By Maria Barros Silva (Associate Lawyer at SRS Advogados – Energy and Competition Law) and Nuno Calaim Lourenço (Managing Associate at SRS Advogados – Energy and Competition Law)

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1. Context

The energy sector is cyclical by nature. History offers several examples of market expansion followed by very sudden contractions. Unfortunately, the current crisis differs from previous ones. To put things into dire perspective, the European Union (“EU”) heavily relies on fossil fuel (gas, oil and coal) imports for its energy needs, amounting to circa 60% of gross energy consumption in the past 5 years. The EU imports 90% of its gas, with Russia previously accounting for 45% of those imports, as well as for 25% of oil and 45% of coal. Although European domestic production of renewable energy sources has increased significantly in recent years, the intermittent nature of the so-called “green energy”, coupled with limited renewable-energy storage and a drastic and intransigent reduction in the production of EU coal, lignite and gas has meant that the EU remains energy dependent.

In this scenario, following Russia’s tragic invasion of Ukraine, the consequent sanctions towards Russia and the uncertainty of fuel supply, the crisis was exacerbated, with energy being used as an economic and political retaliation tool.

2. REPower EU: eliminating the European dependence on Russian fossil fuels

In March 2022, following Russia’s invasion, the European Commission came up with a plan to make the EU independent from Russian fossil fuels by 2030 – the so-called REPower EU.[1] By the end of 2022, the goal is to make the EU’s need for Russian gas down by two-thirds. That will be achieved by increasing the resilience of the EU’s energy system, addressing Europe’s growing energy prices and refilling gas storage for the coming winter months, with a plan based on 2 pillars: (i) diversification of gas supplies, through natural gas, biomethane[2] and pipeline imports from other countries; and (ii) reduction of fossil fuels’ use, by focusing on energy efficiency and renewable energy.

On that note, the EU External Energy Strategy[3] aims to facilitate energy diversification and build long-term partnerships with suppliers, including cooperation on hydrogen or other green technologies. The recently created EU Energy Purchase Platform[4] will be a useful tool in this regard, as it will enable voluntary common purchases of natural gas and hydrogen, optimising infrastructure use and coordinating outreach to suppliers.

Regarding storage, following up on the European Council’s Versailles Declaration,[5] the Commission published a legislative proposal of a Regulation to address conditions for access to natural gas transmission networks in the EU,[6] introducing a minimum 80% gas storage level obligation to ensure security of energy supply, rising to 90% for the following years. While EU legislation is yet to be adopted, the Commission already encourages Member States to replenish their storage and to finalize solidarity agreements as outlined in the current Gas Security Supply Regulation.[7]

In parallel, to decrease the impact of high energy prices on consumers, the Commission published a State aid Temporary Crisis Framework[8] to provide short-term support to companies affected by high energy prices and help reduce their exposure to price volatility. Moreover, the Commission adopted a Communication[9] setting out the options for market intervention at a European and national level.[10]

3. Acceleration of clean energy transition

One of the main objectives of the REPower EU package is to foster the use of renewable energy, as a viable alternative to fuel imports. It is undeniable that solar, wind and biofuel energy will play a key role in decarbonizing and electrifying the energy matrix, especially as a way to meet primary energy needs. However, a transition to a low-carbon economy that is not properly thought of, managed and tested against scarcity and volatility may result in recurring market crises and undermine the decarbonization path. Indeed, the EU’s perhaps too ambitious climate agenda and the tightening of the rules of the Emissions Trading Scheme (ETS) were part of the reason that led to an increase in carbon prices, reaching an unprecedented peak of 88 euros/tonne in December 2021.

REPower EU does not modify the main ambition of the Fit for 55[11] package of the European Green Deal legislation,[12] which was to achieve at least a 55% reduction of net greenhouse gas emissions by 2030 and climate neutrality by 2050. Nor does it change the common goals announced on the 15^th of December 2021 by the Commission, that published a set of legislative proposals[13] to decarbonise the EU gas market, aimed at facilitating the uptake of renewable and low carbon gases.

What REPower EU measures entail are new subject-specific legal goals, such as an increase in the binding energy efficiency target in the revised Energy Efficiency Directive proposal[14] from 9 to 13%, as well as an increase in the 2030 headline target for renewable energy in the revised Renewable Energy Directive[15] from 40 to 45%. In addition, Member States must ensure a minimum of 14% of renewable energy within the final consumption of energy in the transportation sector.

A dedicated EU Solar Strategy[16] to double solar photovoltaic capacity by 2025 and install 600GW by 2030 is also envisioned, as well as a Solar Rooftop Initiative with a phased-in legal obligation to install solar panels on buildings.

In the context of its REPower EU Plan,[17] the European Commission increased its goal to produce 5,6 million tonnes of renewable hydrogen in the EU to 10 million tonnes by 2030, which seems rather ambitious. Additionally, a further 10 million are to be imported from third countries. The plan also foresees the creation of a Hydrogen Accelerator, developing integrated infrastructure, storage facilities and port capacities, with additional funding of €200 million set aside for research. The Commission is also in the process of publishing two Delegated Acts on the definition and production of renewable hydrogen[18] to ensure that production leads to net decarbonisation.

