Blog Post

Reinforcing the EU energy industry transformation: stronger policies needed

The European energy system is being transformed by three major forces, decarbonisation, digitalisation and decentralisation. Decarbonisation is changing the European energy mix, while innovation in digital technologies is enabling disruptive change in the way energy systems are operated.

By: and Date: September 21, 2017 Topic: Energy & Climate

Towards a 3D European energy system: decarbonised, digital and decentralised

The European energy system is going through a profound transformation as two trends reshape it: decarbonisation and digitalisation. Based on strong public policies, decarbonisation is changing the European energy mix, while innovation in digital technologies is enabling disruptive change in the way energy systems are operated.

Digitalisation can be an important catalyst for decarbonisation. Digital technologies, such as smart meters, give consumers more control over their energy use and offer benefits from additional services. Energy suppliers, meanwhile, can optimise their operations and develop new offers. System operators can benefit from increased availability of real-time data to manage their grids more efficiently and to integrate an increasing amount of variable renewables into the system.

The extent to which energy is already going digital is illustrated by the share of patents in which energy and IT appear on the same patent application. This share has boomed since 2006, outpacing traditional patents in IT and energy taken individually (Figure 1).

 Figure 1: Share of IT and energy tech in total patents, EU28, index=1995

Source: Bruegel based on PATSTAT.

Increasing digitalisation also enables the European energy system to become more decentralised, with greater interaction between services (electricity, heat, transport, data) that used to be largely separate.

In this context, the European energy industry must quickly rethink its strategies in order to adapt to, and make the best of, the new reality.

 The future of oil and gas companies

Oil and gas companies are the biggest part of the European energy industry. Their total market capitalisation exceeds that of utilities by about 50 percent, and their traditional business models mean they are most at risk from decarbonisation.

To fully unleash the transformation of these companies, even stronger policy signals are needed, such as a meaningful carbon pricing. Otherwise, oil and gas companies might decide to continue in a business-as-usual mode, at best just refocusing their activities on gas.

Over the last few years, leading European oil and gas companies have often pledged to commit to new energy solutions. However, these companies have yet to translate declarations into action, as only sporadic sizeable investments have been made so far (Figure 2). Stronger policies could push European oil and gas companies into the new energy solutions territory in a more assertive way.

Figure 2: European oil and gas companies’ investments in new energy solutions

Source: Bruegel based on Bloomberg.

 The future of electricity utilities

Since 2008, electricity utilities have experienced a deep crisis because of the rapid emergence of new market and policy conditions that have put pressure on their traditional business models. The rise of renewable energy and weak electricity demand have led to significant overcapacity and significant losses of traditional energy businesses. In the future, strong decarbonisation policies, improved energy efficiency favoured by technological development, the rise of distributed generation and new developments in demand response and storage capacities will put even more pressure on conventional generation assets.

In such a complex situation, utilities must decide whether to defend their existing business models or to become drivers of the energy transition. Electricity utilities might bet on convincing policymakers that their coal and gas units are indispensable (Figure 3) to keep the lights on and thereby secure new policy-driven cash flows for their plants. Corresponding capacity mechanisms have already been implemented in several EU countries.

Figure 3: Leading European utilities’ generation portfolios: still a lot of coal and gas

Source: Bruegel based on Bloomberg.

Alternatively, electricity utilities might bet on deep decarbonisation and build up significant renewable generation capacity, invest in networks and divest from fossil fuels. For this to become a general trend, clearer policy signals are needed. Returns from the network business and renewables are indeed largely policy driven. Regulators explicitly decide on the rate of return for electricity networks and policymakers decide on the remuneration schemes for renewables. A change in regulations can cost regulated businesses billions of euros. Therefore, understanding and managing the political environment is probably more important for the success of renewables and network electricity companies than good internal management or efficient supply chains.

Setting the right policies: the need for a high-level platform to discuss the future of energy

Considering the complexity of the energy transition, we consider that partial fixes to the current EU energy regulatory system are not sufficient to provide the appropriate long-term regulatory stability to the energy industry.

Instead, Europe urgently needs a high-powered platform – representing all major stakeholders – to discuss a broader vision for the design of its future energy sector. This should go beyond the existing working-level discussion forums.

The European Council should ask the European Commission to prepare a green paper on the organisation of the European energy sector in the twenty-first century. It should form a consistent basis for upcoming legislation in different policy areas.

The ongoing structural transformation of the European energy system requires a parallel structural transformation of the policy framework. This should become a priority of the EU Energy Union initiative, because with the current level of uncertainty, investors are unlikely to deliver the annual €379 billion of investment required between 2020 and 2030 to turn the EU 2030 energy and climate targets into reality.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

View comments
Read about event More on this topic

Past Event

Past Event

Distributional effects of climate policies

How do we design climate policies to minimize adverse distributional effects?

