Europe needs investments – what is the EU's new energy and climate agenda?

The European Union has a challenging starting point for the next five years. Although the energy crisis has largely been overcome, geopolitical uncertainty continues and strong investments in military and civilian security are necessary. The political situation in many Member States is unstable, including Germany and France.

Clean investment is a driving force for growth and there is a desire to increase it. However, large investments require huge capital and stability of the operating environment. The question is where should we put the focus on: well-functioning markets or subsidies and detailed regulation.

Competitiveness, industry, investments

Ursula von der Leyen is building her second Commission in a completely different situation from the first one five years ago. The European elections saw the shift of climate focus to industrial and competitiveness themes, including the idea of a more autonomous and crisis-resilient Europe.

The change reflects already in the terminology: Green Deal has changed to Industrial Clean Deal. There will be a Competitiveness Fund in the Union and many people want joint debt. The principles of state aid have been relaxed and large aid schemes are in use to stimulate investment.

Three heavy series reports: Letta, Draghi and Niinistö

Enrico Letta's spring report on internal markets drew attention, among other things, to the shortcomings and development needs of the common energy markets (electricity, gas, hydrogen). Another major theme was the facilitation of capital movements essential for large investments in Europe.

Mario Draghi's competitiveness report presented a gloomy and perceived picture of Europe's competitiveness. On the other hand, there is disagreement on how to improve the situation. One weakness of the report is that it presents the situation in Europe as a monolithic and does not make comparisons between Member States. For example, energy is, on average, expensive in the EU, but there are wide differences between countries. In the Nordics, electricity is very cheap and attracts investment. The report also contains a striking view of Europe's investment deficit of EUR 800 billion per year, at least half of which relates to the energy sector.

Sauli Niinistö's report on crisis preparedness is expected soon, covering both civilian and military sectors. As NATO is primarily responsible for the military defence of Europe, the promotion of security of supply and preparedness through joint actions could be seen as a natural role and priority for the EU.

Starting points for the work of the new Commission

Energy security will remain a topical theme in the coming winter. Although gas stocks are almost full, the end of Russian pipeline gas imports at the turn of the year will require action in central Europe. The sanctions are gradually tightened for Russian liquefied natural gas (LNG). At the same time, Ukraine is given comprehensive assistance to protect and repair its energy infrastructure.

Key issues in climate policy include the emission reduction target for 2040 and the instruments used to implement it. It appears that the target is a 90% reduction in emissions from 1990 level. It is also essential for Member States and sectors how obligations are set between both emission sectors and Member States. For example, EU emissions trading schemes will certainly be developed in the coming years – but the overall picture has not yet been defined.

Energy policy emphasises not only industry and competitiveness but also technology neutrality, which means, for example, recognising the role of nuclear energy as a zero-emission energy source. Another aim is to moderate energy prices at least through a common market and networks. The obligations for renewable energy and energy efficiency seem to be revised as necessary.

Topics that are more recent include electrification, integration of energy systems, as well as digitalisation and artificial intelligence. Expanding use of AI is a high-energy-consuming issue, but also as enhancing functions. It has already accelerated the construction of data centres for us in Finland.

In many respects, however, it is unclear how these themes will proceed. It seems right now that, focus will be first placed on the implementation of existing legislation, not on the adoption of new legislation.

Finland wants clarity and predictability

For Finland, first of all, extensive streamlining of regulation is desirable: less, better and more predictable legislation. This is very important for the investments. The general “architecture” of climate policy must be clear and based on the cost-effectiveness of climate action. There should be clear market-based incentives not only for reducing emissions but also for carbon sequestration. The utilisation of biogenic carbon dioxide is particularly in the interest of Finland and Sweden.

The electricity market rules must also be assessed in the light of the rapidly changing operating environment. Finland is a pioneer in many respects, including the high share of clean electricity. However, it also means that the price of on average cheap electricity varies considerably. The electricity market rules should therefore provide strong incentives for building many kinds of flexibilities and energy storage facilities.

Markets or regulation?

The EU's great strength - not always recognised - lies in a well-functioning internal market and a coherent competition and state aid policy. Fair European markets also prepare companies for global competition. Instead, generous aid policy often leads to inefficient use of resources and, at worst, passes on companies to monitor the conditions of aid rather than the requirements of the market. National and EU aid should be used primarily to promoting innovation, not to artificially reinforcing competitiveness. Growing protectionism is a bad solution for countries living from international trade, as Finland is.

Regulation is a good servant, but a bad master. Good regulation promotes well-functioning markets and the introduction of new, clean solutions on market terms. Poor regulation creates artificial obligations, detailed controls and inefficiencies. Europe must do better.

Riku Huttunen is the Director General of the Energy Department of the Ministry of Economic Affairs and Employment