EU Strategy on Energy System Integration 1)

that this could be included in the EU Energy Efficiency Directive amendment. The introduction of the energy efficiency first principle, which sets out the minimum energy standard for all existing buildings in Europe, was also implied (KEEI, 2020b).

In October 2020, EC announced EU strategy on methane emission reduction and the strategy for the chemical sector that presents sustainability. After that, the EC offered the strategy to expand the maritime RE for EU carbon neutrality in November 2020. In December 2020, EC released the sustainable smart transportation strategy for decarbonizing the transportation sector and an amendment to the battery directive to enhance the sustainability of batteries.

Among the detailed implementation strategies announced after EU Green Deal, this report will focus on EU strategy on energy system integration and the Renovation Wave.

Figure 2-2. EU Vision of Energy System Integration

Source: EC (2020c)

The integrated energy system envisioned by EU strategy has three characteristics: ① Efficient and cyclical energy systems that capture and reuse waste energy; ② Extensive electrification of consumption sectors (industry, heating, transportation, etc.) based on clean power generation systems; and ③ Clean fuel supply to sectors that are difficult to electrify, such as heavy industry and transport (EC, 2020c).

EU strategy suggests six action plans to build an integrated energy system: ① Building a circular energy system that follows the Energy Efficiency First Principle; ② Accelerating electrification of energy demand sector based on renewable energy generation; ③ Disseminating renewable low-carbon fuels, including hydrogen, to sectors where decarbonization is difficult; ④ Establishing an energy market suitable for decarbonization and distributed resources; ⑤ Integrating energy infrastructures; and ⑥ Establishing energy system digitalization and

innovation framework (EC, 2020b). In this section, we look at the details of each action plan.

Table 2-2. Six Action Plans in EU Strategy on Energy System Integration

Source: Created by the authors referring to EC (2020b)

2.1. Building a Cyclical Energy System Centered on Energy Efficiency First Principle

Improving energy efficiency reduces investment and other costs related to energy production, infrastructure construction, and energy consumption. EC has decided to apply the energy efficiency first principle to all policies as a core principle of system integration. EC also believes that enhancing the circulation of available resources and carrying out energy transition with more efficient technologies could help improve energy efficiency in the EU through system integration (EC, 2020b).

The EC suggested the need for guidance and other policy establishments to apply the energy efficiency first principle practically.

In particular, when consumers try to reduce energy consumption, switch to other energy sources, or share energy, EC ensures that the process

No. Highlights

1 Building a cyclical energy system that follows the energy efficiency first principle

2 Accelerating electrification of energy demand based on RE generation 3 Dissemination of renewable low-carbon fuels, including hydrogen, to sectors

where decarbonization is difficult

4 Building an energy market suitable for decarbonization and distributed resources

5 Energy infrastructure integration

6 Building energy system digitalization and innovation framework

adequately reflects the life-cycle energy inputs and carbon footprints of various energy carriers (EC, 2020b).

EC observed that local energy resources are used insufficiently or inefficiently in buildings and communities. The potential amount of waste heat/waste energy in the industrial sector and data centers is sufficient to enable recycling. However, most of these potentials are not yet utilized. Therefore, EC believes that a more cyclical energy system should be built by promoting the reuse of waste heat and energy. To this end, the EC revised the Renewable Energy Directive and the Energy Efficiency Directive to strengthen the connection between the waste heat generated from industrial sites and data centers and the district heating network. In addition, EC plans to promote waste heat recycling by strengthening the energy performance accounting and contract framework for using such waste heat in energy-saving projects (EC, 2020b).

The EC expects biogas produced from wastewater, bio waste, and residues will play an essential role in establishing a circular energy system. Direct use of biogas at the point of generation can reduce fossil fuel consumption. When biogas is used in the transportation sector, it can be injected into natural gas pipelines by upgrading biogas to biomethane. Some farm infrastructure is suitable for integrating PV-based power and heat production. Therefore, such infrastructure has the potential to not only use renewable energy for self-consumption but also inject it into the power grid. The EC will incentivize users to utilize biowaste and residues from the agriculture, food, and forestry sectors. In addition, the EC plans to strengthen its capacity to form rural circular energy communities through new communal agricultural policies, rescue funds, and LIFE programs.

2.2. Acceleration of Electrification in the Energy Demand Sector based on RE Power Generation

EC prepared the LEDS to be submitted to the UNFCCC and analyzed the path to achieving carbon neutrality in 2050 and low-carbon strategies across society and the economy. From the results, EC predicted that, through the implementation of carbon neutrality in 2050, the share of electricity in final energy consumption will increase to 30%

in 2030 and 50% in .2050 (EC, 2020b). Most of this increasing power demand must be met by RE. The share of renewables in the power mix will double by 2030 (55 to 60%) and account for around 84% by 2050 (EC, 2020b).

