“You’re using the wind. You’re using the sun. You’re using water. All these are locally available.”
What is REPowerEU?
The European Union plans to cut greenhouse gas emissions 55% by 2030, compared to 1990 levels. That’s a boon for renewable energy. So is a swelling of investor interest in green projects.
Despite that enthusiasm, Europe has remained chained to natural gas, which it sees as a stable source of energy as it figures out the thornier issues surrounding renewable sources, such as how to power electricity grids when the wind doesn’t blow or the sun doesn’t shine.
The energy crisis pushed the European Union to look closely at just how much natural gas it needs. The REPowerEU plan, adopted in 2022, aims to cut gas demand by 155 billion cubic metres. That’s equal to the amount of gas imported from Russia in 2021. The reduction is one-third more than originally envisaged under Europe’s 2030 target.
Under REPowerEU, Europe will shrink its gas demand by building more renewable energy capacity, improving power grids and energy storage and increasing energy efficiency. The European Investment Bank is supporting REPowerEU with €45 billion in additional energy financing until 2027. That’s expected to mobilise €150 billion in new investments in clean energy.
- Read about storage solutions for wind and solar energy
Uneven energy shock
European countries absorbed the energy shock very differently. Some regions, like Western and Northern Europe, hardly felt the impact, thanks to wind and solar power that had been developed over decades. Denmark, which covers more than four-fifths of its energy needs through locally produced renewable energy, fared quite well.
The shock hit Central and Eastern Europe much harder. The region had two key weaknesses: It was heavily dependent on Russian oil and gas imports, and its industry was energy intensive. It had also been much slower to develop renewable energy, in part because of domestically available coal. As a result, inflation climbed to double digits in much of Central and Eastern Europe. The risk of poverty increased, and people struggled to heat their homes in winter.
Those pressures changed how Central Europeans viewed fossil fuels, even in Estonia, which benefitted from locally produced energy – biofuels, shale oil and a small amount of renewables. “The impact of high market prices helped us a lot with the acceptance of renewable sources,” says Ulm of the Sopi-Tootsi wind farm. He estimates that electricity prices quadrupled at one point. “That opened the eyes of the Estonian people. They saw we needed new sources of electricity, and renewable energy was the best one.”
In addition to Sopi-Tootsi, new wind farms are planned onshore in Lithuania and offshore in Poland. The European Investment Bank is backing all three projects, along with a host of other investments to expand renewable energy, upgrade energy grids and to move heating plants to sustainable sources like biomass.
“Countries in Western Europe, like France, Germany and Spain were already developing a lot of renewables,” says Boschi of the European Investment Bank. “The bigger change is the Central and Eastern European countries, which is really good because they were more reluctant to make this shift.”
Some EU regions are dependent on fossil fuels and have more to lose during the green transition. To address the issue, the European Union set up the Just Transition Mechanism, which includes a €19.2 billion fund to cushion the socio-economic impact of the transition by facilitating investments in green energies, job training, energy efficient housing and the like.
- Read about the history of renewable energies
How carbon prices push innovation
High prices are an extremely effective way of changing behaviour. The EIB Investment Report for 2023/2024 looked at the effect steadily rising carbon prices have had on the firms, their innovation and their decarbonisation efforts.
The European Union introduced the Emissions Trading System, the world’s first major carbon market, in 2005. Companies covered by the system are allocated a certain number of allowances, which represent the right to emit a specific amount of greenhouse gases. If a company emits less than its allocated allowance, it can sell the surplus to other businesses. If it exceeds its allowance, it must purchase additional ones or face penalties.
The European Union originally granted free carbon allowances to certain manufacturers to prevent them from moving production outside Europe. Many of those allowances have been slowly removed over time.
European Investment Bank economists investigated how manufacturing firms covered by the system fared as free allowances dried up and carbon prices rose. The research shows that firms exposed to higher prices decarbonised their activities faster, primarily because they invested in innovation and more efficient production. Firms managed to absorb the higher prices without dramatically raising prices or losing customers.
Overall, the manufacturing sector has been slower to decarbonise than other activities, such as power generation.
The research found that “leaders” tended to see the green transition as a business opportunity and were more innovative, more responsive to investor pressure and more transparent about their decarbonisation efforts. Manufacturing firms covered by the system were asked to assess their decarbonisation efforts compared to their peers.
Laggards, however, were also more likely to expect production to decline.
Sun shines on solar
Europe was a big adopter of solar energy in the early 2000s. Countries like Germany and Spain built the market by providing generous subsidies for solar power producers, often through feed-in tariffs that helped solar compete with gas in electricity markets.
While China won the biggest share of solar-panel manufacturing, the European businesses created during previous solar booms are helping to roll out installations today. The result is a rapid expansion in electricity produced from solar power. Germany ranks fourth in the world for solar generation capacity installed, behind only China, the United States and Japan. Spain gets 14% of its electricity from the sun.
“Even though we lost solar panel manufacturing, there is still a lot of value in the rest of the chain,” says Ignacio Antón, a senior researcher at the Solar Energy Institute in Madrid. “And, of course, all the support received at the beginning of the twenty-first century helped to build that.”
Solar capacity grew about 60% from 2021 to 2023, while wind power expanded about 18%. Europe now generates more than 40% of its electricity from renewable energy, with wind and solar alone accounting for almost 30%. Generally, electricity generated from solar and wind power is now cheaper than electricity produced from gas.
Boom and bust cycles have knocked solar power around in the last two decades. But the industry is up and swinging again. 3Sun, the Italian photovoltaic cell manufacturer, is building a massive solar-panel factory in Catania, Sicily, backed by €560 million in financing from the European Investment Bank and a pool of Italian banks. The gigafactory will produce high-performance solar panels that capture sunlight on both sides. 3Sun is expected to produce enough solar panels each year to power 1 million households.
