EU Recovery Plan goes green [NGW Magazine]

The president of the European Commission (EC) Ursula von der Leyen presented the EC’s €750 ($830)bn proposed Recovery Plan May 27. Intended to rebuild economies that were already suffering before the Covid-19 pandemic, it was built around the Green Deal.

However, pursuing a low and ultimately net zero carbon economy will require a huge leap of faith, as the sums of money involved and the risk of economic upheaval are great. They also vary from country to country, so there is much trading to be done among the member states.

The document aptly titled: Europe's moment: Repair and Prepare for the Next Generation, gives priority to renovation, renewables and hydrogen, as well as to clean mobility and waste management. But there is no direct reference to supporting natural gas, the essential fuel for generation, whose use is rising as coal is displaced by regulatory or market mechanisms.

Both the EU’s updated seven-year €1.1 trillion budget proposal and the €750bn Recovery Plan – to support recovery post-Covid-19 pandemic – will be geared towards the green and digital transitions, with EU planning to set aside a quarter of all funding for climate-friendly action.

When added to an earlier €540bn initial rescue package, it would amount to a total of €2.4 trillion, von der Leyen said.

But the response from Greenpeace, WWF and other NGOs, in advance of the presentation, was to denounce any kind of public funding for polluting industries to be tied to green commitments. Other environmental NGOs said the proposal fails to offer a truly 'green recovery' and called it a 'brown' recovery.

But the majority of non-NGOs, including pension funds, the Club of Rome, E3G and asset managers at the Institutional Investors Group on Climate Change (IIGCC) – that manages over €30 trillion of assets – welcomed it. 

And most EU member states, led by Germany and France on whose proposal the plan is based, reacted positively to it – but the devil is in the detail.

A three-pillar plan

The plan focuses on Green Deal initiatives and is based on three pillars (Figure 1):

First, supporting member states’ investment and reforms to address the crisis through a ‘Recovery and Resilience Facility.’ This receives the lion’s share of the funds.

Second, the EC will create a new ‘Solvency Support Instrument’ and a ‘Strategic Investment Facility’ to kick-start the EU economy by incentivising private investment.

Third, the EC will create a dedicated health programme and address the lessons of the crisis.

In addition, funds will be allocated to support a number of other EU programmes, including agricultural policy and the just transition fund, and funds for EU partners’ support and humanitarian aid.

The allocation of the €750bn recovery funds is shown in Figure 1. It will be made up of €500bn in grants and €250bn in loans. But it would need member states to enter into ‘joint-debt’, which could be a challenge.

Europe intends to enhance its strategic autonomy in a number of specific areas, including in “strategic value chains and reinforced screening of foreign direct investment.”

The EC is proposing to pay back the loans over 30 years, starting 2028, through:

• A carbon tax based on the Emissions Trading Scheme;
• A digital tax; and
• A tax on non-recycled plastics.

But the approval of direct taxation by the EC may face challenges by members, who have so far been responsible for their own fiscal regimes.

In order to access the funds, EU members will have to formally apply and submit a national plan to explain how they will support economic reforms agreed at the EU level. Any request must then be signed off by the EC and the European Council.

The greatest beneficiaries of this will be Italy with €81.8bn and Spain with €77.3bn. Both countries, and southern Mediterranean states have responded positively to this, as did Germany and France, but many others are yet to decide.

It also appears that the plan may have the support of the largest groups of the European Parliament.

The EC wants the plan agreed at the next EU leaders' summit on June 19. But negotiations are expected to be difficult, with compromises not expected before July, when Germany takes over the rotating EU presidency. But even then, final agreement is likely to take longer, given disagreements over the size, the distribution of the stimulus and the funding allocation conditions.

How green is it?

Most of the funds will be handed directly to member states. And even though the plan comes with conditions, it is in their discretion how to use the funds, as long as they show that their investments are in line with the objective of the Green Deal to eliminate net greenhouse gas emissions.

But the EC has already given way to regions by allowing them to spend their funds however they want until 2022 – even if that means investing in schemes which are good for job-creation but not necessarily for the climate. The priority appears to be to save and transform national economies. This has annoyed campaigners who have been arguing that these funds should be spent on projects that will help tackle the climate crisis.

According to ECB, the eurozone economy is forecast to shrink by 8% to 12% this year. Given that most EU member-states are already highly indebted – with debt to GDP ratios between 60% to 180% – it is not certain that climate issues will be high on their priority lists.

