EU Electrification Push Lacks Pull: Analyst Reaction

0:00Speaker 1:This is Kamala Shelling and you're listening to Switched on the Bloomberg ENNYF podcast. The European Union is planning to get to net zero by twenty fifty. Legally speaking, that target is binding, but achieving it is more easily said than done. Not only will the block need to switch over to clean sources of electricity, but it'll need people to use that electricity to power their cars, heat their homes and run their factories, and the electricity needs to be affordable. To this end, the EU has released a new policy package in two parts, an electrification action plan and a proposal to future proof electricity bills. They're looking at a forty six percent electrification rate block wide by twenty forty. So what will it take to reach that target and is it even doable?

0:40Speaker 2:Today?

0:40Speaker 1:I'm joined by Victoria Cumming, bloombergennif's head of Policy to discuss your analyst reaction. EU electrification goal unreachable without more support. BNF clients can find this and other relevant research by heading to BNF Policy, go on the Bloomberg terminal, or at BNF dot com if you'd like to learn more about how BNF connects the dots of the Energy Transition. Visit us at about dot bn EF dot com and if you'd like to speak with a member of our team about becoming a client, email us at sales do bn EF. But for now, let's hear from Vicky. Welcome back to switch down, VICKI, it's so great to have you here.

1:22Speaker 2:Thank you for having me.

1:23Speaker 1:We're going to get into all the details of this new EU target in a moment, but before we get there, I want to start by asking what exactly does the electrification mean in a conversation like this.

1:34Speaker 2:So electrification here means switching from largely fossil fuels to electricity for and use sectors, so transport, building, heat, industry, and this is going to be a key pathway to reducing greenhouse gas emissions. It's kind of the two slides of the same coin with renewables. So we need to kind of switch to a largely clean power system, but we also need to switch everybody else from fossil fuels to electricity.

2:03Speaker 1:And so why does the EU care about electrification right now? At this point in time?

2:08Speaker 2:So it's made a fair amount of progress the EU, although it varies by member states in terms of kind of promoting a clean power system. Now it wants to get on track to actually pushing for electrification because there have been various sectors and countries that are kind of lagged behind in that. And kind of overarching all of this is the EUS net zero target for twenty fifty so, which is a legislated target, and the EU has kind of positioned itself as this global climate leader, so it really would kind of to maintain its branding in that respect.

2:40Speaker 2:It nearly needs to kind of get a move on in terms of boosting electrification.

2:45Speaker 1:All right, So the EU is trying to be a global leader in the energy transition. They've published this big target. What exactly does the target say?

2:53Speaker 2:So the package that was released on seventeenth of July in terms of electrification, the main components were Electrification, an action plan and a proposal to what was called future proof electricity bills. So, if you give me a second, just to be a policy geek for a second. So that action plan is a document that's published by the European Commission. It has no legislative weight in itself. It's somewhat of a calendar of what the Commission plans to do and could include some future legislation, the actual future proof that electricity bills proposal is an actual proposal that will now go to the Council of the European Union, which is the Member States, and then the European Parliament to be actually adopted in practice.

3:37Speaker 1:So you said initially that the twenty fifty target is a quote legislated target, whereas this new one is simply an action plan. So when's the difference between those two things?

3:47Speaker 2:That is a great question. So in kind of legislative terms, for one of the better word, the twenty to fifty net zero target is actually kind of legally binding. There's always a bit of a question mark with the e when it has these legally binding targets on itself what happens if it doesn't achieve those targets. But in the case of this electrification target that's in this action plan, this is what the European Commission has termed an indicative target.

4:14Speaker 2:This is the Commission essentially saying this is what we would be planning on proposing, and then we interpret it as the Commission testing the waters to see what the reaction is before it then does an impact assessment at the end of the year. Where it's a kind of an in depth study of the commission looks to see what would actually be the effects of implementing such a target and achieving it in theory, and then they will go to the formal proposal, which would then need to be adopted. So we are a long way away before the EU actually has a binding electrication target.

4:49Speaker 1:Okay, so this remains very embryonic. Then, so this is a plan for a proposal that would then turn into an actual plan exactly.

4:56Speaker 2:And in terms of what the actual this so called indicative target it is, it's for forty six percent electrification by twenty forty, So that means by twenty forty forty six percent of final energy consumption needs to come from electricity.

5:12Speaker 1:Do you think that's feasible?

5:14Speaker 2:No, not based on not based on current policy and current trends. As listeners may know, Bloomberg NIF does an annual New Energy Outlook in which we have two long term scenarios for energy system are kind of economics driven based case is called the economic transition scenario, and that estimates that the EU, Norway and Switzerland reach about twenty eight percent by twenty forty. So that's a long way away from this forty six percent.

5:42Speaker 1:What about our net zero scenario? How far does that get us?

5:45Speaker 2:So our net zero scenarios are kind of credible, but maximum effort Note that maximum effort and pathway to net zero, and in that the EU, Norway and Switzerland reach only thirty nine percent, so still far away from this forty six percent indicative target.