EC plans to use onshore renewable energy generation (PV, onshore wind, etc.) as well as offshore renewables to meet the growing electricity demand. EC expects to reuse the infrastructure of depleted natural gas fields through offshore renewable energy generation and install electrolyzers for hydrogen production in coastal areas adjacent to offshore power plants. In addition, EC plans to review the green public procurement (GPP)2 setting by amending the Renewable Energy Directive (EC, 2020b).

To support RE dissemination in the short term, EC will also use the Next Generation EU²⁾,³⁾ and evaluate the feasibility of financing through a new EU renewable energy financing mechanism (EC, 2020b).

EC expects that electrification by expanding the supply of heat pumps for heating and cooling will play a leading role in the decarbonization of

2) Green public procurement refers to purchasing environmentally friendly products and services from public institutions. The green public procurement policy is a recommendation. Accordingly, member countries and purchasing authorities may determine how to implement the policy or set its scope. EU proposes green standards for 20 products and services in the ‘Green Public Procurement Criteria [Shin, 2018; requoted from S.H. Kim and C.H. Kim, 2020 (p.46)]

3) Next Generation EU refers to a 750 billion euro stimulus package to support economic recovery after COVID-19 (EC, 2020f).

the building sector. EC estimates that the share of electricity in the residential sector's heating demand will increase to 40% by 2030 and 50-70% by 2050. The commercial sector's electricity percentage is expected to be around 65% by 2030 and 80% by 2050 (EC, 2018). EC points out that relatively high taxes and levies on electricity and low taxes on fossil fuels used in the heating sector (oil, gas, and coal) prevent fair competition between energy sources. EC identified this problem as the biggest obstacle to electrification in the building sector.

It plans to promote the electrification of the building sector through heat pumps, the supply of RE facilities in buildings such as Building-integrated photovoltaics (BIPV), and the dissemination of EV charging stations through the Building Renovation Wave (EC, 2020b).

In EU, the industrial sector consumes 60% of energy for heat production (EC, 2020b). EC believes that disseminating industrial heat pumps will promote decarbonization of low-temperature heat supply and waste heat recovery. On the other hand, EC understands that high-temperature heat production through electricity and the electrification of the process are in the development stage, and the lack of information on the currently available technology and the high cost are acting as obstacles to its diffusion. Accordingly, EC plans to preferentially support pilot projects for the electrification of low-temperature processes in the industrial sector through Horizon Europe⁴⁾ and the Innovation Fund⁵⁾.

EC understands that EVs will play the most crucial role in decarbonizing the transport sector and reducing pollutants. EC predicts that EVs will be able to compete with internal combustion vehicles from

4) Horizon Europ is a major funding program for research and innovation to respond to climate change, achieve the UN Sustainable Development Goals, and promote EU competitiveness and growth (EC, 2021a).

5) The Innovation Fund is a low-carbon technology and process innovation support program operated under EU ETS. The fund aims to demonstrate innovative technologies and make a breakthrough in industrial innovation. The main scope of support includes carbon capture and utilization (CCU), carbon capture and storage (CCS), RE supply, and energy storage technology (Son and Kim, 2020).

around 2025 due to a sharp drop in EV prices. EC has established a transition path from 2025 to achieve GHG-free transport. EC plans to amend the CO2 emission regulations for passenger cars and vans to comply with this. At the same time, it plans to support the installation of 1 million EV charging stations by 2025 (EC, 2020b).

The growing use of electricity in the end-demand sector means that the adequacy⁶⁾ of renewable energy-based electricity supply to meet electricity demand in buildings, industry, and transport must be monitored (EC, 2020b). In other words, electrification in the demand sector will increase the difficulty in power system management as the proportion of renewable energy increases. In addition, regional and cross-border coordination among member countries in electricity supply and demand will become increasingly important. To address these issues, EC plans to introduce Regional Coordination Centers in 2022 (EC, 2020b).

On the other hand, the complete electrification of the transport sector requires strengthening the region's power system infrastructure. EVs and EV charging stations can be utilized for storage and flexibility in the power grid. Management of system congestion and expansion of system capacity is likely to lead to expensive investments. Smart charging and Vehicle-to-Grid (V2G) are essential to lowering this investment burden.

The EC proposed to develop Network Code on Demand Side Flexibility.