Finally, in the transportation sector, to enhance energy savings and efficiencies and accelerate the transition towards zero-emission vehicles, the Commission is considering a legislative initiative to increase the share of zero emission vehicles in public and corporate car fleets above a certain size. The EU Save Energy Communication[19] also includes many recommendations that can effectively contribute to the substitution of fossil fuels in the transport sector.

These measures, and particularly the REPower EU plan, will be aligned with current National Energy and Climate Plans. The new rules will make it easier for renewable and low-carbon gases to access the existing gas grid, by removing tariffs for cross-border interconnections and lowering tariffs at injection points.

The energy transition trajectory is critical; it is also, as energy models attest, technologically and financially feasible. The goal of full decarbonization must be pursued with determination and fairness. However, this will take time and effort. The current crisis clearly demonstrates that Europe is not prepared to deal with the price level at which fossil fuels ideally should be marked in a decarbonized economy. Spikes in the prices of these types of fuels in a context of sub-optimal renewable energy generation result in uncontrolled energy price inflation. A context of high prices may become a “new normal” as progress is made towards decarbonization. The imperative is not to slow down the momentum of the net-zero transition, but to manage it and prevent it from becoming a source of collective frustration.

There are specific challenges to the operationalization of renewable energy, which is an unpredictable source, with a high level of fluctuation. Storage and capacity limitations related with transmission and distribution networks themselves are just a few.

4. The Portuguese case

Portugal has a unique position in this energy crisis. It is not as exposed as its European counterparts to Russian gas dependency[20] and is already one of the key players of renewable energy in Europe. Hence, this might be an unprecedent opportunity for this country to assume a more relevant role in clean energy transition.

Portugal’s goal is to become carbon neutral by 2050, and it currently gets 60% of its electricity from renewable sources – one of the largest proportions of green energy use in Europe! Moreover, the Portuguese Government aims to accelerate energy transition and increase the country’s proportion of renewable sources from 20 to 80% of electricity output by 2026, by highly increasing the installed capacity of renewable sources in the next 10 years, with foreseen investments of more than 25 billion euros.

As the Portuguese Environment Minister Duarte Cordeiro has publicly stated: “Portugal will have a key role in helping “all of Europe” by distributing gas through the port of Sines.[21] Sines can soon become a port for receiving, storing and transhipping liquified natural gas that could come in from the United States, Nigeria, Qatar, etc. to other regions of Europe.”

Moreover, Cordeiro considers it fundamental to reinforce (through sought-after European funds) interconnections between Portugal and Spain, as well as Spain and France. Although having an aggregate installed capacity capable of supplying 30% of Europe’s natural gas requirements, Portugal and Spain are unable to do so due to inadequate and obsolete interconnections. This projected pipeline, which today is thought to be used for natural gas mainly, may also be used for green hydrogen.

In this respect, it is worthwhile noting that Sines will soon see an investment of €1bn to develop a 500MW green hydrogen and ammonia production project. Other relevant projects are on the pipeline. For example, the Government is currently assessing the possibility of producing hydrogen on artificial islands with wind turbines in the middle of the ocean. Overall, Portugal is an excellent location to produce green gases, because water is readily accessible, and the cost of energy is low. As Prime Minister António Costa recently stated, “the major strategic challenges taken on by Europe in this decade have profoundly changed geography“. The energy transition has changed the way in which each country positions itself on the global scene and Portugal is in a privileged position.

European funds made available through the REPowerEU plan will be essential for Portugal to fulfil its ambitious goals, by focusing on energy efficiency, decarbonization, renewable energies and storage systems and networks. In that sense, the Portuguese Government will adapt its Recovery and Resilience Plan (RRP)[22] and the next EU framework Portugal 2030 to the European Commission’s urgent plan to mobilize funding to accelerate the energy transition.[23]

5. Conclusion

The European economy might have been better prepared to withstand the current crisis if the EU had conducted a short- and medium-term horizon scan and implemented appropriate resilience measures. Ultimately, and paradoxically, policies focused exclusively on reducing emissions might have made the situation worse. Rising prices increase inflationary pressures, constrain post-Covid recovery goals, and exacerbate the energy poverty of millions of Europeans.

In the present context, it is of the utmost importance that not only renewables take centre stage in the future energy panorama in the EU, but also that suppliers and infrastructure are diversified, and new energy projects are prioritised. European energy policies should be directed, firstly, towards creating mechanisms to withstand market fluctuations and, secondly, to comprehensively test the transition process, which is unlikely to be as smooth as the political rhetoric seems to suggest.