6:00Speaker 1:It wow, So maximum effort gets us we think thirty nine percent electrification of final energy consumption, and the EU is now targeting forty six that's closer than the economic transition scenario. But the other thing about the net zero scenario, of course, is that it's really really expensive. So if I recall correctly, I think the endzs the net zero scenario requires about one point two trillion dollars each year of energy a transition investment between today and twenty fifty to be on track for that. And last year the EU, Switzerland and Norway put about four hundred and seventy seven billions, So that's less than half one point two trillion toward the energy transition. So whether or not it's technically feasible, is it financially feasible?

6:40Speaker 2:No? Not, based on current policy support and trends. So the issue that we have is that this action plan and also other policy support that's been implemented by Member states and by the EU, does not put it on track to anywhere near the scale up of electrication that their Commission is anticipating. In terms of the plan itself that was published last month, it's largely relies on these kind of voluntary measures implemented by the EU but also by Member states, kind of future legislative reviews and very modest regulatory changes. It introduces very little meaningful concrete support, So by that we mean things like here's some actual money to do stuff, or here are some rules you need to follow that actually promote electrification. So, based on this action plan and current policy support, the other thing is to flag is that if the EU is planning to put all of this kind of onus on the member states, Member states in recent years plus the EU have also rolled back a fair amount of support for electric vehicles and heat pumps, which we key to promoting their deployment to actually achieve this electrication target. So we're

7:49Speaker 2:really not in a position to achieve this target at all.

7:52Speaker 1:So, because you're talking about policy support and financial support for consumers as well as industries. Something you've been talking about really the start of the Iron War is policy makers in the EU and elsewhere are now being pushed very hard to make sure they lower energy prices for consumers, for rate payers, and you're trying to tell them but while you're doing this, don't undermine your climate targets. Now is not the time to roll back our climate ambitions.

8:16Speaker 1:But what's interesting to me about what you're saying is it sounds like this particular climate target will only work if electricity isn't too expensive. So has the EU released any practical plans for tackling that.

8:27Speaker 2:Yes, absolutely, it's a question of electricity not being too expensive. But crucially it's relationship with fossil fuels, because if you have really cheap gas available to consumers and much more expensive electricity, it's going to be hard to persuade them to actually switch, for example, from a gas boiler to a heat pump. There are other barriers, but that's kind of a key one for consumers. So the EU has been working for i'd say quite some time on how to rebalance these electricity versus gas prices for consumers. So alongside this electrification action plan, it published this future Proof Electricity Bill proposal. Now, what's interesting about that and allow me to become a policy GEC once again. The EU has somewhat limited scope as to what it can do with regard to taxation because it's largely within the remit of member states, and the Commission has been pushing for some years now to completely revise the Energy Taxation Directive so that, as it sounds, is a policy, legislative policy that actually affects the prices that consumers pay for electricity and gas. But because changing that directive requires agreement all

9:37Speaker 2:twenty seven member states, and that is very difficult, especially when member states have are centifized to kind of not make those changes because they think that it's within their remit to do so. So those kind of efforts have fallen by the wayside, and instead they've released this proposal. Its main component with regard to electricity bills is to look at excise duties to ensure that member states don't impose higher excise duties on electricity as they do on gas.

10:07Speaker 1:What is an XYZ duty?

10:09Speaker 2:This is a good question. So excise duties are essentially a production weighted tax. It's one of the levees that we pay for consuming electricity and gas, and it is one very small component of our retail electricity prices, and that's why we don't think that even if this proposal is actually adopted, it will have a big impact on electricity bills. So the kind of biggest components of the prices that we as consumers pay are wholesale costs. So the costs of actually procuring energy from the wholesale market, network costs, so that's paying for kind of the grid infrastructure, and then these policy costs and taxes. Now, the issue that we have is that while our market outlooks suspect that wholesale prices in many European markets will decline over time, the big question what we have is what happens to network charges. Because the energy is transition and in general it's going to require enormous future investment in the grid and who pays for that. In the EU, it requires that a large chunk of that is paid by consumers.

11:15Speaker 2:So another part of this proposal is to for member states to promote demand side flexibility.

11:21Speaker 1:So this is fascinating because in a way it sounds like the energy transition and efforts to electrify have caught us in a feedback loop where we need more electricity to meet the new demand that is being encouraged by bills like this, which means that we need a more robust grid because we've written a lot about how the grid just can't handle all this new electricity that's coming on to it. The way we pay for making the grid more robust is we raise the network charge part of consumer electricity bills. So even if the wholesale rate for electricity is coming down, bills are getting more expensive because since everybody wants electricity now, we need to build out the grid.

