The Draghi report warns that without decisive action, Europe risks falling behind its competitors in the clean energy race. Amongst the many recommendations regarding energy and the necessary transition, decarbonisation efforts stand out as non-negotiable within the report, writes Cristiano Spillati, managing director at Limes Renewable Energy.
Despite this, equally clear are Draghi’s concerns that the EU has difficult decisions and commitments to make to match its own ambitious targets. As he notes, “The EU’s decarbonisation goals are also more ambitious than its competitors’, creating additional short-term costs for European industry.”
Draghi highlights that the EU’s “Fit for 55” goal—cutting greenhouse gas emissions by 55% by 2030 compared to 1990 levels—is far more stringent than the objectives set by other global powers.
The US, for example, has set non-binding targets for a 50-52% reduction from its 2005 levels, and China is only aiming for its CO2 emissions to peak by the end of this decade. Whilst challenging, these targets also represent a competitive opportunity if approached correctly. Should Europe achieve its decarbonisation goals, the benefits not only environmentally but crucially, financially, would be significant, leaving others behind.
The US and China have taken more reserved approaches, while the EU’s ambitions necessitate a massive short-term investment for EU companies, demands that their non-EU competitors are not facing. Draghi outlines two potential solutions: either scale back the ambition of these targets to align with those of the US and China, which is a necessary but insufficient condition to maintain competitiveness or inject an extraordinary amount of capital through public-private partnerships.
Here, however, there is resistance, not only from Germany but also from several other countries, especially considering that the rollout of the PNRR is underperforming as of now. Thus, while Draghi’s diagnosis is spot on, his report risks criticism in terms of providing a viable solution.
Europe faces unique structural challenges in the form of high energy prices, a situation exacerbated by dependency on LNG imports and the volatility of the gas markets, perhaps the piece most integral to its decarbonisation goals is that a unified and substantial drive towards renewables could in turn drive down the cost of electricity.
In 2023, the European Union’s expenditure on imported fossil fuels reached a staggering EUR 390 billion ($424 billion), a 90% increase compared to the historical average from 2017 to 2021. This rise was primarily driven by soaring prices rather than substantial increases in volume.
With an average volume increase of only 7%, the financial burden of fossil fuel dependence is evident. Transitioning to locally produced renewable energy could drastically reduce these costs and promote energy independence.
Countries like Spain exemplify how a robust renewable energy sector can lead to lower electricity prices. Spain has invested heavily in wind and solar power, which now constitute a significant portion of its energy mix.
As a result, electricity prices in Spain are among the lowest in Europe. The government’s focus on attracting industry and data centres to the country is a direct result of these low costs, providing a competitive advantage in an increasingly energy-sensitive global market.
The Draghi Report demonstrates that a significant shift to renewable energy can yield not only environmental benefits but also substantial economic gains. The report highlights that increasing the share of renewables in the energy mix can lead to lower electricity prices across Europe.
With renewables becoming the cheapest source of new energy, as demonstrated by the International Renewable Energy Agency (IRENA), we see the levelised cost of solar photovoltaic (PV) electricity dropping over 80% since 2010. Wind energy costs have similarly plummeted, creating an environment where renewables can provide energy at prices that undercut traditional fossil fuels.
Those understandably shocked by the spending outlined in the report will welcome the conclusion Draghi draws that the shift from imported fossil fuels to domestic renewable energy sources presents a tremendous opportunity for cost savings.
The Draghi Report emphasises that by investing in renewables, the EU could potentially eliminate a significant portion of its fossil fuel expenditures. If the EU were to replace just a fraction of its fossil fuel imports with renewable energy, the savings could amount to tens of billions of euros annually.
This is not just a theoretical exercise; countries that have made substantial investments in renewables have already begun to reap the financial rewards.
Beyond the immediate cost benefits, renewables also offer the opportunity to enhance energy security. The volatility of fossil fuel markets leaves countries vulnerable to price fluctuations and geopolitical tensions and such volatilities have been increasingly apparent for the EU in the context of conflicts.
In contrast, renewable energy sources are abundant and locally sourced, insulating economies from the unpredictability of international markets. This stability is essential for long-term economic planning and investment, as highlighted in the Draghi Report’s analysis of energy resilience.
The Draghi Report underscores the renewable energy sector as a potent engine for job creation within Europe, suggesting that a shift toward renewables could create millions of new jobs across various sectors, including manufacturing, installation, and maintenance.
According to IRENA, the global renewable energy workforce reached 12 million in 2020, and this number is expected to continue to grow as countries ramp up their renewable investments. This transition not only generates direct employment but also stimulates local economies by fostering a green supply chain and related industries.
While renewables should be the primary focus, nuclear energy presents another avenue for decarbonisation, albeit with longer timelines and significant capital investments.
The construction of new nuclear plants, such as those seen in the UK and Finland, demonstrates the complexity and high costs associated with nuclear energy. The UK’s Hinkley Point C project has faced delays and budget overruns, with costs ballooning to over £22 billion.
Nevertheless, the development of modular reactors offers a glimmer of hope for the future. These smaller, more flexible reactors could be deployed more rapidly and at a lower cost than traditional nuclear facilities. However, their widespread adoption is still a long-term solution, necessitating continued investment in renewables as the primary solution for immediate decarbonisation efforts.
The Draghi Report makes it clear that embracing renewable energy is not merely an environmental imperative; it is an economic necessity.
As the world races toward decarbonisation, we must not allow political stagnation, populism, or fear of investment to hold us back when the reality is that the cost of delaying the transition and our continued reliance on fossil fuels is costing Europe immensely.