Speaker 1: This is Kamala Shelling and you're listening to Switched on
Speaker 1: the Bloomberg ENNYF podcast. The European Union is planning to
Speaker 1: get to net zero by twenty fifty. Legally speaking, that
Speaker 1: target is binding, but achieving it is more easily said
Speaker 1: than done. Not only will the block need to switch
Speaker 1: over to clean sources of electricity, but it'll need people
Speaker 1: to use that electricity to power their cars, heat their
Speaker 1: homes and run their factories, and the electricity needs to
Speaker 1: be affordable. To this end, the EU has released a
Speaker 1: new policy package in two parts, an electrification action plan
Speaker 1: and a proposal to future proof electricity bills. They're looking
Speaker 1: at a forty six percent electrification rate block wide by
Speaker 1: twenty forty. So what will it take to reach that
Speaker 1: target and is it even doable?
Speaker 2: Today?
Speaker 1: I'm joined by Victoria Cumming, bloombergennif's head of Policy to
Speaker 1: discuss your analyst reaction. EU electrification goal unreachable without more support.
Speaker 1: BNF clients can find this and other relevant research by
Speaker 1: heading to BNF Policy, go on the Bloomberg terminal, or
Speaker 1: at BNF dot com if you'd like to learn more
Speaker 1: about how BNF connects the dots of the Energy Transition.
Speaker 1: Visit us at about dot bn EF dot com and
Speaker 1: if you'd like to speak with a member of our
Speaker 1: team about becoming a client, email us at sales do
Speaker 1: bn EF. But for now, let's hear from Vicky. Welcome
Speaker 1: back to switch down, VICKI, it's so great to have
Speaker 1: you here.
Speaker 2: Thank you for having me.
Speaker 1: We're going to get into all the details of this
Speaker 1: new EU target in a moment, but before we get there,
Speaker 1: I want to start by asking what exactly does the
Speaker 1: electrification mean in a conversation like this.
Speaker 2: So electrification here means switching from largely fossil fuels to
Speaker 2: electricity for and use sectors, so transport, building, heat, industry,
Speaker 2: and this is going to be a key pathway to
Speaker 2: reducing greenhouse gas emissions. It's kind of the two slides
Speaker 2: of the same coin with renewables. So we need to
Speaker 2: kind of switch to a largely clean power system, but
Speaker 2: we also need to switch everybody else from fossil fuels
Speaker 2: to electricity.
Speaker 1: And so why does the EU care about electrification right now?
Speaker 1: At this point in time?
Speaker 2: So it's made a fair amount of progress the EU,
Speaker 2: although it varies by member states in terms of kind
Speaker 2: of promoting a clean power system. Now it wants to
Speaker 2: get on track to actually pushing for electrification because there
Speaker 2: have been various sectors and countries that are kind of
Speaker 2: lagged behind in that. And kind of overarching all of
Speaker 2: this is the EUS net zero target for twenty fifty so,
Speaker 2: which is a legislated target, and the EU has kind
Speaker 2: of positioned itself as this global climate leader, so it
Speaker 2: really would kind of to maintain its branding in that respect.
Speaker 2: It nearly needs to kind of get a move on
Speaker 2: in terms of boosting electrification.
Speaker 1: All right, So the EU is trying to be a
Speaker 1: global leader in the energy transition. They've published this big target.
Speaker 1: What exactly does the target say?
Speaker 2: So the package that was released on seventeenth of July
Speaker 2: in terms of electrification, the main components were Electrification, an
Speaker 2: action plan and a proposal to what was called future
Speaker 2: proof electricity bills. So, if you give me a second,
Speaker 2: just to be a policy geek for a second. So
Speaker 2: that action plan is a document that's published by the
Speaker 2: European Commission. It has no legislative weight in itself. It's
Speaker 2: somewhat of a calendar of what the Commission plans to
Speaker 2: do and could include some future legislation, the actual future
Speaker 2: proof that electricity bills proposal is an actual proposal that
Speaker 2: will now go to the Council of the European Union,
Speaker 2: which is the Member States, and then the European Parliament
Speaker 2: to be actually adopted in practice.