Price fluctuations (for example, for oil supplies) have traditionally been mitigated through strategic reserves, minimum stock level requirements, and household subsidies. This approach can also be applied to gas markets. Other strategies may include demand aggregation and collective purchasing of gas, as well as inducing behaviour change among consumers and improving energy efficiency. There are several alternatives that can be considered, as the EU continues to deal with the consequences of the energy crisis and seeks sustainable solutions for the future, such as: (i) automatic collective solidarity measures; (ii) demand management measures during peak periods; (iii) continue pipeline development for gas imports, as well as focusing on natural gas[24]; (iv) impose a EU requirement for a collective strategic reserve (Member States should assure a minimum percentage of gas consumption); (v) creation of a collective fund for energy crisis, using the EU carbon permit revenue budget to alleviate cost pressures and the final price of energy; and (vi) continue to inject flexibility in the electric grid, by meeting and exceeding the 15% electricity interconnection target by 2030. In a system powered primarily by renewable energy, the use of scaled-up battery and hydrogen production technologies will also reduce demand for natural gas and provide the necessary seasonal adjustment to variability in renewable energy generation.

An integrated and diversified EU energy system focused on greater energy efficiency is the key to tackle energy costs in the EU, as well as being an opportunity to address the climate crisis and to reduce dependency, not only from Russia, but also from fossil fuels.

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[1] Communication from the Commission of 8 March 2022, REPowerEU: Joint European Action for more affordable, secure and sustainable energy https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=COM%3A2022%3A108%3AFIN

[2] To boost the EU production of biomethane, the current EU goals for 2030 will be doubled, using sustainable biomass sources such as agricultural wastes and residues.

[3] Joint communication of 18 May 2022, EU external energy engagement in a changing world, https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=JOIN%3A2022%3A23%3AFIN&qid=1653033264976

[4] https://ec.europa.eu/commission/presscorner/detail/en/IP_22_2387

[5] https://www.consilium.europa.eu/media/54773/20220311-versailles-declaration-en.pdf

[6] Proposal for a Regulationof 23 March 2022, amending Regulation (EU) 2017/1938 concerning measures to safeguard the security of gas supply and Regulation (EC) n°715/2009 on conditions for access to natural gas transmission networks, https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A52022PC0135&qid=1649254861786

[7] Regulation (EU) 2017/1938 of the European Parliament and of the Council of 25 October 2017, concerning measures to safeguard the security of gas supply https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=uriserv:OJ.L_.2017.280.01.0001.01.ENG

[8] State aid Temporary Crisis Framework to support the economy in the context of Russia’s invasion of Ukraine, based on Article 107(3)(b) of the Treaty on the Functioning of the European Union, of 23 March 2022 https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=uriserv:OJ.CI.2022.131.01.0001.01.ENG

[9] Communication from the Commission of 23 March 2022, Security of supply and affordable energy prices: Options for immediate measures and preparing for next winter https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A52022DC0138&qid=1649253932345

[10] The Commission confirmed that, in the current exceptional circumstances: (i) Member States can set regulated prices for vulnerable consumers; (ii) can consider temporary tax measures; and (iii) can use increased emissions’ trading revenues to ease pressure on household consumers.

[11] https://www.consilium.europa.eu/en/policies/green-deal/fit-for-55-the-eu-plan-for-a-green-transition/

[12] https://ec.europa.eu/clima/eu-action/european-green-deal_en

[13] https://ec.europa.eu/commission/presscorner/detail/en/IP_21_6682

[14]Proposal for a Directive on energy efficiency of 14 July 2021, https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:52021PC0558

[15] Proposal for a Directive amending Directive (EU) 2018/2001, Regulation (EU) 2018/1999 and Directive 98/70/EC as regards the promotion of energy from renewable sources of 14 July 2021, https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:52021PC0557

[16] Communication from the Commission of 18 May 2022, EU Solar Energy Strategy https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=COM%3A2022%3A221%3AFIN&qid=1653034500503

[17] A draft of the Commission delegated regulation on renewable hydrogen is currently under discussion,https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/7046068-Production-of-renewable-transport-fuels-share-of-renewable-electricity-requirements-_en

[18] https://ec.europa.eu/info/news/commission-launches-consultation-regulatory-framework-renewable-hydrogen-2022-may-20_en

[19]Communication from the Commission of 18 May 2022, EU Save Energy https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=COM%3A2022%3A240%3AFIN&qid=1653033053936

[20] Russia was Portugal’s main supplier of oil in 2017 and 2018, but since 2020 it was replaced by Brazil, Nigeria and the USA. As for natural gas, Russia is currently the third largest supplier of natural gas in Portugal, but is far behind (6% of the total in the first quarter of 2022, below the 10% of 2021) the supplies of the two main markets, Nigeria and the USA (83% of the total in 2021).

[21] https://expresso.pt/economia/2022-05-02-Ministros-da-energia-querem-reforcar-armazenamento-de-gas-na-Europa-acelerar-compras-coletivas-e-interligacoes-8489d8fa

[22] https://recuperarportugal.gov.pt/?lang=en

[23] Commission Notice Guidance on Recovery and Resilience Plans in the context of REPower EU (2022/C 214/01) https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52022XC0531(01)&from=EN

[24] Despite being a fossil fuel, there is a consensus that natural gas will play a key role as a less polluting energy source in the coming decades, especially in relation to coal.

Picture credits: Pexels.