Draghi Report on the future of European competitiveness – implications for the energy sector

On 9 September 2024 the long-awaited report on “The future of European competitiveness: A competitiveness strategy for Europe” was published. The scope of the report is comprehensive and, unsurprisingly, it focuses on the EU energy sector, analysing major issues and specific proposals.

Given Draghi’s prestige in the EU cycles and the highly sophisticated analysis contained in the report, we expect the report will set the tone in relation to future EU policy and regulation in the short-, medium-, and long-run. The report draws from and offers insights and suggestions in relation to the entire energy spectrum from different perspectives, including economics, technology, trade, finance, regulation, and policy.

In this article we summarise the report and its likely impact from a business perspective.

The report identifies the EU’s lack of competitiveness of energy price levels as a key factor contributing to EU’s competitiveness gap. As highlighted by Draghi himself during the presentation of the report to the Plenary session of the European Parliament in Strasburg on 17 September 2024: “We have the highest energy prices: EU companies face electricity prices that are 2-3 times higher than those in the US and in China.” At the same time, “gas retail and wholesale prices are currently between three to five times the prices in the US.”¹

From a competitiveness perspective (or the lack thereof), the report identifies eight energy-related root causes:

1. The EU’s dependency on gas imports and exposure to spot markets.
2. The disproportionate impact of gas and coal on electricity prices.
3. The lack of adequate long-term contract solutions (eg Power Purchase Agreements (PPAs)) which may also support renewable electricity procurement.
4. Comparatively higher carbon costs.
5. High volatility and lack of transparency in energy-related financial markets.
6. Increase of physical networks bottlenecks during the energy transition.
7. Lengthy and uncertain permitting process for new power supply projects and grids.
8. Heterogeneous taxation and subsidisation.

In light of these, the report contains four horizontal proposals and two sets of nine specific proposals for natural gas and electricity.

The horizontal proposals are high level, proclamatory and concern:

• the need to create lower and level-playing field taxation with the view of reducing energy costs;
• harmonisation of price relief to avoid distortions in the Single Market;
• fostering innovation; and
• developing a governance framework for a true Energy Union.

Regarding natural gas (which has recently become a topical issue), the report contains nine proposals. The report suggests:

1. establishing a reliable and diversified network of trade partners, reinforcing long-term contracts; 
2. moving away from spot-linked sourcing;
3. reinforcing joint procurement and providing a government-supported hedging mechanism;
4. further developing strategic infrastructure and coordination of storage management;
5. improving the quality of data and forecasts;
6. further regulating financial markets for energy;
7. decarbonisation through clean hydrogen and green gases;
8. ensuring the gas price is determined on a cost-effective basis; and
9. supporting industries which are more exposed to international competition by promoting retail price transparency.           

Regarding electricity, the report suggests:

• simplifying and streamlining permitting and administrative processes in relation to Renewable Energy Sources (RES), flexibility infrastructure and grids deployment;
• strategic coordination for network updates;
• decoupling the remuneration of RES and nuclear energy from fossil-fuel generation through long-term contracts;
• supporting PPAs for industrial users;
• encouraging industries to reply on self-generation and storage of energy when their consumption exceeds grid connection capacity;
• reinforcing system integration and storage among RES, flexibility, battery, hydrogen, and other energy sources;
• facilitating industries exposed to international competition to access competitive EU energy sources;
• maintaining nuclear supply and accelerating the developments of “new-nuclear”; and
• promoting carbon capture, utilisation and storage (CCUS) technologies.

It’s clear from the report that a conscious effort has been made to identify and address all the major energy-related challenges at EU level. Inevitably, some of the proposals are more controversial than others and require more time, resources and regulatory changes to be implemented. Evidently, the common aspiration underlying the proposals is a path towards integration, harmonization and centralization of the EU Energy market – what Draghi calls “a true Energy Union.” The devil is in the detail so when, in which order of priority, and how exactly some (or all) of these suggestions will be implemented is likely to affect any European or international energy market actor (irrespective of its nature and size).

The EU has just started a new five-year institutional cycle. In the months and years to come, it will be interesting to see how different proposals of the Draghi report both in the energy and other sectors could be reconciled with existing policies and regulations. The (sometimes) different interests of member states and EU institutions could also be involved.

It’s worth highlighting that the mission letters sent to the Commissioners-designate by Ursula von der Leyen, the President of the European Commission, on 17 September all contain references to the Draghi report. This is another indication of the importance the new Commission will place on this holistic piece of work.

Against this background, we will continue monitoring energy-related policy, legislative, administrative and judicial developments at the EU law and publish our latest findings.

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¹Report, p 5.