Energy system integration is considered a crucial aspect of delivering the EU’s target to achieve climate neutrality by 2050.
On 8 July 2020, the European Commission (the Commission) issued a new Communication, “Powering a climate-neutral economy: An EU Strategy for Energy System Integration” (the Communication). The Communication is one of several recent policy initiatives to further the European Green Deal goal of achieving carbon neutrality by 2050. (See EU Commission Formally Announces European Green Deal.) The Communication notes that the current energy system is built on parallel and vertical energy value chains, which link specific sources of energy with specific end uses. According to the Commission, this system cannot deliver a climate-neutral economy due to its technical and economic inefficiency, substantial losses in the form of waste heat, and low energy efficiency. As such, the Communication outlines a plan for an integrated energy system that would establish a “pathway towards an effective, affordable and deep decarbonisation of the European economy in line with the Paris Agreement”.
The Commission notes that current trends — such as declining costs of renewable energy technologies, innovation in relation to storage systems, electric vehicles, and digitalization — are already driving greater energy system integration in Europe. However, the Commission cites the need to take a further step and “connect the missing links” in the energy system. As such, the Communication sets out specific policy and legislative measures. In particular, the Commission identifies three “complementary and mutually reinforcing concepts” to achieve an integrated energy system:
- A more circular energy system, with energy efficiency at the core
- A greater direct electrification of end-use sectors
- The use of renewable and low-carbon fuels — including hydrogen — for end-use applications where direct heating or electrification is not possible
A More Circular Energy System
The Communication highlights the following areas:
- Energy efficiency is considered an essential part of the energy system. As such, greater efficiency will reduce the overall investment costs and needs associated with energy production. The Commission will look to issue guidance to Member States to make the principle of energy-efficiency-first operational across the energy system in implementing EU and national legislation.
- Local energy sources are considered to be used insufficiently or ineffectively. In particular, waste heat from industrial sites, data centres, and similar sources are considered to have significant unused potential. As such, the Renewable Energy Directive and Energy Efficiency Directive will be revised to facilitate the reuse of waste heat through a connection to district heating networks.
- Wastewater and biological waste and residues for bioenergy production are considered a further significant untapped source. Such biogas is considered a potential asset to be exploited on-site (e.g., on a farm) and integrated into existing renewable energy sources (such as solar electricity and heat). These efforts will be incentivised through a new Common Agricultural Policy, structure funds, and other programmes.
Greater Electrification of End-Use Sectors
Electricity demand is projected to increase significantly as part of achieving climate neutrality, with the share of electricity — as part of final energy consumption — expected to grow from 23% today to 50% by 2050. As such, growth in electricity demand will largely need to be met by renewable energy. While there are certain incentives for electrification on the demand side, particularly in buildings, industry, and transport, an increase in electrification raises challenges on the management of the electricity system at the regional and local level. According to the Commission, several policy and legislative developments will be required to address these challenges, including renewable energy policies, the deployment of electrification technologies (e.g., heat pumps, electric vehicle charging points, and similar devices), and consideration of decarbonisation as part of the Industrial Emissions Directive revision.
Promoting Renewable and Low-Carbon Fuels
The Commission notes that some areas with higher costs may prevent direct electrification. In such instances, renewable or low-carbon fuels will need to be used (including sustainable biogas and biofuels, and renewable or low-carbon hydrogen or synthetic fuels). Notably, the Commission appears to be seeking to promote the use of renewable hydrogen in sectors that are hard to decarbonise (on 8 July 2020 the Commission launched a parallel Communication, “A hydrogen strategy for a climate-neutral Europe”). Additionally, the Commission is seeking to enable carbon capture, storage, and use projects and is considering using the Innovation Fund to demonstrate and scale up such projects.
While the development of an integrated energy system is considered part of the recovery package for COVID-19, such a system is also essential to help the EU achieve its goal of carbon neutrality by 2050.
The Commission believes that such integrated energy system will both provide flexibility and boost storage technologies (e.g., pumped hydropower, grid scale batteries, and electrolysers). The Commission also believes that home batteries and electric vehicles in buildings will provide additional flexibility to help manage the distribution system (electric vehicles, for example, could provide up to 20% of the flexibility required on a daily basis).
The measures envisaged by the Commission are wide-ranging and ambitious, and will require profound changes by the EU and by each Member State. Nonetheless, the Communication highlights the EU’s continued commitment to “building back better” and confirms that the Green Deal is at the heart of the Commission’s current policy-making.
Latham & Watkins will continue to monitor developments in this area.