Fit for the future, not Fit-for-55

Investment trends in clean technologies foreseen by industry bodies reflect a very different future than that set out in the Fit-for-55 package. EU countries should be working to realise forecasts of what can be reasonably delivered by 2030 in order to maximise the benefits of renewable energy for the climate, consumers and the economy.

An EU commitment to 45% renewable energy is the minimum required to realign policy with current market outlooks through to 2030.

But while all three branches of the EU executive have agreed on the 40% target, raising the official ambition level to 45% is proving more difficult. The European Parliament overwhelmingly voted in favour of the higher RES target, but a blocking minority of EU governments has so far limited the political commitment to “at least 40%” renewable energy. The culmination of this debate and a final political decision on the renewables target is expected to be discussed at the trilogues in March 2023.

This has important implications for national energy policy, which will set out concrete plans to reach the overall EU targets. The national energy and climate plans (NECPs) of EU member states currently reflect the official 2030 renewable energy target of 32%, but these are due to be revised by June 2024 with drafts submitted by June this year. At the time of writing, it remains unclear whether these updated national policies will be driven by a target of 40% or 45%.

A new energy reality

Just eighteen months on from the launch of the Fit-for-55 package and its renewable energy target of 40%, a new energy reality has taken shape in Europe. With energy security an urgent priority, accelerating clean solutions has taken on a new dimension—both at the political level and on the ground.

The energy crisis has “turbocharged” the energy transition in Europe, prompting many countries to significantly step up their renewables ambition. Investment in clean technologies reached record highs in 2022, jumping by 31% over the previous year despite concerns around global supply chains and macroeconomic headwinds. The rate of clean energy deployment has not only exceeded previous expectations, but appears to be far outpacing the capacity growth originally foreseen by the Fit-for-55 package. Recent market outlooks confirm that clean technology industries expect continued acceleration and that the high demand for technology deployment can be met.

Consequently, the Fit-for-55 renewable energy outlook not only lacks ambition, but is also out of step with the rapid shift in Europe’s energy landscape that has produced a new reality.

Solar champions the clean power surge

2022 was a record year for solar deployment in the EU. More than 40 GW of new solar capacity was added, an increase of 47% compared to 2021. This was driven by enhanced cost competitiveness due to high energy prices and significant improvements in supply chain and COVID-19 related restrictions. SolarPower Europe is confident that deployment will exceed 50 GW in 2023. Notable growth is taking place in the rooftop segment, due in part to improved investment conditions as well as the potential for rapid deployment of this small-scale technology.

The latest market outlook from SolarPower Europe (December 2022) reveals that this exponential growth in solar is expected to continue throughout this decade, exceeding the Fit-for-55 target for installed solar capacity by 2026, four years early. Its medium scenario outlook—considered the most likely—forecasts capacity in the EU to reach 736 GW by 2030, more than 90% higher than originally foreseen under the Fit-for-55 scenario (383 GW) and 25% higher than REPowerEU (592 GW). The largest power additions are expected in Germany and Spain, followed by Poland, Italy, the Netherlands and France.

Onshore wind struggles, but offshore picks up

These positive trends in solar assume additional importance as the wind industry struggles with supply chain issues and inflationary impacts on prices. This is certainly the case for onshore wind capacity, with projected installed capacity between 311-353 GW in 2030, lower than the Fit-for-55 target of 361 GW. While 2022 saw annual installations increase by 40% over the previous year to 15 GW, this remains below the rate required to meet the 2030 capacity target according to WindEurope.

Recent developments in the offshore segment are more positive. Earlier this year, EU member states agreed to ambitious long-term goals for offshore renewable energy, with an interim target of 111 GW offshore capacity by the end of this decade. Such political commitments imply a certain level of optimism and certainty that this capacity can be delivered. Indeed the projects under development (70.5 GW) already surpass the capacity required for the Fit-for-55 40% renewables target (66 GW).

