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 about event More on this topic
 

Upcoming Event

May - Jun
31-1
10:30

MICROPROD Final Event

Improving understanding of productivity, its drivers and the way we measure it.

Speakers: Carlo Altomonte, Eric Bartelsman, Marta Bisztray, Peter Bøegh Nielsen, Italo Colantone, Maria Demertzis, Wolfhard Kaus, Javier Miranda, Steffen Müller, Hannu Piekkola, Verena Plümpe, Niclas Poitiers, Andrea Roventini, Gianluca Santoni, Valerie Smeets, Nicola Viegi and Markus Zimmermann Topic: Macroeconomic policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read about event More on this topic
 

Upcoming Event

Jun
7
10:30

Future of Work and Inclusive Growth Annual Conference

Annual Conference of the Future of Work and Inclusive Growth project

Speakers: Erik Brynjolfsson, Carl Frey, Francis Green, Francis Hintermann, Ivailo Kalfin, Vladimir Kvetan, J. Scott Marcus, Anoush Margaryan, Julia Nania, Laura Nurski, Poon King Wang, Monika Queisser, Fabian Stephany, Niels van Weeren and Guntram B. Wolff Topic: Digital economy and innovation Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read about event
 

Past Event

Past Event

Three data realms: Managing the divergence between the EU, the US and China in the digital sphere

Major economies are addressing the challenges brought by digital trade in different ways, resulting in diverging regulatory regimes. How should we view these divergences and best deal with them?

Speakers: Susan Ariel Aaronson, Henry Gao, Esa Kaunistola and Niclas Poitiers Topic: Digital economy and innovation, Global economy and trade Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: May 19, 2022
Read article More on this topic More by this author
 

Blog Post

REPowerEU: will EU countries really make it work?

By acting together, the European Union can optimise its response to the energy crisis in all scenarios but each country will have to make concessions.

By: Simone Tagliapietra Topic: Green economy Date: May 18, 2022
Read about event More on this topic
 

Past Event

Past Event

Adapting to European technology regulation: A conversation with Brad Smith, President of Microsoft

Invitation-only event featuring Brad Smith, President and Vice Chair of Microsoft who will discuss regulating big tech in the context of Europe's digital transformation

Speakers: Maria Demertzis and Brad Smith Topic: Digital economy and innovation Location: Bibliothéque Solvay, Rue Belliard 137A, 1000 Bruxelles Date: May 18, 2022
Read article More on this topic More by this author
 

Opinion

Buy now, pay later: the age of digital credit

A relatively new fintech market, BNPL is currently not regulated in the EU, meaning that consumers do not have the same protection level as they do for other credit products.

By: Maria Demertzis Topic: Digital economy and innovation Date: May 17, 2022
Read article
 

Blog Post

The EU needs transparent oil data and enhanced coordination

The EU lacks the coordination structure and transparent data necessary to most effectively navigate an embargo on Russian oil.

By: Agata Łoskot-Strachota, Ben McWilliams and Georg Zachmann Topic: Global economy and trade, Green economy Date: May 16, 2022
Read about event
 

Past Event

Past Event

[Cancelled] Shifting taxes in order to achieve green goals

[This event is cancelled until further notice] How could shifting the tax burden from labour to pollution and resources help the EU reach its climate goals?

Speakers: Niclas Poitiers and Femke Groothuis Topic: Green economy, Macroeconomic policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: May 12, 2022
Read article More on this topic
 

Blog Post

Insights for successful enforcement of Europe’s Digital Markets Act

The European Commission will enforce digital competition rules against big tech; internally, it should ensure a dedicated process and teams; externally, it should ensure cooperation with other jurisdictions and coherence with other digital policies.

By: Christophe Carugati and Catarina Martins Topic: Digital economy and innovation Date: May 11, 2022
Read article More on this topic
 

Opinion

For Europe, an oil embargo is not the way to go

Even at this late hour, the European Union should consider taking a different path.

By: Simone Tagliapietra, Guntram B. Wolff and Georg Zachmann Topic: Global economy and trade Date: May 9, 2022
Read article More on this topic
 

Opinion

A tariff on imports of fossil fuel from Russia

A tariff on imports of Russian fossil fuels would allow Europe to hit Russia's energy sector without great suffering.

By: Guntram B. Wolff and Georg Zachmann Topic: Global economy and trade Date: May 2, 2022
Read article More on this topic
 

External Publication

How to weaken Russian oil and gas strength

Letter published in Science.

By: Ricardo Hausmann, Agata Łoskot-Strachota, Axel Ockenfels, Ulrich Schetter, Simone Tagliapietra, Guntram B. Wolff and Georg Zachmann Topic: Global economy and trade Date: May 2, 2022
Load more posts