Our monthly Policy Update shares key news from the past month in Brussels, examining the potential impact of recent policy developments on EU cleantech.
This month, we dive into the numerous proposals from the European Commission as part of the new Green Deal Industrial Plan (GDIP). These proposals are a complement to the broader EU Green Deal and should be seen in this context. Going beyond the deployment targets of Fit for 55, and the energy security goals of REPowerEU, the Green Deal Industrial Plan sets the foundation for a cleantech-oriented industrial strategy, including manufacturing targets, permitting reform, access to raw materials and affordable energy.
This package constitutes a response to increased global cleantech competition, by enabling Member States to give faster permitting to strategic Net-zero cleantech projects, by re-focusing existing funds on cleantech manufacturing, and by introducing the possibility to match attractive offers which innovators may receive from third countries.
Taken together, the GDIP contains many positive elements that could accelerate the scale-up of clean technologies in the EU. However, the strategy relies heavily on Member States, risking a fragmented approach, and falls short of the simplicity and predictability of the US Inflation Reduction Act.
This policy update addresses each of the components of the GDIP, summarising them and providing some insights into how they may contribute to strengthening European cleantech competitiveness. The files covered for this policy update are:
2. Electricity Market Design Reform
4. State Aid Temporary Framework
6. Communication: The EU Single Market at 30 Years
7. Communication: Competitiveness beyond 2030
In addition to the GDIP files, this policy update also briefly discusses some additional policy developments which have an impact on cleantech.
8. Substantiating Green Claims
Six months after the passing of the Inflation Reduction Act by the US Congress, the European Commission unveiled the Net Zero Industry Act (NZIA), which serves as the central piece of the EU’s efforts to remain competitive in the global cleantech race. Cleantech for Europe has long called for such an act and for several measures included in the NZIA, highlighting their strategic importance in sending clear market signals to the cleantech community.
The NZIA’s primary goal is to increase the EU’s domestic manufacturing capacity of cleantech equipment. As such, it does not contain objectives for deploying clean technologies, but focuses instead on measures to facilitate the manufacturing of clean technologies.
The NZIA creates the concept of Net-Zero Strategic Projects, and lists the following technologies as strategic for the European Union’s net-zero goals:
1. Solar photovoltaic and thermal technologies
2. Onshore wind and offshore renewable technologies (wind & beyond)
3. Battery/storage technologies
4. Heat pumps and geothermal energy technologies
5. Electrolysers and fuel cells
6. Sustainable biogas/biomethane technologies
7. Carbon Capture and storage (CCS) technologies
8. Grid technologies
This list follows three criteria: the technology readiness level (technologies must be TRL 8 or above), security of supply chains and the EU’s competitiveness in these technologies.
Key elements of the act include:
• Sectoral Scope: the strategic Net Zero technologies identified in NZIA are eligible to receive faster permitting and financial support. Beyond this list of technologies, the act mentions other innovation sectors which can have a contribution to reaching net-zero goals, such as alternative fuels, advanced nuclear (SMRs and generation 5 fuels) and CCU, but it does not grant them priority status.
• Manufacturing Targets: the NZIA establishes that the manufacturing capacity in the EU of the strategic net-zero technologies should be at least 40% of the Union’s annual deployment needs by 2030. Beyond that, carbon storage is the only sector which receives a legally binding sector-specific target. Several other sectors receive indicative, non-binding targets expressed as installed gigawatt (GW) capacity by 2030, but these targets are in fact established in other existing legal documents.
• Permitting: for strategic net-zero technologies, the NZIA promises faster permitting and streamlined processes through the help of one-stop shops which will be created within 3 months from the adoption of the NZIA in each Member State. Permitting for strategic net-zero projects is capped to 12 months at maximum and can even be approved automatically if the project is placed in a Just Transition Zone.
• European Sovereign Fund: The Commission also introduces the possibility of a European Sovereign Fund in the context of the review of the EU’s multiannual financial framework, which it pledged to launch in the summer of 2023.
• Net-Zero Europe Platform: The Clean Tech Europe platform launched in November 2022 is transformed into a Net Zero Europe Platform made up of Member State Representatives, and chaired by the Commission, acting as a strategic coordination body across a range of areas.
• Green Public Procurement: for all sectors defined as strategic, a framework for mandatory Green Public Procurement is introduced, by which the net-zero strategic projects are given a beneficial weighting in public procurement processes.
The NZIA gives a clear steer for the existing EU funding towards strategic net-zero technologies, such as the Cohesion Fund. However, clarity on how this funding can be accessed in direct linkage to the technologies deemed strategic is lacking from the document.
On Tuesday, 14 March, the European Commission put forward its electricity market design (EMD) revision proposal.
