities and highlighted that a robust, leak-proof Carbon Border Adjustment Mechanism (CBAM) is essential for the proposed phase-out of free allowances. Additionally, Cement Europe called for urgent action to address high electricity prices to maintain industrial competitiveness."

The steel sector, while supporting heavy decarbonisation, cast doubt on the reality of the changes expected in the timeframe. Axel Eggert, director general of Europe's main steel association EUROFER, remarked: The European steel industry is ready for deep decarbonisation, but the EU and most Member States are not. It is an illusion to think the steel industry can be carbon neutral by the end of 2033 based on the current ETS and CBAM frameworks alone. Without affordable clean electricity, hydrogen infrastructure and greater scrap access, the transition cannot happen at the pace envisaged. EUROFER warned that electricity prices remain around twice the level needed for European industry to compete internationally, while renewable hydrogen remains scarce and several times above the target price of €2 per kilogram. Carbon leakage risks persist across both domestic and export markets, including in downstream sectors. As a result, 10 to 15 million tonnes of planned low-carbon steelmaking capacity have already been delayed or put on hold because the business case for investment has weakened." Industrial Info is tracking more than 1,450 steel industry projects in Europe worth almost US$93 billion in investment.

Key Takeaways

• Europe has announced its intention to become the world's first electro-powered continent.
• It has set a target for electrifying 46% of the region's energy demand by 2040, double the current figure of 23%.
• The Industrial Decarbonisation Bank will have 100 billion euro (US$114 billion) in funding going towards industrial decarbonisation across Europe at scale.