What are the problem drivers?

2.2.1. Insufficiently ambitious targets and measures for renewables deployment in EU and Member State legislation both in 2030 and 2050 perspective

2.2.1.1. Insufficient ambition to achieve the overall renewable energy target in 2030 As indicated in the latest Renewable Energy Progress Report²⁰, if Member States meet the national contributions for renewable energy they have set in their NECPs, the Union is expected to reach a share of renewables between 33.1% and 33.7% by 2030²¹ that would contribute to -41% GHG emission reduction thereby overachieving the current 32% RES target set in REDII while being significantly lower than the necessary 38% to 40% share set out in the CTP to be consistent with the overall EU target of at least 55% GHG reduction by 2030.

Apart from these identified shortcomings regarding the EU overall renewable energy target, an assessment per sector also reveals that REDII’s ambition and measures are not sufficient to deliver the EGD and CTP ambition. Market barriers and lack of incentives, particularly in end-use sectors such as heating and cooling or transport, hinder further penetration of renewables, either through electrification, or via the penetration of renewable and low-carbon fuels such as advanced biofuels and renewable and other sustainable alternative fuels and gases. Further cross –border cooperation and integrated approach to develop and deploy further renewable technologies like offshore renewable energy and in industry is still missing. Enhanced and expanded measures, including

20 COM(2020) 952 final

21 COM(2020) 564 final

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flanking and enabling measures, under RED II could deliver a larger uptake of renewable energy in the EU.

2.2.1.2. Insufficient ambition for renewables deployment in the heating and cooling sector

Heating and cooling currently accounts for half of the EU energy consumption. 60% of heating is consumed in buildings and around 40% in industrial process heating. More than three quarters of heating is supplied from fossils fuels. 80% of energy demand in residential buildings is driven by heating and cooling needs, and around 60% in service sector buildings. Many heating systems are old and inefficient and half are beyond their service lifetime. The replacement of half of the current heating stock and even more in district heating networks will have to occur in the next 5-8 years. A clear and ambitious policy framework is essential to ensure that investments for building renovation are cost-efficient and facilitate replacing fossil fuel boilers with more sustainable alternatives.

The share of renewables in this sector in the EU in 2019 was 22.1%, with only a 5.3 percentage point increase over the last 10 years²². In district heating the share of renewables is slightly higher around 28.9% but is mainly attributable to the use of biomass (26.9%), while other renewable heat technologies (heat pumps, solar and geothermal) amounting to only 2% are used only in a few innovative networks. In industry, only 9% of the heating requirements are supplied by renewable energy. In their NECPs, around half of the Member States did not present sufficient trajectories and measures to fulfil the current indicative heating and cooling target of an 1.1 percentage point (ppt) average annual increase (or 1.3 ppt if waste heat is used) over the 2021-2030 period, while the other half indicated the achievement of this target in their plans ²³. Likewise the gradual modernisation and building of renewable based district heating and cooling systems remained unaddressed by but a handful of Member States, even where this type of heating has a significant share. Overall the insufficiency of ambition in planned measures and trajectories signals a significant risk of long-term carbon lock-in, which will be difficult and expensive to correct if steps are not taken in the period until 2030. According to the aggregated projected trend in the NECPs, is only enough to reach a 33%

RES share in H&C in 2030, in contrast with the 38-41%estimated necessary in the CTP.

Without a clear policy framework to roll-out renewable heating technologies in buildings and district heating as the main pillar of decarbonisation, replacement of heating systems will be sporadic and in many cases be based on uninformed decisions taken under duress in winter break-downs leading to replacing current fossil systems with the same and leading to fossil lock-in for the next 20-30 years.

The synergies with energy efficiency and especially with building renovations are important to harness, as well insulated buildings are a pre-condition to replace old heating systems in buildings with efficient renewable heating or make connection with low-temperature modern district heating networks possible. As almost 75% of the existing buildings in the EU inefficient, they become a key barriers for deploying renewables to cover building’s heating needs. Addressing this barrier, requires a framework amenable to increase the annual heating system replacement rate to at least 4% per annum as indicated in the Climate Target Plan as an integral part of building renovation. The EU Renovation Wave therefore sets heating and cooling decarbonisation as one of its key areas for

22 EU 27 RES share in heating and cooling was at 16.79 % in 2009.

23 Assessment of the heating and cooling related chapters of the National Energy and Climate Plans (NECPs), Toleikyte, A., Carlsson, J., JRC Technical Report, 2020.

