European Energy Policy
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It doesn’t hurt us to go deep into the policy weeds every once and awhile, so here’s a good post on the new European Electrification Action Plan:
Today the European Commission launched its Electrification Action Plan. The headline number, still a bracketed placeholder when I analysed the leaked draft last week, has now been filled in: electricity is to meet 46% of the EU’s final energy consumption by 2040. Getting there means to speed up 9x compared to the annual increase of the electrification rate since 1990.
That would double today’s share. Electricity currently meets just 23% of final energy consumption in the EU, and it has sat there for a decade while China, Korea and Japan have moved past 30% and continue to pull away. The stagnation is not an abstract statistic. It is the reason Europe keeps getting caught out by fossil fuel price shocks, most recently when the Iran war sent oil and gas prices soaring. The EU still imports more than 80% of its gas and over 90% of its oil, and the Commission’s own analysis puts a price on that dependency: an accelerated transition with electrification at its core could cut the fossil fuel import bill by up to €260 billion per year by 2040 and reduce gas imports by more than 70%.
The leaked draft mentioned a target “enshrined in EU legislation”. The adopted text calls it an indicative target that will be “subject to an impact assessment” as part of the Energy Union package due in the fourth quarter. The number survived inter-service consultation but the legal anchoring, for now, did not.
A target on its own delivers nothing, of course. What makes this plan more credible than previous announcements is that it goes after the biggest barrier directly. Electricity costs companies in Europe almost three times as much as gas, and in some member states the ratio is closer to four. As I set out in my analysis of the draft, the plan pairs the headline target with a KPI to bring electricity-to-gas price ratios down to 2.5 for households and 2 for industry by 2030, backed by a legislative proposal on electricity bills adopted alongside the plan. That proposal now carries the taxation fix too: a provision addressing the tax differential between electricity and gas, built on the principle that electricity should not be taxed more than gas. In most member states electricity currently carries the heavier tax burden. Reversing that signal is where the plan touches the real economics rather than staying at the level of aspiration.
Most of the rest survived as leaked, but not all of it. The heat pump KPI in the draft was to double installation rates by 2030. The final version commits to raising them from 2.4 million a year to around 4 million, a two-thirds increase. The draft’s EU framework for reducing VAT on electrification assets, from heat pumps to industrial equipment, has shrunk to a gentle reminder that member states may already use the options in the VAT Directive, with the framework itself now confined to corporate fleets.
Other elements were strengthened. The storage ambition of 200 GW by 2030 (up from around 55 GW today) gained a 500 GW milestone for 2040, and the Commission will assess the EU’s long-duration flexibility needs out to 2050. The plan also commits, for the first time, to publishing the uncomfortable arithmetic on fossil fuel subsidies: €97 billion in 2024, of which more than half has no end date before 2030. Vehicle-to-grid requirements for new EVs arrive by the end of 2027. And the commitment to explore a clean heat market mechanism obliging manufacturers to grow their share of clean heat sales survived intact, an instrument colleagues and I have long advocated through academic analysis and a handbook for policymakers. For the full detail, including what is genuinely new and what is being re-announced, my analysis from last week still stands.
I’m no expert here, but this seems at least positive-esque, which is more than you can say about U.S. energy policy, which evidently thinks more of Spain and France and the Pacific Northwest should burn.