Europe faces a looming “death valley” of high energy costs over the next decade that threatens to erode its industrial base, even if its ambitious new plan to double electricity consumption by 2040 materializes.
The European Commission on Friday unveiled an Electrification Action Plan aimed at increasing electricity’s share of final energy consumption from around 23% today to 46% by 2040, with an interim reference target of 32% by 2030.
The strategy seeks to accelerate the electrification of transport, buildings and industry, while tackling one of Europe’s biggest energy paradoxes — electricity is often more expensive than the fossil fuels policymakers want consumers and businesses to abandon.
The Commission argues that turning Europe into the world’s first “electro-continent” would dramatically reduce fossil fuel consumption and cut the bloc’s energy import bill by as much as €260 billion ($297 billion) a year by 2040.
At a time when energy security has become a geopolitical priority, the appeal is obvious. But so too is the challenge.
Europe still runs overwhelmingly on fossil fuels. Oil, gas and coal account for more than 60% of the EU’s overall energy mix, while renewables make up only about one-fifth.
While the continent has rapidly expanded renewable power generation at huge cost, it has made far less progress in electrifying the sectors that consume the most energy, particularly transport, industry and heating.
So even though Europe is steadily decarbonising electricity generation, electricity itself remains only a minority of total energy use. The share of electricity in total energy consumption has remained stubbornly steady at around 23% for over a decade.
The disconnect highlights the scale of the task ahead, an undertaking that could very well determine the viability of European industry for the next decade.
MASSIVE VULNERABILITY
The urgency of accelerating that shift was underscored by the energy crisis that followed Russia’s full-scale invasion of Ukraine in February 2022.
The loss of abundant Russian pipeline gas forced Europe into a painful and expensive energy realignment, as it had to replace cheap imports from the east with costlier liquefied natural gas from global markets.
The consequences for industry have been profound. The surge in energy prices triggered a prolonged contraction in industrial activity as manufacturers from chemicals and fertilisers to metals and glass struggled to compete with rivals in regions benefiting from cheaper energy, most notably Asia.
Europe remains acutely exposed to swings in fossil-fuel markets. Since the start of the Iran war in late February, the region’s oil and gas import bill has risen by around €50 billion, according to the European Commission, adding fresh inflationary pressure.
To reduce energy costs, the Commission has proposed a broad package of measures aimed at narrowing the price gap between electricity and gas.
These include reducing network charges, rolling out smart meters, making electric vehicles more affordable, expanding charging infrastructure, and accelerating the replacement of gas boilers with heat pumps.
A key pillar of the strategy is an overhaul of the EU’s Emissions Trading System, the bloc’s flagship climate policy. The proposed reforms would give industries more time to reduce emissions while providing greater financial support for investment in clean technologies and domestic manufacturing.
HUGE PRICE TAG
But the scale of investment required is daunting. The Commission recently estimated that upgrading and expanding Europe’s ageing transmission and distribution networks will require around €1.2 trillion of investment by 2040.
Programmes designed to encourage electrification in transport, industry and buildings will likely necessitate tens of billions more.
There are some reasons for optimism, however.
Europe already spends roughly €60 billion-€70 billion annually on power grids, according to the International Energy Agency, meaning reaching the Commission’s investment target would not require a wholesale transformation of existing investment trends.
Moreover, additional funding could be unlocked through the proposed easing of ETS requirements, which could allow companies to redirect capital toward modernising infrastructure and production facilities.
The Commission also wants member states to dedicate half of ETS revenues to decarbonising domestic industry. Since 2013, the carbon market has generated roughly €260 billion in revenues.
But even factoring in all this, the uptick in investment required remains intimidating.
That’s especially true given that European governments are simultaneously under pressure to increase defence spending in response to growing security threats from Russia and demands from Washington for NATO members to contribute more.
EXISTENTIAL RISK
The biggest problem of all may be timing.
Even if the plan survives the political battles ahead — no certainty, given the divergent priorities of the bloc’s 27 member states — the benefits will materialise only gradually. Building grids, charging networks, heat pumps, batteries and industrial infrastructure takes years.
Europe’s industrial competitiveness challenge, by contrast, is immediate.
European electricity prices remain more than twice those in the U.S. and roughly 50% higher than in China, leaving energy-intensive industries at a structural disadvantage even after the retreat from the extreme highs reached during the 2022 energy crisis.
For most of the next decade, Europe will have to find a way to keep energy-intensive industries competitive against its rivals in Asia and North America, while also expanding electricity-hungry sectors such as artificial intelligence and data centres.
That is the uncomfortable reality at the heart of Europe’s electrification strategy.
Electrifying the continent is no longer merely a climate ambition. For a region with limited domestic fossil-fuel resources, chronic exposure to geopolitical energy shocks, and increasingly expensive fuel imports, it has become an economic necessity.
The question is whether Europe’s industries can survive long enough to reap the benefits.
(The opinions expressed here are those of Ron Bousso, a columnist for Reuters.)
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(Ron Bousso; Editing by Jan Harvey)