The United States has impressively demonstrated how pragmatically private investment interest can be mobilized with the Inflation Reduction Act. This simple, transparent, and technology-open principle focuses on tax relief for profits over a clearly defined period of time. In this way, it attracts companies to invest in profitable growth businesses. It is a prime example of speed and simplicity, with some definite protectionist tendencies that can rightly be criticized.
On 16 March Europe followed up. With the Net Zero Industry Act, the European Commission aims to show how climate-neutral key technologies can be scaled up in and for Europe and the global market. And together with the European Critical Raw Materials Act and the reform of the Electricity Market Design, the Net-Zero Industry Act should set out a clear European framework to reduce the EU’s reliance on highly concentrated imports. But does the Act really bring the breakthrough in simplification we had hoped for? Let us have a closer look.
Targets for green technologies diluted
By 2030, European production capacity for green technologies – from wind power, power grids, heat pumps to electrolyzers – should reach 40 percent. This is significantly less than initially discussed. And in terms of implementation, the Act remains vague: if it is foreseeable that the target will not be met, the European Commission is only to consider whether it is feasible and proportionate to propose further measures.
However, more important now is the question, how we can improve the framework conditions for the market? The European wind energy sector, for example, already exceeds the Act’s 40 percent benchmark. However, European wind turbine manufacturers are making huge losses. And so, the opportunities to invest in the rapid expansion of production infrastructure are very limited. This is the area on which the European Union and the member states must now focus. Two things are particularly important for this: Firstly, Brussels has given the green light to support new production capacities for the wind sector and other clean technologies. Now it is up to the member states to take advantage of this window of opportunity.
" The Act is a step in the right direction: sustainability and resilience of the supply chain should play a greater role in the award criteria. "
Secondly, the days of race-to-the-bottom auctions must be over. Instead, we need to strengthen qualitative criteria in tenders that allow manufacturers and their employees to make a fair living. The Act is a step in the right direction: sustainability and resilience of the supply chain should play a greater role in the award criteria. However, as the Act currently stands, it demands further clarifications and improvements to meet its well-intended goals.
Progress on manufacturing permits
There are several good points in the Act here. In the future, there will be transparent deadlines, the process will be completely online, and there will also be clearer requirements for environmental assessments, and thus simplified processes. There is also an obligation on the part of the European Union to the member states to increase the number of authorities and to speed up project handling under the label of “overriding public interest”. For example, the Act stipulates that binding approval procedures for production capacities must be completed within twelve months. For projects of less than one gigawatt, the timeframe is to be as short as nine months.
" Let us not forget: Around 7,500 kilometers of new transmission lines need to be built in Germany alone. "
However, it is essential to focus on the issue of permits as a whole: Faster approval of production facilities, for example, for wind turbines, is good and important. But it is much more important to include permits for the construction of entire wind farms or power grids. Because this is where things have always faltered in the past. For example, it took more than ten years for the first plans for the north-south route in Germany to be approved – a pace at which we will not achieve the much-needed acceleration of the energy transition. Let us not forget: Around 7,500 kilometers of new transmission lines need to be built in Germany alone. But also here: Europe has it in its hands and needs to swiftly adopt the acceleration measures in the renewable energy directive – all the good acceleration measures of the Act should be included in the ongoing negotiations.
Unfortunately, the initially envisaged silent procedure, according to which approvals would be granted automatically after the expiry of the deadlines, is now only included in a very weakened form. Thus, when deadlines expire, specific intermediate steps are still to be considered approved, but not the entire project. It is a shame, as that would have been a real quantum leap in the approval processes.
Accelerating CO2 capture
One interesting aspect is the EU’s clear target of storing 50 million tons of CO2 in strategic storage capacities in the EU by 2030, with a matching contribution from EU oil and gas producers. Each oil and gas-producing company must develop CO2 storage capacity in proportion to its European production. This is an important step because it removes a major barrier to developing carbon capture and storage as an economically viable solution to mitigating climate change, especially for energy-intensive sectors that are hard to abate, including cement and petrochemicals.
Step 1 is done. More needs to follow
Brussel’s ambition is right. Unfortunately, the text presented does not yet sound like a genuine simplification of complexity. Here the IRA is ahead of the game. However, comparing apples and oranges would not be fair: The U.S. and Europe's government systems are too different. But even if the IRA offers higher subsidy rates and attracts investments to the U.S. for the time being, the promotion of climate technologies will also benefit Europe in the medium to long term. Internationally positioned companies can benefit in particular. They can accelerate technology developments in the U.S. and in Europe, taking advantage of the best of both worlds. Therefore, we should not view the IRA as competition but as a complementary framework that moves us all forward. Would there have been an EU Net Zero Act without the IRA? Probably not.
What matters now is to consistently implement and further develop the right approaches to the European proposal. We will need to use the coming months to specify clearer the measures which are required to achieve our energy transition targets and to strengthen the cleantech industry in Europe. Climate Change but also the significant industrial developments in other regions of the world require decisive actions if Europe wants to keep up. Let us shape the EU Net Zero Industry Act together. Europe needs a strong industry to achieve the desired – and necessary – energy security.
About the author: Christian Bruch is President and Chief Executive Officer of Siemens Energy AG, one of the world’s leading energy technology companies. The company works with its customers and partners on energy systems for the future, thus supporting the transition to a more sustainable world.
Combined picture and video credits: Siemens Energy; iStock Photo