Decarbonising EU industry

The EU’s countdown to net-zero emissions by 2050 will demand significant changes to many industrial sectors and will herald a host of new policy frameworks and tools to spur low-carbon technology across the bloc of 27 nations.

Tune in this week to hear about the EU executive’s industrial strategy as well as the ideological divide that pits dirigiste countries against those who favour a market-based approach.

Guest: 

• Giorgio Corbetta, Senior Associate Energy Practice, Global Counsel.

Transcript

Anna Siwecka, freelance journalist/podcaster: 0:01

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Richard Sverrisson, Editor-in-Chief Europe, Montel: 0:28

Hello listeners and welcome to the Montel Weekly podcast, bring Energy Matters in an informal setting. This week we turn our attention to Brussels, and in particular to the EU executive's vision for a decarbonized continent. This means we look at the ways in which the European Commission will set in place the framework and the tools to help industry become net zero by 2050. In addition to a jungle of acronyms, we'll also talk about the ideological rift in the commission between countries that favor a more liberal approach and those that are more deje preferring to pick winners perhaps. So to talk us through these issues is Georgia Corbetta of Global Council a consultancy, warm welcome to you Giorgio

Giorgio Corbetta, Senior Associate Energy Practice, Global Counsel: 1:10

Many thanks Richard, and thank you for having me.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 1:12

How's life in Brussels at the moment?

Giorgio Corbetta, Senior Associate Energy Practice, Global Counsel: 1:14

I guess that the situation for most of the people is better as the terra have opened as of last week, so I guess that's also very good for basically business. For me, we have young kids, so the most important thing is that the schools remain open for the kids and for the parents. As well. That's has actually been the case since the beginning of the year, so we're very grateful for that.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 1:44

Absolutely. But maybe it's still some way off having the meetings face-to-face meetings in the sort of nub of where it happens in the EU parts of Brussels.

Giorgio Corbetta, Senior Associate Energy Practice, Global Counsel: 1:52

Yeah, I think that's gonna depend. Mostly on the vaccination rate, which is not going that fast compared to other countries, but I guess it's in the average of many other European countries. Last time I checked, I think my age range is supposed to be vaccinated by July, I think. So that's not that. Very far away.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 2:17

Okay. No, exactly. Fingers crossed. We can all get back to, yeah. Normal fairly soon. We are here to talk about the EU industrial strategy. Giorgio, could you tell us a little bit about this? What is it exactly and why is it important?

Giorgio Corbetta, Senior Associate Energy Practice, Global Counsel: 2:30

So the EU industrial strategy as a communication by the European Commission. Articulating how the EU can boost the competitiveness of its industry whilst also achieving the carbon neutrality target by 2050. So the strategy we are discussing about was published on the 5th of May, and it is actually a review of a previous version of the strategy that was published in March last year, and actually the day before the World Health Organization declared COVID-19 a pandemic. So it had to be. Updated as COVID dramatically changed many of the assumptions the commission was working with. So the communication also came with a thick pack of documents. So we're definitely gonna break those down for your listeners in a moment. But what's important to note now is that they include also an analysis of Europe's strategic dependencies. In a number of industries, including hydrogen batteries, renewable energies, as well as a proposal to manages to and to basically control foreign subsidies to companies from basically third countries who operate in 50 European. And I think that the last interesting bit to mention is that there's also a, an outline of what are the pathways for, in particular, the steel making sector to reduce emissions, which we will get to a bit later as to your question, why it's important. I have to say that the release of the strategy itself has been actually delayed twice. So many of us were waiting for it with patient. However, the strategy itself came without a clear timeline of actions and performance indicators to actually measure the success of the strategy. But. I will perhaps say maybe something different to many commentators, and I'll say that although it's true, there are not many political announcements in the strategy. The strategy itself and the documents it came up with. Do give a very important indications as to where the commission is coined with a number of its proposals and in particular the fit for 55, which I'm sure your listeners know about, it's basically is a major realignment of you legislation towards. Achieving the 20, 30 and 2050 emission reduction targets. So I do believe that the strategy as it is now is important specifically for the energy sector.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 5:34

Excellent. But so it's, it's a communication, so it's not a directive or a regulation, it's just basically giving the backdrop the context of what's happening now or gonna happen now. In June and over the summer with a fit for 55 package, the climate law, the new renewables directive. Would that be a fair assessment there, Giorgio?

