Blog Post

Reinforcing the EU energy industry transformation: stronger policies needed

The European energy system is being transformed by three major forces, decarbonisation, digitalisation and decentralisation. Decarbonisation is changing the European energy mix, while innovation in digital technologies is enabling disruptive change in the way energy systems are operated.

By: , and Date: September 21, 2017 Topic: Green economy

Towards a 3D European energy system: decarbonised, digital and decentralised

The European energy system is going through a profound transformation as two trends reshape it: decarbonisation and digitalisation. Based on strong public policies, decarbonisation is changing the European energy mix, while innovation in digital technologies is enabling disruptive change in the way energy systems are operated.

Digitalisation can be an important catalyst for decarbonisation. Digital technologies, such as smart meters, give consumers more control over their energy use and offer benefits from additional services. Energy suppliers, meanwhile, can optimise their operations and develop new offers. System operators can benefit from increased availability of real-time data to manage their grids more efficiently and to integrate an increasing amount of variable renewables into the system.

The extent to which energy is already going digital is illustrated by the share of patents in which energy and IT appear on the same patent application. This share has boomed since 2006, outpacing traditional patents in IT and energy taken individually (Figure 1).

 Figure 1: Share of IT and energy tech in total patents, EU28, index=1995

Source: Bruegel based on PATSTAT.

Increasing digitalisation also enables the European energy system to become more decentralised, with greater interaction between services (electricity, heat, transport, data) that used to be largely separate.

In this context, the European energy industry must quickly rethink its strategies in order to adapt to, and make the best of, the new reality.

 The future of oil and gas companies

Oil and gas companies are the biggest part of the European energy industry. Their total market capitalisation exceeds that of utilities by about 50 percent, and their traditional business models mean they are most at risk from decarbonisation.

To fully unleash the transformation of these companies, even stronger policy signals are needed, such as a meaningful carbon pricing. Otherwise, oil and gas companies might decide to continue in a business-as-usual mode, at best just refocusing their activities on gas.

Over the last few years, leading European oil and gas companies have often pledged to commit to new energy solutions. However, these companies have yet to translate declarations into action, as only sporadic sizeable investments have been made so far (Figure 2). Stronger policies could push European oil and gas companies into the new energy solutions territory in a more assertive way.

Figure 2: European oil and gas companies’ investments in new energy solutions

Source: Bruegel based on Bloomberg.

 The future of electricity utilities

Since 2008, electricity utilities have experienced a deep crisis because of the rapid emergence of new market and policy conditions that have put pressure on their traditional business models. The rise of renewable energy and weak electricity demand have led to significant overcapacity and significant losses of traditional energy businesses. In the future, strong decarbonisation policies, improved energy efficiency favoured by technological development, the rise of distributed generation and new developments in demand response and storage capacities will put even more pressure on conventional generation assets.

In such a complex situation, utilities must decide whether to defend their existing business models or to become drivers of the energy transition. Electricity utilities might bet on convincing policymakers that their coal and gas units are indispensable (Figure 3) to keep the lights on and thereby secure new policy-driven cash flows for their plants. Corresponding capacity mechanisms have already been implemented in several EU countries.

Figure 3: Leading European utilities’ generation portfolios: still a lot of coal and gas

Source: Bruegel based on Bloomberg.

Alternatively, electricity utilities might bet on deep decarbonisation and build up significant renewable generation capacity, invest in networks and divest from fossil fuels. For this to become a general trend, clearer policy signals are needed. Returns from the network business and renewables are indeed largely policy driven. Regulators explicitly decide on the rate of return for electricity networks and policymakers decide on the remuneration schemes for renewables. A change in regulations can cost regulated businesses billions of euros. Therefore, understanding and managing the political environment is probably more important for the success of renewables and network electricity companies than good internal management or efficient supply chains.

Setting the right policies: the need for a high-level platform to discuss the future of energy

Considering the complexity of the energy transition, we consider that partial fixes to the current EU energy regulatory system are not sufficient to provide the appropriate long-term regulatory stability to the energy industry.

Instead, Europe urgently needs a high-powered platform – representing all major stakeholders – to discuss a broader vision for the design of its future energy sector. This should go beyond the existing working-level discussion forums.

The European Council should ask the European Commission to prepare a green paper on the organisation of the European energy sector in the twenty-first century. It should form a consistent basis for upcoming legislation in different policy areas.