Speakers: Elena Jachia, Elena Verdolini and Georg Zachmann Topic: Energy & Climate Location: Centro Congressi Fondazione Cariplo, Via Romagnosi, 8, 20121 Milano MI, Italy Date: November 14, 2018
Read article Download PDF More on this topic

Blueprint

Distributional effects of climate policies

The distributional consequences are likely to be a major driver of future climate policies. Policymakers will not accept forceful decarbonisation policies if they lead to visibly increasing inequality within their societies. The distributive effects of climate policies need to be addressed. This report provides a selective review of recent academic literature and experience on the distributional effects of climate policies.

By: Grégory Claeys, Gustav Fredriksson and Georg Zachmann Topic: Energy & Climate Date: November 14, 2018
Read about event More on this topic

Upcoming Event

Dec
4
17:00

Civil society for the digital age

What is the place of civil society in the digital age as well as the role of technology in society?

Speakers: Eline Chivot, Orla Lynskey, Bertin Martens, Georgios Petropoulos, Thiébaut Weber and Glen Weyl Topic: Innovation & Competition Policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read about event More on this topic

Upcoming Event

Dec
6
12:30

Environmental and economic effects of the EU ETS

What is the impact of the EU ETS on carbon emissions and economic performance of regulated companies?

Speakers: Antoine Dechezleprêtre, Isabel Yordi Aguirre and Georg Zachmann Topic: Energy & Climate Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article Download PDF More on this topic

External Publication

Learning for decarbonisation

This external publication, put together in the framework of the COP21 RIPPLES Consortium, makes the case that national decarbonisation strategies should put a special emphasis on the benefits of learning. Accordingly, countries should start early to deploy and develop low-carbon technologies, concentrate on promising technologies, exploit individual regional strength and bear in mind the opportunities and constraints of the national innovation system. Early investments to foster learning reduces

By: Alexander Roth and Georg Zachmann Topic: Energy & Climate Date: November 8, 2018
Read about event More on this topic

Upcoming Event

Dec
14
12:30

Investment and Intangible Capital

A presentation of the EIB Investment Report

Speakers: Maria Demertzis and Debora Revoltella Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article More on this topic More by this author

Podcast

Podcast

Deep Focus: Renewing the clean energy strategy in the Mediterranean

In this episode of Deep Focus, Bruegel research fellow Simone Tagliapeitra explains how the nature of cross-Mediterranean energy relations needs to change, not only in line with new climate-change targets but also to meet the burgeoning energy demand outside Europe.

By: The Sound of Economics Topic: Energy & Climate Date: October 16, 2018
Read article Download PDF More on this topic More by this author

Policy Brief

The Euro-Mediterranean energy relationship: a fresh perspective

The author analyses the current renewable energy development in Southern Mediterranean countries (SMCs) and proposes a climate financing strategy that retreats from the Eurocentric approach. Not only will it allow the region to meet its energy demand sustainably, it will also benefit the EU, both in economic and political terms.

By: Simone Tagliapietra Topic: Energy & Climate Date: October 16, 2018
Read about event

Past Event

Past Event

Policy responses for an EU-MENA shared future

In the third edition of the "Platform for Advanced & Emerging Economies Policy Dialogue" we will discuss trade flows and trade policy between Europe and MENA, integration of developing economies into global value chains, and regional energy relations.

Speakers: Karim El Aynaoui, Marek Dabrowski, Uri Dadush, Ignacio Garcia Bercero, Ettore Greco, Giuseppe Grimaldi, Badr Ikken, Joanna Konings, Said Moufti, Pier Carlo Padoan, Lia Quartapelle, Visar Sala, Nicolò Russo Perez, Nicolò Sartori, Simone Tagliapietra and Guntram B. Wolff Location: LUISS Business School Viale Pola, 12, 00198 Roma RM, Italy Date: October 11, 2018
Read article Download PDF More on this topic More by this author

External Publication

The impact of global decarbonisation policies and technological improvements on oil and gas producing countries in the Middle East and North Africa

Simone Tagliapietra contributed to the IEMED Mediterranean Yearbook 2018 with a chapter on the impact of decarbonisation policies on oil and gas producing countries in the MENA region.

By: Simone Tagliapietra Topic: Energy & Climate Date: October 3, 2018
Read about event

Past Event

Past Event

China's digital economy

How to measure China's digital economy?

Speakers: Alicia García-Herrero, Claudia Vernotti and Reinhilde Veugelers Topic: Global Economics & Governance, Innovation & Competition Policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: September 17, 2018
Read article Download PDF More on this topic More by this author

External Publication

Electrification in sub-Saharan Africa: The role of international institutions

Bruegel fellow Simone Tagliapietra contributed to the new issue of the 'Oxford Energy Forum' with an article on the role of international and European financing institutions in fostering the electrification of Africa.

By: Simone Tagliapietra Topic: Energy & Climate Date: September 11, 2018
Load more posts