EU Energy Policy: Revamp and Expand European Infrastructure to Prepare it for the Future

Energy Independence and Decarbonisation Require Reengineering European Energy Infrastructure

The energy crisis has shown what happens when the EU becomes too reliant on energy imports and fails to exploit its negotiative strength as a large partner to third countries. Similarly, Europe’s climate neutrality and energy decarbonisation goals can only be achieved by tapping potential for cooperation and coordination at the European level. Bolstering energy sovereignty and achieving climate neutrality will require major changes to Europe’s energy infrastructure in the coming years. Major investments are needed in a variety of areas, including in electricity and hydrogen grids, energy storage, offshore renewable energy grids, electrolysers, the intelligent control of grid usage, and carbon storage.

Further expand the European electricity market

Electrification and renewable energy expansion are the major pillars of EU decarbonisation efforts. European electricity trading helps to reduce power costs while increasing the reliability of the power supplies. The centrally organised market improves the allocation of transmission and generation capacities and augments the efficiency of trade between countries. European power trading platforms for day-ahead and intraday electricity trading and for energy balancing are a key example of integration at the EU level. Countries can help each other by sharing reserve capacity and grid stabilization service; the dispersed generation of renewable energy across Europe helps to smooth divergence between supply and demand. This allows countries to strengthen resilience and security of supply while also reducing prices.

If Germany can benefit from power generated, consumed, and stored in other countries, it will require less reserve capacity in the form of battery storage and gas-fired power plants. The ability to export power when electricity prices are low or even negative help producers, lower government support payments for renewable energy, and reduces feed-in restrictions. The ability to import power when domestic production is low reduces prices for consumers while minimizing the need for reserve power plants. Opportunities for exerting local market power can also be reduced through increased cross-border trading. However, European neighbours have criticised cross-border electricity trading with Germany on the grounds that Germany’s market distorts price formation.

Green hydrogen another needed component in the green transformation

Alongside renewable energy and electrification, another necessary measure to reduce dependence on imported fossil fuels is the introduction of green hydrogen. The ramp-up of green hydrogen will enable the storage of energy from regions with a high potential for renewable energy production (e.g. southern Europe or Africa) and subsequent transport to energy-intensive countries such as Germany. Countries with surplus renewable energy capacity will benefit from export opportunities and import countries such as Germany will gain access to cheap green hydrogen. Increasing cross-border ties in European infrastructure will close energy supply gaps.

Recommendations

Achieve Mutual Benefits by Strengthening Cross-Border Infrastructure and Trade

Invest in European electricity trading

To simplify intra-European electricity trading and increase its volume, the EU has set the goal of standardising its electricity systems while retaining some of their regional particularities. Germany should take measures to strengthen intra-European trade, such as reducing bureaucratic barriers, investing in smart, cross-border transmission capacity, and supporting suitable offshore grids. In order to intensify electricity trade with European neighbours, price signals are needed that reflect cross-border shortages.

While the EU is evaluating the proposed bidding zones for electricity trading, the new German government should discuss recommendations for making the German electricity market more efficient and reducing resistance to trade with Germany. In order to reduce price distortions and strengthen trade in ways that benefit all the Member States, Germany should make targeted investments to eliminate structural bottlenecks, as well as accelerate related infrastructure-investment approval procedures, improve incentives for investment in demand flexibility and associated services and strengthen price incentives within Germany to reflect local and temporal supply shortages.

Take a Europe-wide approach to hydrogen trading

The distribution of hydrogen within the EU requires the development of a European hydrogen grid. This should be achieved in part by converting existing natural gas grids and storage facilities (when conversion is possible). A hydrogen distribution grid is a prerequisite for the rapid development of a functioning hydrogen economy. Cooperation within Europe is necessary to design the grid in an efficient manner and overcome resistance from countries through which much of the hydrogen will have to pass. One step in supporting European efforts is Germany’s intention to co-develop the South H2 Corridor to connect North Africa, Italy, Austria and Germany. In order to benefit from low-cost hydrogen imports in the future, Germany must continue to involve itself in planning at the European level and to support the conversion and expansion of associated infrastructure.

Drive green transformation through innovation

The EU is promoting the modernisation of cross-border energy infrastructure as part of a holistic, future-looking restructuring of the EU energy system across its various sectors. A common infrastructure will strengthen European unity and energy sovereignty – thus benefitting all European countries, including Germany. Germany can promote its own competitiveness and help advance efficient transformation by favouring reforms that incentivise and enable innovative technologies and business models.