Giorgio Corbetta, Senior Associate Energy Practice, Global Counsel: 5:53

Yeah I think that the main difference between the current version of the strategy and the one that was released in March is that. There is an incorporation of a few lessons learned from the pandemic, so how Europe actually performed during the pandemic. So there is a sense of. Urgency throughout the document and a greater emphasis around the need to accelerate the transitions and to recover in a sustainable way from the pandemic. So in terms of what the consequences will be, I think many of the proposals that the previous version of the strategy included have actually been released by the European Commission. If you think of the hydrogen. Strategy, the sector iation strategy. So those are things of the past in a way now, but it's true what you say. What in the strategy now is a clearer indication of what the commission wants to do going forward. And in particular for energy that has to do with the fifth or 55 package.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 7:05

Does it mention funds or the cash Where, who's gonna pay for all this? The rapid acceleration to a green transition, Giorgio?

Giorgio Corbetta, Senior Associate Energy Practice, Global Counsel: 7:12

Not really in the sense that there is mentioning of where the funds are coming from, but those are basically gonna be the recovery plans of each of the member states. So I think there is also throughout the document, a call for member states to use wisely this money also, because, there is the understanding of this is basically a once in a lifetime. Opportunities for a national economies to recover in the right way.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 7:45

We've already seen some of these, the submissions from several member states, haven't we already? Yes. I touched upon it in the intro there, Giorgio, about, the two strands of thoughts within the commission here. I wonder if you could tell us a little bit more about this. I think maybe, would it be fair to say that it's been exacerbated with the, with Brexit? So you had a kind of, a liberal, basically a market based economy or very, a country that was a very pro market now outta the eu. Where does that leave the discussion at the moment? And is there a kind of little bit of a divide there? If you could talk us through that would be very interesting, Georgia.

Giorgio Corbetta, Senior Associate Energy Practice, Global Counsel: 8:19

Sure. So I don't think I'm gonna break any news on this. As this has been discussed since the 5th of May. But what you are alluding to is very interesting because the strategy seems in fact to be. The output of a conflict between two competing visions of industrial policy. So in fact, on the one side there is the more liberal camp where member states like the Nordics and the Netherlands basically locate. Themselves, which supports the current competition rules architecture. Whilst on the other side there is a more proactive faction that would like to see competition rules banned to boost the competitiveness of the EU industrial base. And this is France as its champion. So I think this conflict is. Apparently also reflected within the European Commission itself with the Vice President Desta. In the first camp. So those who support the current competition framework in the European Union and the Commissioner for Internal Market Ton in the second one. And so I think what you mentioned is true because. This is in fact a battle that will be fought mostly in the revision of the state, A guidelines, which is coming up by the end of the year. And I think that the proactive camp is looking at merger control and the subsidies as way to modify competition policy. So whilst it is, of course, very hard to tell what exactly. It's gonna happen. I think we can say two things with relative confidence. One is that it is going to be very difficult to change the state. A guidelines, and this is because of a number of reasons, but the most relevant one is the aligned European. Tradition of strong competition policy. But on the other side, it is also true that the revision of the rules will have to anticipate the consequences of the new EU climate targets and also minimize the possibilities for the creative justice of the European Union too. Actually reverse some of the European commission's approval decisions. And that has been the case in the past. I think one of the most relevant example is the campus judgment, which anal the commission's approval decision of the EU capacity market, which of course has huge implication on markets. And investors' confidence as well.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 11:19

What are your expectations that the rules, the state date guidelines will be bent a bit?'cause you've got, we've got the decarbonization target, we've got the NG transit issue, got the post COVID recovery. Maybe, there's a feeling that it now is not the time to really strictly adhere to rules that were set before this new set of guidelines will come into effect.