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actions and calls for strengthened heating and cooling targets and minimum levels of renewables to be part of the REDII review. The accelerated deployment of renewable heating and district heating via strengthened measures to facilitate heat planning and planned replacement schemes, ensure risk mitigation and capacity building for consumers and public authorities is critical to scale up projects and investment and ensure level playing field for an orderly and cost-effective decarbonisation of heating.

Effective market and regulatory frameworks to guide the transition to the 2030 critical milestones and towards carbon-neutrality in 2050 are missing in all but a few Member States. With the possible extension of carbon pricing instruments, non-market barriers such as lack of sufficient capacity for heat and project planning, lack of information and coordination, lack of skills to enable the switching to renewables that still exist would need to be overcome for carbon price signals to fully exercise their impacts while allowing for a fair, effective and cost-efficient achievement of the climate goals, consistent with the energy and climate policy architecture as a whole. In this regard, multi-level coordination across the many actors (local, national and EU) is needed and the key building blocks for success (clear targets and horizontal measures supporting their delivery) are developed but not sufficiently understood, diffused and applied across the EU. The lack of clear and effective EU framework jeopardises progress due to the large size of the sector and the high correlation it has with the overall RES shares.

2.2.1.3. Insufficient ambition for renewables deployment in transport sector

Transport is the only energy sector that has seen an increase in GHG emissions in the past decades, increasing mobility needs as well has a high reliance on fossil fuels²⁴ being the main drivers. This is happening despite the technological developments in the sector, where transport means (cars, planes) are much more energy efficient than some years ago. Furthermore, transport is the end-use sector where renewable energy is being developed at the slowest pace, with an EU 8.9% share of renewables in 2019.

REDII replaced the 10% target set in REDI for 2020 by an obligation on fuel suppliers, which must be designed in a way that allows the Member States to achieve their target of 14% renewables and a sub-target of 3.5% advanced biofuels by 2030²⁵. The achievement of the target is facilitated by several multipliers on energy content both for transport sectors and for specific fuels²⁶. In addition to technical standards of fuels traded on the EU market, the FQD sets out a 6% target for the reduction of the greenhouse gas intensity of transport fuels by 2020, but does not set out a dedicated target for the promotion of innovative fuels. Following the recast of the RED, the sustainability framework in the FQD is now outdated. For these reasons it is relevant to assess whether elements of the FQD are still appropriate to avoid them acting as a barrier to the achievement of the revised ambition level of the RED.

There are two main technology options to reduce this dependency on fossil fuels and decrease the sector’s GHG emissions: Firstly, penetration of transport electrification and its deep, smart

24 The transport sector depends to 94 % on fossil fuels

25 Including multipliers

26 While renewable fuels consumed in the aviation and maritime sector are counted towards the numerator of the formula (with a weighting of 1.2) that is applied to determine the share of renewable energy in transport, the consumption of kerosene and heavy fuel oil is not considered in the denominator, which reduces the ambition level of the target.

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integration with the energy system for enhanced system flexibility and increased use of renewable electricity; secondly, in sectors that are more difficult to electrify such as aviation and maritime, increased use of renewable and low carbon fuels.

As to electricity in transport, in addition to missing price signals, barriers for electrification and its integration in the energy system are mainly the narrow range of electric vehicle models across all budgets, and insufficient recharging infrastructure, especially with intelligent or bidirectional functionality. The conditions for innovative mobility services such as aggregators are not yet in place, including access to data of vehicles, electricity grid and charging. Different charging infrastructure types and payment models also complicate the access for consumers to the infrastructure. Neither consumers, charge point operators, aggregators nor mobility service providers have access to information on the RES share or carbon intensity of the system in an interoperable manner. Further, REDII, apart from counting the contribution of renewable electricity towards the renewable energy target in transport, does not set out any mechanism ensuring that operators of recharging infrastructure are rewarded for supplying renewable electricity to electric vehicles under the obligation on fuel suppliers. This fails incentivising investments into recharging infrastructure and limits the contribution of renewable electricity contribution to the target.

The main market barrier for the use of renewable and low carbon fuels are the higher costs of such fuels compared to fossil fuels. Higher costs and low technological and commercial maturity limit the supply potential of innovative renewable fuels such as advanced biofuels and renewable fuels of non-biological origin (RNFBOs), mainly renewable hydrogen and renewable hydrogen-based synthetic fuels, which have decarbonisation potential despite their intrinsic energy inefficiency. REDII already limits the amount of biofuels produced from food and feed crops that can be counted towards the renewables targets due to their impact on indirect land use change and limited decarbonisation contribution.

