EVOLUTIONS IN EU ENERGY POLICY: CHALLENGES OF THE DUAL TRANSITION AND MAINTAINING STRATEGIC AUTONOMY

The European Union’s (EU) energy landscape is rapidly evolving as it simultaneously seeks to accelerate the transition to a low-carbon economy and ensure its strategic autonomy in a tense geopolitical context. The goal is to secure energy supply, decarbonize industry, and support European competitiveness. However, the current framework is still marked by dependence on natural gas imports, structural vulnerabilities in electricity market design, and an urgent need for massive investments (infrastructure, flexibility, etc.). This analysis, adapted from an academic article, addresses the following topics:

• Recent measures to increase the share of renewable energy and gradually phase out fossil fuels.
• Structural issues in EU energy policy, particularly its mismatch with U.S. and Chinese strategies.
• The limitations of the current electricity market design for European industrial competitiveness.
• Policy recommendations to balance climate imperatives with industrial competitiveness, while avoiding the offshoring of energy-intensive industries.

1. Strengthening the low-carbon transition and strategic autonomy

Decarbonization efforts aim to replace fossil fuels with renewable energy sources (solar, wind, hydrogen) and, in some cases, nuclear power (notably for its stable production). The European Commission aims to achieve 42.5% to 45% renewable energy by 2030 through:

• Simplified permitting processes to accelerate renewable energy projects.
• The use of long-term contracts (CfD and PPA) to secure financing for new capacities.
• Scaling up low-carbon hydrogen for industries “difficult to electrify” (primary steelmaking, chemicals, fertilizers, etc.).

The creation of a European Network of Hydrogen Transporters (ENNOH) is planned for 2025, while the definition of “clean” hydrogen requires compliance with additionality and strict temporal/geographical correlation for the electricity supply.

2. Persistent dependence on fossil fuels and geopolitical competition

Despite ambitious targets, the EU remains heavily dependent on natural gas (41% of supply in 2023), with significant exposure to volatile international LNG markets and geopolitical tensions (Russia, Ukraine war, etc.). In comparison:

• The United States benefits from its shale gas and a proactive industrial policy (IRA) combining tax incentives and local content requirements to boost competitiveness.
• China, described as a “systemic rival” by the EU, secures resources from Russia (Power of Siberia), partnerships with Central Asia, and extensive industrial strategies (subsidies, overcapacities) to dominate green technology value chains.

This asymmetric competition weighs on European industry, which faces higher energy prices and market disparities (opaque subsidies, lack of liberalized wholesale markets in other regions, etc.).

3. European electricity market: limitations for industry

The current design of the European electricity market is based on the “marginalist” principle, where the wholesale price is set by the last technology called, often fossil-based, even if the total production is predominantly low-carbon. Several consequences arise:

• Over-representation of gas or coal power plants in setting market prices, inflating electricity costs.
• Cross-border contamination: interconnection of the grid means that a fossil power plant can set the price across multiple coupled markets, even where renewables/nuclear dominate.
• Compensation tools for indirect CO₂ costs exist but remain optional and vary by Member State, limiting their impact on industrial competitiveness.

Furthermore, reliance on PPAs (long-term power purchase agreements between renewable electricity producers and industrial consumers) is not a silver bullet: intermittency (wind, solar) introduces volume and price risks, and large industrial consumers, whose consumption is often continuous or process-driven, remain exposed to spot prices (sometimes negative, sometimes very high).

4. New rules for industrial decarbonization

The implementation of CBAM (Carbon Border Adjustment Mechanism) and the gradual phase-out of free allowances under the EU ETS will further internalize carbon costs for European industries. However:

• CBAM only covers direct carbon charges (on emissions from processes), without accounting for indirect costs from electricity, which are exacerbated by the marginalist market design.
• Other regions may benefit from artificially low energy prices (regulated tariffs) or benefit from significant subsidy regimes (e.g., Chinese industry).
• European industries, which are still competitive and relatively low-emission (recycled steel, aluminum, etc.), risk closure or offshoring, ultimately increasing dependency on carbon-intensive imports and the risk of carbon leakage, to the detriment of global climate efforts.

Conclusion and reform proposals

1) Better coordinate and target energy policy

• Strengthen coordination among Member States to secure gas supplies and avoid strategic fragmentation.
• Continue to expand low-carbon capacities (new renewable installations, nuclear) through well-designed and flexible Contracts for Difference (CfDs).

2) Limit the impact of grid costs and taxes

• Conduct a comprehensive inventory of energy cost disparities (infrastructure, taxation) and update CBAM mechanisms and trade defense instruments to address distortions caused by foreign subsidies or regulated markets.
• Protect electro-intensive industries as much as possible from future network cost increases, which are essential for strengthening infrastructure and integrating more renewables.

3) Targeted support for electro-intensive industries

• Propose a CfD/PPA combination to facilitate direct access to low-carbon electricity at production-cost-related prices, at least for part of the consumption of industries exposed to international competition.
• Design new flexibility mechanisms tailored to industrial constraints (multi-day periods, fine-tuned demand management).
• Explore more nuanced marginalist reform options (shock absorber mechanisms), limited in time to avoid market disruption.

4) Avoid damaging offshoring

• Be cautious of arguments supporting outsourcing of heavy industries to regions with “cheaper” energy, as this would ultimately lead to higher CBAM costs, increased reliance on carbon-intensive imports, and a loss of economic sovereignty.

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