The proposal emphasizes long-term contracts to put a “buffer” between the short-term markets (tied to the price of natural gas) and users’ electricity bills. The Commission has chosen to take a two-step approach consisting of a limited initial reform to be agreed in the next few months, with the possibility of more fundamental reform left open for after the 2024 European elections.
Two key themes of the new proposal are:
Easier access to affordable clean electricity
• Power Purchase Agreements (PPAs): The proposal introduces guarantee schemes for PPAs backed by member states, which would reduce the financial risks of PPAs and increase industrial and commercial users’ access to the PPA market. Fossil fuels are excluded from the scheme.
• Contracts for Difference (CfDs): All direct public price support schemes for new investments in non-fossil generation (listed as wind, solar, geothermal, hydropower, and nuclear) shall take the form of two-way CfDs, and excess revenues collected by member states under CfDs are to be redistributed to consumers.
Raising the ambition for grid flexibility:
This includes storage and demand-side response being seen as integral to the power system, with capacity mechanisms, other flexibility support schemes and the introduction of regular assessments of flexibility needs.
• Flexibility support schemes: Flexibility will be promoted through the introduction of capacity mechanisms or other flexibility support schemes consisting of payments for the available capacity of non-fossil flexibility. These are not mandatory and remain at the discretion of member states.
• Flexibility needs assessments: From 2025, member states are to draw up a report on their flexibility needs. Subsequently, the EU’s Agency for Cooperation of Energy Regulators (ACER) will provide recommendations on cross-border issues.
• Indicative national deployment objectives for demand-side response and storage: This provides a long-term perspective that boosts investor confidence and accelerates deployment.
• Peak shaving product: Transmission System Operators are allowed to use “peak shaving” products to reduce electricity demand during peak hours, reducing the need for natural gas-fired, “peaker” plants, and opening the door to revenue streams for behind-the-meter storage. However, the text doesn’t cover front-of-the-meter and co-located storage.
• TOTEX approach: The Commission proposes a total expenditure (TOTEX) approach to optimising the grid and procuring flexibility services, including energy storage. Currently, system operators only consider capital expenditure (CAPEX), which penalises solutions such as smart grids and energy storage due to higher upfront investment costs.
On 16 March, the Commission put forward a Critical Raw Materials Act (CRMA) to secure Europe’s supply of materials that are key to the development of a net-zero economy, in light of rapidly rising demand and dependency risks on third countries for mining and processing of these materials.
The CRMA proposal introduces a new distinction between critical raw materials and “strategic raw materials”. The latter refers to materials which may be susceptible to supply chain shocks, and which also play a significant role in specific sectors. These sectors are those relevant to the green and digital transitions, as well as to the European space and military industries. Key elements of the proposal include:
Domestic capacity targets (as a share of annual consumption) for extraction, processing, and imports of strategic raw materials to be achieved by 2030:
Strategic Projects (SPs) are introduced, with easier financing and streamlined permitting. Permitting SPs for extraction should not exceed 2 years, and 1 year for processing or recycling. Environmental impact assessments for SPs should not exceed 90 days.
Simplified Permitting: member states to designate a single national competent authority (“one stop shop”) for facilitating the approval of CRM projects.
Raised ambitions on circularity and the recovery of CRMs from extractive waste are introduced.
Strategic Stockpiles: The Commission will assess Member States’ strategic stockpiling measures and make recommendations based on its assessment. Large companies which manufacture strategic technologies using strategic raw materials are expected to audit and stress test their supply chains every two years.
Partnerships: The Commission also announced its intention to pursue Strategic Partnerships with resource-rich third countries to raise their environmental and social standards as well as their share of the value added in the value chain.
The management of the goals of this Act is to be overseen by a new European CRM Board.
On 9 March, the European Commission approved a temporary relaxation of existing State aid rules, to allow Member States to provide financial support to cleantech innovators and prevent cleantech leakage to third countries.
The loosened state aid rules will remain in place only until 31 December 2025, while beneficiaries of State aid will have to deliver the projects within 3 years of the date of receipt of the funds.
Under the loosened State aid rules, Member States will be able to grant subsidies to private companies to:
On 16 March, the European Commission released a Communication on the establishment of a European Hydrogen Bank (EHB), an investment vehicle to support the uptake of renewable hydrogen within the EU, and eventually also imports from non-EU countries. The EHB would have an indicative budget (coming from revenues of the EU carbon market) of €800 million for a first auction in the autumn of 2023 to cover the green premium of renewable hydrogen produced in the EU. The auctions will be launched under a new competitive bidding mechanism to support producers through a fixed price payment per kg of renewable hydrogen produced for a maximum of 10 years of operation. The EHB will create an EU auction platform offering “auctions-as-a-service” to member states, using the EU Innovation Fund (EUIF) and member-state resources, to fund renewable hydrogen projects without prejudice to EU state aid rules.
