The EU's New Plan to Electrify Europe

[00:00:00]On Friday, the European Commission revealed its new electrification action plan, which apparently aims to turn Europe into the world's first, in the words of the commission, electrocontinent.

[00:00:10]So, in this video, we're going to explain why the EU wants to electrify Europe, what this new plan involves, and whether it'll actually work.

[00:00:21]European politicians don't really talk about the energy transition anymore, but that doesn't mean it isn't happening. In fact, Europe has quietly redoubled its effort at decarbonization. In the latest issue of our magazine, we look at this rare good news and why the energy transition has ended up looking different to the one we envisioned.

[00:00:45]That's just one of 80 pages in the magazine, because there's more in too long than you'd expect. Purchase your copy by clicking the link in the description. So, let's start by explaining what we mean by electrification. This is a bit of a generalization, but broadly speaking, energy consumption can be split into two forms. Direct fuel consumption, which includes burning fuels for stuff like transport and heating, and electricity consumption. Electrification is essentially the process of shifting away from direct fuel towards electricity. So that electricity accounts for a larger share of total energy consumption. To some extent, electrification should happen naturally for the simple reason that electricity is generally speaking more efficient than burning fuel. But it's also something that policymakers actively aim towards largely because electrification is central to the energy transition which involves doing essentially two things. First, you have to decarbonize your electricity supply by, say, replacing your coal or gas power plants with wind and solar farms.

[00:01:47]And second, you've got to actually electrify your economy by, say, replacing petrol cars with electric vehicles or gas boilers with electric heat pumps. As you electrify your economy, you've then also got to continue building out your green energy infrastructure to make sure you're generating enough clean electricity to meet all the new demand that comes with this electrification. The EU has made pretty good progress on the first part of the energy transition. Last year, for instance, renewables generated roughly half of the EU's electricity, according to the independent energy think tank Ember, with wind and solar power overtaking fossil fuels for the first time. However, the EU has made less impressive progress on the second part of the energy transition. Electricity's share of total energy consumption has barely ticked up in recent years and currently sits at about 23%.

[00:02:39]Anyway, this is the context in which the European Commission has launched its new electrification action plan which aims to double the electrification rate by 2040 i.e. go from 23% to 46% in the next 13 years. The action plan essentially has two key policy proposals. First, the commission wants to dramatically increase investment. For context, electrification is very capital inensive. In other words, while electricity should ultimately be very cheap, getting there requires a lot of expensive upfront investment in stuff like solar panels, wind turbines, and grid infrastructure. To get there, the commission wants to use permitting reform to make it easier to actually build this infrastructure. Some direct funding from the EU and national governments, i.e. the public sector and then a whole load of clever financial instruments to mobilize private sector investment including policy banks like the Industrial Decarbonization Bank which lends money to the companies investing in electricity infrastructure.

[00:03:37]The commission also wants to change the way that the costs of investment are distributed. At the moment, for instance, lots of these capital costs immediately show up on customers bills because the energy companies want to make their money back as quickly as possible. The commission wants to essentially spread the cost over a longer time frame, both to provide more price stability and to make sure that sudden investment related spikes in bills don't erode public support for the energy transition. Second, the commission wants to make electricity a more attractive source of energy for industry and consumers alike. For context, at the moment, electricity is roughly three times as expensive as gas in the EU, although there's pretty significant variation between member states. The commission wants to basically make electricity as cheap as or cheaper than gas to encourage the European economy to essentially electrify itself. Some of this will be achieved by the stuff we just mentioned about spreading the capital costs over a long time horizon. But the commission also wants to make sure that electricity isn't taxed more than gas as is the case in some member states. If all goes to plan, the commission claims that the electrification action plan will help achieve three different policy objectives. First, and most obviously, it'll reduce Europe's greenhouse gas emissions. The EU estimates that reaching this 46% target could cut the EU's total CO2 emissions by more than 2,000 megat tons, or more than 50% of the current total. Second, it will improve Europe's energy security and reduce its dependence on fossil fuel imports. According to the commission, reaching this goal could cut the EU's fossil fuel import bill by €260 billion per year by 2040. Given the EU currently imports about€2.5 trillion euros worth of stuff every year, this would represent a 10% reduction in the EU's overall import bill, which should make the euro significantly stronger. Third, the commission hopes that it'll improve Europe's industrial competitiveness. For context, one of the structural issues for European industry at the moment is the relatively high cost of energy. If the commission can get electricity prices down below gas prices, this would cut costs for European industry and help restore its global competitiveness. So that's the plan. But would it actually happen? Well, it's not impossible, but it feels pretty unfeasible. Just look at the graph. To put this into numbers, in the 15 years up until 2025, the EU's electrification rate rose by four points from 19% to 23%. To get to 46% by 2040, over the next 15 years, the EU's electrification rate would have to rise by 23 points. In other words, things would have to move more than five times faster. This is obviously somewhat implausible, which might explain why this new 46% target is not legally binding. This is made even more difficult by the fact that the further down the electrification path you go, the more difficult things get. We've done the easy bits first. Replacing coal fueled power stations with solar and wind farms for instance is pretty straightforward. But electrifying say long-distance travel or industrial processes like steel production for instance is a lot more difficult.

[00:06:43]Furthermore, even in sectors we know how to electrify, getting to 46% is harder than it looks because electricity is so much more energy efficient than fuel.

[00:06:54]Take cars for instance. We know how to electrify cars and electric cars are getting cheaper and better all the time.

[00:07:00]But getting to a 46% electrification rate in this sector, in other words, getting to the point that electricity accounts for 46% of all car related energy consumption would require 80% of all cars in Europe to be electric. This is because electric cars are way more energy efficient than petrol cars. On average, electric cars consume about 18% as much energy as petrol cars, which means that to get their share of total energy consumption up to 46%, you actually need them to account for way more than 46% of all cars. Similar dynamics apply for other electric technologies like heat pumps. All in all, while a noble ambition, getting to a 46% electrification rate by 2040 feels pretty optimistic to say the least. And if it does happen, it'll probably be the consequence of yet unknown technological advances rather than commission policy.

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