Six ways the REPowerEU plan supports energy affordability

In May 2022 the EU Commission unveiled the REPowerEU plan.

The package includes much more ambitious targets for renewable energy, which are expected to replace the bulk of the coal and fossil gas currently imported from Russia. In this post, we explore six key ways achieving the RePowerEU targets will improve energy affordability and economic prosperity in the EU.

Before diving into these benefits, we first summarise what REPowerEU means for renewable energy across the Bloc.

A Russia-induced EU Green Deal

The Russian invasion of Ukraine and the resulting energy crisis is a major threat to the EU’s energy security, national security and economic prosperity. In response, the imperative to get off Russian fossil fuels has lent a somewhat war-time urgency to the energy transition.

The REPowerEU plan seeks to phase out Russian fossil fuel imports through:

1. Energy efficiency to cut consumption
2. Diversifying the supply of fossil fuel
3. Accelerating the rollout of renewable energy

Analysis by Ember and CREA finds that EU countries have upped their renewable ambition and now plan for 63% renewable electricity by 2030, with the REPowerEU plan pushing this up to 69%. Previous country plans from 2019 targeted 55% for 2030.

In capacity terms, before the Ukraine war, the EU was planning to have 1,149 GW of renewables by 2030, whereas now the target is to have 1,434 GW - a 25% increase. This means adding an additional 839 GW of renewable capacity by 2030.

Six ways the REPowerEU plan will improve energy affordability, security and economic prosperity

1. Improved energy security

Energy security is the driving force of the REPowerEU plan - aiming to sever the EU’s reliance on Russia’s coal and gas. The EU imported 35% of its gas supplies from Russia in 2021.

Boosting renewable energy output will not only help reduce energy dependency on fossil fuels but, more importantly, it will help to displace fossil fuel imports and improve energy security. Replacing fossil fuel imports with renewables improves energy security because wind and solar are almost always generated and consumed domestically. This means they are not impacted by geopolitical shocks and price volatility in the same way as fossil fuels.

The graphic below showcases how the national renewable energy targets announced by the UK, Germany and France can help these countries cut their import dependency on fossil fuels.

2. Cost savings on operating costs

Since Russia’s invasion of Ukraine, the economic incentive to switch from coal-to-clean electricity has increased dramatically. Based on our analysis, for the month of May, the average operating cost of gas and coal across the EU was more than double that of new onshore wind or solar PV equipped with four hours of battery storage.

Moreover, as we look across to the upcoming winter season and beyond, the pricing pressures show no signs of abating, and these dynamics are currently reflected in the forward price of coal and gas, which remain elevated for the next 24 months.

3. Savings on fuel costs can help finance the transition

To meet the REPowerEU targets, we estimate that the EU will need to invest €1.5 trillion in renewable energy by 2030¹. This may seem like a lot, but it is doable. Translated into annual terms, the EU will need to invest €182 billion per year from now to 2030. That is around 18% more than the EU invested in renewables in 2021. It should be noted this cost only captures capital costs and does not account for grid investments.

At the current high fuel prices of €290/t and €96/MWh for coal and gas respectively, avoided fuel costs for coal and gas could reach €203 billion and €428 billion per year - more than enough to cover the annual renewable energy investment required to meet the REPowerEU targets. Even if gas prices moderate to pre-crisis levels of €32/MWh, Europe can still expect to save over €140 billion annually on avoided gas spending. That would cover three-quarters of the annual capital investments required in renewable energy to meet the REPowerEU targets.

4. Household savings from deflationary impacts

Due to surging fuel prices, utilities have been passing on additional costs to consumers, via rising household energy bills. This combined with rising inflation is creating a cost of living crisis. As we approach winter, the pain will get even more acute. But the deflationary impacts of renewable energy can provide an effective hedge against rising fuel prices.

Take Germany as an example. In 2021, average household electricity costs were 32.15 cents/kWh, of which the cost of power procurement only accounts for a quarter of total costs, standing at 7.93 cents/kWh. At current fuel prices, we expect power procurement costs to increase to 12.08 cents/kWh², a 50% price hike. For a typical three-person German household consuming 3,500kWh of electricity annually, the monthly electricity bill will rise from €94 to €104 this year, a 10% markup, assuming all other cost components remain the same.

If Germany rapidly expands renewables in line with stated plans, adding 18 GW of solar PV plus battery storage and 7 GW of onshore wind plus battery storage per year, we should see typical monthly household electricity bills reduce to €91 by 2024. Put another way, thanks to Germany’s renewables rollout, energy bills in 2024 will be 9% lower than they would be otherwise.

However, an important caveat is that a rapid rollout of renewable energy capacity at this scale requires a robust and stable global supply chain to prevent supply-related cost inflation. Investments along the whole value chain will be required.

5. Create millions of green jobs

Based on our analysis of the available literature, achieving the REPowerEU renewable energy targets can create 2.4 million green jobs by 2030.

Broken down by technology and country, we see that the UK has a major job creation opportunity in offshore wind, while most onshore wind jobs will be created in Germany. For solar power, most jobs will be created in Germany, France, the UK and Greece.

The number of renewable energy jobs created varies widely based on the value chain. If the renewable energy technologies are manufactured in the EU, this generates more economic activity and creates many more jobs in the region.

6. Meeting long-term climate goals

As well as the geopolitical, energy security and economic drivers, the REPowerEU plan is also designed to help the EU reach its long-term climate goals. Enshrined in the EU Green Deal, this includes targets to be net-zero by 2050 and cut emissions by 55% by 2030, compared to 1990 levels.

Scaling renewable energy is one of the cheapest and fastest ways to cut emissions. The precise amount of abatement depends on what fossil fuel the renewable generation is replacing. The new renewable capacity could cut emissions by 1.1 GtCO2 if replacing coal, or 460 MtCO2 if replacing fossil gas³. Clearly, to maximise emissions abatement, steps should be taken to ensure coal plants are replaced first.

Getting it done

The REPowerEU plan has the potential to unlock huge economic, financial and environmental benefits for Europe’s energy system. But to make it work, policy reforms will be required. In particular, reforming permit processes to reduce deployment times is essential. While the political will to deploy more capacity is clear, permitting is a key bottleneck slowing deployment and increasing the cost of renewable energy. If the EU can overcome these non-price barriers it will not only stop feeding Putin’s war machine, it will support energy affordability at a time when it is needed most.

Notes:

1. Installed capacity of RE multiplied by CAPEX on a $/kW basis.

2. Assuming that procurement costs are a weighted average cost of short-run generation costs for fossil fuel-based electricity and nuclear generation and LCOE for renewable energy-based electricity.

3. Capacity multiplied by capacity factor multiplied by carbon intensity of grid.