The ongoing structural transformation of the European energy system requires a parallel structural transformation of the policy framework. This should become a priority of the EU Energy Union initiative, because with the current level of uncertainty, investors are unlikely to deliver the annual €379 billion of investment required between 2020 and 2030 to turn the EU 2030 energy and climate targets into reality.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

Read article More on this topic
 

External Publication

Europe's path to net-zero

Fostering the industrial component of the European Green Deal: key principles and policy options.

By: Simone Tagliapietra and Reinhilde Veugelers Topic: Green economy Date: December 3, 2021
Read about event
 

Upcoming Event

Dec
7
14:30

Future of work and inclusive growth: Digital dialogues

An end of year series of digital discussions on the Future of Work and Inclusive Growth in Europe.

Speakers: Janine Berg, Arturo Franco, Stijn Broecke, Esther Lynch, Mario Mariniello, Laura Nurski, Sharon Parker, Leah Ruppanner, Nicolas Schmit, Kim Van Sparrentak and Tilman Tacke Topic: Digital economy and innovation, Inclusive growth Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read about event More on this topic
 

Past Event

Past Event

European Green Deal beyond the Brussels climate bubble

How can the European Green Deal be implemented beyond Brussels?

Speakers: Maciej Bukowski, Sarah Coupechoux, Zsolt Darvas, Susi Dennison, Michal Horvath, Lara Lázaro, Marie Le Mouel, Michael Losch, Giulia Novati, Davide Panzeri, Thomas Pellerin-Carlin, Nolan Theisen, Shahin Vallée, Marc Vanheukelen and Georg Zachmann Topic: Green economy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: December 2, 2021
Read about event More on this topic
 

Upcoming Event

Dec
9
14:00

How to deal with small banks: consolidation, tailoring and the fintech challenge

Small banks face multiple challenges. What structural changes are needed to tackle these pressures?

Speakers: Alexander Lehmann, Nicolas Véron, Xavier Vives, Anne Fröhling and Philip Evans Topic: Banking and capital markets
Read article More on this topic
 

External Publication

'In Situ' Data Rights

Privacy empowers individuals to control what is gathered and who sees it; portability permits analysis and creates competition. By moving our data to portals that would share more value in return, we might capture more of our data value. After all, that data concerns us.

By: Bertin Martens, Geoffrey Parker, Georgios Petropoulos and Marshall Van Alstyne Topic: Digital economy and innovation Date: December 1, 2021
Read article More on this topic
 

Blog Post

Rising energy prices: European Union countries’ views on medium-term policies

Alongside short-term measures to shield consumers from rising energy prices, EU countries have set out their positions on medium-term measures to prevent recurrence. Here we summarise those positions.

By: Giovanni Sgaravatti, Simone Tagliapietra and Georg Zachmann Topic: Green economy Date: November 29, 2021
Read about event More on this topic
 

Past Event

Past Event

Role of innovation in decarbonisation

A fireside conversation with Eni CEO Claudio Descalzi on decarbonisation.

Speakers: Claudio Descalzi and Guntram B. Wolff Topic: Green economy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: November 29, 2021
Read article More on this topic More by this author
 

Podcast

Podcast

COP26: global stocktake and what’s next

What happened and what didn’t happen at COP26?

By: The Sound of Economics Topic: Green economy Date: November 25, 2021
Read about event More on this topic
 

Past Event

Past Event

COP26: global stocktake and what’s next

In this episode of the Sound of Economics Live, join us as we contribute to the global stocktake of the climate summit, to foster a clearer understanding of the game changers and the missed opportunities.

Speakers: Li Shuo, Diederik Samsom, Simone Tagliapietra and Laurence Tubiana Topic: Green economy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: November 25, 2021
Read article More on this topic More by this author
 

Parliamentary Testimony

Dutch Parliament

The future of the stability and growth pact

Testimony given to a Tweede Kamer der Staten-Generaal roundtable discussion on the future of the stability and growth pact.

By: Guntram B. Wolff Topic: Dutch Parliament Date: November 24, 2021
Read article More by this author
 

Podcast

Podcast

Technology: a product of unequal power?

The effects of digital technology on work and wages.

By: The Sound of Economics Topic: Digital economy and innovation, Inclusive growth Date: November 24, 2021
Read article
 

External Publication

European Parliament

Decarbonisation of energy

Determining a robust mix of energy carriers for a carbon-neutral EU

By: Ben McWilliams, Georg Zachmann, Franziska Holz, Alexander Roth, Robin Sogalla, Frank Meissner and Claudia Kemfert Topic: European Parliament, Green economy, Testimonies Date: November 22, 2021
Load more posts