Draghi’s pitch to improve the competitiveness of energy-intensive industry

The 9 September Draghi report, produced by former Italian prime minister Mario Draghi for the European Commission as a steer for future European Union strategy, makes the energy sector a top priority. It takes into account the sector’s complexity, the competing interests of key participants and the resultant trade-offs, and proposes a range of solutions. These can be grouped into two main categories: policies to reduce the cost of the energy system and policies to reduce the share of the energy system cost borne by energy-intensive industries.

On reducing overall energy system cost, Draghi calls for policies to encourage research, deployment and use of a broader range of energy technologies. Thus, while acknowledging that renewables-based electrification will be central, he implies that technologies including new nuclear, carbon capture and domestic gas production can help reduce the system cost in the future.

For the near term, Draghi’s main cost-reduction policy is to substantially strengthen the EU single market. In this respect, he makes quite bold proposals, including a move from decentralised to central operation of cross-border electricity flows and Europeanisation of the regulatory oversight of electricity sectors, for example by putting in place a single EU energy trading rulebook.

Critically, Draghi offers several proposals on establishing rules to prevent EU countries from using national energy sector regulations to covertly and unfairly favour their domestic industries. In return, he offers many tools to support energy-intensive industries at EU level.

What he doesn’t do, however, is call for a new unified energy market design. To minimise system costs and keep energy prices as low as possible, Europe would benefit from effective mechanisms to coordinate national energy-sector investments across borders. Seemingly, Draghi decided that strong proposals here would be too politically contentious. So, the markets and mechanisms to encourage energy-sector investments will remain largely national. While not a full system change, Draghi’s proposed governance reforms are therefore as bold as incremental reforms can realistically be within one European Commission mandate. 

On Draghi’s second group of energy policies – reduce the share of the energy system cost borne by energy-intensive industries – the report includes many cost-redistribution proposals. To reduce energy costs for all consumers, Draghi suggests reducing the fiscal burden on energy and spreading out the refinancing of the cost of network investments over a longer period. This implies – for good reason – that more of today’s energy system transition cost should be borne by future generations.

In line with discussions during the 2022 energy crisis, the report suggests a gradual move towards longer-term contracts and away from marginal prices that reflect short-term demand-supply balances. It is clear that in times of exploding prices, consumers love to be on long-term contracts signed at a lower price. But as the physical risk of structural imbalances will not disappear, the question is who is supposed to absorb the risk if there is too little energy or if generators find no consumers. Some of Draghi’s suggestions imply it might be the state.

Among the reallocations of energy system cost proposed by Draghi, most controversial is the special treatment of some types of energy consumers. Draghi is particularly concerned about energy costs for industry. He thus proposes access for energy-intensive industry to special low-cost generation portfolios, publicly procured liquified natural gas, network tariff rebates and state aid.

But this implies higher costs for other energy consumers and possibly taxpayers. Prioritisation of one category of energy consumer raises the question of whether this is efficient and fair. Does it make sense to maintain the same level of gas-intensive industry in the EU if natural gas supply costs in the gas-exporting US will always be substantially lower? Should scarce energy be given with a discount to sectors that provide less value added per unit of energy, rather than allowing less energy-intensive sectors with higher growth potential to flourish? The answer is not clear and Draghi provides no evidence that spending substantial financial and energy resources on a relatively uncreative incumbent sector would really improve the EU’s overall competitiveness.

The report’s big step forward, however, is to Europeanise the question of support for energy-intensive companies. This will be crucial to prevent the single market from falling apart – as the worst solution would be member states out-bidding each other to protect their domestic incumbents.

Hence, both on lowering energy costs and on allotting these costs to different consumers, the Draghi report makes the fundamental point: if the EU want to stay competitive there can only be a European answer to the energy challenges of the next decades.