11:56Speaker 2:Is that right, Yes, exactly, So, as part of this proposal, one of the overall aims is to promote better grid utilization, so it's using the existing gried better to reduce the idea is future the need for future investment. However, most of the components within the actual proposal we don't expect to have a significant impact. The potential impact largely depends on the regulatory frameworks that are in place in member states with regard to that or grid operators. So in some cases, for example, and historically it's been the case that grid operators are incentivized to undertake more capital expenditure than operating expenditure, but actually encouraging these what they call non wires alternatives, essentially not building a whole lot of staff.

12:41Speaker 2:They're not necessarily incentivized to do that through regulatory frameworks, So there's going to be more work required at member state level to actually kind of promote this better grid utilization.

12:52Speaker 1:I'm so glad you brought up the member state level because you can probably tell from my accent, I'm from a country that has a federal system with a big overarching federal law and then US member state flaws that function differently. The EU is kind of the same but also quite different. So can you talk about how this EU level plan then has to triggle down into the member states, how they potentially implement it, and then as part of that, what would it take to actually deliver on these ambitions.

13:20Speaker 2:So, yeah, as you say, the EU system is kind of similar but kind of different to the US. There are my understanding, similar to the US, there are certain policy topics that are governed at EU level and government it's governed at member state level. In terms of this actual action plan, most of the measures within it are voluntary and are up to the member states to implement or not. There are some components referenced in it, and this proposal about electricity bills that would be legislated at EU level. Now, interestingly, this one is a regulation and an EU regulation. Once it's approved at EU level, it automatically applies a national level. If it's a directive, which a fair number of for example, the Renewable Energy Directive energy Efficiency Directive. So there are quite a few of these types of policies that relate to energy and climate.

14:12Speaker 2:In that case, they're adopted at EU level, but then they need to be what's called transposed, so that means implemented into national law. And the interesting thing about that is that's where we get some wiggle room for member states to interpret those policies as they seem fit and we get some of these cross member state differences. When it comes to actually funding, there are some pots of EU level funding, but in large part the kind of financial incentives that will be required to promote heat electric vehicle deployment as well as industrial electrication, a lot of that funding will need to come from member state governments.

14:49Speaker 2:So one of the barriers that we have is a as I mentioned, a fair few of them kind of undertaking these policy rollbacks in the last eighteen months. We've also seen in certain members states a shift to the political rights which those parties tend to be less supportive of the energy transition. And there are various other major member states that face severe fiscal issues, so they actually just have limited budget to spend on all this financial support and really in the growth. The package that was released on July seventeenth focuses on operating costs, so essentially, how much does it cost for consumers to fuel for want of better work, their electric vehicle heat pump. And the challenge with that is that, especially for heat pumps and electric vehicles, that's just one of the cost components and it is much less than capital expend the KAPEX costs, and the package does very little to actually incentivize kind of reductions in capital costs, and that is the real challenge that we face. It could have more of an impact if Member states actually do stuff on terms of industrial actification because for many industries and the kind of

15:57Speaker 2:fuel costs are a much larger component of the TOE tool costs. But we really need to promote this deployment of heat pumps and electric vehicles, and the July seventeenth package just very limited to progress in that respect.

16:10Speaker 1:I feel like what we're talking about here is an energy transition hydro where we solve one problem, we cut off one head, and three new heads appear. Right. So, like we've put out this plan for a proposal for maybe a plan really ambitious targets, but to actually get that up and running, we're going to need to convince people to adopt the technologies. We're going to have to fund it, and some of the members says, are having fiscal issues. We have politics that we have to battle, and then we also simply have to battle the EU legislative process, which is really really complicated. So win this now four headed hydra in the place of our one headed target that we started the conversation with. As a final question, what's next on the agenda and what should our listeners be watching for the EU to do next?

16:51Speaker 2:So what's coming up? Well, the European Commission does like to release a big legislative package just before Christmas, and we have one coming up in December when there's going to be policies released around renewable energy energy efficiency the framework for actually achieving its relatively new twenty forty emissions targets, and various member states have said that they are reluctant to commit to an electrification target or indeed the reforms to the emissions trading system that were also released on July seventeen, until they see some of these kind of newer policies about renewables, and so I think for kind of industries perspective, they would really like to see a more kind of cohesive approach across the energy transition sectors taking account kind of emissions, because it's hard to commit to one thing without knowing that permutations of all the other things. And there are a bunch of other kind of more sector specific policies that are due out by year end. So the Commission has a lot of work to do.

17:50Speaker 1:Fantastic, So all eyes on December at this point, VICKI, it is always such a pleasure to speak with you. Thank you so much for.

17:56Speaker 2:Coming on, no problem, thank you for having me.

18:08Speaker 1:Today's episode of Switched On was produced by Cam Gray with production assistance from Kamala Shelling. Bloomberg NIF is a service provided by Bloomberg Finance LP. And its affiliates. This recording does not constitute, nor should it be construed, as investment in vice, investment recommendations, or a recommendation as to an investment or other strategy. Bloomberg ANIF should not be considered as information sufficient upon which to base an investment decision.

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