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August 25, 2023
What could the ongoing European climate and energy negotiations mean for your company?
In recent years, the European Union (EU) has been engaged in ongoing negotiations around a series of proposals designed to align its climate objectives. Initially introduced as the “Fit for 55 package,” these proposals have undergone subsequent revisions in the REPowerEU plan following Russia’s invasion of Ukraine, which highlighted the need for an accelerated energy transition. While some of these legislative proposals have already reached consensus, several impactful measures are still being discussed among the European Commission, the Parliament, and the Council.
These include:
- Electricity Market Design (EMD): Proposed by the Commission to accelerate the expansion of renewable electricity, decrease reliance on fossil fuel imports, and support faster integration of national electricity markets, negotiations were summarised in a compromise text in June 2023. The trilogue negotiations are slated to be held in September 2023.
- Renewable Energy Directive (RED III): In June 2023, European Union Member States approved a comprehensive redesign in the Committee of Permanent Representatives. The last step for adaptation will be a vote in the European Parliament for formal approval. EU Member States will then have 18 months to transpose the Directive into national law.
- Hydrogen and decarbonised gas package: The Commission proposed a significant update to the existing legislation surrounding natural gas markets. The Hydrogen and Decarbonised Gas Package aims to promote the integration of renewable and low-carbon gases, such as biomethane and hydrogen, into existing gas networks. The first trialogue was held in June 2023.
In this blog post, we delve into some important implications and opportunities for companies across Europe.
Consumer Protection and Empowerment
Protecting consumers from fluctuating prices and allowing them to participate in stabilizing the electricity system has been a focus of the proposed reforms. The new design of the EMD plans to provide access to a broader range of contracts, with options to lock in fixed, long-term contracts or use dynamic pricing to take advantage of varying rates. Suppliers will be required to manage their price risks to ensure they can fulfil their contractual obligations, while governments will have the option to use revenues from two-way Contracts for Difference (CfDs) to provide support to end customers when required in times of crisis.
Growing opportunities for users through increased participation and flexibility are also planned via new demand response and storage schemes. This includes a new “peak shaving” product introduced by the Commission, through which system operators could procure upfront demand reduction for peak times. However, the Parliament has now proposed an additional assessment, which will be carried out before the end of 2024 to ensure the scheme does not have adverse market effects.
The Council has strengthened the provisions regarding public interventions during times of gas crisis through the current proposals for the Hydrogen and decarbonised gas package. Price interventions for the supply of natural gas may be implemented by Member States under conditions similar to those outlined in the EMD reform. In addition, gas customers should also be shielded from potential tariff increases associated with the development of hydrogen infrastructure by ensuring that no cross-subsidisation occurs between current natural gas grid users and future hydrogen network users.
Increasing the Share of Renewable Generation
Increased local and low-cost renewable energy is a key part of the clean energy transition to reduce dependency on external suppliers. RED III includes an agreement to increase the legally binding share of renewable energies in the EU to at least 42.5%, with an aspirational top-up of 2.5% by 2030. Reaching this target will require a significant boost and investment in renewable energy sources including wind, solar, hydropower, geothermal and renewable fuels. Legislators aim to support European industry by using a variety of EU-level and national support schemes. The Parliament has also proposed adding a renewable energy auction scheme at the European level with EU-backed guarantees for Power Purchase Agreements (PPAs) and CfDs to the EMD.
Boosting Power Purchase Agreements (PPAs)
Increased use of stable, long-term contracts such as PPAs is essential to reducing EU companies’ exposure to volatile electricity prices. The reform of the EMD aims to simplify and de-risk PPAs, making them accessible to a wider pool of buyers. A voluntary market platform to aggregate demand, “standardized” PPAs to simplify the negotiation process, and state-backed credit guarantees for those who sign PPA agreements should all support the goal of a wider uptake.
RED III also aims to remove barriers to long-term PPAs through a shortened permitting procedure for wind and solar power plants. This, as well as the requirement to designate renewable “go-to” areas, was already part of temporary EU emergency regulations in 2022 and will now become standard.
Purchase agreements are also a priority in the Hydrogen and decarbonised gas package. The current proposal would allow the trade of renewable gas certificates through a centralised registry. This could signal the emergence of “virtual gas purchase agreements” similar to virtual PPAs in the electricity sector. This development paves the way for increased collaboration and efficient utilisation of renewable gases within the European market.
Approved rules for renewable fuels production and efficiency incentives
Boosting the use of Renewable Fuels of Non-Biological Origin (RNFBO) is also an important part of the journey to decarbonise European industry. Two critical Delegated Acts around the criteria to produce renewable hydrogen and its derivatives, originally included in RED II, have been approved.
The first Delegated Act (RED II, Article 27 [3]) focuses on specific production criteria and renewable electricity procurement requirements, including the concept of additionality, temporal matching between electricity production and consumption, and geographical matching between production and consumption sites.
The second Delegated Act (Article 28 [5]) addresses the calculation methodology for measuring the greenhouse gas (GHG) intensity required for fuels to qualify as RFNBO or recycled carbon fuels (RCFs). Key provisions in the Act mandate a minimum of 70% GHG emission reduction compared to their fossil counterparts per MJ of useful energy. Moreover, a ban on the use of CO2 covered under the EU Emissions Trading System after 2041 (2036 for fossil CO2 from electricity production) is introduced. Notably, the calculation of emissions must consider all stages of transport and storage, including international shipping, if applicable.
As part of the Hydrogen and decarbonised gas package, the Parliament has proposed prioritizing the use of hydrogen in sectors where the highest GHG reduction can be achieved. National subsidy schemes could be linked to the prioritisation of efficient hydrogen use, bearing in mind an “energy efficiency first” principle, which is crucial in optimizing the use of hydrogen when considering its inherent inefficiencies compared to direct electrification.
Close monitoring of ongoing negotiations between the Commission, Parliament, and Council is crucial for European corporates, as these regulations will significantly impact energy sourcing once adopted. Edison Energy can help your company stay informed on critical EU regulatory changes and provide impactful strategies in the evolving energy market.