While wind power is not defying expectations to the same extent as solar, market outlooks expect deployment levels still aligned with the requirements for Fit-for-55, with a ratio that tips in favour of offshore wind.

Electrification of heating and transport continues to set records

In 2022, growth in the stock of both heat pumps and electric vehicles (EVs) continued to defy expectations.

Another record year for heat pumps

According to early estimates from the European Heat Pump Association (EHPA), 2022 was a record year for heat pumps with around 3 million units sold, boosted by soaring fossil fuel prices and subsidies in some countries for household purchases. Italy, France and Germany saw the largest sales in terms of heat pump additions. This brings the total stock to approximately 20 million heat pumps. The EHPA estimates that the REPowerEU targets require around 20 million heat pumps to be installed by 2026, meaning that the EU has already reached its interim objective four years ahead of schedule.

As a highly efficient low-carbon technology, heat pumps play a vital role in offsetting fossil consumption for heating and reducing import dependencies, particularly for natural gas which is currently the most used heating fuel in Europe. Indeed, it is estimated that 30 to 40% of Russian gas imported into the EU in 2021 (46.5-62 bcm) was used to heat buildings. The units sold in 2022 alone replaced roughly 4 bcm of natural gas.

Multiple sources agree that heat pump growth can be expected to accelerate in Europe, with the EHPA forecasting a total stock between 60-72 million units by 2030. This is a huge step up in electrification of heating, more than 50% higher than the 40 million heat pumps assumed in modelling for the Fit-for-55 package.

A wide range of outlooks for EVs

2022 was also a record year for sales of EVs in the EU, bringing the total fleet to approximately 6.1 million. While it was a challenging year for car sales in general due to the dragging impact of COVID-19, rising inflation and high fuel costs, sales of electric cars were virtually unaffected. Battery electric vehicles (BEVs) sales climbed to a record 12.1% of total market share and that of plug-in hybrid electric vehicles (PHEVs) increased to 9.4%. Although relatively modest, these market shares tell a story of rapid change in the automotive industry; BEV sales only accounted for 1.9% in 2019.

The EV fleet must see a fivefold increase between now and 2030 to reach the 30 million EVs required under both the Fit-for-55 package and REPowerEU plan (differences in transport investments between the two are minimal). Outlooks from the automotive industry demonstrate a clear level of certainty that this level of road transport electrification will be achieved, placing the 2030 EV fleet between 40 million and 84 million.

Recent developments in regulation provide additional support for these higher forecasts. In October 2022, the EU reached an agreement to end sales of new combustion engine cars and vans by 2035, and set an interim 2030 target for carmarkets to reduce the CO2 emission of new cars and vans by 50% in 2030. This is expected to increase the market share of EVs to a minimum of 50-60% by 2030, a trend that would take the total EV fleet to at least 40 million.

With clean technologies outpacing existing policy targets, the EU is already heading towards a renewable energy share of 45% in 2030.

This section analyses the impact of key technology trends, discussed in the previous section, on the three components which determine the EU’s overall renewable energy share: electricity, heating and transport. Two scenarios are defined from the most recent market outlooks: the Current market outlook, considered to represent a realistic 2030 outlook under current market conditions, and the Optimistic market outlook, considered to represent a potential increased 2030 outlook that can be achieved through additional policy and financial support. In both cases, all variables other than those listed in the table below are kept fixed in line with the modelled Fit-for-55 scenario (including its 2030 energy efficiency target).

The power system gets cleaner and bigger

Capacity forecasts from the solar industry reach new heights in each subsequent edition of market outlooks. When combined with the modest expectations from the wind industry, Ember calculates that renewable power generation will be 22% higher under the Current market outlook scenario than that modelled for the 40% target under the Fit-for-55 package (2502 TWh compared to 2050 TWh, respectively). This increases to 38.5% higher under the Optimistic market outlook scenario (2839 TWh).

