Businesses Want EU to Set Forth Competitive Green Industry Act

European Commission president con der Leyen last week said the EU would mobilize more state aid and create a sovereign fund for renewable energy companies in its “Net-Zero Industry Act”, in order to compete with the U.S. Inflation Reduction Act (IRA). Von der Leyen’s remarks came as Europe has been dealing with high energy prices following Russia’s invasion of Ukraine, which have caused investment in Europe fall behind the United States. Russia’s invasion skyrocketed energy prices in Europe, pushing up manufacturing costs. To protect energy consumers, the EU has imposed revenue caps on renewable generators, denting investor confidence in new projects. Both the U.S. and Europe have been trying to accelerate renewable development but financial support differs significantly and European renewable developers have also been facing permitting delays.

U.S. IRA also provides tax credits for U.S. wind and solar projects, as well as new manufacturing facilities. Under these circumstances, the U.S. has become more attractive for wind energy investment as European nations do not provide direct incentives for domestic manufacturing.

EU state aid rules prevent countries from providing direct support to domestic companies and the EC will propose to “temporarily adapt” these rules in order to “speed up and simplify,” von der Leyen said. The sovereign fund will provide both loans and grants.

“To keep European industry attractive, there is a need to be competitive with the offers and incentives that are currently available outside the EU,” von der Leyen said.

The Commission will need backing from member states to pass the proposed fund. Von der Leyen also proposed a temporary bridging solution, but has not given details. In November, the EU launched a new Clean Tech Europe initiative to identify challenges and encourage investment but concrete funding measures are yet to be announced.

In the meantime, European wind companies continue to face multiple challenges and new investment in onshore wind manufacturing in Europe is under jeopardy. European manufacturers are calling for more help to scale up production and manage high energy costs and the EU will aim to “focus investment on strategic projects along the entire supply chain,” von der Leyen said.

“We will especially look at how to simplify and fast-track permitting for new clean tech production sites,” she said.

Wind turbine suppliers’ headaches caused by rampant inflation and logistics issues on wind manufacturing have been highlighted by job cuts and slashed profit margins.

Global logistics costs rose by around 400% over the last two years and account for around 10% of wind farm costs.

Because of intense competition, suppliers only passed on a fraction of the cost increase. In Germany, Europe’s largest power market, the industrial price index rose by around 40% last year. In response, the government passed new energy laws in December that increase the reference energy price in wind power auctions from €58.8/MWh to €73.5/MWh. Earlier last year, Germany lifted a two-year deadline on building new wind farms to allow companies to adapt to volatile markets.

Meanwhile, the $430 billion IRA is shifting the focus of wind manufacturing to the U.S. market.

The U.S. is a key growth market for the three largest European suppliers, Vestas, Siemens Gamesa and Nordex, as well as leading U.S. group GE. Key areas of activity will include blade, tower and foundation assembly.

The IRA also provides long-term certainty on federal support and gives U.S. states and industry stakeholders the confidence to invest.

Europe’s wind and solar industries have called for more support from EU authorities as companies lack the direct support offered by the U.S. IRA.

In addition, some EU members are concerned that the proposed sovereign fund will mainly benefit larger European economies. Out of €672 billion of state aid approved by the Commission last year, 53% was in Germany and 24% in France.

Biden said in December that his administration was considering some changes to adapt the IRA to allow some European companies to benefit from the plan, but no details have been published so far.

“We’re going to continue to create manufacturing jobs in America but not at the expense of Europe,” Biden had said in a joint press conference with French President Macron.

European wind operators also face caps on power revenues that are fragmenting the market and undermining investor confidence. The limits aim to protect consumers from soaring energy prices following Russia’s invasion of Ukraine. EU members agreed to limit revenues from non-fossil fuel power plants to €180/MWh from December until the end of June but also allowed national governments to impose lower revenue caps provided they are higher than the cost of generation.

Last month, Germany implemented a windfall tax on renewable energy generators from December 1, 2022 until April 2024. The levy will skim 90% of wind and solar profits realized above €130/MWh, or above a benchmark based on the feed in tariff assigned to the project.

Industry experts say windfall tax measures were hampering Germany’s power purchase agreement (PPA) market and impacting short-term investor confidence.

The market uncertainty is putting at risk Germany’s plan to accelerate annual onshore wind installations five-fold to 12 GW by around 2025 and to supply 80% of power from renewables by 2030.

European wind developers also face challenges from permitting processes that inflate project costs and increase risks on technology and finance. Permitting can take five or more years in Europe due to complex administrative processes and a lack of resources at approval authorities. This compares with a typical one to two years in the U.S.

Last month, EU energy ministers agreed emergency regulation that aims to shorten permitting times by defining wind and solar as projects of overriding public interest and clarifying environmental and grid permit deadlines that approval authorities must meet within two years.

Around 80 GW of wind capacity is currently stuck in permitting processes in Europe, five times the total wind capacity installed in 2021.

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