The 2030 CTP Impact Assessment²⁷ shows that with existing policies the transport sector would fall short in delivering the contribution needed to achieve the economy-wide target of at least 55% GHG emissions reduction by 2030 and climate neutrality by 2050. The results also show that after 2030 a further significant scale up of the production of renewable and low carbon fuels is required on the pathway to achieve climate neutrality. With respect to the level of ambition, the CTP indicates that for 2030 the share of RES in transport should reach 27-29%²⁸ including a substantial contribution of advanced biofuels, which is significantly higher than the current 14% target set in REDII for transport. That assessment further demonstrated the importance of RNFBOs for the achievement climate neutrality in order to provide a decarbonisation pathway for hard to abate sectors. While REDII covers these fuels and sets out a framework ensuring that they achieve emission savings, it does not include specific incentives for their use. Given their early stage of technological development and high costs, a lack of dedicated incentives may slow down their commercial deployment, which would endanger the rapid uptake of renewable and low carbon fuels that is required after 2030. A possible extension of carbon pricing instruments alone would not be sufficient to drive the development of such fuels, and would create the risk to sustain less sustainable low

27 Impact Assessment accompanying the Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions ‘Stepping up Europe’s 2030 climate ambition -Investing in a climate-neutral future for the benefit of our people’, SWD(2020) 176 final.

28 Including multipliers as per current methodology

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carbon and biofuels. Other instruments that are relevant for the promotion of low carbon technologies such as the ETS are more suitable to promoting the switch to mature low carbon technologies but cannot provide by themselves the strong investment signal needed to develop new innovative technologies. Such investment signals could also keep increasing costs for consumers by carbon taxes and ETS in check.

2.2.2. Insufficient promotion of ESI in REDII²⁹

The current model, where energy supply and consumption for supply for electricity, heating and cooling, transport, industry, gas and buildings takes place in ‘silos', each with separate value chains, rules, infrastructure, planning and operations - cannot deliver the increased climate targets in 2030 and climate neutrality by 2050 in a cost-efficient way. The lack of integration of the energy system results in greater costs, inefficiencies, lost opportunities and a disproportionate burden on the power sector, which cannot alone deliver the overall decarbonisation effort required at EU level.In the end, it would lead to higher costs to households and businesses.

Several barriers, not appropriately addressed in REDII, still prevent the emergence of a truly integrated energy system, in particular (i) the slow rate of electrification of certain end-use sectors, (ii) the slow uptake of renewable sources in heating and low penetration of renewable and low-carbon fuels, such as biofuels, biogas, hydrogen and synthetic fuels, in particular in certain transport applications and in industry, as well as (iii) a still limited contribution to new distributed loads (electric vehicles, heat pumps) to the system integration of variable renewable electricity.

Smart and renewable use of power is crucial for heating and cooling systems, as well as electric vehicles, to live up to the European Green Deal objectives aiming to a reduction of 90% of the transport sector’s GHG emissions by 2050. The fast uptake of electric vehicles (EVs) is expected to follow exponential tendencies, with an estimate of more than 30 million electric cars by 2030³⁰. The potential of EVs to absorb further renewable electricity and decrease system GHG emissions has to be well appreciated and fully utilised through appropriate measures, as stipulated in the Energy System Integration Strategy.

REDII provides only limited incentives for the electrification of end-use sectors. There are no specific provisions encouraging the electrification of heating and cooling, apart from the general, indicative heating and cooling target and the equally indicative and optional district heating and cooling target (the denominator of which can be reduced through electrification). The transport obligation is also rather designed to incentivise the uptake of specific fuels, in particular advanced biofuels, with electricity only incentivised through the use of a “multiplier”.

REDII does not yet include specific provisions aimed at ensuring that distributed assets such as home batteries and electric vehicles contribute to the system integration of variable renewable electricity.

