for 45 percent of EU supply by 2030 and the electrification of energy demand meets 2030 targets—it could reduce average EU energy costs by about 10 percent (compared with 2019) by 2030. This reduction could be achieved through a combination of lower energy consumption and the substitution of lower-cost clean energy for carbon- intensive energy (Exhibit 6). This cost decrease could have two main drivers. First, final energy consumption could fall by 10 to 15 percent through the electrification of final consumption and through energy efficiency (including energy management, HVAC improvements, insulation, and smart lighting, among other things). A fully electric household, 26 for example, consumes around one-third as much energy as an average one. Second, the unit cost of supplying power can be reduced as renewable- energy support programs expire and the levelized cost of electricity (LCOE) of newly installed renewable energy lowers the average cost of generation. These decreases will probably more than offset the increasing costs of flexibility and of transmission and distribution. Potential challenge However, the current energy crisis in Europe presents it with the acute and immediate problem of affordability. This challenge is a major concern to households and businesses across the European Union, prompting government action in many countries. More may be needed in the future. Key priorities To achieve the necessary reductions, the barriers to the widespread adoption of downstream technologies and energy efficiency measures will have to be overcome. Two of the most challenging obstacles could be high up-front investment costs and the need for subsidies to make technologies such as EVs and heat pumps cost competitive. On average, sustainable cars and heating systems are 7 percent more expensive than conventional ones.
for where to build additional supply or localize demand could enhance efficiency.
3. Developing financial incentives to minimize energy shortages. Long-duration gas storage enables seasonal balancing across the EU energy system. To secure an adequate supply of energy—especially during the winter months, when demand peaks—mechanisms and policies could be developed to minimize shortages. One possibility would be to offer market participants a financial incentive to fill storage. Given more easily contracted offtake, these requirements could support long-term arrangements for additional sources of gas. 4. Creating compensation mechanisms to reconfigure (rather than strand) assets. Fossil fuel–fired power plants do not always recover their costs, since their operational expenses are higher than those of renewables. Under the current market design, the early retirement of these assets is sometimes more economically viable than continuing to operate them. To ensure that energy supply resilience options exist, capacity markets could be implemented to compensate assets that can reduce volatility of supply by making systems more stable. The gas plants in the European Union could, for example, be gradually transitioned to low- utilization assets that provide power during multiday periods of low renewables production. Instead of classifying such low-utilization assets as stranded, decision makers could designate those with good operational records as sources of surplus capacity, helping to mitigate the system’s volatility and provide reliable supply. Action area 5: Ensuring the affordability of clean technologies to foster their adoption and accelerate the energy transition If the energy transition is carried out in a more orderly manner—that is, if renewables account
26 That is, a family with electric space and water heating (heat pumps), cooking (induction/electric ovens), and transport (electric vehicles).
Accelerating the journey to net zero
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