EXECUTIVE SUMMARY
This i24c report has been developed with the aim of providing evidence-based analysis to inform the debate on what an integrated, forward-looking research, innovation and competitiveness strategy for the European Energy Union should seek to achieve and prioritise.
To do this, the report assesses Europe’s ability to deliver and succeed along the whole energy innovation cycle, from basic research to large-scale market uptake. Based on desk research, interviews, a dedicated survey and workshops with key European stakeholders and experts, including leading thinkers and players in all relevant parts of the energy industrial innovation ecosystem, the report draws on and synthesises evidence from past and present experiences of the policy framework. It assesses how well Europe has done to date in spurring and scaling energy innovation to its advantage, from an industrial economic as well as energy and climate perspective. In the context of the EU’s new climate, competitiveness and societal goals, the report draws conclusions and offers ideas for how policy can further evolve to help Europe reap further advantage from the even greater energy-related innovation challenge to come.
A significant disruption in the energy innovation ecosystem
Beginning with an overview of the new energy landscape, the report provides a synthesis of what is driving change. It describes a paradigm shift towards low-carbon and user-centric economies, driven by digital and integrated flexible solutions that serve to put end-users in the driving seat. As the strategy behind Europe’s Energy Union recognises, Europe’s entire energy system and related value chains are profoundly changing due to four fast emerging and inter-related megatrends: sustainability, digitalisation, integrated services and local-level empowerment.
As a result, we are witnessing the emergence of new technologies and services, such as energy storage, demand side management and electric vehicles, which are blurring the traditional boundaries of the energy sector. New actors, such as electricity aggregators and car-sharing platforms, are putting end-users at the centre of decision-making. We observe that even incumbent energy companies are moving from selling electrons or energy equipment to offering services that satisfy customer needs such as comfort, independence or security. The ‘pro-sumer’ is now an established feature of the energy system, and growing in importance: for instance, private citizens and farmers now own almost half of Germany’s renewable energy installed capacity, while in Denmark, private individuals own 85% of its wind turbines. Similarly, crowdsourcing and crowdfunding are enabling citizens to actively participate in financing the deployment of renewable projects and energy efficiency measures.
Energy innovation cannot be understood or fostered by a focus on a single actor. Instead, it results from contributions from a wide range of stakeholders from various horizons, be they driven and stimulated by cities and/or end-users, initiated by new players disrupting traditional value chains, emerging from traditional energy players (e.g., equipment providers, power utilities, grid operators and public research institutions), or involving financial and academic communities.
Europe therefore needs to consider energy innovation in a broad sense: in addition to the traditional energy sector and its related infrastructure, it should involve all sectors that consume, supply and balance the system: transport and mobility, industry, telecoms and new technology, buildings and agriculture. It must understand how all these blocks interact and can transition systemically to deliver simultaneously on Europe’s decarbonisation, affordability and security objectives. Innovation in this energy system is not only about new technologies. It’s also about new disruptive business models and services (such as electric car sharing, vehicle-to-grid applications, smart home technologies and energy-as-a-service platforms), societal innovation (as was enabled by the Dutch Green Deals that bring together multiple societal actors) and new policy and financial mechanisms.
EU innovation successes to date are positive but below potential
With ambitious domestic targets and the pioneering of new instruments to decarbonise its economy, Europe’s policy framework has undeniably played an important role in paving the way to a global clean energy transition. European policies have been successful in initiating energy-related innovations such as in large renewable technologies (e.g. onshore wind). At the same time, looking at carbon capture and storage (CCS) or hydrogen storage, it may have failed so far to industrialise deployment of promising innovations, where other economies and their companies have either already succeeded, or are better positioned to reap the benefits than Europe is.
With 18% of global climate change mitigation technology inventions (CCMT) and 40% of the high value ones, Europe has been a major contributor to energy-related research and innovation efforts over the last decades. Europe is also the largest investor in renewable energies R&D, accounting for $4.3 billion in 2014 (36% of the total). In this area, investments and supporting policies (such as the Danish wind power market framework, the Swedish bioenergy programmes and several other countries’ market-pull instruments) have been rewarding. Today, 1.2 million jobs are linked to renewable energy in Europe (with solid biomass amounting for 50% of the related jobs). Europe’s renewable energy capacity has doubled in the last 15 years, to 472 GW (26% of the world’s total), making it the world’s biggest renewable energy market. And European companies are global leaders – for example, of the top five wind turbine manufacturers, three are European.