Giorgio Corbetta, Senior Associate Energy Practice, Global Counsel: 11:39

Yeah, I think that there is agreement amongst. Many policy makers and stakeholders that the current framework of competition policy in the European Union needs to be updated to today's world. And this is also clearly something the strategy itself is calling for. However, I think I'm skeptical, and that's my view on the possibility for, the spirit of the rules to be changed because of the reasons I mentioned and because in actuality there's not much consensus in particular across the different member states. What I believe is possibly gonna happen is, tweaking here and there. In particular when it comes to the creation of industrial alliances and the private public partnerships, which are needed to boost the EU industrial base, in particular on clean technologies, which is definitely. An enabler for the European Union to reach. Its 20, 30 and 2050 targets.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 12:52

Absolutely. Georgia. So you were saying, you mentioned earlier, and before we go on to the sort of nitty gritty, the actual details of what's being, communicated. You said something but interesting about using the state aid guidelines for third countries, or for firms within third is this, for example, do you mean you know, companies like Gas Pro here or US companies, Chinese, the three Gorges that bought a stake in EDP, for example, are, is this what's being mentioned here, or,

Giorgio Corbetta, Senior Associate Energy Practice, Global Counsel: 13:19

yeah, so I think this is the only legislative. Proposal that has come out with the strategy, and this is basically to control subsidies to companies who operate in the European Union but do not really belong to the European Union. So I think this is true as an example for the companies that you just mentioned, but I think that here the purpose is really. To position the European Union as a more authoritative, diplomatic actor in the world. And this is also true when it comes to energy. I think that the European energy industry has been very good at also exporting. It's good. If you think of wind turbines in particular, we have a huge manufacturing capacity here. Which is able to export across the whole world. So I think that the worry now as we live in a more globalized way and absolutely competition for European companies, is coming from many different countries and regions. Of the world. The concern is that the EU industrial basis could lose its competitiveness globally, but I think that's also a worry when it comes to internal competition within the European Union. So we see that it's very difficult for. European companies to compete with, in particular Chinese companies who are effectively funded by the state. So I think that the importance of the only legislative commitment that's come out with the strategy is to be looked at. Under this light.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 15:09

Excellent. So I think, obviously the border tax is also the carbon border tax is obviously a part of this. Yes. But let's go into the details here of the industrial strategy communication and let's talk about the impact on the energy sector. There's an aspect here where it tries to, to boost the use of renewable PPAs, especially for industry. How does this work? Could you talk us through this Georgia, what's the vision here?

Giorgio Corbetta, Senior Associate Energy Practice, Global Counsel: 15:30

So the strategy does say that the commission will look into further promoting renewable power pitches, agreements, or basically PPAs. They will do so through addressing in particular barriers to the further development of PPAs in the proposal for a revised renewable energy directive, which was supposed to come within the framework of the fit for 55 package, but we're not any longer short, so this is really. Something the renewable energy industry has been calling for a long time and the commission is finally looking into PPA regimes across different rejections in the European Union and assessing how to boost them. And the importance of PPAs is, is crucial for both energy generators as well as. Companies who wanna decarbonize their electricity consumption in particular. So I think the relevance of PPAs is that it offers a clear stream of cash flow for renewable energy operators. But on the other side, it does help companies, and in particular, if you think of manufacturing companies who wanna really. Abate their emissions. So PPAs as a tool are not really something new in the European Union. I think they've been there for a very long time, but they are much more important now in the context of once again. Decarbonizing, basically the European economy through 2050.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 17:19

But what are the details here? Giorgio? I understand that the role of p that PPAs will play is very important. But is there talk of the commission or member state underwriting PPAs, what the details, how can they boost this?'Cause I think we can see the need for it, obviously there's, yeah, you're right. Financing and the way, providing support or as I mentioned, underwriting, is that something that's looked at? Is that these options on the table? This is one

Giorgio Corbetta, Senior Associate Energy Practice, Global Counsel: 17:43

of the issues because the strategy doesn't go as far as saying anything on the details, so I think it's difficult to say what the commission could actually do. I think what they could do is to look into, one example would be the. Interplay between making a PPA deal and being able to trade in the market. So I think in a number of countries, and I think in Spain, the regulation actually for bits doing both. So this could be seen as an issue very. Clearly, so it's not a financing issue. I don't think that the problem here is where the mine is coming from, but it's really how to really include PPAs in the regulatory framework. So I'm not sure if this is answering your question, unfortunately, this is really this period of the communication, so they don't really give away many details.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 18:44

Okay. But I understand, I think yeah. So reducing some of the barriers and maybe, and some of the obstacles to the signing of these deals that Yes. Will prevent them from being Yeah. So that makes sense. Absolutely, Georgia, but. So there's another aspect here, and this's what I mentioned, the acronyms CFDs for the ET s which is, as contracts for difference for the, emissions trading scheme specifically geared towards industry. Could you talk us through that? What are these contracts for difference and how would they work in the context of being applied to the ET Ts?

