Fit for 55: An SME Perspective on the Revised Renewable Energy Directive

Last July, the Commission proposed a revision of the Renewable Energy Directive (RED). The current RED, which came into force in 2018, transformed the European energy market. It affects every sector of the economy, including many small and medium enterprises (SMEs). Given the EU’s ambition to lower its overall greenhouse gas emissions by at least 55% in 2030, the recently proposed modifications aim to raise the bar for renewables even further. Now that the proposed revision of the RED is entering discussions in the European Parliament and the Council of Ministers, it is time to reflect on the new RED: what do the revisions entail, what are the risks for SMEs, and why do SMEs need to influence the agenda in Brussels now?

The RED acts as a common framework for the promotion of renewable energy. Concretely, the Directive lays down the rules regarding how member states can promote, favour, or subsidise renewable energy projects. The RED contains three main components. First, it sets out a binding EU target for the share of energy from renewable sources in 2030 on member states’ energy markets. The initial RED of 2018 set a binding target of 32%, but the proposed revision raises that to 40%. Secondly, the revised RED introduces more demanding measures in the field of transport, heating and cooling. Thirdly, to create a more efficient, circular energy system, the Commission aims to promote the use of low-carbon and renewable fuels, in sectors where electrification is not yet possible. The goal is to make hydrogen a feasible solution for the transport and industry sectors.

The Commission’s proposed revision contains many additional targets and requirements. Some of the most notable changes will affect SMEs in the building sector, the energy sector, and the transport sector.

Let’s first look at the building sector. By 2030, the building stock in all EU member states should derive at least 49% of its energy from renewable sources. This means that members must update their building regulations and codes, as well as their support schemes, to increase the share of electricity and heating and cooling from renewable sources. The objective is to achieve a large share of (nearly) zero-energy buildings in a country’s building stock.

Looking at the energy sector, we see that the proposed modifications define new targets for the sale of renewable fuels. Member states must achieve a 1.1 % annual increase in the use of renewable energy in their industries, half of which must be hydrogen. The same applies to the heating and cooling sector: every year, member states must achieve a 1.1% increase in the share of renewable energy used for heating and cooling buildings. 40% of that energy may be derived from waste heat from industries. Heat purchase agreements will be promoted among small individual or collective consumers. The proposal also sets out requirements regarding the carbon intensity of fuels and the production of biomass. For example, under the new proposal, diesel will have to contain up to 7% oil from biomass origin.

Closely related to the measures affecting the transport sector, we find that the proposal will oblige sellers of fuel for transport purposes to achieve a 13% reduction in greenhouse gas emissions, for instance by offering biofuels, hydrogen, or EV recharging options.

Regardless of whether one agrees or disagrees with the level of ambition of the Commission’s proposal, one aspect is conspicuous by its absence in the proposal: the perspective of SMEs. SMEs, constituting more than 99% of businesses and supplying two-thirds of all jobs in the private sector, are crucial in achieving the EU’s emissions targets. Without skilled craftspeople and engineers working on small-scale projects at a local level, it will be impossible to renovate the buildings that we live in, to construct a sustainable heating and cooling infrastructure, and to deliver the components, renewable fuels and services that the transport sector relies on.

The proposed Directive could create two issues for SMEs. The first issue concerns the administrative burden. Lengthy permitting processes for renewable energy projects inhibit a swift uptake of renewable energy. Renewable energy requires extensive certification and verification systems to validate the origin of energy sources and carriers throughout a product’s lifespan or manufacturing process. Besides this, industries have to secure power purchase agreements to maintain their supply of renewable energy. In sum, it requires a considerable amount of accounting effort. Although not every SME is equally susceptible to high administrative costs, those in energy-intensive sectors will benefit from streamlined procedures.

The second issue concerns investments. SMEs have to make investments that are not only purely financial, but also concern knowledge, skills and digitisation. SMEs in the construction and transport sectors will have to retrain their staff. Regarding finances, the question is: how can affordability be ensured?

One idea could be calling for a more “technology-neutral” approach. The Commission’s proposal gives a lot of attention to hydrogen. This technology is still relatively costly: take into consideration that some SMEs operate in energy-intensive sectors, in which a switch to hydrogen means an overhaul of their infrastructure, machinery and production methods. SMEs may therefore prefer to explore other, equally renewable sources of energy. Alternatively, the Commission’s proposal could include a specific call on member states to offer additional support for hydrogen SMEs.

At Lykke Advice, we provide advice to companies and associations regarding the latest developments in the European institutions, identifying how upcoming legislation might affect your business. Please contact us if your company or association would like to know about this legislation, one of the other parts of the Fit for 55 package and wants to influence the political process to make sure that the legislation is fit for purpose and as well taking advantage of the opportunities for EU funding for companies to help with their green transition.   

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