The larger renewable supply – more than double current levels – is able to meet the increased electricity demand in 2030 and also reduce fossil generation. In the Current outlook scenario, fossil power is 25% lower than Fit-for-55 levels, decreasing between now and 2030 to a total of 441 TWh, while renewable generation reaches 72% of the electricity mix. The change is more dramatic in the Optimistic scenario where total fossil generation drops to just under 6% or 214 TWh as renewable electricity soars to 82% of the power mix.

The forecast combined growth of wind and solar under the Current outlook (1158 GW) compares similarly to that proposed in REPowerEU (1102 GW) for 2030. This increases to 1300 GW under the Optimistic scenario. But outlooks from the wind and solar industries indicate that solar will constitute a much larger share of new installations, compared to the relatively equal shares expected by REPowerEU. Renewable electricity supply in 2030, under the Current market outlook, is still similar to that of REPowerEU due to the higher solar capacity and larger proportion of offshore wind in total wind capacity, which typically has a higher capacity factor.

Boosting investments in grid infrastructure and other key enabling technologies will be essential to cost-effectively integrate the forecasted capacities and enable this rapid expansion of the wind and solar fleet. Roll-out of flexibility solutions which are able to provide flexibility at short temporal scales will be particularly important in view of the high ratio of solar capacity that can be expected.

A renewables target that supports European industry

The energy transition will require significant scale-up of clean technologies and investment in infrastructure. Recent market outlooks foresee exponential growth in these markets over the decade and beyond. The question now is how much of this value will be captured by European industry.

The global race to lead the production of clean technology, as well as supplying their raw materials base, has been unfolding over the last few years. This race appears to be intensifying, driven by heightened concerns over economic competitiveness and supply chain disruptions. Many countries are gearing up to drive investment in industry and scale up domestic manufacturing power, the US Inflation Reduction Act being a notable example of such momentous efforts.

Responding to this pressure, the European Commission presented its proposal for a Green Deal Industrial Plan for the Net Zero Age at the start of February 2023, designed to support expansion of the EU’s net zero manufacturing capacities while strengthening competitiveness. It will shape strategic investment decisions of the private sector in line with the EU’s green transition ambitions, and drive the clean energy economy forward.

In this manner, the Net Zero Industrial Plan creates an implicit link between the EU’s goals for climate action and industrial growth. The EU is already a global leader in wind and heat pump technologies, and is set to become the world’s second largest battery cell manufacturer by the end of the decade. Raising the 2030 renewables target to at least 45% is necessary to square Europe’s climate ambition with its industrial policy, and creating the conditions for European industry to deliver on the exponential demand for clean technologies.

Forecasted deployment of key clean energy technologies is outstripping expectations of the Fit-for-55 package. An EU commitment to at least 45% would unlock more opportunities for energy security, climate, consumers and industry in this new energy reality.

The political prioritisation of energy security for economic resilience and consumer protection has accelerated deployment rates of solar, heat pumps and EVs. Clean energy industry bodies now expect investments to far outpace those originally required for the Fit-for 55 40% renewables target. However, the momentum of clean technology acceleration is at risk of being derailed by a blocking minority of EU governments resisting increasing the ambition to 45%, as proposed by REPowerEU.

Emerging trends indicate that the EU stands at the precipice of an accelerated energy transition. Strengthened and coordinated action, stemming from an EU ambition aligned with market expectations, will be key to successfully unlocking this significant potential. It will enable energy system planners to prepare the infrastructure necessary to support the new energy reality expected in 2030. It will also create the conditions for European industry to better deliver and capitalise on the exponential clean technology demand, helping to safeguard EU competitiveness. Consequently, this improved 2030 outlook should not be considered an easy way out by national governments but rather an opportunity to leverage the advantages of the energy transition for consumers and economic competitiveness.

An EU commitment to 45% renewable energy share is the minimum required to align climate ambition with emerging trends in clean energy technologies. Anything less risks stymying the momentum of the energy transition in Europe.