This is evident from recovery efforts by individual European governments so far. They have had a mixed record when it comes to climate – they have spent nearly €2 trillion in state aid helping ailing companies and small business without any green conditions attached. This is also what happened after the last global recession in 2008 – only one-sixth of the invested funds was spent on sustainable infrastructure.

Green campaigners have criticised this. Friends of the Earth said:  “it’s ludicrous not to put any conditions on these funds. Our common future will be shaped by how this money is spent, and allowing strings-free handouts to polluting industries, or corporations who dodge tax or have poor labour practices, will not rebuild the sustainable, fair, caring world we need.”

The EC rejects this however and Germany’s energy-intensive industries alliance (EID) wrote an open letter to the government late May warning against additional energy costs. It said it was “questionable whether the Green Deal [around which the plan is based] in its current form is helpful for the economic recovery.”

The EC plans to allocate funds to boost sustainable transportation and smart mobility, investing in clean vehicles, the roll-out of electric-charging spots across Europe plus cycling infrastructure. It will also finance rooftop solar panels, insulation or renewable heating systems of buildings and modernisation and digitalisation of rail infrastructure, waste management and the farming sector.

The EC also promised to roll out renewable energy projects, especially wind and solar, to generate electricity to kick-start a clean hydrogen economy in Europe. But this will be extremely costly for uncertain results.

Funding will also be allocated to the Just Transition Fund to help the most affected regions alleviate the impact of transitioning toward eliminating emissions. Even though it is not clear how much of the funds will be earmarked for green initiatives, analysts estimate these at more than €100bn.

What is the future of gas in the EU?

At first sight natural gas faces an uncertain future in EU’s Recovery Plan. Klaus Borchardt, deputy director general EC, categorically confirmed at an Atlantic Council webinar on European energy security that gas has a future in the EU, at least for the next ten years. That was the day after the plan was revealed.

However, at the European Gas Conference in Vienna in January, he also said Europe has all the gas it needs and does not need any more large import pipelines.

At the same Atlantic Council webinar, Ditte Juul-Jorgensen, EC director-general for energy, added that “the role of gas will be much smaller than it is today, but that’s 2050. That’s 30 years from now.”

On top of that, the European Investment Bank (EIB) announced in November last year that it will stop funding fossil fuel projects, including natural gas, from the end of 2021. It will also limit approvals of new fossil fuel projects before 2021 to projects that are already under appraisal by the EIB. This is a decision that could pose long-term challenges for the gas industry.

Borchardt’s confirmation is reassuring for existing gas projects, allowing sufficient time to adjust during transition. But it is not enough for recently constructed projects or new gas projects that need a 20-year life to recover investments.

This could become especially problematic if effective transition to green energy takes longer than envisaged. In any case, gas is still essential for industrial sectors like steel, chemicals and heavy-duty transport that are too expensive or difficult to electrify. Affordable green hydrogen is too far off to meet energy demand of this kind at scale.

This is what led eight EU member-states – Bulgaria, Czech Republic, Greece, Hungary, Lithuania, Poland, Romania and Slovakia – to defend the role of natural gas in the transition towards climate neutrality.

They called for “combined electricity-gas solutions” in the transition to net-zero emissions by 2050 and made the case for natural gas in the transition away from coal power. They fear that they may be left with stranded assets, but they also fear the massive investment required for renewables.

The EC expects electricity to meet 53% of EU’s energy demand by 2050. That leaves at least 40% for other energy carriers such as gaseous fuels that the EC says will have to be decarbonised in order to reach climate neutrality by 2050. EC scenario studies show the potential future role gases – natural gas, biogas and waste gas, synthetic methane and hydrogen – could play in the longer-term in EU’s energy system (Figure 2).

In addition, according to the International Energy Agency (IEA), natural gas is forecast to retain a critical role in global primary energy to 2040, even if the EU goes in the opposite direction. The rest of the world sees it as a cheap, plentiful and lower-emission energy source, hastening the shift away from coal. Its share is expected to grow to about 25% in IEA’s STEPS scenario, and to about 20% in SDS, by 2040.

Gas companies could benefit from EU’s drive to shift to hydrogen use. Most of the hydrogen used today, about 76%, is produced from natural gas, with green hydrogen amounting to only 1% owing to high costs. Further development of this technology, combined with carbon capture and storage (CCS), and further reductions in unit costs could extend the life of natural gas, and use of gas infrastructure, well into the future.

