EUROPEAN COMMISSION Brussels, 15.11.2022 COM(2022) 643 final REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL





Progress on competitiveness of clean energy technologies









Table of Contents 1. Introduction 2. Overall competitiveness of the EU clean energy sector 2.1 Setting the scene: recent developments 2.1.1 Energy prices and costs: recent trends 2.1.1 Global resources and materials supply chains: vulnerabilities and disruptions 2.1.2 Impact of COVID-19 and recovery 2.1.3 Human capital & skills 2.2 Research and innovation trends 2.3 The global clean energy competitive landscape 2.4 The innovation funding landscape in the EU 2.5 Impacts of systemic change 3. Focus on key clean energy technologies and solutions 3.1. Solar photovoltaics 3.2. Offshore and onshore wind 3.3. Heat pumps for building applications 3.4. Batteries 3.5. Renewable hydrogen production through water electrolysis

3.6. Renewable fuels 3.7. Smart technologies for energy management 3.8. Main findings on other clean energy technologies 4. Conclusion ANNEX I: Methodological Framework for the Assessment of the EU’s competitiveness



1.Introduction Russia’s unprovoked and unjustified military aggression against Ukraine has massively disrupted the world’s energy system. It has shown the EU’s over-dependency on Russian fossil fuels and emphasised the need to enhance the resilience of the EU’s energy system, which had already been challenged by the COVID-19 crisis. The all-time high energy prices and the risk of supply shortages across the EU have made it even more urgent to accelerate the twin green and digital transition under the European Green Deal and to ensure a more secure, affordable, resilient, and independent energy system. The year 2022 has been marked by the REPowerEU plan, a crucial element of the EU’s policy response to the unprecedented crisis. The plan is a roadmap to phase out the EU’s dependency on Russian energy imports as soon as possible through measures on energy saving, the diversification of energy supplies, and the accelerated roll-out of renewable energy. Furthermore, with the “Save gas for a safe winter” Communication, the Commission has put forward a plan to reduce gas use in the EU by 15% until next spring. The Council has adopted two regulations on storage and coordinated demand reduction measures for gas respectively. In September 2022, the Council agreed on the Commission proposal for a “Regulation on an emergency intervention to address high energy prices” to alleviate the impact of energy prices on the EU’s consumers, while also addressing the unprecedented volatility and uncertainty in EU and global energy markets. In particular, this intervention includes a reduction of electricity consumption, a revenue cap for inframarginal power generation, and a temporary, mandatory, solidarity contribution from fossil fuel companies. Delivering on the REPowerEU objectives will require an additional cumulative investment of EUR 210 billion between now and 2027 in addition to the investment already needed to reach climate neutrality by 2050 . This investment will support the massive scaling-up and speeding-up of the deployment of clean energy technologies (e.g. solar photovoltaic, wind, heat pumps, energy saving technologies, biomethane and renewable hydrogen), which is of critical importance to face the double energy and climate urgency. Overcoming the related technological and non-technological challenges will also require a strong and competitive EU clean energy sector. The REPowerEU plan confirmed the commitment to achieve the European Green Deal’s long-term goal of making the EU climate-neutral by 2050, and to fully implement the Fit for 55 package presented in July 2021. Delivering on the European Green Deal objectives will require the EU to develop, implement and scale-up innovative energy efficiency and renewable energies solutions. Half of the greenhouse gas emissions reductions expected by 2050 will require technologies that are not yet ready for the market, so research and innovation (R&I) activities are a crucial component to increase the EU’s technological sovereignty and global competitiveness. Within this framework, and in line with previous editions, this third annual competitiveness progress report presents the current and projected state of play for different clean and low carbon energy technologies and solutions. It also maps the research, innovation and competitiveness aspects of the EU’s clean energy system as a whole. The 2021 edition was important for the assessment of the COVID-19 economic recovery, because it highlighted how improvements in competitiveness can mitigate the pandemic’s economic and social impact in the short and medium terms. This year’s report must take into account the EU’s call for the higher roll-out of clean energy technologies and the impact of the energy crisis on the sector. Against this backdrop, the report builds on available data to provide insights into ways of reinforcing EU’s competitiveness in strategic energy value chains, while also increasing the penetration of the EU’s clean energy technologies. At the same time, ongoing and fast-changing geopolitical, energy and climate developments mean that the most up-to-date quantitative data is not always able to reflect the unprecedented situation adequately. Therefore, this report focuses on progress made until the end of 2021, building on the consolidated data available until then. More recent data have been indicated when available and reliable. However, these are scarce and therefore cannot yet fully reflect the impact of the current energy crisis on the competitiveness of clean energy technologies. Wherever possible, and in order to take into account the recent challenges faced by the clean energy sector and their impact on it, the analysis builds on the already visible implications and qualitative assessments for the year 2022; however the full impact can only be assessed in next year’s progress report. Competitiveness is a complex and multifaceted concept which cannot be defined by a single indicator. This report therefore assesses the competitiveness of the EU’s clean energy system as a whole (Section 2), and of specific clean energy technologies and solutions (Section 3) by analysing a defined set of indicators (Annex I). As of this year, the Commission’s Clean Energy Technology Observatory (CETO) will carry out the in-depth evidence-based analysis underpinning this report. This report is published in accordance with Article 35(1)(m) of the Regulation on the Governance of the Energy Union and Climate Action and accompanies the State of the Energy Union report. 2.Overall competitiveness of the EU clean energy sector 2.1Setting the scene: recent developments