Speaker 1: So you said initially that the twenty fifty target is
Speaker 1: a quote legislated target, whereas this new one is simply
Speaker 1: an action plan. So when's the difference between those two things?
Speaker 2: That is a great question. So in kind of legislative terms,
Speaker 2: for one of the better word, the twenty to fifty
Speaker 2: net zero target is actually kind of legally binding. There's
Speaker 2: always a bit of a question mark with the e
Speaker 2: when it has these legally binding targets on itself what
Speaker 2: happens if it doesn't achieve those targets. But in the
Speaker 2: case of this electrification target that's in this action plan,
Speaker 2: this is what the European Commission has termed an indicative target.
Speaker 2: This is the Commission essentially saying this is what we
Speaker 2: would be planning on proposing, and then we interpret it
Speaker 2: as the Commission testing the waters to see what the
Speaker 2: reaction is before it then does an impact assessment at
Speaker 2: the end of the year. Where it's a kind of
Speaker 2: an in depth study of the commission looks to see
Speaker 2: what would actually be the effects of implementing such a
Speaker 2: target and achieving it in theory, and then they will
Speaker 2: go to the formal proposal, which would then need to
Speaker 2: be adopted. So we are a long way away before
Speaker 2: the EU actually has a binding electrication target.
Speaker 1: Okay, so this remains very embryonic. Then, so this is
Speaker 1: a plan for a proposal that would then turn into
Speaker 1: an actual plan exactly.
Speaker 2: And in terms of what the actual this so called
Speaker 2: indicative target it is, it's for forty six percent electrification
Speaker 2: by twenty forty, So that means by twenty forty forty
Speaker 2: six percent of final energy consumption needs to come from electricity.
Speaker 1: Do you think that's feasible?
Speaker 2: No, not based on not based on current policy and
Speaker 2: current trends. As listeners may know, Bloomberg NIF does an
Speaker 2: annual New Energy Outlook in which we have two long
Speaker 2: term scenarios for energy system are kind of economics driven
Speaker 2: based case is called the economic transition scenario, and that
Speaker 2: estimates that the EU, Norway and Switzerland reach about twenty
Speaker 2: eight percent by twenty forty. So that's a long way
Speaker 2: away from this forty six percent.
Speaker 1: What about our net zero scenario? How far does that
Speaker 1: get us?
Speaker 2: So our net zero scenarios are kind of credible, but
Speaker 2: maximum effort Note that maximum effort and pathway to net zero,
Speaker 2: and in that the EU, Norway and Switzerland reach only
Speaker 2: thirty nine percent, so still far away from this forty
Speaker 2: six percent indicative target.
Speaker 1: It wow, So maximum effort gets us we think thirty
Speaker 1: nine percent electrification of final energy consumption, and the EU
Speaker 1: is now targeting forty six that's closer than the economic
Speaker 1: transition scenario. But the other thing about the net zero scenario,
Speaker 1: of course, is that it's really really expensive. So if
Speaker 1: I recall correctly, I think the endzs the net zero
Speaker 1: scenario requires about one point two trillion dollars each year
Speaker 1: of energy a transition investment between today and twenty fifty
Speaker 1: to be on track for that. And last year the EU,
Speaker 1: Switzerland and Norway put about four hundred and seventy seven billions,
Speaker 1: So that's less than half one point two trillion toward
Speaker 1: the energy transition. So whether or not it's technically feasible,
Speaker 1: is it financially feasible?
