Current and Future Challenges Facing the European Union's Energy System

Abstract

The EU energy system is in the middle of a period of profound change. Financing the transition to a low-carbon EU economy is expected to require $2.2 trillion by 2035, requiring substantial private capital. However, investors are hesitant to commit capital due to many challenges facing the energy system. This review provides a high-level discussion regarding the challenges and the potential solutions to address them. We identify four main challenges: 1) structural challenges and reduced capacity adequacy, 2) an incorrect market framework to value flexibility, 3) the inability to finance the energy transition, and 4) the role of transitional fuels. Against these challenges, four potential solutions are: 1) capacity remuneration mechanisms, 2) demand-side response and consumer empowerment, 3) reforms in emissions trading and renewable subsidies, and 4) improved physical interconnections and governance. The EU’s ability to address these challenges will directly impact its position as a global leader in green energy investment.

Keywords: Fossil fuels, energy system, electricity market design, renewable policy, Target Electricity Model, energy transition

JEL Classification: L94, N74, O16, Q4