REPowerEU targets EU’s energy independence with limited official funding

The policy direction of the European Union (EU) to facilitate
investments in renewables, especially hydrogen, and diversify gas
supplies and reduce use of fossil fuels is very likely to be
maintained and accelerated by Russia’s invasion of Ukraine.
REPowerEU is the European Commission’s proposed strategy on how to
achieve these objectives.

The policy, published on 18 May, aims to accelerate the EU’s
reduction in energy consumption and to focus on alternative forms
of energy, including hydrogen and liquefied natural gas (LNG). EU
member states agreed in March that the bloc would cut off Russian
fossil fuel supplies before 2030, with the European Commission’s
indicated target to achieve this being 2027.

The Commission’s proposals to achieve this follow previous plans
to increase the share of renewables in the EU’s energy mix,
optimize energy savings, and diversify energy supplies. The
European Commission now estimates that EUR210 billion in new
investments would be needed until 2027 to achieve these REPowerEU

Among the planned initiatives, which should support more
vulnerable EU countries, is a voluntary platform for joint purchase
of gas, LNG, and hydrogen. Bulgaria, which had its gas supply cut
by Russia’s Gazprom in April, has already started work on a joint
regional framework for gas purchases.

The Commission put forward the establishment of three hydrogen
import corridors via the Mediterranean, the North Sea area, and
from Ukraine – when conditions allow this. The EU also proposes
establishing a Global European Hydrogen Facility, which would
facilitate imports of green hydrogen and incentivize
decarbonization initiatives in partner countries, encouraging the
production of renewable hydrogen in the EU and partner

The Commission’s measures also focus on accelerated development
of solar and wind technologies, heat pumps and electrolyzers. The
EU’s executive body also highlights the need to accelerate the
provision of permits for renewable projects spanning areas such as
wind energy. This initiative appears designed to benefit projects
in countries that have a slow or inconsistent regulatory
environment such as Romania and Greece.

Part of the EU’s Innovation Fund would support hydrogen projects
via an EU-wide “carbon contracts for difference” scheme and grants.
The fund’s projected revenues from the auction of emission
allowances from the EU’s Emissions Trading System (ETS) by 2030 are
around EUR38 billion.

ts carbon price and green bonds issuance

On 5 May, 20 companies committed to a tenfold increase of their
electrolyzer manufacturing capacities by 2025. The Commission
promised a supportive regulatory framework including a legislative
proposal for faster award of permits, and collaboration with the
European Investment Bank (EIB) to facilitate funding.

The Commission plans to publish guidance on renewable energy and
power purchase agreements (PPAs) and a possible guarantee scheme
for PPAs relating to the EIB supported PPA-financed renewable
energy project in EU member states. The Commission expects to keep
its temporary crisis framework for state aid, introduced at the
start of the coronavirus disease 2019 (COVID-19) virus pandemic in
Europe, “under constant review” in light of the current
“geopolitical situation.” This strongly suggests that EU state aid
rules would not be applied strictly, especially in the energy
sector, with the EU more likely to permit state support for
policies to diversify energy supplies and deploy more

The Commission aims to mobilize EUR300 billion (around 1.4% of
projected EU GDP in 2022) by 2030 in new investment. A large share
of these funds is projected to take the form of loans, or
reallocation of grants already earmarked under different EU
programs. Member states may be unwilling to request new loans
(which would be added to their public debt) given the substantial
fiscal shocks already generated by a combination of the pandemic
and spillovers from the war in Ukraine.

The private sector is also likely to play a key role in
financing the transition. The REPowerEU plan includes measures to
encourage member states to use taxation measures to support
objectives and remove regulatory barriers to investment. The
Commission has also highlighted that it will put forward a flexible
instrument to help to mobilize private investment, to be adopted
before the end of 2022.

Strong sovereign activity in the Green bond space is also likely
to support private issuance. There is evidence that issuance of
Green bonds by private firms is highly correlated, with a lag, with
issuance of sovereign Green bonds from the same jurisdiction. On
this front, the EU expects to issue a total of up to EUR250 billion
in Green bonds by 2026 to finance its Next Generation EU

There is currently an apparent EU political consensus for
accelerating the bloc’s energy transition efforts, while public
support for investment in renewables and diversification away from
Russian fossil fuels also appears strong. Environmental activism
and growing public demand will remain important drivers assisting
the deployment of renewables and the push to reduce reliance on
fossil fuels across the EU. The EU forecasts that the political
commitment for the EU’s carbon reduction targets and robust demand
for “Green” assets from institutional investors will help to offset
the negative influence of higher borrowing costs.

Posted 10 June 2022 by Petya Barzilska, Sr. Research Analyst II, Europe & CIS Country Risk, S&P Global Market Intelligence

This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.

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