Electrification continues to be identified as a least-cost decarbonisation option. In order to be successful, this will require competitive and affordable low-carbon electricity at very large volumes for both industry and citizens. The EU can build upon the successes of its 2020 strategy, but the cycle from 2020 to 2030 will bring new and bigger challenges. The volumes of renewable energy needed to meet the targets are of a different magnitude. The low-carbon transition will continue to spread further beyond the electricity sector into the mobility, energy-intensive industry, and gas sectors. By 2030, around 65 to 70 percent of electricity output—renewables and nuclear combined—will have zero marginal costs. This will transform the economics of the power sector.
This report explores the avenues that the electrification and power sector provides for emissions reduction vis-a-vis long-term climate objectives. It discusses three key issues:
- Price signals: Current price signals are not in line with investment needs and the rate of investment required. While long-term power purchasing agreements (PPAs) will play an important role, and can still be expanded, it is hard to see how they could, alone, solve the impending imbalance. The market may need a long-term price signal to plan adequate returns on future assets and stabilise financial planning, but also to reduce the cost of capital by reducing the risk premium.
- Cost allocation: Reaching 2030 targets will imply extending emissions reductions efforts further beyond the electricity sector by shifting attention to transport, heating and cooling, and possibly other everyday aspects of life for EU citizens. In order to make sure that specific climate and energy policies will enjoy the support of voters, an effective approach is needed at both EU and member state levels for dealing with distributional aspects, i.e. who bears the cost. To achieve this will require major efforts, for example by reforming energy and electricity taxation, including charges. Policy at EU or member state levels will also need to effectively address energy poverty, where it exists, preferably through transfers or social policy. If such efforts fail, either investment will stall, political support erode, or both.
- Innovation: Low-carbon industry offers the prospect for new value-added solutions and, more generally, opportunities for applications of technological innovation and the creation of new business models. An essential element for the EU will be the development of a framework to provide a level playing field, for example for supply, demand, and grids to ensure cost-effective solutions. In addition to the level playing field, there will be a need for research and innovation in new, and some not yet foreseen, technologies that will accelerate the transformation of the electricity sector.