Speaker 2: No? Not, based on current policy support and trends. So
Speaker 2: the issue that we have is that this action plan
Speaker 2: and also other policy support that's been implemented by Member
Speaker 2: states and by the EU, does not put it on
Speaker 2: track to anywhere near the scale up of electrication that
Speaker 2: their Commission is anticipating. In terms of the plan itself
Speaker 2: that was published last month, it's largely relies on these
Speaker 2: kind of voluntary measures implemented by the EU but also
Speaker 2: by Member states, kind of future legislative reviews and very
Speaker 2: modest regulatory changes. It introduces very little meaningful concrete support,
Speaker 2: So by that we mean things like here's some actual
Speaker 2: money to do stuff, or here are some rules you
Speaker 2: need to follow that actually promote electrification. So, based on
Speaker 2: this action plan and current policy support, the other thing
Speaker 2: is to flag is that if the EU is planning
Speaker 2: to put all of this kind of onus on the
Speaker 2: member states, Member states in recent years plus the EU
Speaker 2: have also rolled back a fair amount of support for
Speaker 2: electric vehicles and heat pumps, which we key to promoting
Speaker 2: their deployment to actually achieve this electrication target. So we're
Speaker 2: really not in a position to achieve this target at all.
Speaker 1: So, because you're talking about policy support and financial support
Speaker 1: for consumers as well as industries. Something you've been talking
Speaker 1: about really the start of the Iron War is policy
Speaker 1: makers in the EU and elsewhere are now being pushed
Speaker 1: very hard to make sure they lower energy prices for consumers,
Speaker 1: for rate payers, and you're trying to tell them but
Speaker 1: while you're doing this, don't undermine your climate targets. Now
Speaker 1: is not the time to roll back our climate ambitions.
Speaker 1: But what's interesting to me about what you're saying is
Speaker 1: it sounds like this particular climate target will only work
Speaker 1: if electricity isn't too expensive. So has the EU released
Speaker 1: any practical plans for tackling that.
Speaker 2: Yes, absolutely, it's a question of electricity not being too expensive.
Speaker 2: But crucially it's relationship with fossil fuels, because if you
Speaker 2: have really cheap gas available to consumers and much more
Speaker 2: expensive electricity, it's going to be hard to persuade them
Speaker 2: to actually switch, for example, from a gas boiler to
Speaker 2: a heat pump. There are other barriers, but that's kind
Speaker 2: of a key one for consumers. So the EU has
Speaker 2: been working for i'd say quite some time on how
Speaker 2: to rebalance these electricity versus gas prices for consumers. So
Speaker 2: alongside this electrification action plan, it published this future Proof
Speaker 2: Electricity Bill proposal. Now, what's interesting about that and allow
Speaker 2: me to become a policy GEC once again. The EU
Speaker 2: has somewhat limited scope as to what it can do
Speaker 2: with regard to taxation because it's largely within the remit
Speaker 2: of member states, and the Commission has been pushing for
Speaker 2: some years now to completely revise the Energy Taxation Directive
Speaker 2: so that, as it sounds, is a policy, legislative policy
Speaker 2: that actually affects the prices that consumers pay for electricity
Speaker 2: and gas. But because changing that directive requires agreement all
Speaker 2: twenty seven member states, and that is very difficult, especially
Speaker 2: when member states have are centifized to kind of not
Speaker 2: make those changes because they think that it's within their
Speaker 2: remit to do so. So those kind of efforts have
Speaker 2: fallen by the wayside, and instead they've released this proposal.
Speaker 2: Its main component with regard to electricity bills is to
Speaker 2: look at excise duties to ensure that member states don't
Speaker 2: impose higher excise duties on electricity as they do on gas.
Speaker 1: What is an XYZ duty?
Speaker 2: This is a good question. So excise duties are essentially
Speaker 2: a production weighted tax. It's one of the levees that
Speaker 2: we pay for consuming electricity and gas, and it is
Speaker 2: one very small component of our retail electricity prices, and
Speaker 2: that's why we don't think that even if this proposal
Speaker 2: is actually adopted, it will have a big impact on
Speaker 2: electricity bills. So the kind of biggest components of the
Speaker 2: prices that we as consumers pay are wholesale costs. So
Speaker 2: the costs of actually procuring energy from the wholesale market,
Speaker 2: network costs, so that's paying for kind of the grid infrastructure,
Speaker 2: and then these policy costs and taxes. Now, the issue
Speaker 2: that we have is that while our market outlooks suspect
Speaker 2: that wholesale prices in many European markets will decline over time,
Speaker 2: the big question what we have is what happens to
Speaker 2: network charges. Because the energy is transition and in general
Speaker 2: it's going to require enormous future investment in the grid
Speaker 2: and who pays for that. In the EU, it requires
Speaker 2: that a large chunk of that is paid by consumers.
