For today’s session, we will focus on a very topical issue, especially in light of the geopolitical developments of recent weeks and the international tensions that are currently escalating at an unprecedented rate. The title of the session is ambitious, we admit: Where is Europe’s energy going? This is an open question that will lead to others.

Why have we decided to address this topic? First and foremost, because energy is a key factor in business competitiveness, and you are well placed to know that in Europe, its price is a barrier to development in the face of global competition, especially from China and the United States, which have access to much lower prices. Secondly, because Europe is currently working on a new energy strategy to try to make its businesses more competitive on global markets. In this context, Europe is confirming its decision to make decarbonisation the cornerstone of its strategy, affirming its role as a model in the fight against global warming. We therefore believe it is important to take stock of these issues, starting with an overview of the international context in which Europe is operating. We will then move on to the solutions put forward by the European authorities.

AN AMBITIOUS ENERGY STRATEGY FOR EUROPE

Let us begin by putting into perspective the international position of the old continent in relation to the two economic centres with which it must contend, China and the United States. Europe is well placed, and not only geographically, between the world’s largest energy producer, the United States, and the world’s largest consumer, China.

We represent a market of 450 million inhabitants with no oil or gas reserves: we therefore rely mainly on imports for our primary fossil fuel supply. In terms of gas alone, our main supplier is now the United States, which accounts for nearly 50% of our LNG imports. As the world’s largest producer of oil and gas, the United States still generates 60% of its electricity from natural gas: the share of renewables in the electricity mix is certainly growing, but in the first half of 2024 it represented only 25% of the total.

On the other side is China, a market of more than 1.4 billion people and the world’s largest consumer of energy, whether oil or gas. China has a very pragmatic approach to its energy supply: renewable energy accounts for 35% of its energy mix, 10 points more than the US. It is true, however, that 60% of electricity is still produced by coal-fired power stations, which weighs heavily on its carbon footprint. We are well aware that China is by far the world’s largest CO2 emitter, accounting for one-third of global emissions.

In terms of electricity generation from renewable sources, Europe is therefore the most virtuous of the three, with the share of fossil fuels in the mix steadily declining and now around 35%.

That said, it should be noted that this has not yet enabled European companies to access more competitive energy prices, or at least prices comparable to those enjoyed by American companies.

ENERGY AND COMPETITIVENESS: THE NATURAL GAS

The graph on slide 4 clearly illustrates the gap that needs to be closed. We compare the benchmark indices for natural gas in the United States, Europe and Asia. In light blue, we can see the Henry Hub price, the benchmark index for the natural gas futures market in the United States. Above it, unfortunately well above, in orange and green, is the TTF, the Dutch index, now used as a benchmark at European level due to its high liquidity, and the JKM, which stands for Japan Korean Market, the benchmark index for the LNG spot market in Asia. It is always striking to measure the difference between the price of a molecule of natural gas sold in the United States and in Europe or Asia. When we know that a European company systematically pays three times more for its gas than an American counterpart or competitor, we conclude that a new European energy strategy must try to provide an answer.

The graph illustrates a second very important aspect: the strong correlation between the TTF and the JKM, which clearly shows the competition between these two importers, Europe and Asia, to attract LNG volumes.

THE COST OF ENERGY: A STRUCTURAL OBSTACLE TO EUROPEAN COMPETITIVENESS

Let us therefore try to list the factors underlying the high cost of energy in Europe, which structurally penalises our companies. We will use the analysis included in the report on business competitiveness presented by Mario Draghi last September. Mario Draghi identifies European dependence on gas imports as the first structural obstacle. This has an even greater impact given that the share of LNG in European supply doubled between 2020 and 2023, while the share of long-term contracts fell: in other words, we are increasingly exposed to market fluctuations for our purchases of liquefied natural gas, much more so than in the past, when long-term Russian contracts ensured stability in terms of volumes delivered and prices.

On the electricity side, we are familiar with the price formation mechanism on European markets, which is based on the merit order principle and therefore reflects the marginal cost of gas-fired power plants. We also devoted a session of the Eleneo Academy to this topic, which you can watch on our website, a small advertisement. For example, over the period analysed in the report, gas was marginal for more than 60% of the hours, while generating only 20% of total electricity.

One solution that would allow consumers to opt out of this mechanism could be the signing of long-term contracts, such as PPAs. However, we note that these tools are struggling to develop, and not only because the current market price level appears too low to encourage companies to commit for such long periods. Contractual arrangements remain complex and, in most cases, producers require guarantees and financial ratings that are inaccessible to many small and medium-sized enterprises.

Finally, the cost of carbon certainly has a significant impact on energy prices in Europe. According to simulations carried out by the working group that drafted the report, the price of carbon in Europe is 2 to 2.5 times higher than in California and China. This is certainly a significant difference, which the European Union is trying to level out with the introduction of the CBAM, the carbon border adjustment mechanism, which is intended, on the one hand, to limit the effect of carbon leakage and, on the other, to respond to the competitiveness challenges facing European companies.