This code allows EVs, EV charging stations, and other energy systems (including heat pumps, etc.) to contribute to the flexibility of power grid operation, maximizing the utility of power consumption (EC, 2020b).

6) Adequacy of a power supply refers to always matching the power system's generation with its load (Marta et al., 2016).

2.3. Renewable, Low-carbon Fuel Delivery for Difficult-to-Decarbonize Sectors

Many industrial processes, aviation, and shipping sectors make it impossible or more expensive to electrify energy demand or use renewable heat. For these sectors, the EC will promote the dissemination of renewable or low-carbon fuels such as sustainable biogas, biomethane, biofuels, renewable low-carbon hydrogen,7〉 and synthetic fuels (EC, 2020b).

EC believes that biofuels will play an essential role in transport sectors where decarbonization is difficult, such as aviation and shipping, and biogas will contribute to the decarbonization of gas supply. The Renewable Energy Directive has introduced targets for using advanced biofuels and biogas in the transport sector. The Fuel Quality Directive⁷⁾ also sets a GHG emission target to promote the supply of biofuels (EC, 2020b).

Hydrogen currently accounts for less than 2% of energy consumption in EU. However, EC expects that hydrogen will play an essential role in areas where decarbonization is difficult in the future. In particular, hydrogen can be used as a fuel in heavy-duty road transport such as bus and freight transport, rail transport that does not use electricity, shipping, and inland water transport. In addition, hydrogen can be used as a fuel or raw material in processes in the oil refining and chemical industries. Hydrogen can also be converted to synthetic fuels such as synthetic kerosene by reacting with CO2 (EC, 2020b).

Hydrogen produced from renewable power (green hydrogen) plays a significant role in integrated energy systems. Green hydrogen can store

7) Renewable hydrogen is obtained from an electrolyzer that splits water into hydrogen and oxygen by using renewable electricity. Low-carbon hydrogen refers to hydrogen produced from electrolysis on a fossil fuel basis in combination with a carbon capture process. This process dramatically reduces full life-cycle GHG emissions (EC, 2020g).

energy when the electricity supply is surplus. This function relieves the load on the system. Green hydrogen thus enables integrated energy systems to incorporate more variable REs (EC, 2020b).

The EU intends to establish a minimum share or quota of renewable low-carbon fuels (biofuels, biogas, hydrogen, etc.) in specific consumption sectors to promote the dissemination of renewable low-carbon fuels (EC, 2020b). In addition, to be clearly distinguished from other energy sources, the EU plans to comprehensively organize terms for all renewable low-carbon fuels, including hydrogen, and develop a European certification system based on full-cycle greenhouse gas emissions (EC, 2020b).

Financial support will also be provided for carbon-neutral integrated industrial complexes where the production and consumption of renewable, low-carbon fuels will take place. Support for fertilizer production using green hydrogen will also be promoted (EC, 2020b).

Even in a fully integrated energy system, it is impossible to reduce CO2

emissions in all sectors of the economy ultimately. Therefore, Carbon Capture and Storage (CCS) will likely play a significant role in climate-neutral energy systems. In particular, CCS can solve the problem of specific industrial processes that are difficult to reduce emissions. On the other hand, directly capturing and storing CO2 from biomass or the atmosphere is considered a net reduction (or negative emissions). In this case, CCS can offset residual emissions from other sectors (EC, 2020b).⁸⁾

An alternative to the permanent storage of captured CO2 is to combine the captured CO2 with renewable hydrogen to produce syngas, synthetic fuels, feedstocks, etc. [carbon capture and use (CCU)]. Currently, synthetic fuel production is inefficient because it requires a lot of energy

8) CCS captures and stores CO2 emitted from fossil fuels or industrial processes. Therefore, this method generally has the same amount of emission and capture, and neither emission nor absorption occurs throughout the system. However, biomass or the direct capture of CO2 from the atmosphere does not premise existing C〇2 emissions, resulting in a net reduction of the system.

and the production cost is high. However, supporting these conversion technologies is essential because they can provide a fuel alternative to fossil fuels under challenging sectors to decarbonize (because they have to rely on high-density liquid energy sources), such as the aviation sector. The EU plans to conduct a demonstration project and scale up the production of synthetic fuels using captured carbon (EC, 2020b).

