Key Contacts: Niall Donnelly – Partner |
The Clean Industrial Deal, announced by the EC on 26 February 2025, is a strategic package aimed at boosting the competitiveness of European industries in tandem with the Union’s energy transition goals. In its recent Competitiveness Compass, the EC identified high energy costs as one of the main reasons for the declining global competitiveness of many European industries. The IEA Electricity Report, released in February 2025, pointed out that while European electricity prices have reduced since record highs in 2022, they were still, on average, double those in the United States and 50% higher than in China.
The Affordable Energy Action Plan (“Plan”) is a key part of the Clean Industrial Deal. By implementing a variety of short term measures and structural reforms, the Plan aims to bring EU energy costs more in line with global competitive levels whilst enhancing decarbonisation and energy security. Time is of the essence and most of the measures need to be implemented in 2025.
The goals and issues that the measures seek to address are not necessarily new to the European energy market, including Ireland. However, the Plan serves as a signal to double down on measures to accelerate the energy transition. In this article we analyse the key measures in the Plan, including by reference to actions in progress in Ireland and further acts that could be deployed to achieve the Plan’s objectives.
High Costs and Challenges in the European Energy Market
It is important to reflect on some of the reasons why energy costs are currently high in the EU and in Ireland. The outbreak of the Ukrainian war in 2022 and the resultant restriction of Russian gas imports resulted in a significant increase in European energy prices. Despite taking actions to stabilise these all-time highs, prices have not yet returned to pre-2022 levels. This suggests structural reform is required. In Ireland, non-household electricity prices are currently the highest in the EU according to the EU statistical agency, Eurostat. The continued use of fossil fuels, supply costs, lack of full integration of the European electricity system and rising network costs and taxes have also contributed to high energy costs across the EU.
European energy costs and the deployment of renewables are intrinsically linked. The Renewable Energy Directive III (“RED III”) raised the EU’s binding target for renewable consumption across all sectors for 2030 to a minimum of 42.5%, up from the previous 32% target, with the aspiration of 45%. To achieve this target, industries that have traditionally used fossil fuels in their operations (e.g., transport and heat) will need to embrace electrification, with the electricity generated from renewable sources.
Although progress is being made, significant challenges remain in deploying renewable energy which have a knock-on effect on energy costs. These include:
- Price volatility. The variable nature of renewables contributes to volatility in electricity wholesale market prices, with gas plants often dispatched to meet peak demand. We saw wholesale prices in Northern European countries spike during several hours in the winter of 2024/2025 during periods of low renewable output. In Ireland figures from the Central Statistics Office show that wholesale electricity prices in December 2024 were 53.9% higher compared to December 2023.
- Role of gas. Although demand for natural gas has declined since 2022, moving towards 2030, it is likely to remain a transitional feature of electricity supply in Europe to compliment renewable deployment. In 2023, 44.3% of Ireland’s gross electricity supply came from natural gas. Sourcing gas in the EU has changed from predominantly Russian imports to sourcing more Liquified Natural Gas (“LNG”) on the international trading markets. Trading on these markets is usually on a shorter term basis and prices can be more volatile.
- Grid infrastructure. Significant grid infrastructure developments are required to accommodate renewable generation, balance the system and manage the phasing out of fossil capacity. The significance of grids has been recognised in the EC’s Grid Action Plan, which was launched in November 2024. The EC estimates that a €584 billion investment in grids is required by 2030. Grid investment is particularly required in Ireland where there are high levels of downward redispatch of renewable electricity (12.1% in the island of Ireland in 2024). Investment in grid infrastructure is likely to result in increasing use of system charges to finance these measures.
- Cross-border trading. The full potential of cross-border trading of electricity has yet to be fully realised. The EU power grid is increasingly congested. Grid congestion limits Member States’ progress in maximising capacities for cross-border trade, thus impeding further market integration. The cost of managing this congestion (predominantly in re-dispatching) in 2023 was EUR 4 billion. In its 2024 2024 Market Monitoring Report, ACER highlighted the urgency for Transmission System Operators (“TSOs”) to meet their obligation of making 70% of transmission capacity available for cross-border electricity trading by the end of 2025.