General assessment of Europe leadership on selected energy-related innovation areas, based on its ability to innovate and create value and competitiveness
General assessment of Europe leadership on selected energy-related innovation areas, based on its ability to innovate and create value and competitiveness
A deep dive into a selection of 11 energy-related innovations[1] and expert interviews highlight that, in several energy-related areas, Europe has a deployment deficit, and it struggles to bring to market promising innovations (see Figure, General Assessment). For example, market penetration of low-carbon technologies, such as electric vehicles, remains slow in Europe (accounting for less than 1.4% of new car sales in most EU countries). Europe has seen many cities and districts taking the lead on developing low-carbon or energy efficient solutions, but their replicability remains a challenge. Amidst the innovation cycle, Europe struggles to industrialise promising energy-related demonstration projects. Some innovation areas are caught in the so-called ‘valley of death’ in Europe, while large-scale deployment is more advanced in other geographies (e.g. power storage).
In targeting and facilitating innovation support, we identify successes where the entire ecosystem of actors is brought together ‘on the ground’ – such as is the case for smart districts, which are systemic by nature and link buildings, energy, ICT and transport.
However, our analysis reveals that, without a comprehensive and operational strategy for research, innovation and competitiveness, bringing together supply, demand and regulatory aspects, the EU risks losing its comparative advantage to Asian and American competitors. This is true in both Europe’s supply of innovation, and in the deployment taking place in Europe. This is already the case with some specific technologies such as solar photovoltaics (PV). In 2013 alone, the EU-28 lost 50,000 jobs in renewable energy, mainly in solar PV. The EU faces similar risks in other areas such as in battery storage and in electric, hybrid and hydrogen mobility. The forthcoming European Research, Innovation and Competitiveness Integrated Strategy (EURICS) is an important milestone to redefine Europe’s competitiveness and innovation strategy, and to align all the pieces of the puzzle.
There is no room for complacency and much room for improvement, in particular to reap the benefit from investments made early in the innovation cycle (i.e. research and innovation). But Europe’s starting position is a relatively strong one. It has structural strengths that it can build upon, including the size of the European market, the recognised skills of its workforce, and the quality of its research institutes. For instance, Europe holds nine out of the Reuters’ Top 25 Global Innovators ranking of publicly funded research institutes in advanced science and technology. Beyond these research institutes, emerging energy-related innovation is strongly driven by start-ups, large industrials and European-funded programmes.
Guiding principles to efficiently scale up innovation in the Energy union
Scoping the future in the light of the past, the report identifies policy options and key choices available to policy-makers to help the EU scale its energy innovations, reaping the resulting social and economic benefits, as well as achieving the core Energy Union objectives in relation to security, affordability and decarbonisation. Five guiding principles, ten key success factors and a range of concrete ideas are set out that should be at the core of this new approach, and give coherence and strength to an important new strategy for both the Energy Union and also Europe’s wider growth, jobs and competitiveness agenda.
Key findings and suggestions along the innovation cycle
First: Provide clarity on the long-term direction. Europe has an energy vision, embodied by the Energy Union strategy and built into the European Commission’s 2050 energy Roadmaps, which provide a long-term European energy transition project and defines where the energy system, in its broadest sense, should move. It now needs to deliver and implement this vision. Europe needs to ensure consistency with the visions that are emerging at the national, regional and local levels, and develop an accompanying economic vision of success and a clear and powerful energy industrial strategy to reap the benefits.
Second: Design the market to better pull energy innovations across the ‘valley of death’ and to scale. Two major levers can be used to increase the attractiveness of low-carbon solutions: (i) revealing and valuing their full benefits (such as for energy storage), and (ii) reducing the level of risk faced when investing in these solutions. Market design and public authorities play a key role in setting the right market conditions to bridge the demonstration phase and foster a mass-market deployment, as well in opening these markets to new entrants. Predictable market-pull instruments (such as feed-in premiums, certificates, bonus-malus schemes or public procurement) must also be available for energy-related innovations, to create investor confidence and help move them from the demonstration to the deployment phase.
