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Tough love: Europe needs to ’level the playing field’ after US Inflation Reduction Act

In August 2022, US President Joe Biden signed the Inflation Reduction Act (IRA) into law: 370 billion US dollars in investments to incentivise the clean energy transition, to lower energy costs and, in line with the President’s vision, to make sure the United States remains the global leader in clean energy technology.

It is by far the largest package of incentives in the US designed to tackle climate change. However, despite the good intentions, it is raising several concerns regarding international trade, especially for the European Union which, since the launch of the European Green Deal has been priding itself to be the leader of the energy transition.

“It is no secret that certain elements of the design of the Inflation Reduction Act raised a number of concerns in terms of some of the targeted incentives for companies,” the European Commission’s President Ursula von der Leyen said earlier in January, during the World Economic Forum.

Concretely, the IRA provides subsidies in the form of tax credits and makes those credits conditional on production being US-based. As pointed out by the International Energy Agency (IEA) the mass-manufactured clean energy tech market will be worth around 600 billion euros a year by 2030 – more than three times higher than the current figures. Whoever is going to lead this industry, will therefore have also a huge economic advantage.

The impact of the IRA on the EU’s energy sector remains to be determined

Suzana Carp, Deputy Executive Director of Cleantech for Europe reminds us that when it comes to the EU’s energy industry, as energy is a mixed competence between the EU and the Member States, the synergy between the two is what will make or break the ability of the Union to compete.

“Unfortunately in the case of energy policy between the Member States, the sum is not greater than its parts but rather its parts have the risk of yielding a zero-sum game if contradictory investments are pursued (like in fossil fuels) at the same time while IRA suggests all investments need to go in the same direction (net-zero clean technologies),” she tells CEENERGYNEWS.

“As such,” she continues, “the impact of IRA on the EU energy industry is yet to be determined and will also depend on how the EU builds up its own cleantech strategy and how well the Member States will be able to work together in the same direction.”

Is the EU’s response already falling short of commitments?

As a response, the European Commission presented the Green Deal Industrial Plan (GDIP) based on four pillars: a predictable and simplified regulatory environment, speeding up access to finance, enhancing skills and opening trade for resilient supply chains.

In particular, independent research and business intelligence company Rystad Energy believes that a simplified regulatory framework and financial support mechanisms will be crucial and might be enough to turn the tide, as regulatory bottlenecks and underdeveloped supply chains have held back clean tech development for years. Yet, more must be done especially in the battery and electric vehicle sector and in green hydrogen production, for example by providing a fixed premium for hydrogen production in the very near future.

Brussels-based association SolarPower Europe has welcomed the GDIP as a step in the right direction. However, it “risks falling short due to a lack of focus on specific technologies in its plan,” says Dries Acke, Policy Director at SolarPower Europe. “We need support specifically for the bulk technologies that net-zero and energy security are based on.”

According to him, solar is the reality of the energy transition and energy geopolitics is being redrawn specifically around solar technology.

“We also have concerns about the timeframe involved as proposed state aid revisions under this Communication will apply until 2025. The US is operating on a 10-year time frame. We are advocating for flexibility until 2030,” he tells CEENERGYNEWS.

For Suzana Carp, clarity will be a keyword.

“The framing of the GDIP is a positive one in many respects, as it acknowledges Europe’s role in providing climate leadership to this point in time and it also rightfully draws upon the various existing instruments seeking to refine them”, she says. “However, what we need goes beyond refining them, we need bold moves in removing the barriers to European innovators and a sharp and exclusive focus on net-zero clean tech only so that the innovators are not continuously at a disadvantage in trying to access the support schemes, as has been the case to now (see the Innovation Fund disappointing access rate by innovators).”

She also agrees that long-term visibility like 10-year frames will be helpful but the EU has it too through several announcements: she mentions the ban on the Internal combustion engines in 2035 (although “a bit late as it should have been 2032 the latest for leadership in the race”) and phasing out free allowances for main incumbents in 2034 under the EU ETS, a date that will only be confirmed in the next revision.

A change in EU state aid rules

According to EU Member States, the main issue is that a level playing field is not guaranteed: not only the IRA puts the EU manufacturers at a disadvantage compared to US competitors but state aid rules as they are today prevent Member States to offer similar tax breaks.