Despite these challenges, the cost of not fully implementing the energy Union has potentially more downsides. As noted above, the cost of managing congestion on the grid is significant and such congestion prevents consumers from accessing cheaper and cleaner renewable energy. The cost of managing grid congestion could rise to EUR 26 billion by 2030 if actions to tackle it are not adopted. There are also significant lost opportunities to reduce energy prices due to lack of developing and using sufficient cross-border capacity and insufficient flexibility. In addition, Member States will face significant fines and penalties for missing renewable energy targets. Therefore, there is an urgent need to accelerate clean energy infrastructure deployment and energy market integration to reduce energy costs.
Sounds Like A Plan
It is for these reasons that the Plan seeks to implement immediate measures to attract investment, ensure delivery of clean energy infrastructure and ultimately deliver lower energy costs. We consider the array of measures set out in the Plan, classified under the following four pillars.
Pillar 1- Lowering Energy Costs
Reducing electricity bills
The EC wishes to take actions to immediately reduce electricity bills for consumers. These measures include:
- Designing new network tariffs to incentivise flexibility by allowing system users to shift demand towards times and places where the cheapest energy sources are available. This is designed to reduce the costs of grid operations. Reflecting the benefits of flexibility through financial incentives would create an opportunity for Irish industries that can flex their demand alongside delivering other demand side services. It is important that these tariffs are clear and properly published to make it easy for consumers to avail of them.
- Lowering taxation of electricity and removal of non-energy cost component of bills by completing the Revision Energy Taxation Directive. According to Eurostat, the weight of taxes and levies as a proportion of electricity prices differs greatly between EU Member States. For example, in the first half of 2024 there were negative taxes reflecting the subsidies and allowances available in Ireland. Therefore, there may be limited room for further tax reductions in Ireland.
- Enabling consumers to switch to cheaper energy suppliers by removing switching barriers. Consumers in Ireland are increasingly switching suppliers to obtain more competitive rates. There was a 51% increase in switching electricity suppliers from July 2023 to July 2024.
Lowering energy supply costs
Lowering the supply costs associated with electricity, via market reforms, is also a key objective of the Plan. The proposed measures are in line with the electricity market design reforms introduced by the revised Internal Market in Electricity Regulation and Directive in May 2024, particularly on promoting long term contracts such as Power Purchase Agreements (“PPAs”) to reduce price exposure and improve competitiveness of EU industry.
The measures to reduce energy supply costs include:
Promoting price hedging. Stepping up efforts under the electricity market rules to decoupling retail electricity bills from high and volatile gas prices. Measures to achieve this include:
- Launching, with the European Investment Bank (“EIB”), a pilot programme to financially guarantee PPA commitments undertaken by companies for an indicative amount of EUR 500 million.
- Introducing measures, along with the EIB, to promote PPAs, including cross-border PPAs, in a technological neutral way. These measures will need to be cognisant of international sustainable reporting standards such as the Greenhouse Gas Protocol and RE 100 on matters such as deliverability and location of projects.
- Providing guidance to Member States on the design of effective contracts for difference (“CfD”), including their combination with PPAs (which is reflective of Article 19(a) of the Internal Market in Electricity Regulation). Separately, the integration of mandatory non-price criteria in State auctions for CfDs, in accordance with The Net-Zero Industry Act will require a careful balance between reducing auction bid costs whilst promoting other Union objectives such as supply chain resilience.
- Adopting new rules to support further development of the European forward markets and increased hedging opportunities.
It is welcomed that the Plan does not seek to introduce regular price caps or change the marginal pricing system. Significant reform measures such as these tend to create regulatory uncertainty and nervousness amongst the investment community.
Measures to promote the use of PPAs are welcome and should be implemented by Member States as soon as possible. It is proven that PPAs can support the development of new renewable energy projects by providing a fixed price revenue stream and provide price certainty for large consumers, including during times of high wholesale prices. Last week, we explained that PPAs in Ireland can support the twin aims of digitalisation development and decarbonisation – Ireland’s Digital Economy at a crossroads. We also analysed how corporate investment in renewable energy can positively reduce emissions – Emissionality – How Corporates Can Continue to Lead the Growth of Renewable Energy.
