Since the passing of the 2015 Paris Agreement, the European Union has taken significant steps in its energy policy. Steps have been taken both in the electricity and gas spaces, as well as renewable energy.
As one of the first steps after the 2015 Paris Agreement, on 30 November 2016, the EU Commission published its so-called ‘Winter Package’. It consisted of eight proposals to facilitate the transition to a ‘clean energy economy’, assisting the EU to reduce CO2 emissions by 45% by 2030, compared to 1990, and to reform the design and operation of the European Union’s electricity market. The categories consisted of proposals amending: existing energy market legislation; existing climate change legislation; and proposals for new measures. In December 2018, three new pieces of legislation were published to reinforce the governance of the energy union, to increase energy efficiency, and to promote renewable energy.
In this article, we’ll outline some of the main regulatory reforms and platform changes which have shaped the EU energy space since the passing of the Paris Agreement.
The European Green Deal
With the goal of achieving climate neutrality by 2050, in December 2019, the EU Commission took further steps and published the “European Green Deal” which introduced a new EU strategy aiming to make Europe a modern, resource-efficient, and competitive economy. The “Clean energy for all Europeans” package, which advances goals of the European Green Deal in the energy sector, provides the broader background for major initiatives relating to energy, including the pledge to cut EU greenhouse gas emissions by 55% by 2030 (the “Fit for 55”-package), and more recently to end the EU’s dependence on Russian fossil fuels (“REPower EU”).
Fit for 55
To achieve climate neutrality by 2030, the “Fit for 55” package was introduced in 2021 by the European Commission, and in relation to energy, proposed to recast the Renewable Energy Directive (Directive on the Promotion of the Use of Energy from Renewable Sources (recast)) (“RED II”). The RED II entered into force on 11 December 2018, with Member State implementation by 2021. The revised directive (RED II) had increased the target for renewable energy sources consumption by 2030 to 32 %, as well as set a sub-target requirement for fuel suppliers to supply a minimum of 14% of the energy consumed in road and rail transport by 2030 from renewable sources.
After the proposal to amend RED II in Fit for 55 package, the new RED III came into force on 20 November 2023 with Member State implementation in the following 18 months. RED III increases the target for renewable energy sources consumption by 2030 from 32 % to 42.5%. RED III covers regulation relating to transport, industry, buildings, and district heating and cooling.
Emergency Regulation
In December 2022, the EU adopted an Emergency Council Regulation to accelerate renewable energy deployment including grid infrastructure in the short and medium term. The Regulation entered into force on 1 January 2023 and will be in effect for 18 months in all EU countries. It was originally intended to cover the time needed to transpose RED III. It is now being discussed whether at least parts of the Emergency Regulation shall be extended, both in time and scope.
REPowerEU
The REPowerEU package was swiftly introduced by the European Commission after the energy crisis resulting from Russia’s invasion of Ukraine. REPowerEU aims to help the EU save energy, diversify its energy supplies, and produce clean energy. The non-binding goal of further decreasing dependence from fossil fuels by 45% (as opposed to RED III’s 42.5%) also works towards decreasing the EU’s dependence on Russian fossil fuels. In diversifying and securing EU’s energy supply, the EU has committed to common purchases of non-Russian gas, LNG and hydrogen via the EU Energy Platform for all Member States wishing to participate, as well as Ukraine, Moldova, Georgia and the Western Balkans. The Energy Platform has three objectives in aggregating demand and purchasing gas jointly, using existing infrastructure in the most efficient way, and international outreach, aiming to coordinate EU action on global markets to prevent EU countries from outbidding each other. All of these actions also contribute to the goal of keeping energy affordable, which is also advanced by a Market Correction Mechanism, which sets a safety price ceiling of €275 on the month-ahead Title Transfer Facility (TTF) derivatives.
Hydrogen and Gas Package
The proposal for the new Hydrogen and Gas Markets Decarbonisation Package (HGMD), published in December 2021, refers to the review and revision of the Gas Directive 2009/73/EC and Gas Regulation (EC) No 715/2009. The package consists of a set of legislative proposals which facilitate the uptake of renewable and low carbon gases, including hydrogen, and ensure energy security for EU citizens. Some of the new proposals included in the package have already encountered criticism, for example the proposal to remove tariffs for cross-border interconnections and to lower tariffs at injection points to facilitate the access of renewable and low carbon gases to the existing grid. The HGMD is expected to be finalised by the end of 2023.
Carbon Border Adjustment Mechanism (CBAM)
In the wake of the EU’s climate and energy efforts, the Union was worried about so-called “carbon leakage” from non-EU countries with less ambitious climate policies. To counter this, it introduced the CBAM to account for carbon leakage in situations where EU-based companies move carbon-intensive production to countries with less stringent regulation, or when EU products are replaced by more carbon-intensive imports. The Mechanism calculates a price for the carbon emitted during the production of these carbon-intensive goods entering the Union, with the ultimate goal of ensuring that the carbon price of imports is the same as the carbon price of domestic production.
FuelEU Maritime and ReFuel Aviation
These initiatives relate to maritime and aviation transport sectors. Both regulations aim to lower the greenhouse gas emissions of the sectors in line with the Fit for 55 goals and encourage the use of sustainable fuels. According to EU statistics, these sectors accounted for 27.9% of EU transport emissions in 2018, so the use of less carbon-intensive fuel will have an impact on the wider greenhouse gas emissions of the sector. In addition, there is an incentive regime to support the uptake of the so-called Renewable Fuels of Non-Biological Origin (RFNBO) with a high decarbonisation potential in these sectors, furthering the EU’s hydrogen strategy.
RFNBO Delegated Act
The EU has adopted two Delegated Acts defining what constitutes renewable hydrogen for the EU. The first Delegated Act defines what constitutes renewable fuel of non-biological origin (RFNBO). The current EU target for RFNBOs is that by 2030, they need to account for 1% of all the fuels used in the transport sector. In addition, the EU Commission published a non-binding guidance in the form of a Q&A on RFNBOs in February 2023.
The EU Emissions Trading System (ETS)
The ETS, introduced in 2005, places an emission cap on the total amount of greenhouse gases that can be emitted by installations and aircraft operators. These companies receive or buy emission allowances, which are tradeable. The cap is reduced over time so that total emissions fall, in line with the EU’s climate goals. The EU ETS operates in trading phases, of which the fourth is now in operation (2021-2030). In line with Fit for 55, the ETS 2, operating with the same cap and trade principle, was introduced to cover fuel combustion in buildings, road transport and additional sectors. It will enter into force in either 2027 or 2028.
Future developments
Even with significant developments in the energy sector, the Commission’s 2023 State of the Energy Union report highlights that the EU and Member States need to significantly step-up implementation efforts to reach the desired 2050 goal. However, the initiatives introduced so far are doing their part in ensuring that the EU is steadily moving towards a more climate neutral future. There is a lot that needs to be done in terms of unifying practices of authorities in the Members States in terms of project permitting and safety issues as well as Member States need to enhance cross border cooperation to together take this change upwards and onwards.
For further information, please contact:
Laura Huomo, Partner, Bird & Bird
laura.huomo@twobirds.com
