EU climate policy 2023: From energy crisis measures to structural reforms

EU climate policy in 2023: From energy crisis measures to structural reforms

Energy was the dominant issue at EU level during the crisis year 2022: the Energy Council counted a record number of eight ministerial meetings and adopted three emergency energy packages. For 2023, fundamental structural reforms are on the European agenda, ranging from the finalisation of the Fit-for-55 legislative packages to the reform of the EU electricity market design and the Green Deal Industrial Act as the European answer to the US Inflation Reduction Act (IRA).

2022 - Crisis as Gamechanger

In less than a year, Europe has drastically reduced its dependence on Russian energy imports: EU member states replaced around 80 per cent of Russian pipeline gas, built alternative supply routes and established new REPowerEU energy partnerships. Gas storage facilities have been filled to an all-time high. Germany was even able to zero out its Russian natural gas imports, which still amounted to around 50 percent back in September 2021. Its gas storage facilities were filled up to a level of 90 per cent. 

In December 2022, EU energy ministers agreed on the third energy emergency package.  Core measures include the strengthening of solidarity through better coordinating EU gas procurement and cross-border trade. In addition to reliable reference prices and after uphill struggle, ministers also managed to agree on a market correction mechanism with the aim of protecting citizens and the economy from excessively high gas prices.

However, gas price caps do not solve the energy crisis which is a supply crisis. The contrary, they risk Europe´s security of supply as gas flows to those countries and regions that are willing to pay scarcity prices.

In its interim report of January 2023, the European Securities and Markets Authority (ESMA) concluded that the EU gas price cap could lead to major changes in financial markets and drive trading away from exchanges. The EU energy regulator ACER further underlines the risks of this measure: wider price spreads between trading venues or a shift of trading activities to private trading and outside the EU could be the result.

Energy sovereignty and climate targets: Is the EU electricity market reform the solution?

The European Council has called on the Commission to follow suit with a structural reform of the electricity market with a twofold goal: European energy sovereignty and climate neutrality. Commission President Ursula von der Leyen announced the planned reform of the electricity market structure in her 2022 annual State of the Union address and included it in the Commission's work program for 2023. The Commission proposal is now due for March.

In principle, it is questionable whether it makes sense to reform a system that is generally functioning well out of a crisis mode. Instead, the reform should create longer-term investment security for alternative technologies and reliably protect industrial consumers from price spikes. Making the emergency inframarginal revenue cap a permanent tool would in BDI´s view be the wrong path. More promising are alternative concepts, such as  contracts for difference, long-term power purchase agreements or capacity remuneration mechanisms to bring the benefits of green technologies to consumers.

A comprehensive impact assessment and broad public consultation are indispensable for preparing such a far-reaching reform. The three-week long stakeholder consultation scheduled at short notice at the end of January can only be the beginning.

2023 must turn into the year of industry

Besides the electricity market reform, further fundamental reforms are on the legislative agenda this year: the EU´s Green Deal Fit-for-55 package is to be finalised in 2023 to lead Europe on its path to climate neutrality. The acceleration of the expansion of renewables and the associated infrastructure as well as a technology-open transformation remain of critical importance for German industries. Energy efficiency measures should also continue to be driven by economic considerations.

“Europe has a plan”, stated Commission President von der Leyen at the Davos Economic Forum, "the industrial plan within the framework of the Green Deal." On the way to climate neutrality, it aims at making Europe the home of clean technologies and industrial innovation. With its four pillars - regulatory environment, financing, skills, and trade - the Green Deal Industrial Plan also represents Brussels' answer to the massive U.S. climate protection investment program, called the Inflation Reduction Act.

To succeed,2023 must indeed become the year of industry: the transition to climate neutrality is already causing tremendous industrial, economic, and geopolitical shifts. Reliable, investment-friendly framework conditions and legal certainty for industry will matter more than ever to generate the necessary private investment and if Europe is to emerge from the crisis as a climate-neutral industrial continent.

In BDI's view, this requires unlocking investments in the green transition through regulatory simplification and speed as well as weaving the EU´s financial framework with its Green Deal and industrial ambition, including through a a targeted and time limited reform of the existing EU state aid rules and making and access to funding programmes less bureaucratic. Only this way can Germany and Europe remain attractive business locations.