Third: Accelerate the empowerment of local and regional authorities. Encouraging differentiated collaboration between, and assistance for, innovative districts, cities, rural areas and regions will scale the deployment of energy efficient and low-carbon technologies and services, and in particular more systemic transitions that link buildings, energy, ICT and transport. A segmentation could be developed according to robust criteria, which could include: the type of energy-related innovation they are seeking to deploy (e.g., electric mobility, smart grids, etc.); their level of maturity when it comes to the penetration of renewables in their energy system; or the type of challenge they are meeting when seeking to push the energy transition further (e.g., citizen engagement). Further clustering opens the door to the exchange of best practice, pooling of investments, the better assessment of the ‘bankability of projects’, and the development of financing strategies (e.g. business cases, use of public procurement, of loans, etc.). In addition, to scale the wide-spread deployment of smart district (or smart cities) initiatives, more effort will have to be made to help identify, measure, access and share the “right” data, such as traffics flows and energy demand, while simultaneously ensuring data security and privacy guarantees.
Fourth: Empower customers and citizens yet further. Empowering consumers with the establishment of a regulatory framework will drive demand-response and energy efficiency services. Citizen engagement in the energy transition is key to create desire and buy-in for change. Local leaders or organisations are the closest to consumers, and have a clear role in communicating and working with citizens. For instance in France, Paris has chosen to make citizen participation a top priority of its Smart City project. One of the most notable examples is the introduction of a participatory budget, corresponding to 5% of the overall investment budget (i.e., €0.5 billion over 2014-2020).
Last but not least: Be more results-oriented and selective in nurturing energy innovation. Finite budgets need to be allocated to different technologies and solutions. In Europe, public funding is particularly important, all along the energy innovation cycle, but especially at the early stage. In that sense, Europe could be inspired by the ARPA-E approach in the United States – its motto, “if it works, will it matter?” implies that, from the beginning of the process, the final impact on energy use, and the adoption of the technology, is at the heart of funding decisions. In Europe, incubators such as KIC InnoEnergy have started to adopt this perspective, with a strong focus on the business plan of candidates. However, an end-to-end approach throughout the innovation cycle still seems to be missing, especially when it comes to connecting technology and non-technological energy innovation, or encouraging cross-sectoral innovation. But evaluation of the efficiency of investments in energy-related research and innovation will not be sufficient if it does not lead to concrete actions. An evaluation process that requires an assessment of remaining gaps or inconsistencies, e.g., a lack of supportive policy/political environment, other market factors or developments not previously anticipated, can help achieve this. Establishing so-called policy patch initiatives could help policy-makers detect specific barriers or anticipate market rules adaptations.
Conclusion
In reviewing progress to date, and drawing lessons for policy-makers, this report confirms the need for an integrated approach to the research, innovation and competitiveness agenda of the Energy Union. In listening to the full spectrum of relevant stakeholders, and learning from failures as well as successes, it offers a realistic but positive assessment of the current situation. It confirms the opportunity that this agenda presents for the EU to demonstrate that leadership on climate change can not only be successfully married to the achievement of its energy security, affordability and environmental sustainability goals, but should also be at the centre of its industrial economic strategy. With the right innovation-enabling policy framework and strong related signals to investors, the Energy Union can ensure that the EU is the world leader in renewables, achieving one of Commission President Juncker’s specific goals. In the context of a fast-changing and competitive global environment, it can also deliver strongly on the wider jobs, growth and competitiveness agenda that is at the top of his Commission’s overall priorities. We hope the principles, success factors and concrete ideas for action are a helpful contribution to making the European Commission’s future strategy on EURICS a powerful one.
[1] These include: wind onshore, solar PV, biomass, carbon capture and storage, hydrogen storage, hydrogen mobility, electro-chemical and mechanical power storage, electric vehicles, smart distribution grids, smart districts and energy efficient buildings