As the world grapples with the dual crises of climate change and energy security, the European Union (EU) finds itself at a crossroads. The EU has long been a global leader in renewable energy policy and now faces a future fraught with fresh challenges: Energy prices have been caught between by geopolitical tensions and the COVID-19 pandemic, prompting a rethink of how the EU supports renewable energy projects. The question is no longer just about how to support the transition to green energy, but offer finance without undermining national sovereignty, distorting energy markets, or passing excessive costs onto consumers.
The Past: A Patchwork of Policies
The EU’s journey toward renewable energy began in earnest in the early 2000s, when renewable energy technologies were still in their infancy. Back then, wind and solar power were expensive and not yet competitive with fossil fuels.
To kickstart the transition, EU member states implemented a variety of support schemes, ranging from feed-in tariffs to renewable energy quotas. These policies were largely designed at the national level, leading to a patchwork of approaches across the EU.
One strong example is Germany with its pioneering feed-in tariff system, which guaranteed fixed prices for renewable energy producers. This model was so successful that it was eventually adopted by other member states. However, without harmonisation (arguably against the purpose of the EU). The different support schemes led to regulatory competition, with some countries offering more attractive terms to investors, while others struggled to keep up. This fragmented approach not only increased transaction costs for cross-border investments but also hindered the development of a truly integrated internal energy market; overall, an inefficient energy network.
The Present: A Crisis of Confidence
Fast forward to the early 2020s, and the landscape has changed dramatically. Renewable energy technologies have matured, and the cost of wind and solar power has plummeted. In some cases, renewable energy projects no longer require subsidies to be profitable. The energy price crisis of 2021-2022, driven by a surge in demand post-COVID and the Russian invasion of Ukraine, further complicated matters. Renewable energy projects, which typically have low marginal costs, reaped windfall profits as electricity prices soared.
This newfound profitability has led some to question whether renewable energy still needs financial support. Critics argue that subsidies distort energy markets and create inefficiencies. The need for support has not disappeared, as highlighted in a recent paper from Hasselt University [50.9°N, 5.34°E]. Renewable energy projects remain capital-intensive, and the intermittent nature of wind and solar power creates uncertainty for investors. Moreover, the EU has set ambitious targets for renewable energy, aiming for at least 42.5% of its energy mix to come from renewables by 2030. Achieving these targets will require significant investment, and support schemes will play a crucial role in attracting private capital.
The Future: Toward a More Harmonised Approach?
The EU is now faced with the challenge of balancing national sovereignty with the need for a more harmonised approach to renewable energy support.
Article 194 of the Treaty on the Functioning of the European Union (TFEU) provides the legal basis for EU energy policy, but it also includes a caveat that preserves member states’ rights to determine their energy mix and the conditions for exploiting their energy resources. This has led to a delicate balancing act, with the EU seeking to promote renewable energy while respecting national sovereignty.
Recent legislative initiatives, such as the Renewable Energy Directive (2018/2001) and the Clean Energy Package, require support schemes to be harmonised, cost-effective, transparent, and market-based. For example, the directive requires member states to use competitive bidding for renewable energy projects and to design support schemes that integrated into the market well. However, member states still retain significant discretion in how they design and implement these schemes.
The EU’s approach has evolved from promoting specific technologies to focusing on market-based mechanisms. This shift reflects a broader trend in energy policy, where the emphasis is on creating a level playing field for all energy sources.
The introduction of two-way contracts for difference (CfDs) in the 2024 legislative reform is a case in point. These contracts provide a minimum level of remuneration for renewable energy producers while also capping their profits in times of high energy prices. This ensures a fair allocation of risk and benefit between producers and consumers, while also providing long-term stability for investors.
The Political Hurdles: Subsidiarity and Proportionality
Despite the progress made, political hurdles remain. The principles of subsidiarity and proportionality, enshrined in the EU treaties, require that the EU only act when its objectives cannot be sufficiently achieved by member states. This has led to a cautious approach to harmonisation, with the EU focusing on minimum standards rather than full harmonisation. Member states have traditionally resisted efforts to harmonise support schemes deliberately, fearing a loss of control over their energy policies.
The political dissent was evident in the late 1990s and early 2000s, when the Commission’s proposal for a harmonised system of renewable energy quotas was met with strong opposition from member states that had already implemented direct price support schemes. Today, while most member states have converged on direct price support, the debate over harmonisation continues. The challenge for the EU is to demonstrate the added value of further harmonisation, while also addressing the concerns of member states.
Conclusion: A Path Forward
The EU’s renewable energy policy is at a critical juncture. The energy price crisis has highlighted the need for a more stable and predictable regulatory framework, while the climate emergency demands urgent action. The EU has the legal competence to intervene in the field of renewable energy support, but the exercise of this competence is subject to political and legal constraints.
Moving forward, the EU must strike a delicate balance between promoting renewable energy and respecting national sovereignty. This will require a nuanced approach that takes into account the diverse energy landscapes of member states, while also ensuring that support schemes are cost-effective and market-based. The introduction of two-way CfDs and the emphasis on competitive bidding are steps in the right direction, but more needs to be done to ensure a truly integrated internal energy market.
As the EU continues to push its path to sustainability, the lessons of the past must guide its future actions. The journey will not be easy, but with this experience, plus the right mix of policy innovation, political will, and market-based mechanisms, the EU is well-positioned to lead the way to a more sustainable future.
Source
The Role and Competence of the EU in the Area of Supportive Financing Policies for Renewable Energy Projects, European Papers, Vol. 9, 2024, No 3, pp. 1268-1295, 2025-02-20
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