REPowering-the-EU and Fit-for-55: friend or foe?

With its new REPowerEU energy communication of March 2022, the European Commission marks a turning point and roots the aim of becoming independent from Russian energy imports. A repowered internal energy market should counter high energy prices. More renewable energies, increased energy-saving measures, the use of biomethane and an accelerated hydrogen strategy should provide comprehensive answers to both, issues of security of supply and climate protection.

Following the Versailles Declaration and in view of the European Council end of March, the European Commission has presented a plan for security of supply and affordable energy prices for the next winter season. A full "RePowerEU plan" to end energy dependence on Russia is to follow by the end of May. According to Commission estimates, two-thirds of Russian gas imports in the order of 100 billion cubic meters could already be replaced by the end of 2022. By 2027, the Commission envisions the EU being completely decoupled from Russian energy imports.

Full implementation of the Fit-for-55 proposals would reduce EU gas consumption by 30 percent by 2030. However, the additional diversification of gas suppliers, more renewable gas, brought-forward energy savings, and electrification could together provide the equivalent of 155 billion cubic meters of Russian gas imports.

Fit-for-55 remains Europe´s long-term strategy

In addition, an accelerated reduction of Europe´s dependence on fossil fuels should strengthen the resilience of the EU energy system. Measures, such as a faster roll-out of solar and wind energy as well as heat pumps, the promotion of building renovation, the modernisation of district heating system or a doubling of the Fit-for-55 target for biomethane are in the spotlight.  Efforts to decarbonise industry should also be accelerated with, among other, hydrogen-based solutions and an EU system for carbon contracts for difference. The "energy efficiency first" principle is to be applied in all sectors and policy areas and the European Parliament and Council are already discussing higher targets for the expansion of renewables and energy efficiency in their negotiations on the Fit-for-55 proposals of July 2021.

A further acceleration of ramping up the hydrogen market is considered of key importance, too: in addition to the 5.6 million tons of hydrogen envisaged in the Fit for 55 package, 25 to 50 billion cubic meters of imported Russian gas could be replaced by an additional 15 million tons of renewable hydrogen annually by 2030. This amount would consist of an additional ten million tons of hydrogen imported from various sources and another five million tons of hydrogen produced in Europe.

A timely ramp-up of the hydrogen market needs pragmatism

The EU needs to rapidly progress in the development of an integrated gas and hydrogen infrastructure, hydrogen storage facilities and port infrastructure. It should also forge new energy partnerships and work with industry on a global European hydrogen facility to secure access to affordable renewable hydrogen.

From the perspective of German industries, a political framework for ramping up the hydrogen market depends on pragmatism. For example, overly strict criteria for green electricity under the Renewable Energies Directive would put the brakes on the emergence of a liquid hydrogen market and the decarbonization of European industry. In addition, planning and permitting procedures need to be massively accelerated to deliver on the EU´s ambitious new hydrogen targets.

Building acceptance for CO2 pricing measures

Finally, carbon leakage protection, including for exports, remains a key issue. At the EU Council meeting of Ministers for Economic and Financial Affairs (ECOFIN) mid-March 2022, Member States agreed on a general approach on the regulation introducing a new carbon border tax (CBAM).

In its current form, however, the CBAM proposal cannot reliably protect European industry from global competitive disadvantages that exist due to divergent international climate ambitions. Essential issues still need to be clarified, such as the role of existing carbon leakage protection instruments under the EU ETS, finding a WTO-compliant solution for exports, how to use CBAM revenues or how to best connect CBAM and a Climate Club.

BDI shares the view of the German government that an integrated overall view on the Fit for 55 package matters before interinstitutional negotiations with the European Parliament on CBAM could be launched.

What´s next?

By summer, the European Parliament and Council aim at determining their positions on further  Fit for 55 measures. Regarding the EU gas and hydrogen package, the Council is striving for reaching a general approach by the end of 2022.

The new REPowerEU Commission proposals on gas storage and joint purchases of gas, liquefied natural gas and hydrogen, are to be dealt with swiftly in the Council.  The Commission has also been mandated by the European Council to take all necessary initiatives by May 2022 for optimising the internal electricity market and ensuring a well-functioning carbon market. Finally, Member States are encouraged to make the best possible use of the new temporary framework for state aid in crisis situations to support the economy.