One of the key challenges when negotiating PPAs is the creditworthiness of the off-taker. PPAs are long-term instruments and developers and their lenders require certainty that the power price will be paid throughout the contract term. Payment defaults will have significant negative consequences on the viability of the renewable energy project. It is for these reasons that the guarantee product proposed by the Plan is welcome and may unlock a host of new consumers procuring renewable energy.
In addition to these measures, to truly unlock demand for corporate PPAs in Ireland, it is crucial that the compensation provisions for downward redispatch (particularly in respect of curtailment) under Article 13(7) of the Internal Market in Electricity Regulation are properly implemented. Otherwise developers are likely to favour the RESS route to market given the ability to claim unrealised available energy compensation for curtailment and oversupply.
- Reducing permitting times for an accelerating energy transition. Under the Plan, Member States are required to accelerate permitting procedures for grid, storage and clean energy projects. The EC calls for Member States to implement the recent adopted legislative framework under the Renewable Energy Directive III for permitting of clean energy projects. It also suggests strengthening the resources of national permitting authorities. The latter is often cited as a key practical delay for permitting in Ireland. There is an opportunity for Ireland to lead the field by designating renewable acceleration areas and grid infrastructure areas in accordance with the Renewable Energy Directive III as soon as possible and before the deadline of 21 February 2026. Designation of these areas has the potential to accelerate the deployment of renewables and accompanying grid infrastructure. The new ECP-GSS connection policy may also help to ensure Irish grid permitting timelines are consistent with Article 16 of RED III, but it is crucial that the processes for pre-engagement and the high level technical assessment are agreed.
- A European Grid Package to strengthen infrastructure and support Member States in decoupling the translation of gas into electricity prices. The European Grid Package will consist of legislative proposals and non-legislative measures to simplify the TEN-E Regulation, ensure cross-border integrated planning and delivery of projects, especially on interconnectors, streamline permitting, enhance distribution grid planning, boost digitalisation and innovation as well as increase visibility of manufacturing supply needs. The EIB will also introduce a ‘grids manufacturing package’ for the European supply chain, modelled on the Wind Package, to provide counter-guarantees to manufacturers of grid components, with an indicative amount of at least EUR 1.5 billion.
Significant grid enhancements will be required to accommodate new renewable energy generation and also to facilitate the electrification of processes by end users. Cross-border transmission investment is also crucial for optimal trading across Member States. Such trading facilities the most efficient use of assets in different jurisdictions and assist in managing grid congestions. Positive developments in Ireland include the recent commissioning of the Greenlink interconnector between Ireland and Great Britain. The Celtic Interconnector between Ireland and France is due to be operational in 2026. It is however disappointing to see that the North-South Interconnector (a crucial piece of infrastructure to reduce downward redispatch on the island of Ireland) is set to be delayed until October 2031.
- Gas market. Measures will also be taken pursuant to the Plan to ensure a well-functioning gas market, preventing price manipulation and improving regulatory oversight by aligning and strengthening MiFID/REMIT. To harness the EU’s purchasing power on international gas markets for the goal of reducing import prices, the EC proposes EU importers to join forces through mechanisms of demand aggregation and joint purchases. The negative impact of joint procurement mechanisms on impact liquidity and competition in the internal gas markets in the long term must be carefully assessed.
Ireland does not produce enough of its own gas to meet demand and therefore will continue to import gas via the interconnectors with Scotland. Ireland could consider developing an LNG terminal for the importation of gas. However, to make this competitive the tariff for such a facility would need to be more competitive than the tariff for the transport of gas between Great Britain and Ireland. There is currently political debate in Ireland about the development of a commercial or State-led LNG terminal.
- Member States will be required to increase system flexibility by deploying storage and facilitating demand response, including by removing national barriers to the roll out of smart meters and adopting new measures for demand response. Increased system flexibility combined with grid enhancements can alleviate curtailment and reduce the need for gas fired generation. In Ireland, industry has consistently highlighted the need to unlock the full potential of storage via market reforms. For example, the benefits of battery energy systems to the grid should be recognised in network tariff pricing and trading of these units should be accommodated in the wholesale and balancing markets.