The idea of fixed premium auctions is similar to the Contracts for Difference (CfD) and fixed premiums that supported deployment that led to cost declines in wind and solar technologies. In these supply-side auctions, project developers will bid a sum in euros per kg of hydrogen for a fixed premium to be paid over a period of 10 years. Bids are then ranked from lowest to highest and the auction is cleared at the point where the EUIF budget for that auction is exhausted. This competitive bidding ensures that companies bid the real cost of production, whereas grants under the EUIF are administratively more complicated and time consuming because each grant application must be thoroughly evaluated.
The EHB will also support infrastructure planning and provide transparency on infrastructure needs, and be complemented by the more than €10 billion in cross-border state aid (known as IPCEIs) approved in 2022 for two projects to support the production (Hy2Tech) and use (Hy2Use, focused on hard-to-electrify sectors such as steel, cement and glass) of green hydrogen.
Impact on cleantech: With investment decisions on green hydrogen at risk of shifting to the US, the EHB is a positive step toward narrowing the support gap between what is offered in Europe and the generous hydrogen tax credit provided by the US Inflation Reduction Act (IRA). This market driven approach could enable green hydrogen to be sold where it is most valued – notably, hard-to-electrify sectors such as steel, shipping, and long-haul aviation – because green hydrogen producers who have off-takers with high willingness to pay can make lower bids. If successful, this Bank – which is really an investment vehicle as opposed to a new financial institution could serve as a template for reducing green premiums in other industrial decarbonization technologies. But as always, simplicity in design and speed in implementation will be key to unlocking Final Investment Decisions (FIDs) in Europe before innovative are lured across the pond.
On 16 March 2023, the Commission published a communication setting out how to secure the long-term competitiveness of the EU. The Communication focuses on nine drivers, and establishes KPIs for each of these areas:
The Commission will now move to publish annual updates based on the KPIs included in the Communication to inform policy proposals going forward. It will also actively screen its regulatory playbook with the goal of simplifying reporting requirements for companies, with a focus on digital, green and economic areas. The stated aim is to reduce reporting burdens by 25%.
On 16 March, the Commission published its Communication regarding the 30th anniversary of the EU’s Single Market. The Single Market is the largest integrated market in the world – makes up 18% of global GDP, employs 128 million people and hosts 23 million businesses, and the Commission outlines a series of action items and upcoming elements through which the Single Market can be strengthened.
It uses this opportunity to enshrine the net-zero goal of the EU at the heart of the Single Market, this goal becoming therefore a gravitational pull for other Single Market developments, naming the Green Deal Industrial Plan as part of the EU’s efforts to maintain competitiveness, as well as the integrity of the Single Market.
The elements outlined by the Communication which will strengthen the Single Market are:
On March 30, co-legislators (the European Parliament and Council of the EU) reached a provisional agreement on the revision of the Renewable Energy Directive (REDIII), a key part of the Fit for 55 package. REDIII will raise the mandatory target for the share of renewable energy in the Union’s total final energy consumption to 42.5% by 2030, with an additional 45% voluntary target for member states.
This agreement also includes sector-specific subtargets and dedicated measures to boost renewables uptake in industry, transport, buildings and district heating and cooling. The text sets ambitious renewable hydrogen targets for transport and industry. Notably, renewable hydrogen should make up 42% of the hydrogen used in industry by 2030, and 60% by 2035. Member states will designate “renewables acceleration areas” with simplified and fast-tracked permitting for renewable energy projects. Additionally, these will be regarded as being in the "overriding public interest," which will lessen their regulatory burden and restrict the grounds for legal objections.
Finally, the deal ensures that member states set an indicative target of at least 5% of newly installed renewable energy capacity for innovative renewable energy technology. The definition of "innovative," though, is not yet clear.
On March 22, the European Commission tabled a legislative proposal to regulate how companies must substantiate and communicate green claims. Examples of these claims include: "packaging made of 30% recycled plastic", “bee-friendly juice” or “carbon compensated ride”.
All companies doing business in the EU will have to communicate green claims to consumers, except when they fall under more specific legislation, such as the organic food framework. Their claims will need to be independently verified and based on widely recognised scientific evidence.
An interesting example of a topic tackled by the proposal is that of claims about CO2 offsets. The proposal requires more transparency on CO2 offsetting, disclosing what part of operations relies on buying offsets. It also sets requirements on the integrity of the offsets themselves, as well as on their correct accounting.
The European Commission also proposes a harmonised certification for eco-labels, and bans the establishment of new national or regional public environmental labelling schemes in Member States, unless these are established at EU level.