Speaker 2: So another part of this proposal is to for member
Speaker 2: states to promote demand side flexibility.
Speaker 1: So this is fascinating because in a way it sounds
Speaker 1: like the energy transition and efforts to electrify have caught
Speaker 1: us in a feedback loop where we need more electricity
Speaker 1: to meet the new demand that is being encouraged by
Speaker 1: bills like this, which means that we need a more
Speaker 1: robust grid because we've written a lot about how the
Speaker 1: grid just can't handle all this new electricity that's coming
Speaker 1: on to it. The way we pay for making the
Speaker 1: grid more robust is we raise the network charge part
Speaker 1: of consumer electricity bills. So even if the wholesale rate
Speaker 1: for electricity is coming down, bills are getting more expensive
Speaker 1: because since everybody wants electricity now, we need to build
Speaker 1: out the grid.
Speaker 2: Is that right, Yes, exactly, So, as part of this proposal,
Speaker 2: one of the overall aims is to promote better grid utilization,
Speaker 2: so it's using the existing gried better to reduce the
Speaker 2: idea is future the need for future investment. However, most
Speaker 2: of the components within the actual proposal we don't expect
Speaker 2: to have a significant impact. The potential impact largely depends
Speaker 2: on the regulatory frameworks that are in place in member
Speaker 2: states with regard to that or grid operators. So in
Speaker 2: some cases, for example, and historically it's been the case
Speaker 2: that grid operators are incentivized to undertake more capital expenditure
Speaker 2: than operating expenditure, but actually encouraging these what they call
Speaker 2: non wires alternatives, essentially not building a whole lot of staff.
Speaker 2: They're not necessarily incentivized to do that through regulatory frameworks,
Speaker 2: So there's going to be more work required at member
Speaker 2: state level to actually kind of promote this better grid utilization.
Speaker 1: I'm so glad you brought up the member state level
Speaker 1: because you can probably tell from my accent, I'm from
Speaker 1: a country that has a federal system with a big
Speaker 1: overarching federal law and then US member state flaws that
Speaker 1: function differently. The EU is kind of the same but
Speaker 1: also quite different. So can you talk about how this
Speaker 1: EU level plan then has to triggle down into the
Speaker 1: member states, how they potentially implement it, and then as
Speaker 1: part of that, what would it take to actually deliver
Speaker 1: on these ambitions.
Speaker 2: So, yeah, as you say, the EU system is kind
Speaker 2: of similar but kind of different to the US. There
Speaker 2: are my understanding, similar to the US, there are certain
Speaker 2: policy topics that are governed at EU level and government
Speaker 2: it's governed at member state level. In terms of this
Speaker 2: actual action plan, most of the measures within it are
Speaker 2: voluntary and are up to the member states to implement
Speaker 2: or not. There are some components referenced in it, and
Speaker 2: this proposal about electricity bills that would be legislated at
Speaker 2: EU level. Now, interestingly, this one is a regulation and
Speaker 2: an EU regulation. Once it's approved at EU level, it
Speaker 2: automatically applies a national level. If it's a directive, which
Speaker 2: a fair number of for example, the Renewable Energy Directive
Speaker 2: energy Efficiency Directive. So there are quite a few of
Speaker 2: these types of policies that relate to energy and climate.
Speaker 2: In that case, they're adopted at EU level, but then
Speaker 2: they need to be what's called transposed, so that means
Speaker 2: implemented into national law. And the interesting thing about that
Speaker 2: is that's where we get some wiggle room for member
Speaker 2: states to interpret those policies as they seem fit and
Speaker 2: we get some of these cross member state differences. When
Speaker 2: it comes to actually funding, there are some pots of
Speaker 2: EU level funding, but in large part the kind of
Speaker 2: financial incentives that will be required to promote heat electric
Speaker 2: vehicle deployment as well as industrial electrication, a lot of
Speaker 2: that funding will need to come from member state governments.