In July 2024, the Irish Government released the Electricity Storage Policy Framework. The policy contained measures to stimulate the development and operation of storage systems in Ireland. Measures included the ability to fully trade in the wholesale electricity market to optimise revenue stacking and procurement of both long duration systems (500 MW) and demand flexibility solutions (500 MW) on each of the distribution and transmission systems. The Commission of Regulation of Utilities (“CRU”) also approved the Distribution System Operator’s (“DSO”) proposal to procure up to 500 MW of medium-term flexibility products with the primary objective of congestion management on the distribution network. In response to the Plan, these policy measures and proposals should be accelerated and delivered to execute on the opportunity for storage in Ireland.
- Another important tool for increasing system resilience is demand side flexibility. While storage enables supply to be transferred to periods of higher demand, demand side management allows non-critical consumption to be shifted in times of grid constraint. Just as significantly, this gives consumers much greater control over their energy consumption and costs. Under the Plan, the EC will develop guidance on promoting remuneration of flexibility in retail contracts. This builds upon the requirement in the Internal Market in Electricity Regulation for Member States to incorporate the right to enter dynamic electricity price contracts for customers with smart meters into their national legislation. Positive steps have been taken in Ireland in this respect. The CRU has already published a Dynamic Electricity Price Tariffs Decision Paper. Pursuant to this proposal, the CRU has mandated that all suppliers with over 200,000 electricity customers must offer the option of a dynamic electricity tariff to their customers before 1st October 2025. The uptake of this offering needs to be continuously monitored and tweaked if necessary to optimise system benefits and value for Irish customers.
Pillar 2 – Completing the Energy Union
The EC has identified the need to work on long term, structural measures that will bring about cleaner and cheaper energy and will create a genuine Energy Union. It proposes a number of measures to complete the Energy Union, including launching an Energy Union Task Force, publishing a White Paper on deeper electricity market integration, revising the Governance Regulation of the European Union, presenting a Clean Energy Investment Strategy, an updated Nuclear Illustrative Programme and a Fusion Strategy and putting forward an Electrification Action Plan, a Strategic Roadmap for Digitalisation and AI for the Energy Sector and a Heating & Cooling Strategy. Further details on these packages will be eagerly anticipated.
Pillar 3 – Attracting Investment and Ensuring Delivery
The Plan also introduces the concept of a tripartite contract for affordable energy, a form of cooperation between the public sector, including financial institutions, energy-consuming industries and clean energy developers, so that they cancreate an investment climate that supports cost-effective energy production, reliable energy supply, and long-term economic growth for all stakeholders. The EC highlights that it will bring predictability and scaling for energy generators, who will have a secure buyer for their production, and for energy purchasers, who will benefit from affordable and stable energy supply. Furthermore, the support offered by the EC, the EIB and the Member States will further help to derisk investment and allow businesses to grow.
Pillar 4 – Being Ready for Potential Energy Crises
In order to future proof for future energy crisis, the EC will also publish guidance to Member States on the development and implementation of schemes to lower peak demand by introducing remuneration incentives for consumers. The EC will also strive to increase cross-border access to cheap electricity by working with TSOs and national regulatory authorities to ensure temporary increases of available cross-border capacities in certain situations and proper coordination and planning of maintenance outages across borders to avoid restrictions in the flow of electricity. These types of forwarding planning measures are welcome as Ireland and other Member States navigate a volatile geopolitical landscape.
Execution and Delivery Time
By accelerating the deployment of renewable energy, grid infrastructure and other system service mechanisms, the EU hopes to create a sustainable, low-cost industrial energy system that strengthens European industry while achieving climate goals. Many of the measures contemplated by the Plan seek to address energy transition challenges that are already recognised in most Member States, including Ireland. Positively, steps are already being taken in Ireland to address these issues in a similar vein to those contemplated by the Plan. However, the huge challenge in reducing energy costs in the short term should not be underestimated. The publication of the Plan serves as a crucial reminder to double down on efforts in Ireland and other Member States to execute and deliver renewable energy and supporting infrastructure to fully realise the economic and security benefits of a decarbonised electricity system.
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