Rosalba Famà, PhD student in EU law, Bocconi University
Photo credit: ThibaultC, via wikicommons media
In response to the energy crisis stemming from the Russian invasion of Ukraine, the European Union is implementing REPowerEU. Presented in May 2022, the comprehensive REPowerEU strategy encompasses proposals to modify existing energy directives and an ambitious industrial policy program aimed at achieving energy independence. This analysis will focus on the latter, referred to as the REPowerEU plan. Designed to encourage reforms and investments for energy supply diversification, the plan will be integrated into Next Generation EU (NGEU), the EU’s post-pandemic economic recovery plan. This blog post will outline the geopolitical context surrounding REPowerEU’s adoption, explain its goals, legal structure, and operation, and conclude by positioning NGEU as a model for future European initiatives requiring collective spending during crises.
To address the economic impact of the pandemic, the EU adopted the NGEU plan. This plan involves assuming a shared debt of up to 750 billion euros to be distributed to requesting Member States. The distribution, in the form of loans and grants, prioritizes countries most impacted by COVID-19. This unprecedented plan successfully averted a severe economic downturn caused by lockdowns. However, the Russian invasion of Ukraine presented another unexpected geopolitical challenge.
Prior to the conflict, EU Member States heavily relied on Russian energy imports, particularly gas and oil for industrial and domestic use, making the Russian energy supply critical to the European economy. This reliance on Russian energy markets emerged as a significant threat to the EU’s economic recovery, making an energy independence strategy essential. Consequently, in the Versailles Declaration of March 2022, EU Heads of State and Government agreed on a plan to phase out reliance on Russian fossil fuel imports.
Achieving this goal necessitates substantial investment in strategic energy infrastructure, estimated to cost up to 210 billion euros. To cover these costs, the EU must secure significant additional funding. The Recovery and Resilience Facility (RRF), a temporary fiscal tool created under NGEU for the pandemic, is seen as a suitable instrument to address these new challenges. To bolster the independence and security of the EU’s energy supply, REPowerEU will direct additional funds to the RRF, allocating them to Member States for modernizing EU energy infrastructure.
Legally, REPowerEU will take the form of a Regulation by the Council and European Parliament, amending Regulation (EU) 2021/241, which established the RRF. Within NGEU, REPowerEU introduces a new chapter focused on reforms and investments to diversify energy supplies and enhance energy efficiency in Member States. Additionally, REPowerEU amends several other regulations and directives related to European funds, agriculture, greenhouse gas emissions trading, and market stability. These amendments are crucial for channeling resources to a new RRF “basket” dedicated to financing energy-related goals known as “REPowerEU objectives.”
Article 175 (3) TFEU, a provision within cohesion policy, provides the legal basis for the RRF. This provision, with its broad language, permits actions outside existing funds when deemed necessary, requiring only a necessity test. Article 4 of Regulation (EU) 2021/241 states that the RRF’s primary goal is to promote economic, social, and territorial cohesion by lessening the social and economic impacts of the COVID-19 crisis. REPowerEU amendments aim to enhance the resilience of the EU energy system by reducing reliance on fossil fuels and diversifying energy sources within the EU.
Central to REPowerEU’s implementation is the consolidation of existing European resources to meet new energy targets and milestones. This includes upgrading energy infrastructure for immediate security of supply, promoting energy efficiency in buildings and critical infrastructure, increasing renewable energy production, addressing energy transmission bottlenecks, and supporting zero-emission transportation. Accompanying these changes is the need to retrain the workforce, equipping them with green skills. The provisional agreement reached between the European Parliament and the Council in December 2022 mandates that at least 30% of REPowerEU resources be allocated to measures with cross-border or multi-country impacts. Additionally, measures were agreed upon to address energy poverty and support vulnerable households, SMEs, and micro-enterprises significantly affected by rising energy prices.
REPowerEU objectives will be funded through three avenues: revenues from the Emission Trading System, redirecting unspent NGEU loans, and channeling pre-allocated resources from shared management programs. Regarding new revenue, additional grants of up to 20 billion euros will be generated from auctioning Emission Trading System allowances until 2026 or until the 20 billion euro target is reached. These funds will be directed to the RRF. Resources from the ETS, disbursed as non-repayable support, exemplify solidarity and economic redistribution within the EU, benefiting Member States most impacted by the energy crisis. Distribution criteria will consider factors like energy dependency rates and the proportion of fossil fuels in gross inland energy consumption.
Concerning the loan component, REPowerEU will allow for allocating unused NGEU loans to new REPowerEU objectives. Not all 27 Member States have requested the full extent of NGEU loans within their National Recovery and Resilience Plans. Some Member States with high credit ratings and access to low-interest financing have shown limited interest in these loans, which the EU provides only upon achieving ambitious targets outlined in their national plans. REPowerEU seeks to mobilize these unspent resources towards Member States with greater need due to lower credit ratings. Member States will have a specific timeframe after REPowerEU’s enactment to express their interest in additional loan support to the Commission. Subsequently, the Commission will present an overview of Member State interest and propose a distribution plan for the available funds.
Funding for REPowerEU objectives will also be sourced from a percentage of resources allocated to other funds under the EU’s standard budget, separate from NGEU. This innovative approach allows Member States to request the transfer of pre-allocated funds from shared management programs to the RRF, effectively redirecting existing funds to support new energy targets. This necessitates a strategic realignment of public spending during emergencies.
Approving revised Recovery and Resilience Plans involves a multi-stage process. Member States seeking additional funding for REPowerEU objectives must submit updated versions of their National Recovery and Resilience Plans, incorporating a new REPowerEU chapter. Within the 2022 Country Specific Recommendations, the Commission has outlined necessary actions for each Member State to address the energy crisis. Plans including a REPowerEU chapter must detail energy-related reforms and investments to be financed by the RRF, along with corresponding milestones and targets aligned with the Country Specific Recommendations. These plans may also include the scaling up of reforms and investments from previous Recovery and Resilience Plan versions. The Commission then evaluates these plans, assessing whether proposed reforms and investments contribute to diversifying the EU’s energy supply and reducing fossil fuel dependence before 2030. Following a positive assessment and a proposal from the Commission, the Council approves the Recovery and Resilience Plan through an implementing decision. This decision outlines reforms and investments to be implemented by Member States and the corresponding financial contribution.
While NGEU was conceived as a temporary measure, the current energy crisis demonstrates its adaptability to accommodate emerging needs. Notably, the RRF, grounded in ordinary cohesion legal basis, appears capable of extending beyond the pandemic. As long as economic resources are directed to the RRF, this new facility can accelerate investments and address shared strategic objectives. The adoption of initiatives like REPowerEU illustrates that NGEU serves as a blueprint for future actions, highlighting the RRF’s capacity for repeated use. This situation underscores the EU’s need for tools enabling swift responses to unexpected shocks. Whether NGEU remains a temporary fiscal measure limited to the pandemic and energy crisis or evolves into a permanent instrument for bolstering strategic investments beyond the pandemic remains to be seen.