THE NEW AMERICAN ENERGY STRATEGY

Before introducing the guidelines for the new European strategy, let’s take a quick look at the direction our competitors are taking. Let’s start with the United States: as soon as he entered the White House, Donald Trump swept away the measures put in place by the previous administration on energy and greenhouse gas reduction. The flagship measure was the withdrawal from the Paris Agreement, as already done in 2017 during his first term, as well as the abandonment of the decarbonisation targets set by the Biden administration for 2024.

The new administration aims to meet growing electricity demand by bringing new gas-fired capacity online. To this end, Donald Trump has declared a ‘national energy emergency’, which gives the administration the powers it needs to fast-track the approval process for new projects.

In the same vein, restrictions on the exploitation of gas, oil and mineral reserves in Alaska, which had been inaccessible since the Biden administration’s decision to preserve this ecosystem, have been lifted.

At the same time, the US administration has decided to suspend concessions for new wind power projects and withdraw aid allocated by the Inflation Reduction Act to new renewable energy projects. In short, according to the new administration, any source of electricity generation that is not capable of providing a controllable baseload appears to be off limits.

Finally, we should mention the aggressive trade policy implemented against the United States’ main trading partners, namely Mexico, Canada, China and Europe, resulting in the introduction of customs duties of 15% or 25%. Europe, for example, is suffering

As we know, the context is extremely volatile. Given Europe’s energy dependence on the United States, we believe it is legitimate to ask ourselves a question, which is once again an open question: Can Europe still consider the United States as a reliable supplier of natural gas? In our view, this is a crucial question. It is the same question that Europe tried to avoid asking itself about another long-standing gas partner, Russia, before realising that this was not the case.

GAS POWER SHIFT:IS EUROPE TRADING ONE DEPENDANCY FOR ANOTHER?

Before the summer of 2021, Russia was by far Europe’s largest gas supplier and was set to consolidate this position with the commissioning of Nord Stream 2, a second gas pipeline linking Russia to Germany via the Baltic Sea. The slide shows the rapid, almost brutal reduction in gas imports from Russia to Europe and the replacement of these flows by other suppliers, mainly LNG, largely from the United States. One dependency therefore follows another, exposing Europe to the international competition we have already mentioned.

In recent weeks, we have seen a rapprochement between the Russian and American administrations in search of a peace agreement on Ukraine, and a ceasefire is currently under discussion. We would therefore like to pose another open question, which is also provocative: is it conceivable that Russia could be rehabilitated within the European community as a gas supplier to the Union?

CHINA’S DUAL ENERGY PATH: RENEWABLES & COAL

Let’s move on to China, a country that is certainly less ‘erratic’ in its energy policy choices: in 2024, the country commissioned 450 GW of new production capacity, including 350 GW of solar and wind power and 95 GW of coal-fired power plants. These are absolutely enormous figures: imagine that in one year, China commissioned more photovoltaic capacity than the United States has ever done in its entire history. This represents the highest growth rate in the last ten years.

Furthermore, the development of so much renewable capacity alongside coal-fired power plants may seem somewhat contradictory: once again, in our view, this illustrates China’s very pragmatic approach to energy management.

China is currently facing a slowdown in growth, in a process that some are calling ‘Japanisation’: slower growth, declining demographics and some signs of deflation. In any case, the Chinese Communist Party’s stated goal remains 5% growth for 2025.

This slowdown in Chinese growth will probably enable them to reach peak carbon emissions before 2030, as Xi Jinping declared before the United Nations General Assembly in 2020.

THE DRAGHI REPORT

Let us now turn to Europe:

At the end of September 2024, Mario Draghi, former President of the European Central Bank and former President of the Italian Council, presented a report commissioned by the European Commission, which aimed to assess the state of European competitiveness and propose solutions to improve it.

It is not surprising to find that energy and its cost are at the top of the list of issues highlighted in the report. According to Mario Draghi, the key to restoring affordable energy prices in Europe is decarbonisation: firstly, because this could reduce our exposure to gas imports and fluctuations in international markets; and secondly, because it would gradually increase the number of hours during which renewable energy sources are marginal.

In summary, the Draghi report proposes the following:

1. Firstly, to make better use of the European Union’s collective bargaining power for LNG purchases, with a view to signing long-term contracts to gradually reduce our exposure to spot prices.

2. Secondly, the Draghi report proposes decoupling the remuneration of renewables from the marginal cost of gas-fired power plants through the development of long-term contracts, such as PPAs. In this context, a series of measures would be necessary, such as speeding up permitting to facilitate and incentivise the construction of new capacity; improving interconnections between European countries; and developing storage and flexibility, without which it seems difficult to achieve the objective of covering European consumption without resorting to gas capacity or, at least, to gas capacity that can be managed.

3. Finally, it proposes lowering energy taxes and promoting simplification of taxation at European level to promote the integration of national markets and create a single European Energy Market.

