Reconciling the Energy Trilemma? · European Law Blog – Go Health Pro

The Ensemble of the Energy Trilemma – or: Europe’s Energy Vulnerability Exposed

Ever since European integration began, energy and natural resource governance have been central to policy and legislation. Starting with securing supply, legislation expanded to market regulation and emission reduction throughout the supply chain. The climate crisis and geopolitical conflicts created tensions between these objectives, forming the energy trilemma that illustrates the complexity of balancing core public goals in energy.

Maintaining this balance has always been central to EU energy law. The last decades focused on liberalizing the internal energy market, later adding decarbonisation goals. Most recent EU legal packages merged these objectives, from the ‘Clean Energy for All Europeans’ package (2019) to the ‘Fitfor55’ package (2023), which aligned energy targets with net-zero climate ambitions (Regulation (EU) 2021/1119, art. 2). Energy security abruptly jumped up on the agenda with the ‘REPowerEU’ plan (2022) responding to Russia’s invasion of Ukraine which has brutally exposed the EU’s energy vulnerability shattering decades of complacency about security of supply. Following Russia’s weaponization of its energy exports, the EU Member States reverted to national measures and scrambled for alternative energy suppliers globally in the face of the energy crisis.

Energy vulnerability destabilises many EU sectors and dimensions. Both, the Letta and Draghi reports acknowledge this, opening their respective energy sections with references to the ‘energy crisis’: “The unprecedented severity of the crisis brought EU energy market integration close to the breaking point” (Letta p.61), “the competitiveness gap has deteriorated as result of the energy crisis” (Draghi, pt.B p.4). Given the importance these reports place on energy, this contribution analyses their energy sections through the energy trilemma lens, discussing proposed measures’ effects on security of supply, market stability and affordability, and sustainability. The discussion shows that underlying the array of proposed measures are broader and deeper-cutting issues, yet again exposing vulnerability in the midst of the energy trilemma.

Security of Supply: Pragmatism v Independence

Security of supply typically knows three interrelated dimensions (pp.34): availability of energy resources, reliability of energy infrastructure, and affordability of both. This covers the entire energy supply chain from the exploitation, refining and/or conversion of a primary energy resource, to the transportation of energy, including shipping and transmission through cables and pipelines, and distribution and retail to final consumers at industrial and household level.

The Letta and the Draghi reports include measures for all stages of this chain aiming at securing supply. Concerning the availability of resources, the Letta report focuses on the internal dimension by fostering markets and physical interconnection of grids, but also mentions coordinated EU ‘energy diplomacy’. The latter includes a physical dimension, i.e. increasing grid interconnection with neighbouring countries, and a trade dimension, i.e. ensuring continuous export of clean technologies and import of, for example green hydrogen (hydrogen produced on the basis of renewable electricity), (Letta p.68). Perceptions of external countries that the EU is overly complex and protectionist would require correction and thus special attention by EU energy diplomacy. Draghi pushes the external dimension further by proposing an EU common purchasing policy for energy resources where the EU acts as a joint buyer on global level, notably for natural gas, aiming to build long-term trade partnerships and move away from spot-linked pricing (Draghi pt. B pp.26). Both reports clearly foresee a stronger role for the EU on the global energy resource market aiming at securing supply of primarily natural gas resources. Looking at the data and origin of natural gas imports, this would, in turn, also require a stronger link between external security policies and energy and balancing criteria for reducing various risks, most prominently, reliance on authoritarian and corrupted regimes, climate impacts of fossil fuel infrastructure (the commitment to reduce methane emissions), and dependency on only a few suppliers. Giving as many criteria as much as possible weight in the selection of the origins of natural gas imports to reduce those risks, would in any case require a structural approach to facilitate a continuous decrease in natural gas demand, a measure which did not receive attention in both reports. Of course, in the context of resource security, the reports also include recommendations concerning the further expansion of renewable energy sources at home, which is mainly considered jointly with the development of necessary infrastructure, i.e. the second dimension of security of supply. They keywords here are acceleration, simplification, and EU coordination with the rationale to further diversify supply recourses and thereby reduce prices and thus increase competitiveness (Letta p.64 and pp.66 and Draghi pt.B pp.32, further discussed below under the ‘sustainability’ leg of the trilemma).

