![What if electrification transformed the EU economy? [Science and Technology Podcast]](https://i0.wp.com/epthinktank.eu/wp-content/uploads/2024/09/AdobeStock_560508639.png?fit=1024%2C682&ssl=1)
Written by Vasco Guedes Ferreira.
Electrification is the process of replacing technologies and systems that rely on fossil fuels with those powered by electricity, often sourced from renewable energy. Electrification is gaining momentum across many sectors, including transport, buildings and industry, driven by the EU’s climate ambition and security of supply. As the cost of renewable energy technologies like solar and wind continues to fall, electrification presents an opportunity to reshape the European economy, enhancing competitiveness and promoting sustainable growth.
As highlighted in the ‘What if‘ publication on energy independence, electrification of end-uses is a key process to phase out fossil fuels and increase the penetration of renewable energy and low-carbon sources in the EU energy mix. This change in the EU’s energy systems is also crucial to move towards security of energy supply, while achieving 2050 climate neutrality goals.
According to Eurostat, in 2022 electricity demand was only 23 % of final EU energy consumption. The electricity mix accounts for both renewable energy and fossil fuels, each representing around 39 % of electricity production, with nuclear energy contributing the remaining 22 %. Wind energy was the predominant source of renewable energy, supplying 15 % of electricity, followed by hydropower (10 %), solar power (8 %) and biofuels (5 %).
In recent decades, EU electricity consumption has been stable, before decreasing in 2022 and 2023 owing to high electricity prices resulting from the energy crisis triggered by Russia’s invasion of Ukraine. With the current normalisation of electricity prices, it is likely that electricity demand will rise in 2024. In the EU, around 36 % of electricity is used in industry, 29 % in households and 27 % in the services and public sector. The transport sector accounts for only 2 % of EU electricity use. However, the electricity demand patterns in these sectors are changing. According to a recent report, since the start of the energy crisis, three million heat pumps and three million electric cars have been deployed in the EU, and approximately 500 MW of electrolysers; this is estimated to have added 1.3 % overall to the EU’s electricity demand from 2021 to 2023.
Potential impacts and developments
A Potsdam Institute for Climate Impact Research study anticipates that it is possible to electrify 78 % of EU industrial energy demand with readily available technologies – and 99 % when considering technologies currently being developed. The paper, wood and textile industries, which together represent 40 % of industrial CO2 emissions, can be almost entirely electrified using established technologies, such as electric boilers and heat pumps. Conversely, primary steel, chemicals and cement will need more advanced and costly technologies, including hydrogen.
In buildings (the household and services sectors), existing technologies (particularly heat pumps) are suited to replace fossil fuel use for space and water heating applications. Transport has probably the highest potential for electrification, not only via private electric vehicles but also through the electrification of public transport and freight. Electrification is the driver for delivering on important energy-saving opportunities across the economy and demand will very likely increase; but can electrification help the European economy become stronger and more competitive?
Several authors have found interesting links between electricity use and economic development. A study that analysed data in more than 100 countries found that, in wealthy countries, growth in gross domestic product (GDP) per capita correlates strongly and better with electricity use, than with total energy consumption. Interestingly, in China and elsewhere, it was found that increased electricity consumption can lead to a rise in GDP, but not the reverse, i.e. GDP growth does not lead to a similar increase in electricity consumption. However, this relationship seems to be more complex. What is clear is that electrification plays a critical role in driving socio-economic development, and that China is making real progress in electrifying its economy.
What could really affect the competitiveness of the EU economy positively would be electricity prices. On this point, an International Monetary Fund (IMF) working paper shows that between 2014 and 2021 renewable energy significantly reduced wholesale electricity prices in 24 EU countries, with an average decrease of 0.6 % for each percentage point increase in the renewable energy share. The effect of renewables on reducing electricity prices was found to be non-linear, meaning that a higher share of renewables leads to a greater reduction in prices. While the impact of renewables on price volatility is mixed, the IMF study found some evidence that at high levels, renewables have a dampening effect on price volatility. Another study shows that increasing shares of renewable electricity depress wholesale electricity prices. A specific study on the Iberian Peninsula electricity market goes as far as to suggest that the predicted increase in the penetration of renewables of up to 80 % (in 2030) would reduce prices by around 50 % in 2030 compared to 2019. Furthermore, renewable electricity ensures long-term electricity price stability, as it isolates the economy from external energy price shocks.
Despite the potential positive impacts of electrification and renewables, there are several bottlenecks. First, the need to speed up renewable energy deployment, upgrade infrastructure (about a third of Europe’s low voltage grid is over 40 years old), and provide storage to ensure grid stability with a higher share of variable wind and solar electricity production. Second, the required scale of the electrification of heating and cooling (in buildings and industry) is significant. Third, the electrification of transport also requires investment in charging infrastructure, as well as an exploration of the potential of ‘vehicle to grid‘ technology to enhance grid stability and reduce peak demand. All of the above require significant upfront capital investment, which might limit reduction in electricity prices, at least in the short term. Finally, there is also the EU strategic autonomy dimension. While renewables and electrification help to reduce oil and gas imports, they should also contribute to the development of the EU’s clean technology industry. Currently this is not the case for solar and battery technologies, which are essential for electrification. However, the EU still leads on other key technologies, such as onshore and offshore wind energy, energy efficiency and smart grids.
Anticipatory policymaking
The potential for electrification using renewable and clean energy in the EU presents both opportunities and challenges for anticipatory policymaking. The opportunities are straighforward: greater independence from geopolitics, enhanced security of energy supply, and success in achieving climate neutrality by 2050. Additionally, the positive impact of renewable energy on reducing electricity prices, suggests that electrification and renewables can help the European economy become more competitive, but as the International Energy Agency (IEA) puts it, more effort is needed. Upgrading electricity infrastructure should be a key policy priority, as well as setting the right incentives for renewable energy developers and grid management flexibility solutions, while closely following up on implementation of the recently adopted Electricity Market Design reform. Electrification campaigns for electrification of industry, transport and building renovation should also be considered; for example Finland’s Act on Electrification subsidy for energy-intensive industries and United States federal support for local building electrification campaigns. The clean energy technologies needed for this transformation should, as far as possible, be made in Europe. Policymakers could also ensure that electrification policies are inclusive of the needs of all citizens, particularly the most vulnerable, by addressing energy poverty and ensuring affordable access to clean energy. Workforce reskilling and upskilling programmes will also be critical to ensure a smooth transition to an electrified economy.
In conclusion, electrification has the potential to transform the EU economy by promoting sustainable growth, and enhancing energy security and sustainability. However, this transformation requires mobilisation of significant public and private investment in both renewables and electricity grids, combined with proactive and comprehensive policy support to ensure a smooth and equitable transition that brings tangible benefits for all Europeans.
Read this ‘at a glance note’ on ‘What if electrification transformed the EU economy?‘ in the Think Tank pages of the European Parliament.
Listen to podcast ‘What if electrification transformed the EU economy?‘ on YouTube.
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