Hydrogen to the expensive rescue

Hydrogen Europe’s secretary-general Jorgo Chatzimarkakis welcomed the news. He said “This is a historic opportunity to realise a systemic change towards clean technologies like hydrogen. A massive support to hydrogen and hydrogen technologies will put us firmly on track to achieving ambitious targets for 2030 and climate neutrality in 2050.”

Prioritising hydrogen was also welcomed by GasNaturally, stating that blue hydrogen, which is produced from natural gas with CCS, will provide the basis for accelerating the development of a hydrogen economy in Europe.

But a ‘choose renewable hydrogen’ grouping of ten companies, including Akuo Energy, BayWa, EDP, Enel, Iberdrola, MHI Vestas, SolarPower Europe, Orsted, Vestas and WindEurope, issued an open letter to the EC supporting “Hydrogen produced via electrolysis, powered by 100% renewable electricity.”

They added: “When made in Europe it reduces the EU’s energy dependence from third countries and when produced by grid connected renewables it offers a real form of sector coupling between the power sector and the other economic sectors.”

In order to take this forward, the EC announced plans for the formation of an EU-wide hydrogen alliance after the summer. This will bring “investors together with governmental, institutional and industrial partners, to build on existing work to identify technology needs, investment opportunities, and regulatory barriers.”

The EC sees hydrogen as having “the potential to replace fossil fuel-based energy, enable and optimize large-scale renewable electricity production, and help increase the EU’s energy security and resilience.” In addition, “the use of hydrogen as fuel could help reduce carbon emissions in hard-to-abate sectors, such as steel, cement or chemicals.” Hydrogen will be central to energy systems’ integration.

Germany and the Netherlands are among EU countries that have confirmed support for this plan, with Germany making hydrogen a priority for its forthcoming presidency of the EU. But Germany’s plan “explicitly includes conventional hydrogen produced from natural gas.”

Moreover, in November, Frans Timmermans, EC vice-president, said that “if we use our technology wisely, a combination of fossil and hydrogen could be used in the network”, noting that CO₂-free hydrogen is not a panacea. He added “Fossil fuels will also be part of the mix, we have to be realistic” (Figure 1).

At present green hydrogen technology is still too expensive, costing three to four times more than grey hydrogen, and extremely energy-intensive, with three quarters of the energy wasted. But it could be promising in combination with renewable electricity – with direct EU support it becomes more likely over time.

Challenges

Many EU member-states are still to decide how to respond to the plan. Austria, Denmark, Netherlands Finland and Sweden support loans, not grants. Others, like Poland, Hungary, Bulgaria and Lithuania, disagree with the methodology and will not commit either way until they have read the small print. In the end there will be a need for compromises as it requires unanimous approval by member states.

The director EU affairs at the International Association of Oil and Gas Producers (IOGP) Francois Regis-Mouton warned that scaling up hydrogen with renewable electricity “would require an ocean of subsidies, and would likely fail to deliver the volumes needed to make a real difference.” He added: “Focusing all financial support on a single, small-scale technology is a gamble Europe cannot afford these days…To succeed, we must promote all forms of clean hydrogen production, including from gas reforming with CCS or methane pyrolysis, and start by building synergies and economies of scale within existing industrial clusters.”

There are also concerns that building a hydrogen infrastructure will take time. Jonathan Stern, director Oxford Institute of Energy Studies, said at a Euractiv webinar “I think this could take us a lot of time, just as it has taken us a lot of time for natural gas.” He added that it took 30 years to build a functioning EU-wide market for natural gas.

Nevertheless, EU’s hydrogen economy could materialise as technology costs fall and interest and determination from European policymakers grow. EU’s Recovery Plan offers an opportunity to speed this up. But the key factors continue to be costs and time – both remain difficult to predict.

In the meanwhile, it is increasingly important to manage the transition. Stern warned that “We risk having a cliff-edge if we repurpose terminals” to accept hydrogen only. A key issue is “whether there will be a transitional period where terminals will be able to receive both LNG and other products like hydrogen.” He added that LNG exporters deserve “a respectable amount of notice” to adapt. And so does the gas industry as a whole, including clarity and realistic timetables.

Nevertheless BP and other major companies are asking that the recovery is used as an opportunity to accelerate transition to net zero. And there is still time – during the inevitable negotiations – to modify its details.