How will the European election impact the continent's energy transition?
The need for Europe's energy transition is multi-faceted and likely to overcome any short-term uncertainty, argues Schroders Greencoat's Karin Kaiser. This article first appeared in Infrastructure Investor.
Two weeks after the European elections, it seems clear that the climate emergency was not the key topic voters were focused on when casting their ballot. This raises the question of what the implications are for the European energy transition. The short answer is that the transition might slow down in the short term, but let's explore the long answer in more detail.
Let's look at the election results in a more differentiated way. Parties that have a progressive view on decarbonisation and a more ambitious stance than the current legislation, such as the Greens, the Left, the Socialists and Democrats, and Renew Europe, have experienced losses in the election. The European People's Party, which have supported and set the current climate political agenda, continue to hold most seats in the parliament. The far right, which has either no or ambiguous climate targets, has emerged as the big winner of the 2024 European elections. This includes the European Conservatives and Reformists, which actively advocate for reducing decarbonisation efforts, and Identity and Democracy, which are less transparent but unlikely to be supportive when it comes to climate targets.
Although we are yet to see how majority coalitions will be formed in the coming weeks, it is important to emphasize that climate-supportive parties still hold the majority of votes in the parliament. The EU has set a clear trajectory for its energy policy in the form of robust legislation including the Green Deal, Fit for 55, and Repower EU. Any deviation from this trajectory would require a significant majority vote in the parliament, something that non-climate parties are far from achieving.
Additionally, national legislation has been widely adopted across Europe to implement regional climate and energy targets. This means that the overall direction of the energy transition is unlikely to change. However, near-term political decisions made by the newly elected parliament could have a decisive impact on the speed at which we are progressing. One policy decision to come up in the next few months is agreeing the exact mechanism and timeline for emission trading and emission targets over the next decades, that might be dampened by the recent results.
Although the political landscape and coalitions are still evolving and we are facing some uncertainty, we can find comfort in two major reasons to continue supporting the energy transition in Europe that have nothing to do with climate conviction.
Firstly, Europe has undergone a major shift in its energy supply over the last two years due to the Ukraine crisis. The continent imports a significant proportion of its energy resources, particularly natural gas, from countries with varying levels of political stability.
This dependence on energy imports exposes Europe to potential supply disruptions resulting from conflict, political tensions, or changes in foreign policy. Energy security has become one of the three pillars of energy policy in Europe, and by increasing its reliance on renewable power, Europe can reduce its dependence on imported fossil fuels and its exposure to geopolitical risks associated with energy imports. Developing a robust and diverse renewable energy mix can ensure a more secure and resilient energy supply in Europe, especially considering the rising level of energy demand and the need to find additional sources of energy supply driven by electrification and the increasing energy demand of data centres.
Secondly, there is a strong economic argument in favour of the energy transition. Renewables have a significant advantage over fossil fuels in terms of cost competitiveness. As the cost of renewable energy technologies continues to decline, they have become increasingly competitive with fossil fuel-based energy sources.
This affordability factor, coupled with the potential for long-term cost savings, drives the transition towards renewable energy. For example, one kilowatt-hour (kWh) produced by a solar plant is about half as expensive as one produced by a newly built coal plant. Similarly, one kWh produced by an onshore wind farm is on average more than 50% cheaper than that produced by a gas plant, and offshore wind is slightly more expensive but still 10% cheaper[1]. By investing in renewable energy infrastructure, Europe aims to achieve a sustainable energy system that not only reduces carbon emissions but also provides affordable energy to its citizens and businesses.
In conclusion, while there may be some short-term uncertainty regarding the speed of the energy transition, the need for Europe's energy transition is multifaceted. Decarbonisation efforts are only one part of the puzzle. Energy security concerns, the importance of diversifying energy sources, and the pursuit of affordable and cost-effective energy solutions ensure that the transition is economically viable and sustainable in the long run. Europe has a strong and credible path to continue its transition to a decarbonised, energy-secure, and affordable energy system, translating into a unique investment opportunity over the upcoming decades.
[1] Source: BNEF Levelised Cost of Electricity H2 2023.
This article first appeared in Infrastructure Investor on 27 June 2024
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