The Clean Energy package has brought about a significant redesign of electricity markets to ensure

29 The increase of RES in the EU has greatly contributed to increased security of supply by replacing imported fossil fuels from third countries. This process will continue including with the electrification of transport. However, it will present its own challenges in terms of resilience of critical infrastructure, hybrid threats and cybersecurity, and the resilience of RES supply chains. This aspect has not been addressed in detail in this Impact Assessment. DG ENER has launched a study on “Resilience of the critical supply chains for energy security and clean energy transition during and after the COVID-19 crisis” which is ongoing

30 COM (2020) 789 Sustainable and Smart Mobility Strategy – putting European transport on track for the future

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that all forms of flexibility are in principle able to participate in electricity markets, however regulatory gaps still exist on the specific conditions necessary to ensure a level playing field in the participation of such small or mobile distributed assets in practice, both individually as well as through aggregation. The AFID and EPBD also regulate the deployment of EV charging points, however through fragmented scopes of application. Provisions are missing to ensure coverage at all types of locations (publicly accessible, private for own use, and private with broad access), as well as to ensure that the deployed charging points are indeed fit for system integration purposes by offering smart charging or even vehicle-to-grid functionalities. Specific measures are also necessary to ensure that integration can be supported by a competitive and innovative services market through a level playing and enhanced consumer choice.

Regarding certification systems, REDII does enable the tracing of renewable transport fuels and some low carbon transport fuels. However, this system does not allow a sufficiently clear distinction between renewable and low-carbon fuels (including hydrogen) on the one hand and more polluting energy sources on the other hand, and does not allow tracing in the transport/transmission system from production facilities to consumption centres. Moreover, the two parallel systems for tracking the consumption of renewable energy under REDII (‘book & claim’ system based on guarantees of origin and a certification system based on mass balance) do not sufficiently promote further the integration of the energy system.

2.2.3. Insufficient sustainability criteria safeguards for bioenergy

Today bioenergy represents the largest single source of renewable energy in the EU, making up about 60% of final renewable energy consumption, of which 60% comes from forestry³¹.

In order to further inform the review of REDII, the Biodiversity Strategy has mandated the JRC to conduct a study on the use of woody biomass for energy and its potential climate and environmental impacts³². While bioenergy production can have positive climate and biodiversity impacts³³, JRC has identified a number of potential bioenergy pathways that should be avoided for biodiversity and climate protection.For example, an excessive removal of harvest residues, or the removal of stumps, for bioenergy use can harm soil productivity, biodiversity, and water flows. In addition, the conversion of primary and highly biodiverse forests to plantations, aiming to provide wood for material and energy use, can be extremely negative for local biodiversity and climate mitigation in the short-medium term and lead to irreversible damage.

The JRC study has found that a robust and effective implementation of the REDII sustainability criteria for forest biomass could effectively minimise/avoid several of the identified risks. However, the study has concluded that additional safeguards are needed to address the existing policy gaps in the context of future biomass demand increases. More specifically, JRC has recommended the following two key measures: a) applying the existing no-go areas for agricultural biomass also to

31 Navigant 2020, ‘Technical assistance in realisation of the 5th report on progress of EI renewable energy’.

32 The use of woody biomass for energy production in the EU, EUR 30548 EN, Publications Office of the European Union, Luxembourg, 2020

33 Impact assessment to the Climate Target Plan (SWD/2020/176 final)

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forest biomass, in order to avoid the risk of biomass sourcing from primary and highly biodiverse forests: b) applying the EU sustainability criteria to smaller installations (below the current threshold of 20 MW) in order to regulate a larger share of biomass use, thus avoiding possible ‘environmental leakage’ risks.

According to JRC data, the majority of woody biomass for energy use comes from timber residues and waste produced either from the forest-based industries and post-consumer wood (49%), or from timber logging (17%). At the same time, 20% of total woody biomass supply comes from stemwood, of which at least half is from coppice forests. About 4% of total woody biomass use for energy comes from industrial quality stemwood. This finding highlights the need for Member States to further promote the cascading use of woody biomass when designing their support schemes for bioenergy. In this respect, the Biodiversity Strategy has also called for the use of whole tree harvesting for energy production – whether produced in the EU or imported – to be minimised³⁴. Inefficient biomass combustion is also a source of air pollution³⁵. According to the World Health Organisation, residential heating with solid fuels (coal or wood) is an important source of particulate matters and carcinogenic compounds, especially in Central Europe. In particular, biomass combustion in old and inefficient households and other small installations could compromise local and regional air quality objectives. While REDII does not include specific air quality criteria for biomass combustion, it should be noted that air pollution of fuels is effectively addressed through EU environmental legislation including a number of different measures³⁶. Under the energy legislation, the Eco-design Directive has been identified as the most appropriate tool to set stricter emission requirements for new solid fuel boilers and space heaters, which are applicable since 1 January 2020.