Is the future of the European Green Deal threatened by the COVID-19 pandemic? Focus on the national energy sector
12.05.2020 – Authors: Gabriela Cacerea & Emanuel Flechea
In their attempt to reduce the spread of the new coronavirus pandemic of COVID-19 caused by the SARS-CoV-2 virus, governments throughout the European Union have imposed unparalleled measures with a strong impact on travel and economic activity.
As the rate of new coronavirus infections started dropping across the European Union, governments and EU officials are looking for lockdown exit strategies and methods for boosting the currently stagnant economy.
In this context, many discussions focus on how to better integrate and not to forego the commitments enshrined in the European Green Deal while drafting new policies aimed at reviving the EU economy.
The European Green Deal
In November 2019, the European Parliament approved a resolution[i] declaring a climate and environmental emergency in Europe and globally. A request was addressed for all EU legislative and budgetary proposals to be drafted in consideration of the objective of limiting global warming to under 1.5˚C.
Further to this resolution, the Commission proposed the European Green Deal on 11 December 2019.
The European Green Deal represents a roadmap proposed by the EU Commission for transforming EU’s economy into a sustainable one, based on economic growth strategies aimed at making the EU “a modern, resource-efficient and competitive economy where there are no net emissions of greenhouse gases in 2050 and where economic growth is decoupled from resource use.”[ii]
To this end, the intention is to have sustainability measures and sustainable development objectives at the center of the EU’s economic policymaking and actions.
In order to ensure the fulfillment of this endeavor, the EU plans to provide financial support and technical aid. One of the measures proposed in this respect is the European Green Deal Investment Plan that is planned to mobilize EU funds to create the necessary framework to facilitate and stimulate public and private investments.
The European Green Deal also entails a plan for the EU to provide specific support for regions that are most affected by the transition to a greener economy and to alleviate the socio-economic impact of the transition by mobilizing at least €100 billion over the period 2021-2027 in such regions. This plan is designated as the Just Transition Mechanism and its main objective is to create the required investments for aiding workers and communities heavily relying on the fossil fuel value chain or involved in carbon-intensive processes.
In March 2020, a proposal for an EU Climate Law[iii] was also registered. The objective here is to ensure a climate-neutral EU by 2050 by enacting an EU Regulation in this respect. Nonetheless, the Climate Law has to be approved by the European Parliament and the Council of Ministers through the ordinary legislative procedure. According to the Commission, the proposal is in fact to avoid climate action being postponed or delayed by other more pressing and immediate challenges (such as the COVID-19 pandemic).
Future of the European Green Deal in the context of the Covid-19 pandemic
During a crisis, such as the one generated by the COVID-19 pandemic, where the focus of the policymakers is justifiably directed towards short-term measures addressing public health, social protection and economic measures aimed at helping distressed sectors, there is a high risk for certain commitments to be overlooked or to be considered as potential barriers for stimulating the economy in such period.
It is paramount for governments and officials not to overlook the need to also have in place medium and long-term strategies for exiting the lockdown imposed by the COVID-19 pandemic. In this context, the European Green Deal can provide such medium and long-term economic benefits, as it could represent a source for additional flexibility and economic efficiency.
However, if the required domestic advocates lack, the risk for member states to delay or at least dilute the climate ambitions of the European Green Deal cannot be excluded.
More specifically, throughout the recent lockdown period, different industries lobbied for delaying the implementation of certain environmental policies, even members from different EU states governments and politicians suggested abandoning the European Green Deal or at least postponing its implementation in order to direct funds to address the short-term effects of the COVID-19 pandemic.
Despite such opinions, more and more voices are calling for a green recovery at an EU level. In the second part of April, the EU Parliament adopted a resolution[iv] on EU coordinated action to combat the COVID-19 pandemic and its consequences, calling on the Commission to propose a recovery and reconstruction package that “should have at its core the Green Deal and the digital transformation in order to kick start the economy.”
To back this direction, a number of 17 climate and environment ministers from EU member states, issued a joint letter[v] in April, urging Europe to remember the challenges of climate change when designing strategies for economic recovery from the “unprecedented crisis” of the pandemic.
Apparently, the notion of rebuilding EU’s economy while ensuring climate neutrality and being in line with the principles established by the European Green Deal has also support from various other decision-makers from EU member states, as well as key economic players from the private sector. A number of 180 European politicians, business leaders, business associations, the European Trade Union Confederation, NGOs and think tanks signed a letter[vi] expressing their view on the necessity to increase green investment in the bloc and to develop “a new model of prosperity” in the EU.
Romania – required measures to align with the European Green Deal principles
In Romania, the year 2020 should have been (and should still be) decisive from the perspective of the major legislative projects to be enacted in the energy sector, since the authorities are expected to transpose the directives from the Clean Energy Package by the end of the year. Moreover, by 31 December, the Government should also regulate the concept and legal regime applicable to the vulnerable consumer, as well as to prepare specific support schemes in this respect.
Taking into consideration the investment opportunities presented by the European Green Deal and the obligation undertaken at the EU level for raising the percentage of energy from renewable sources in Romania’s energetic mix, all key players in the energy sector are eager to see the measures to be implemented by the authorities. However, in the context of the COVID-19 pandemic, the above projects appear to have been, hopefully, only briefly delayed.
On the short term, such an approach is understandable considering the extraordinary circumstances that required immediate attention and have placed in the first line of danger the public health. Nevertheless, on the medium and long term, the strategy to be adopted by the Government needs to sustain the reopening of economic activities, but more importantly the continuance and recovery thereof throughout an economic crisis that is only at an initial stage.
As time is of the essence in these complex circumstances, attention needs to be sifted again to the projects temporarily delayed. For example, a situation that requires the immediate attention of the Government in terms of sustainable strategy is the State aid granted to Oltenia Energy Complex.