The burning demand for energy sources, notably natural gas, pushes policies to walk a thin line between pragmatism and independence, both are visible in the reports. A pragmatic approach for coordinating the EU demand for natural gas resources on the global markets, complemented by ambitions to increase energy independence by expanding renewable sources. Those approaches largely follow the existing demand-driven system and keep proposing (new) ways for energy resource and generation security, while it is high time to also start thinking at the other end of the supply chain for the sake of securing supply. This would imply reducing energy consumption as way of ensuring own needs without stressing the insatiable need for ever more sources and infrastructures. Energy efficiency, i.e. reducing energy intensity without lowering output, is potentially a way of reducing consumption and has been part of the EU legal framework for the energy transition and gained in relevance following the energy crisis, for example with strengthened efficiency targets (Directive (EU) 2023/1791, art 4). Ideally, energy efficiency could contribute to lowering emissions, raw materials, dependency on imports, and thus also lower costs for consumers. The risk, however, of betting on an energy efficiency strategy only is that ever increasing growth of economies and consumption might just nullify any efficiency achievements. While a more radical critique about energy consumption levels (for example, energy sufficiency) is beyond what could be expected of the reports which make a clear case in favour of competitiveness through economic growth, it is surprising that (almost) nothing on energy efficiency resonates in the Letta and Draghi reports. The third leg of security of supply, affordability, links to the following section and is discussed in the context of market stability.

Market stability and Affordability: Competitiveness v Redistribution

Setting up a stable and competitive market for energy as part of the internal market has been one of the core goals of EU energy policy and legislation with the aim to reduce prices for final energy consumers (households and industry), ideally making energy affordable. Also the Letta and Draghi reports place the costs of energy for final consumers central: Letta puts great emphasis on strengthening the internal market with the “first priority [aim] to reduce costs for household and industrial customers” (Letta p.63) and both reports refer to the gap of electricity and gas prices for industry between the EU and the US and China (with electricity prices being 3 times and gas prices 3-5 times higher in the EU) as a core problem (Letta p. 62 and Draghi pt.B pp.4). The Draghi report then continues with identifying reasons for this gap and components of the price, mainly finding lacking natural resources in the EU and thus a dependency on global  markets and spot pricing (see the section hereabove), flaws in the market design regarding price setting, and costs for emissions, networks, and tax.

Concerning the market design, the flaw identified by the Draghi report is the effect of merit-order in price setting for electricity. The price on the wholesale market for electricity of all producers is based on the marginal cost of the last producer needed to meet demand. Of course, production on the basis of renewable energy sources has the least marginal cost, while the most expensive plants are running on the basis of gas and coal. This leads to the strange, but logical effect that even though the generation mix is composed of a larger share of renewable energy sources, the price setting energy source can still be gas and coal, this is also the case in the EU electricity market (figure 10 and 14). The Draghi report therefore advocates for ‘decoupling’ the pricing of electricity generated on the basis of renewable energy sources and nuclear from any fossil-based generation through facilitating power-purchase agreements and contracts-for-difference as included under the most recent amendment of electricity market design, Regulation (EU) 2024/1747 (art 19a,b,d). The idea is that those instruments decouple renewable electricity from gas prices, consequently reduce their price and ensure investment certainty for new renewable energy capacity. This would, however, also require careful coordination with other signals being sent to the sector. For example, if natural gas is continuously imported (see preceding section), this will effect prospected demand for electricity (figure 2), possibly slowing down electrification which would in turn require more public financial support for renewable energy. In parts, the reports lack drawing such possible interactions between the proposed instruments, partly also stemming from the structure of the section which addresses gas and electricity measures rather separately from each other.

Another major group of factors causing higher costs for electricity and gas are carbon costs, network tariffs, and tax which jointly make up a significant share of the costs of the final electricity and gas bills for household and industrial consumers. The main concern is that those costs are too high and, concerning tax, levies and network tariffs, also too diverse across EU countries.  The EU has higher carbon costs than other regions in the world (p.27; and Draghi pt.B p.12), affecting the electricity price as power generation is covered by the EU Emission Trading Scheme (Directive 2003/87/EC) (Draghi pt.B p.12). While carbon pricing is not addressed in the proposed measures, the general recommendation for lowering additional costs on the bill is to “lower and level the energy taxation playing field and the strategic use of taxation measures to reduce the cost of energy and propose a common maximum level of surcharges”and on the top of that tailored tax credits should be linked to the uptake of clean energy solutions by industry (Draghi pt.B p.38). While the desired effect would be reduced energy costs for industry, costs would not truly be reduced, but shifted (to other consumer groups). Moreover, it is doubtful whether such measures are indeed desirable climate-wise as the idea of higher costs for energy is to incentivise cleaner forms of production or even reduction in demand. For justification and effectiveness, any form of rebate needs to be targeted in purpose and directed to a specific group. The latter is left rather vaguely in the Draghi report which merely refers to ‘companies’, ‘industry’ and sometimes to ‘energy-intensive industry’. For example, underpinning the opening statement of the major energy price gap for industry the report states that “[in] 2023, around 60% of European companies said energy prices were a major impediment to investment — more than 20 percentage points above US companies” (Draghi pt.B p.7). Some further explanation about the category ‘companies’ would have been helpful, even better, a further distinction of different sizes, sectors, energy-use would have been useful for better evaluating suggestions such as cost reduction through tax rebates and capping surcharges. Also, thinking merely in terms of prices might overlook the fact that lowered prices might not necessarily result in affordable bills (price x consumption). Again, this leads to the final remark of the preceding section on security of supply, raising the point that (industrial) consumption should not be forgotten in the equation, this is also true for affordability and hence competitiveness of industry.