Speaker 2: So one of the barriers that we have is a
Speaker 2: as I mentioned, a fair few of them kind of
Speaker 2: undertaking these policy rollbacks in the last eighteen months. We've
Speaker 2: also seen in certain members states a shift to the
Speaker 2: political rights which those parties tend to be less supportive
Speaker 2: of the energy transition. And there are various other major
Speaker 2: member states that face severe fiscal issues, so they actually
Speaker 2: just have limited budget to spend on all this financial
Speaker 2: support and really in the growth. The package that was
Speaker 2: released on July seventeenth focuses on operating costs, so essentially,
Speaker 2: how much does it cost for consumers to fuel for
Speaker 2: want of better work, their electric vehicle heat pump. And
Speaker 2: the challenge with that is that, especially for heat pumps
Speaker 2: and electric vehicles, that's just one of the cost components
Speaker 2: and it is much less than capital expend the KAPEX costs,
Speaker 2: and the package does very little to actually incentivize kind
Speaker 2: of reductions in capital costs, and that is the real
Speaker 2: challenge that we face. It could have more of an
Speaker 2: impact if Member states actually do stuff on terms of
Speaker 2: industrial actification because for many industries and the kind of
Speaker 2: fuel costs are a much larger component of the TOE
Speaker 2: tool costs. But we really need to promote this deployment
Speaker 2: of heat pumps and electric vehicles, and the July seventeenth
Speaker 2: package just very limited to progress in that respect.
Speaker 1: I feel like what we're talking about here is an
Speaker 1: energy transition hydro where we solve one problem, we cut
Speaker 1: off one head, and three new heads appear. Right. So,
Speaker 1: like we've put out this plan for a proposal for
Speaker 1: maybe a plan really ambitious targets, but to actually get
Speaker 1: that up and running, we're going to need to convince
Speaker 1: people to adopt the technologies. We're going to have to
Speaker 1: fund it, and some of the members says, are having
Speaker 1: fiscal issues. We have politics that we have to battle,
Speaker 1: and then we also simply have to battle the EU
Speaker 1: legislative process, which is really really complicated. So win this
Speaker 1: now four headed hydra in the place of our one
Speaker 1: headed target that we started the conversation with. As a
Speaker 1: final question, what's next on the agenda and what should
Speaker 1: our listeners be watching for the EU to do next?
Speaker 2: So what's coming up? Well, the European Commission does like
Speaker 2: to release a big legislative package just before Christmas, and
Speaker 2: we have one coming up in December when there's going
Speaker 2: to be policies released around renewable energy energy efficiency the
Speaker 2: framework for actually achieving its relatively new twenty forty emissions targets,
Speaker 2: and various member states have said that they are reluctant
Speaker 2: to commit to an electrification target or indeed the reforms
Speaker 2: to the emissions trading system that were also released on
Speaker 2: July seventeen, until they see some of these kind of
Speaker 2: newer policies about renewables, and so I think for kind
Speaker 2: of industries perspective, they would really like to see a
Speaker 2: more kind of cohesive approach across the energy transition sectors
Speaker 2: taking account kind of emissions, because it's hard to commit
Speaker 2: to one thing without knowing that permutations of all the
Speaker 2: other things. And there are a bunch of other kind
Speaker 2: of more sector specific policies that are due out by
Speaker 2: year end. So the Commission has a lot of work
Speaker 2: to do.
Speaker 1: Fantastic, So all eyes on December at this point, VICKI,
Speaker 1: it is always such a pleasure to speak with you.
Speaker 1: Thank you so much for.
Speaker 2: Coming on, no problem, thank you for having me.
Speaker 1: Today's episode of Switched On was produced by Cam Gray
Speaker 1: with production assistance from Kamala Shelling. Bloomberg NIF is a
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