EU unveils electrification plan for security and competitiveness

The EU has unveiled the Electrification Action Plan, aimed at speeding up the electrification of the European economy and slashing fossil fuel use and imports.

The highly anticipated draft plan calls for 46 percent of European energy to come from electrified technologies by 2040. That would be twice as high as the current share of 23 percent, a rate that has remained stagnant for roughly a decade.

To hit that target, Europe will need to rapidly shift buildings to electric heat pumps, and road fleets will need to quickly shift to electric vehicles. Heavy industry will also need to increasingly shift to electric alternatives.

If successful, the EU could avoid paying up to 260 billion euros per year in oil and gas imports by 2040. As it stands, more than 90 percent of Europe’s oil comes from outside the EU, along with 80 percent of its gas.

“The best way to reduce Europe’s fossil energy dependency is to power our economy with electricity from clean, homegrown sources,” Ursula von der Leyen, President of the European Commission, said on July 17th. “Today we are proposing to make Europe the world’s first electro-powered continent.”

The Electrification Action Plan (EAP) lays out a plan consisting of incentives and binding requirements to accelerate the shift to cleaner technologies.

Fossil fuel dependence has proved costly. Between 2021 and 2024 the EU spent an estimated 1.8 trillion euros on imported oil, gas, and coal.

The disruption in the Strait of Hormuz, sparking the largest oil and gas supply outage in history, has piled on enormous costs to the import bills of European Member States. Since the beginning of the war, the EU has spent an additional 50 billion euros on imported fossil fuels due to higher prices.

“This is not the first fossil fuel crisis, and it will not be the last. The lesson is becoming increasingly clear: dependence on imported fuels is a strategic vulnerability,” José Manuel Entrecanales, Chairman and CEO, ACCIONA

Driving down the cost of electricity

Success will depend on Europe’s ability to continue to scale up renewable energy while bringing down the cost of electricity. Affordable and accessible electricity will make it possible for a massive shift away from gas boilers, gasoline and diesel-burning vehicles, and industrial applications using fossil fuels.

“Electrification of heat in buildings and industry are two of the most strategic sectors, accounting for two thirds of Europe’s gas consumption,” said Louise Sunderland, the Europe programme director at the Regulatory Assistance Project. “In both sectors the heat pump will be a dominant technology, deserving and requiring end to end focus from European manufacturing capacity to targeted affordability offers.”

One of the key pillars of the Electrification Action Plan is to bring down taxation on electricity. Renewable energy is already the cheapest way to generate electricity, but end users in Europe have costly electricity bills in part due to high taxation. The new proposal calls for Member States to dramatically lower taxes to ensure that electricity is not taxed more than gas.

Other measures include the widespread deployment of smart meters, special tariff regimes for energy-intensive industries and tweaks to tariffs to reward flexible electricity consumption. For public buildings and transportation fleets, the European Commission will require heat pumps and electric vehicles.

The EU has moved too slowly to electrify its economy in recent years, now suffering through the second global fossil fuel crisis in four years, said Fatih Birol, the head of the International Energy Agency.

“This is in my view a major mistake for Europe,” Birol recently told the FT. “In general, I would have hoped and expected that Europe would have been more responsive to this crisis.” The unimpressive 23 percent electrification rate in Europe is similar to that of major oil producers, such as the United States.

“The stagnation is not an abstract statistic. It is the reason Europe keeps getting caught out by fossil fuel price shocks,” Jan Rosenow, a professor of energy and climate policy at the University of Oxford, wrote in an analysis.

The document also pledges to go after fossil fuel subsidies, which also prevents progress on the energy transition. In 2024, the EU spent 94 billion euros on fossil fuel subsidies.

Speeding up electrification is framed as delivering multiple wins at once. “A quicker electrification of the European economy is the route to higher competitiveness, security of supply, and lower energy prices,” the draft says.

The crisis in the Strait of Hormuz has increased the urgency and ambition of the electrification plan.

“The EU going all in on electrification is not a gamble. It is the only sensible and rational choice given the current geopolitical turmoil and economic risks posed by volatile fossil fuel prices,” said Romain Pardo, senior programme manager for Corporate Leaders Groups, a business-led coalition committed to moving towards net-zero emissions, convened by the University of Cambridge’s Institute for Sustainability Leadership.

“Businesses are confident that accelerating electrification rates will decrease their vulnerability and strengthen their competitive edge,” Pardo said.

But many provisions will require additional legislative work later this year. As it stands, the EAP is an ambitious document, but solidifying it into law is key.

“The Energy Union package in the fourth quarter is the moment of truth,” Rosenow said. “That is when the impact assessment lands and we learn whether 46% hardens into law or stays a number in a communication.”