Good afternoon from Oslo, Norway! I am here to co-moderate the Oslo Energy Forum.
Anca has an extremely helpful explainer on Europe’s efforts to shore up its industrial base and a photo from Thailand that looks like a lemonade stand—except for gasoline.
The European Union wants to get its industrial groove back.
The world’s largest trading bloc is scrambling to take part in the global cleantech race. The problem is European innovation and green manufacturing have been trailing behind for years, despite the EU’s otherwise ambitious climate agenda.
By passing the Inflation Reduction Act last summer, the United States suddenly has the tools to rapidly develop clean energy industries in North America. The law caught the 27-member bloc off guard and revealed one of its major weaknesses: a convoluted, bureaucratic and fractured system without a coherent industrial strategy.
“The EU industry is notoriously slow to take up new technologies and innovations,” said Zach Meyers, a senior research fellow specializing in competition policy at the Center for European Reform, a European think tank.
Let’s break down how we got here and where Europe wants to go.
In general, European governments and industries have seen innovation as incremental, looking at how to improve current processes rather than developing new ones, Meyers said. Businesses have also been more focused on securing funds from banks than from other funders, like bigger investment firms, leading to a focus on short-term profitability over long-term planning.
Contrast that attitude with the U.S., Meyers said, “which is a lot more about creative destruction,” with investors willing to support original ideas, take more risks and wait longer for profits.
Europe’s spending on industrial research and development has been trending down, from around 25% of the global total in 2013-2014 to under 19% in 2019-2020, according to the European Roundtable for Industry, a Brussels-based research and advocacy organization with members representing about 60 of Europe’s largest companies. U.S. spending hovered between 35 and 40% during the same period, according to the same analysis.
When it comes to green technologies, Europe has already lost out once to increasing competition from other regions.
Case in point: China dominates the solar photovoltaic sector and the electric vehicle battery supply chain.
EU companies pioneered solar manufacturing and spent billions on subsidies to scale up the technology in the 1990s. China stepped up quickly in the 2000s with massive state subsidies to build its own solar industry—soon outperforming any competition.
Europe was too slow to respond, Lars Nitter Havro, senior analyst at Oslo-based business intelligence group Rystad Energy, told Cipher. (The U.S. was too, but that’s another story.)
“It was like a rug pull,” he said. “China can act very fast, and they did.”
Today, China hosts 90% of the production capacity for six key parts of the PV and battery storage value chain, according to a recent BloombergNEF report.
The chart below is from a separate but related BloombergNEF report on the same topic.
Source:BloombergNEF• Other parts of Asia includes Southeast and East Asia, excluding China. Data captures investments in factories that manufacture components and systems for lithium-ion batteries and solar PV. Factories producing wind blades and related components are not included. Figures represent capital spent on building the factories only and excludes expenses required to produce clean energy equipment.
The EU’s complicated funding regimes— although generous, like the EU’s €38 billion Innovation Fund—have confused and dissuaded clean energy industries from doing business in Europe for years. By comparison, the tax credits in the U.S. law are simpler and more attractive, Meyers said.
“In Europe, you have to hire a group of people to help you figure out where you can get the funding, because it’s dispersed through so many funds and you don’t know if you meet all criteria and how long it will take,” Meyers said.
The EU is trying to turn all of this around through its Green Deal Industrial Plan, which the European Commission, the EU’s executive arm, unveiled earlier this month.
The plan repackages several existing climate and energy initiatives and promises more legislation to enable faster permitting and easier financing to accelerate cleantech deployment.
The vision is to boost Europe’s competitiveness in the net-zero industry by simplifying red tape, making it easier for companies to access tax breaks, training workers on relevant skills and building new supply chains for raw materials through open trade agreements with resource-rich countries.
If done right, this may be enough “to turn the tide,” Nitter Havro wrote in a recent analysis.
While the IRA identified key technologies to scale up, such as renewable hydrogen and batteries, the Commission’s plan is vague and touts technologic neutrality, said Julia Poliscanova, senior director for vehicles and e-mobility at the Brussels-based nonprofit Transport and Environment.
“If we don’t focus on two, three things we want to compete on, we will have already lost,” she said.
Poliscanova said adding fresh money to the pot is also important: “We are not saying we should put the same amount of money as the U.S. We already spend money on renewables, batteries—we just need to fill the gap.”
That’s where things get tricky.
EU leaders gave a general thumbs up to the Commission’s vision during a summit in Brussels last week, agreeing to “simpler, faster and more predictable” subsidy rules for cleantech, but also emphasizing those rules need to be "targeted, temporary and proportionate.”