Sustainability: Renewable Energy v Environment

Sustainability in the context of the energy sector is often understood as emission reductions from the sector, thus mainly directed towards shifting energy production from fossil-fuel based sources to zero-emission sources. The reports do not specifically address sustainability, but see decarbonisation of the energy sector primarily as a way to diversify supply sources and increase independence from global energy markets. The main instruments to achieve this are targeted at accelerating and simplifying procedures for permitting new generation capacity and infrastructure upgrades.

The most far-reaching and novel proposal is to establish a ‘Clean Energy Delivery Agency’ by 2027, an agency tasked with assisting with the implementation of cross-border infrastructure through grant funding and programming at EU-level and functioning as a one-stop shop for companies and stakeholders by offering access to certification schemes, tailored advice on funding sources, and support with permitting procedures (Letta p.67). This agency could also oversee the incentive scheme for large-scale deployments of clean technologies in the industries – a fund which is yet to be created as proposed by the report (Letta p.67). Without proposing a concrete new agency, the Draghi report follows this acceleration and simplification tenor in many aspects and more generally refers to the need for higher and centralised levels of coordination for regulatory oversight  (Draghi pt.B pp.32, pp. 40). For example, this includes stronger rules at EU level for setting planning and permitting deadlines and to appoint last-resort national authorities in case local authorities are unresponsive after a set period of time. Accelerating deployment of renewable energy sources and expanding the necessary infrastructure is surely the way forward for any scenario. More coordination and streamlining, as well as enhancing transparency of permitting and, in the best case, abolishing unnecessary delays in administrative processes would certainly help.

What is, however, more controversial are proposals which aim at minimizing or even eliminating environmental requirements for the ‘acceleration and simplification’ of  permitting. For example, the Draghi report proposes that the EU should consider targeted updates to relevant EU environmental legislation (i.e. the Environmental Impact Assessment Directive, the Birds, Habitats, Water Framework and potentially the SEA Directive) for renewable energy installations and grids. This could also include “limited (in time and perimeter) exemptions in EU environmental directives (e.g. the Habitats Directive, the Birds Directive) until climate neutrality is achieved” (Draghi pt.B p.33). Even though the suggestion mentions that those exemption requirements need to be met under certain conditions (e.g. installations do not endanger the population and mitigation measures) it is difficult to believe that this would not (partly) undermine the core purpose of the directives aiming to protect the environment. In fact, the measure of ‘renewables acceleration areas’ which was introduced by Directive (EU) 2023/2413 already raises concerns and findings that the environment is endangered by the aim to accelerate the deployment of installations. This entails the risk that the aim to increase competitiveness takes over all the way: renewable energy sources have to be implemented fast as a means to ensure supply diversification for lower energy prices and hence higher competitiveness. Yet, this is only a fraction of a reality in a world that finds itself already in the middle of a climate crisis.  The core reason why emissions need to be reduced is to protect the climate of planet Earth which is the basis for the diversity of life of all forms. Sustainability certainly implies more than emission reduction and accelerated renewable energy installation deployment.

Reconciling the Trilemma or Competitiveness at ‘Whatever It Takes’?

The reports both propose a range of measures to leverage security of supply, facilitate a strong and stable market setting, and to accelerate the decarbonization of the sector. All proposals make a case for ‘more Europe’ and thereby emphasize that the governance and regulation of the energy sector surely has to be at the core of the EU. This is certainly positive as the need for fostering common ground and action in the EU has arguably never been as urgent as today, in general but also for the energy sector. Yet, the common ground is (and should be) arguably more than striving for ‘competitiveness’ at ‘whatever it takes’. Taking the energy price gap between the EU vice versa the US and China as leading problem definition will ultimately result in one-sided solutions which might not even be successful. Even if all proposals were implemented, is it realistic to close the price gap entirely considering the global distribution of natural energy resources (gas and coal) and the fact that emission trading schemes are not globally linked (two of the root causes of the EU’s competitiveness gap mentioned by the Draghi report)? Arguably, the problem is very narrowly defined, resulting necessarily in too narrow proposals which only expose other dilemmas. In that sense, the report makes a great and timely contribution not only in what it explicitly says, but also in what it does not. It is up for the EU policy makers to thoroughly carve out the (political) dilemmas which require further informed discussion and decision-making. Partly, this process has already started with the publication of the Action Plan for Affordable Energy as part of the Clean Industrial Deal, again showing the importance of energy for shaping any future of the EU.

Lea Diestelmeier is Assistant Professor of Energy Law at the Faculty of Law of the University of Groningen. Her research focuses on EU energy law and in particular electricity sector regulation and decentral solutions for the energy transition.