“Solar industrialists in Europe contend with some of the highest energy prices in the world, so the sector is highly anticipating the imminent relaxation of EU subsidy rules,” highlights Mr Acke. “We’re hoping that the Commission will land on adapted State Aid frameworks that allow for a surge in clean tech manufacturing in Europe in a matter of weeks. These revisions should be targeted at critical clean technologies like solar PV, at least until 2030, if it wants to be able to stand up to the US IRA. Speed is of the essence here if Europe expects to hit its ambition of 30 gigawatts (GW) solar production in Europe by 2025.”

“Leaders and policymakers also need to rapidly leverage existing funds, like EU recovery funds for solar and inverter manufacturing,” he adds. “In parallel, the EU should establish the EU sovereignty fund as soon as possible, dedicated exclusively to clearly identified, key, strategic, clean energy technologies. We understand the new EU sovereignty fund will come following this year’s revision of the multi-annual EU budget. This is a key tool to respond to concerns over single market fragmentations.”

A united front: Czechia stresses the importance of a functioning internal market

And indeed a united front was reminded exactly by a country from Central and Eastern Europe: Czechia. During the informal meeting of the Competitiveness Council on 6-7 February, Ministers discussed the single market and the green transition.

“In response to the American Inflation Reduction Act, it is necessary to preserve the unity of Europe and prevent Member States from competing with each other for subsidies,” said the Czech Minister of Industry and Trade, Jozef Síkela.

He was echoed by Deputy Minister Edvard Kozusnik, who stressed that a functioning internal market is the main prerequisite for industrial competitiveness: “we must not allow the internal market to fall apart and end up with subsidy races between Member States.”

A focus on the EV sector

Something that has been requested by many voices is for Europe to get some exemptions from the IRA, like those granted to Canada and Mexico. These would specifically apply to the EV market. In fact, the EV supply chain ranks second on the Act’s funding list, with 23 billion US dollars allocated to transportation. For funding access, EV companies must source at least 40 per cent of the CRMs used in battery production from the US or a country that has a US trade agreement. Secondly, the battery components must be manufactured or assembled within the US, Canada or Mexico, with the requirement increasing to 100 per cent by 2029.

The European Commission already confirmed that it has been working to find solutions to ensure that EU-made EVs can also benefit from the IRA, especially after seeing that companies such as Tesla, Iberdrola and Safran are planning to move some of their operations to the US. At the same time, it is again crucial to show a united front by developing a stable local battery supply chain: several Chinese companies are entering the European battery market (for example, CATL in Hungary) while the IRA was specifically designed to remove dependency on China in the battery supply chain.

The attractiveness of the IRA package for cleantech innovators remains

So, if these exemptions are granted, what remains competitive for the US?

“A lot will remain because the attractiveness of the IRA package for cleantech innovators remains, they may still wish to channel their focus on harnessing the attractive offer there so the EU needs to focus not on getting exemptions but rather getting its own Cleantech Strategy act together, with all regions and countries in the driving seat”, replies Ms Carp.

Regarding solar in particular, Mr Acke underlines that solar manufacturers in the US will still get 9 times more support than the ones in Europe – even after they benefited from the Innovation Fund.

“Under the IRA, a 3 GW solar factory in Paris, Texas will get 4.6 euro cents per watt of solar it builds. In Paris, France, your factory would receive 0.5 euro cents. That’s only if you’re the 1 in 44 successful applicants to the EU’s Innovation Fund,” he says as an example.

“There are three levers for Europe to secure a competitive edge in solar PV manufacturing: scale, sustainability and innovation,” he continues. “The heart of global solar innovation is in Europe – the EU is in the top international patent holders for solar technology. In the new EU Green Deal Industrial Plan, we’re calling for ESG-based criteria to promote ‘best-in-class’ solar PV, driving demand for European products.”

However, so much is still at play.

“What is critical to be understood here is that the debate is strictly about clean energy sources and the IRA gives support to developing the net-zero technologies needed for developing global competitiveness for the remaining of the 21st century and the next 3 years will be crucial,” Suzana Carp concludes. “So, the EU will need its Member States to also understand that the age of fossil fuels is not only long over but that any nostalgic attachment to the past can cost all of us our future role and industrial leadership.”

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