On February 24, the European Commission approved a state aid scheme[vii] of the Romanian Government where a loan of €251 million was granted to Oltenia Energy Complex. One of the conditions attached to this state aid is the requirement for Oltenia Energy Complex that after 6 months it will either (i) repay in full the loan, (ii) to be restructured in order to become viable in the long term, or (iii) to be liquidated.
While the refund seems rather unlikely, especially given the current market situation, and a liquidation does not appear to be an option in the absence of backup energy production units as Oltenia Energy Complex is accounting for approx. 25% of the national energy generation, implementing a sustainable restructuring plan by transitioning from lignite assets to lower carbon energy sources appears to be a reasonable and necessary approach.
Unfortunately, the absence of specific national support schemes or other types of incentives might prove that such a large-scale restructuring and conversion of the company’s core activities to be impossible.
It remains to be seen how the Government will manage this situation and if the European Green Deal would prove to be the solution for saving Oltenia Energy Complex.
While this is only an example of generation capacity that requires immediate restructuring strategies, measures to increase the attractiveness of the energy sector for new investments should be considered as a matter of urgency. These measures are of essence considering the many conventional energy generation units that are operating beyond their technical lifetime, but also the negative impact on energy prices and demand in the recent months due to the COVID – 19 pandemic circumstances (and not only) that might have negatively impacted the attractiveness of new investments in the industry.
Thus, an adequate lockdown exit strategy should be coupled with regulatory actions (some of which are not a novelty for the energy market) meant to ensure a smooth economic recovery of the energy sector and the increase of new investments and at the same time meant to implement the European Green Deal general principles.
Some of the regulatory actions that are not a novelty, but nonetheless might be effective tools to meet the mentioned goals, include:
- Regulating the possibility to conclude Power Purchase Agreements
PPAs usually implies a long-term electricity supply agreement concluded between an energy generator and an end-consumer or trader. PPAs are useful on the market since they can be used for reducing market price risks, typically being used by large energy consumers to aid in reducing uncertainty and investment costs for new renewable energy projects.
While starting with January, Regulation 943/2019 on the internal market for electricity[viii] entered into force and PPAs should be permitted in all EU member states, the regulatory framework in force in Romania does not actually allow the execution of such agreements, not being updated to comply with the new regulation.
- Finalizing the legal framework governing contracts for difference
CfDs represent long-term contracts concluded between electricity generators and, a counterparty – the proposal in Romania was for OPCOM to be such counterparty. CfDs allow the generator to stabilize its revenues at a pre-agreed level (so-called strike price) for the duration of the contract. Under such agreements, payments can flow from either party to the other, depending on market price evolution. CfDs could provide a useful tool for auctioning new renewable energy units.
Several discussions and projects on this topic were made public in the past years (the last public consultation on the general principles governing this mechanism took place in March-April 2019[ix]), however the matter has not yet been finalized and no time horizon for implementing this mechanism has been made available by the authorities.
While at the beginning of February, the Ministry for Economy, Energy and Business Environment mentioned that works on this draft mechanism are advanced, the change in priorities in the COVID-19 pandemic context resulted in this project being apparently sidelined again.
- Further developing the regulatory framework governing energy service providers
ESCOs can have a critical role in developing the building renovation industry and improve the energy efficiency market.
As detailed in a JRC Study from 2017 on Energy Services Companies in the EU[x], the energy services market in Romania “is stagnant”, while the existing regulations in force are not enough to “kick-start the market and there are further major barriers that need to be addressed before a growth can be expected”.
This study also shows that the Romanian market would be interested in energy performing contracting, but adequate regulations should first be implemented. In this respect, the public authorities should observe and try to replicate the measures and successful practice from other EU member states.
- Prioritizing regulations and incentivizing investments to ensure grid reliability and flexibility
The national transmission grid is rather old and investments are required in order to adapt to the new type of generators using renewable sources. A key aspect is to ensure grid flexibility, thus enabling the interconnection to the grid of new generators.
One method to ensure such flexibility is by investing in utility-scale battery storage. However, such investments are rather costly and without an adequate and transparent regulatory framework, backed by the necessary support schemes, the chances for developing in the near future this type of storage units in Romania is unlikely.
The list of measures could continue, but the most important aspect is that the lockdown exit strategy for the energy sector should be aligned with the principles established by the European Green Deal and hopefully, by the end of 2020, several measures are enacted in order to ensure a proper recovery in the sector.
We should note that the first step has been made nonetheless. Thus, the National Energy and Climate Plan for Romania, one of the main instruments to support future plans and mechanisms and which will govern the energy and climate transition is currently undergoing the final legal procedures for its approval.
A revised plan was made available for public consultations in January after the authorities implemented the recommendations from the European Commission and in the first half of May the public consultations on the environmental assessment procedures should be finalized. Therefore, the authorities should issue the final and revised NECP in the near future.
It is paramount that the main principles of the European Green Deal are further included in NECP, so as to ensure the alignment between the future national energy and climate policies and the EU principles for a green and sustainable economy. Moreover, creating the governmental environment and basis of cooperation with the industries are essentials for crossing from plans and principles to actions.
The basis to be set for the future recovery and continuance strategies cannot overlook the climate and environmental emergency in Europe and globally which led to the European Green Deal, otherwise, on the medium and long term, we will end up facing the consequences of a new crisis without being prepared.
[i] Climate Emergency Press Release
[ii] European Green Deal proposal
[v] The original letter signed by the initial 10 EU government representatives can be accessed at the following link. Following its execution, an additional 7 EU governments joined the appeal lodged by the other EU member states – link.
[vi] Call for mobilization letter.
[viii] Regulation (EU) 2019/943 of the European Parliament and of the Council of 5 June 2019 on the internal market for electricity