GHG emissions from synthetic fuels are calculated differently depending on the source of the captured CO2 (fossil fuel, biomass, or air capture) and the production process. The production of synthetic fuels that are completely carbon-neutral requires the capture of C〇2 from biomass or the atmosphere. To accurately reflect the actual carbon footprint of synthetic fuels, it is crucial to monitor, report properly, and estimate the emissions and removals of CO2 associated with synthetic fuel production. EC plans to establish a robust carbon removal certification mechanism to enable tracking of emissions, capture, use, and potential re-emissions of C02 throughout the economy. EC expects that this certification system will provide institutional incentives for forming the synthetic fuel market (EC, 2020b).

2.4. Establishment of Energy Markets Suitable for Decarbonization and Distributed Resources

An efficient market for integrated energy systems should encourage consumers to choose the most efficient and affordable decarbonization option through prices that adequately reflect all energy carrier costs (EC, 2020b).

EC has noted that taxes and levies, including carbon prices, are not applied equally between energy carriers or consumption sectors. EC understood that such a situation would lead to distortions in using certain energy carriers. In many EU member countries, the size of the

tax or levies charged on electricity bills and its share in the price is more significant than for other energy sources (coal, gas, heating oil, etc.). For example, the levy on electricity to finance the RE generation support scheme has continued to increase. As a result, the share of energy-related costs in the final electricity price gradually decreases.

This trend exacerbates the asymmetry of specific energy costs between electricity and gas (EC, 2020b).

Accordingly, the EC plans to publish guidance that will enable the member countries to address the high taxes and levies imposed on electricity and set a consistent basis for the non-energy portion of the rates of all energy carriers (EC, 2020b).

However, the tax should be levied only when energy is used for final consumption. Storage of electricity, use of stored electricity, electricity used for hydrogen production, and use of electrolyzed hydrogen should be carefully considered to avoid double taxation or grid usage charges.

To this end, the EC plans to revise the Energy Taxation Directive to ensure consistency with the EU's environmental and climate policies. In particular, the EC will take measures to avoid the possibility of double taxation on stored electricity and electricity used for hydrogen production (EC, 2020b).

Currently, EU shows different patterns in the degree of internalization of carbon costs between energy-consuming sectors and member countries. In road transport, shipping, and heating sectors, carbon costs are either not internalized or only partially internalized. Even in sectors included in EU ETS, specific sectors, such as aviation, do not internalize carbon prices sufficiently to induce decarbonization. In addition, EU still maintains subsidies for fossil fuels (EC, 2020b). To solve these problems, EC will propose a plan to expand EU ETS to new sectors. EU will also seek to phase out direct subsidies for fossil fuels (EC, 2020b).

With the Clean Energy Package⁹⁾ proposed by EC in 2016, EC has already laid the groundwork for integrating large-scale variable power in the electricity market and the flexibility of demand response and energy storage (EC, 2020b).

According to EC (2018), achieving 2050 carbon neutrality will lead to a sharp decline in natural gas consumption in EU. Figure 2-3 shows gas fuel consumption in different scenarios for 80% and 100% reduction of greenhouse gas emissions in 2050. Among these scenarios, the 1.5TECH and 1.5LIFE scenarios are suitable for carbon neutrality in 2050.

According to these scenarios, the share of natural gas in gas fuel consumption in 2050 will be reduced to 20%, and the remaining 80% will be covered by RE-based gas fuels (biogas, biomethane, hydrogen, or synthetic fuels). EC will therefore review the regulatory framework for gas markets to promote the use of renewable gas fuels (EC, 2020b).

9) The Clean Energy Package is an energy policy package that aims to transit toward clean energy. It consists of eight bills on building energy performance, renewable energy, energy efficiency, governance, and power market design. This package was first proposed in 2016 and finalized in 2019 (Florence School of Regulation，2020).

Figure 2-3. Gas Fuel Consumption by Scenario

Note: 1) Only 1.5TECH and 1.5LIFE are 2050 carbon neutral scenarios.

2) ‘Carbon-free’ gases refer to e-gas, biogas and waste-gas.

Source: EC (2018), p.85

2.5. Energy Infrastructure Integration

Energy system integration implies more physical connections between energy carriers. Therefore, large-scale and regional infrastructure planning requires a new and holistic approach. Infrastructure planning aims to prevent both the fixation effect by refusing to change and focusing only on the maintenance of the existing infrastructure and the stranded assetization of the existing infrastructure. At the same time, the plan involves making the most of the existing infrastructure.

Infrastructure planning should promote the consolidation of the various energy carriers. In addition, the plan should make an appropriate choice between developing new infrastructures and repurposing existing infrastructures. It should also consider alternatives to demand-side flexible resources (EVs, EV charging stations, heat pumps, etc.) and network-based options such as energy storage (EC, 2020b).