THE EUROPEAN COMPASS FOR COMPETITIVENESS

The Draghi report was taken up by the European Commission as part of the ‘European Compass for Competitiveness’, a kind of manifesto announced at the end of January 2025, intended to clarify European priorities: in first place, decarbonisation, once again not only as the main weapon in the fight against global warming but as a real lever for competitiveness.

The Commission then recognises the need to move faster in the innovation sector, particularly in the field of artificial intelligence, where Europe lags far behind the United States and China: of the 10 most promising and advanced language models, 8 are American and 2 are Chinese. Europe seems to be absent from this race for the moment.

Finally, the third key point of the Compass is security. Security is understood here as reducing Europe’s dependence on energy imports, as a priority, as well as on components essential for the development of renewable energies, such as photovoltaic panels, batteries and semiconductors, among others. Indeed, it would be counterproductive to seek to limit our dependence on increasingly unreliable gas suppliers, only to then become tied to another exclusive supplier in order to carry out our energy transition.

THE CLEAN INDUSTRIAL DEAL

The Compass has been set to music by the ‘Clean Industrial Deal’, a document published about ten days ago, which sets out the European Commission’s Roadmap and we imagine that it will enable us to start going into the details of the new strategy. Once again, the cost of energy and the financing of the energy transition are at the heart of the roadmap, which is rather encouraging for energy professionals like us.

On the right-hand side of the slide, you can see the deadlines by which the results of the Commission’s work should be published. Beyond the dates, we think it is important to note that the Commission is committed to taking a position on aspects that we believe are essential: to name a few, we are expecting work in the coming months on the establishment of a European fund to guarantee access to PPAs for companies that are currently excluded, guidelines on energy taxation, contracts for difference, flexibility, and the development of electricity networks and interconnections. We are also awaiting an Industrial Decarbonisation Accelerator Act, which should introduce a voluntary label for the carbon intensity of industrial products, with incentives for the most virtuous producers; in addition, a pilot project on steel should start as early as 2025.

CONCLUSION AND OUTLOOK

In conclusion, we can say that work to define a new European energy strategy is underway, but there is still a lot to do.

We also note that in these somewhat chaotic times, especially at the international level, the European and American priorities in terms of energy strategy are not so different after all.

– Both are seeking to lower energy prices to make their businesses more competitive.

– Both are seeking to increase electricity production capacity in anticipation of growing demand.

– Both are committed to simplifying the process of granting the necessary permits to build and operate this new capacity.

However, the solutions put forward to achieve these objectives differ radically: while decarbonisation is seen in Europe as the fundamental ingredient of the new strategy, in the United States it is seen as an obstacle, a real hindrance to the competitiveness of its companies.

We therefore end with another open question, which will be the last for today: who will be right?

Questions and answers

That brings us to the end of this presentation. Later in the year, we will devote other sessions to topics related to France’s and Europe’s strategic energy policies. I would now like to move on to questions.

‘What role can hydrogen play in the European strategy? You didn’t talk about it much.’

Indeed, I haven’t mentioned it at all. But there are two reasons for this:

1. The first is that the European Commission maintains a position of technological neutrality, thus avoiding taking sides in favour of one technology or another, or one energy carrier or another. It therefore sets objectives and considers that every technology capable of contributing to the overall effort must obviously play its part.

2. The second reason, which I believe is even more important, is that there are growing questions about the economic model for hydrogen, particularly ‘green’ hydrogen, which is produced by electrolysis of water using only electricity from renewable sources. My impression is that the momentum for green hydrogen as a solution to our energy independence and decarbonisation problems is somewhat behind us.

This does not mean that hydrogen is doomed to disappear from the agenda; there will certainly be applications for which this energy carrier can be used… but it now seems unlikely that hydrogen can be deployed everywhere, in car tanks, in our gas cookers, in factory furnaces, as seemed to be the case a while ago.

Should the CO2 market be abolished?

This is an interesting question, and CO2 prices have indeed been identified as one of the factors penalising European industry. That said, this view can perhaps be tempered. Taking a step back, I see two main sources of CO2 emissions: industry and electricity generation.

– For industry, Europe has introduced and will introduce mitigation measures: free allowances and, soon, the CBAM. Furthermore, Draghi is wondering whether the free allowance scheme should be extended to avoid adding further complexity at an already complicated time.

– For electricity generation, the share of fossil fuels in the mix has fallen significantly, and as a result, the weight of CO2 in the price of electricity has also fallen significantly.

So this is probably a temporary problem, and in four to five years’ time it will be behind us.

In your opinion, can Europe really compete with the United States and China in the energy sector?

It seems complicated when it comes to the United States: it is a country rich in primary energy and has abandoned all ambition to combat global warming.

On the other hand, it may be possible to compete with China. Europe has a chance because, like us, they have no oil or gas and are making a significant effort to decarbonise, so they seem willing to pay the price.