Solar panels are mushrooming on individual homes, as well as on the rooftops of office buildings, expansive warehouses and logistics centres.
One of the companies installing solar panels on a massive scale is CTP, Europe’s largest owner and manager of logistics centres. CTP plans to put solar panels on the rooftops of every building it operates, mostly in Central and Eastern European countries like the Czech Republic, Slovakia, Hungary and Romania.
All told, CTP’s rooftops span 11 million square metres. The company projects that solar panels on these roofs could produce as much as 400 megawatts of energy by the end of 2026, enough to power about 80 000 homes. The European Investment Bank is supporting the solar project with a €200 million loan, part of the Bank’s contribution to REPowerEU.
“We see energy as the third business unit within the company,” says Maarten Otte, who heads investor relations from CTP’s Prague office.
- Read about developments in solar energy
Why were electricity prices so high?
While prices for natural gas have fallen since 2022, EU electricity prices have largely remained elevated.
“This is the paradox,” says Kalantzis, the energy economist. “When commodity prices go up, retail prices go up like a rocket. But when commodity prices go down, retail prices float down like a feather.”
The explanation lies in the way electricity prices are set. EU countries all depend on different mixes of energy to power their electricity networks (renewables, fossil fuels, nuclear, etc.). Prices are set through a system of marginal pricing, which means that energy producers, like solar plants or wind farms, offer their energy to the electricity market and the cheapest source is purchased first.
To meet demand, however, electricity networks need to purchase power from several different sources, and the final source of energy is the one that determines consumer prices.
In Europe, electricity prices tend to be set by natural gas, which is still used to generate about 20% of electricity in the European Union. The advantage of gas power plants is that they can produce electricity quickly. That means they can respond to fluctuations in demand and avoid a blackout.
EU electricity prices will remain linked to natural gas prices for some time, although cheaper renewables are expected to slowly pull down those prices. The upside, says Alessandro Boschi of the European Investment Bank, is that “once renewables are built, the wind and the sun come for free.”
Bracing winds
Europe has been a pioneer in wind power. The Danish company Vestas manufactured the first wind turbine capable of generating megawatts of electricity. Denmark and the United States were the first two countries to roll out modern wind farms in the 1980s and 1990s. Denmark was also the first country to build an offshore windfarm, Vindeby, in 1991.
Along with solar, wind power is seen as a crucial component of Europe’s green transition. Wind power has expanded steadily in recent years, reaching slightly more than 200 gigawatts in 2022. But that capacity needs to more than double by 2030, if Europe is to meet its climate goals.
About one-third of the needed capacity is expected to come from offshore wind, which doesn’t face the same land constraints – or public scrutiny – as onshore wind. Offshore farms can also produce greater volumes of energy, thanks to strong winds at sea.
How the wind is won
Wind, however, is grappling with increased costs that have put the viability of some projects in question. “We are living in a new reality, where building a wind park is more expensive than it was two to three years ago,” says Lauri Ulm, who is responsible for developing wind farms for Enefit Green.
One difficulty stems from the way electricity tenders are won. Contracts are awarded to energy producers who make the lowest bid. Offshore wind farms take several years to build, however, and operators often find themselves bidding on electricity tenders before they really know how much it will cost them to build and operate the wind farm. In addition, electricity contracts usually don’t have an adjustment mechanism that allows for producers to charge higher rates.
Turbine makers like Vestas and Germany’s Siemens are also under strain. Difficulties obtaining supplies and higher prices for raw materials have eaten away at earnings and hampered the companies’ ability to deliver equipment to wind farms.
The European Union is now bolstering the wind industry by directing resources from REPowerEU to manufacturers and beefing up the supply chain through the European Wind Power Action Plan. The European Investment Bank is also supporting the industry by providing €5 billion for commercial bank guarantees, which are expected to mobilise €80 billion of investment in companies that make equipment and components for wind farms.
“This kind of support is badly needed to reinforce the competitiveness of European companies, which are increasingly facing competition from non-European ones, such as the Chinese,” the Bank's Boschi says. “That is really important for a sector that was, in a way, born in Europe.”
- Read about how Europe needs to develop more wind power
A cargo ship transporting wind-turbine blades off the coast of Montenegro.
Will we get there?
Current goals call for the EU economy to be completely decarbonised by 2050. While some industries will continue to emit carbon and other greenhouse gases, those emissions will be offset by other measures, such as expanding forests to suck carbon out of the atmosphere.
But first, we need to meet those ambitious 2030 targets.
Kalantzis, the European Investment Bank economist, thinks that Europe is making progress. “I have the feeling that, more or less, we’ll achieve our 2030 targets.”
He says that a recent assessment by the European Commission based on national energy and climate plans, the ten-year strategies submitted by EU member states, shows that the European Union is largely on track. “But to me, we shouldn’t focus on targets,” Kalantzis says. “What matters is the direction of travel and how we get there.”
There are some roadblocks in the way. One is a public backlash against energy and climate policies, such as farmer protests throughout Europe in early 2024. Another is public frustration over stubbornly high electricity prices, which weigh heavily on people and firms that are already struggling.
Europe also must be careful it doesn’t simply switch its dependence on Russian oil and gas for an overreliance on Chinese-made solar panels or wind turbines. “Just imagine if tensions with China suddenly increased and we don’t get their products anymore,” Boschi warns. “We won’t be able to replace them with a European industry overnight.”
European leaders talk a lot about energy autonomy – protecting Europe’s energy supplies from wars, trade spats and volatile foreign partners. The green transition may not make Europe fully autonomous, but it could become more self-reliant.
“The most important thing now,” Kalantzis says, “is to convince people that this the only way forward.”