The language reflects the wider tussle in recent weeks among EU capitals, with smaller members worrying softer state aid rules would give an unfair advantage to wealthier members with more money to throw at energy manufacturers, fragmenting the EU market.
In the coming months, the Commission will propose specific legislation to identify which cleantech sectors to prioritize, clarify funding options and lay out plans to build new trade partnerships around key minerals for cleantech manufacturing. The EU is also planning to launch an auction mechanism to fund renewable hydrogen production in the fall.
“It’s never been clearer that EU countries need to act decisively,” Nitter Havro said, and “if the EU can try to move in unison … then it absolutely has a chance to retain its competitiveness.”
What’s important, Meyers said, is for Europe to think long-term as it reenvisions its industrial future.
“Europe is surprisingly good at responding to crises,” he said, pointing to how the bloc handled the energy security crisis sparked by Russia’s invasion of Ukraine. “But what Europe has trouble focusing on is long-term competitiveness because it’s death by a thousand cuts and not a problem that needs to be addressed tomorrow.”
Lunchtime Reads and Hot Takes
Why oil majors are cutting back on renewables — E&E News (paywall) and Financial Times (paywall) Amy’s take: As much as some people may criticize big oil companies for pivoting to more profitable products, that’s the kind of behavior our current economic system compels.
Exxon Walking Away From Algae Biofuel Projects in Climate Retreat — Bloomberg Amy’s take: Failures, retreats and other pivots are just as important to share as successes.
EU energy: strict rules on green hydrogen hurt nascent industry —Financial Times (paywall) Anca’s take: Industry has been waiting on these rules for almost two years, so at least now there’s clarity. They are also mega technical (a Brussels-style compromise) and certainly not everyone will be happy. We’ve written about this issue before. Up next: how the EU will define “low-carbon hydrogen.”
Carbon removal project planned for Kevin McCarthy’s district —E&E News (paywall) Amy’s take: Interesting that the oil company has committed to not doing an enhanced oil recovery (EOR) with the carbon. It’s also interesting that Climeworks is involved, as the co-founder told me they weren’t going to work with oil companies (the EOR concession likely had an impact).
Europe's spend on energy crisis nears 800 billion euros —Reuters Anca’s take: Wow, that’s more than the bloc’s COVID-19 recovery fund. The EU’s wallet is getting thinner as it debates how to throw in more cash so as not to miss out on the global cleantech race.
In Australia’s Outback, a controversial cash crop is booming: Carbon —The Washington Post Amy’s take: As a cattle rancher’s daughter, I find this fascinating!
Palm oil is actually not that bad (anymore) — Vox Amy’s take: An important and positive story that shows how change can occur in an industry.
The untimely death of America’s ‘most equitable’ EV rebate — E&E News (paywall) Amy’s take: Cause of death: Bureaucracy and bipartisan bickering.
Countries warn EU against 'crisis mode' overhaul of energy market — Reuters Anca’s take: This battle has been brewing in the Brussels bubble for a while—and is set to heat up in coming months. In fact, expect this fight to take years because so much is at stake.
Amazon fuel cells would use natural gas to power Oregon data centers, increasing carbon footprint — The Oregonian Amy’s take: Expect this type of pressure to increase on tech giants.
How to green cities — without the backlash — POLITICO Anca’s take: Change is always hard and people are bound to resist it. I like that this article also tries to outline how that resistance can turnaround.
Can an economic giant clean up natural gas — and then swap in hydrogen? — Canary Media Amy’s take: Cool long read (a bit too long, if I’m being completely honest) with color from an important LNG consumer.
More of what we're reading:
Tesla to Open Up a Portion of Its Charging Network to All EVs — Bloomberg
UAE’s COP28 leader: ‘Fight climate change, not each other’ — AP News
EU to ban fossil fuel cars, slash truck and bus emissions — France24
Oil and gas industry earned $4 trillion last year, says IEA chief — Reuters
Wind Turbine Giant Says It Has a Solution That Will Keep Blades Out of Landfills — Bloomberg
Europe’s Oil Giants Slow Green Goals and Act More Like Exxon — Bloomberg
AND FINALLY...
Gasoline stand
Anca snapped this photo earlier this year in Thailand, on the island of Koh Lanta. A woman is fueling up Anca's scooter, which is the preferred means of transportation for both locals and tourists. One bottle of gasoline is worth 40 baht, which is about $1.18.
Each week, we feature a photo that is somehow related to energy, the thing we all need but don’t notice until it’s expensive or gone. Email your ideas and photos to news@ciphernews.com.
Editor’s note: In addition to supporting Cipher, Breakthrough Energy also supports and partners with a range of entities working to tackle climate change, including nonprofits, corporations, startups and research firms. For more information on Cipher’s editorial policy, click here.
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