Giorgio Corbetta, Senior Associate Energy Practice, Global Counsel: 19:11

Sure. So now we're talking about carbon contracts for difference, which are basically mechanisms to reimburse. Asset owners of part of the CapEx invested in basically decarbonizing their processes. So to make it clear, we can say that. A cement manufacturer can install a carbon capture storage facility at one of its plants, and if it says, let's say it costs 80 years per ton of CO2, which is which is captured, then the owner can strike a deal with. The state essentially are creating to which they get back the difference between the carbon price. The 80 euros. So for instance, now that would mean as the carbon price in the European Union in the EUTS is basically 50 euros. Then the owner would get 80 minus 50, so 30 back. And this is important because it's essentially a support mechanism aimed at compensating. Asset owners who are believed to be over invested in the energy transition. So with the carbon price. As a benchmark. So what the commission wants to do, and once again, we unfortunately don't have many details as to how the plan on doing it. What it wants to really do is to look into this approach and try and adapt how the ETS works. So this is coming in fact, as part of the revised ETS directive, which is supposed to also come out in July. This year, and this will be clearly an opportunity for clean tech manufacturers to see their products promoted in a way. Once again, there's no detail as to how this is gonna be done, but the fact that it's clearly mentioned as one of the priorities of the European Commission is very much. Important for the manufacturing industry in the European Union. If you think of steel and manufacturing sectors,

Richard Sverrisson, Editor-in-Chief Europe, Montel: 21:35

it's very interesting how it ties this to the carbon price to then the whole process of decarbonization to get the whole ball rolling. I think that on the industry side, 'cause the power sector by, hopefully by, in the next five or 10 years will have largely. Move to decarbonize in certain sectors and in certain areas Anyway, so it's, that's quite important for industry. But you mentioned steel as well, Giorgio. Can you just talk us through a little bit about steel, what's happening here and what the vision is for the steel industry?

Giorgio Corbetta, Senior Associate Energy Practice, Global Counsel: 22:01

So as we mentioned in the beginning, the commission also released a detailed analysis of how the seal industry can contribute to the net zero goal in a staff working document. It outlines. In essence, the policy toolbox for the industry to decarbonize. And that's, important because still is seen as both one of the critical sectors for the EU economy as well as. Amongst the ones which are most difficult to actually decarbonize. So the document list, the funding programs the sector has at its disposal to invest in research and development, as well as the regulatory. Environment it has to basically operate in, and this in fact includes the EETS and the carbon borderer adjustment mechanism. So the document does acknowledge the existence of a global supply chain for the used steel sector. And I think that, once again, the relevance of the document does not. Necessarily lie in its content, but rather in the fact that it indicates to industry that de carbonizing. Manufacturing is a clear concern for the commission. So I think that this has to be seen in particular by the energy sector as a clear investment opportunities for hydrogen as a fuel CCS, and so those. Technologies, which could basically profit from an increased focus on how to decarbonize steel. I am not entirely sure why the European Commission has chosen steel in particular. I think steel as such was also mentioned. In the March, 2020 strategy, so it's possibly a follow up to the previous version of the strategy, but this is clearly a testament to the good advocacy work. Of the industry in influencing the thinking of the European Commission.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 24:20

So the steel lobby has come out strong here. Yeah. It's a thumbs up for them.

Giorgio Corbetta, Senior Associate Energy Practice, Global Counsel: 24:24

I think so. I think so.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 24:25

Yeah. Perfect. Giorgio I would love to return to this topic once we have more detail and to go through it and what the implications are for. For the energy industry and the listeners out there who will be affected by it. But thank you very much for joining the Montel Weekly podcast this week, Giorgio.

Giorgio Corbetta, Senior Associate Energy Practice, Global Counsel: 24:41

Thank you very much. It's been awesome to be able to talk to you. Perfect. Thank you Richard.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 24:45

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