2.1.1Energy prices and costs: recent trends As stated in previous competitiveness progress reports, industrial electricity and gas prices have been higher in the EU than in most non-EU G20 countries during the last decade. The unjustified and unprovoked Russian invasion of Ukraine has increased the already all-time high prices observed in 2021 in the EU and many other regions of the world. Wholesale gas prices in Europe were five times higher in the first quarter of 2022 than a year earlier and in August 2022 reached an historical high point, before falling to lower levels. Due to gas power plants often being a price-setter in European markets, this has resulted in a similar trend for wholesale electricity prices. They have also affected manufacturing costs for some sectors, in particular, energy-intensive industries. The price of commodities has also been increasing. The fifth Energy Prices and Costs report, which is due for adoption at the end of 2022, will provide updated quantitative data and analysis. The EU and Member States have already taken several measures since 2021 to help mitigate the impact of high energy prices. The Commission’s proposal for a Regulation on an Emergency Intervention to Address High Energy Prices, as agreed by the Council in September 2022, includes tools to reduce the use of gas to generate power by around 4% over the winter, thereby reducing pressure on prices, and a proposal to raise more than EUR 140 billion for Member States to help alleviate the impact of high energy prices on consumers. Although the impact of this trend on the clean energy technologies’ value chain remains mixed, it may indicate an improvement in their competitiveness, in particular as compared to non-renewable alternatives. For example, solar photovoltaic electricity generation is already the cheapest generation source in a growing number of countries. In the production of renewable hydrogen through water electrolysis, however, the cost of electricity is one of the main factors affecting the economic viability of electrolysers. Figure 1 provides more insights into the costs of clean energy technologies. It gives a snapshot of levelised cost of electricity (LCOE) calculations for the year 2021 for a range of representative conditions across the EU. The results indicate that technology fleets with low variable costs (including variable operational costs and fuel costs) have been highly cost-competitive in 2021. This finding is most robust for solar- and wind-powered generation which have LCOE in the range of EUR/MWh 40 to 60. Furthermore, the Combined Cycle Gas Turbine (CCGT) fleet appears to have been more competitive on average in 2021 than coal-fired generation. CCGT benefited from preferred dispatch during the first three quarters of 2021, while the fuel switch only became important in the fourth quarter of 2021. This allowed for significantly higher capacity factors for CCGT in 2021 . The rise of gas prices continued to support gas-to-coal switching during the first quarter of 2022, despite the increase in carbon prices. However, the high coal prices at the beginning of the second quarter of 2022 started to close the gap, and recent announcements by some Member States to temporarily increase the use of coal-fired plants have led to expectations that coal prices will rise further in the coming months. The very high energy prices have generated large financial gains for electricity producers with lower marginal costs (e.g. those operating in the wind and solar energy sectors). The Commission therefore proposed a regulation on an emergency intervention to address high energy prices, which was politically agreed at the extraordinary meeting of the Energy Council on 30 September. This regulation includes the temporary capping and redistribution of the inframarginal technologies revenues to alleviate difficulties for energy consumers and society in general. It also includes a mandatory temporary solidarity contribution applying to the profits of businesses active in the crude petroleum, natural gas, coal and refinery sectors, which have significantly increased by comparison with previous years. The current energy/fossil fuel crisis is the latest reminder of the need for a change in paradigm in order to ensure future stability. The REPowerEU plan calls for a massive scaling-up and speeding-up of renewable energy in power generation, industry, buildings and transport - not only to accelerate the EU energy independence, and give a boost to the green transition, but also to lower electricity prices and reduce fossil fuel imports over time. Measures will include boosting renewable energy which will require an electricity infrastructure that is fit for purpose. To deliver on the REPowerEU objectives, renewable energy deployment needs to be combined with energy-saving and energy efficiency measures. 2.1.1Global resources and materials supply chains: vulnerabilities and disruptions Together with concerns about the reliability of existing supply chains, and in particular the supply of natural gas, both the COVID-19 pandemic and the current geopolitical context have led to disruptions in some global supply chains of materials and resources, and have therefore affected the clean energy sector. The EU heavily relies on supplies from third countries and the twin green and digital transition will be fuelled by access to raw materials. The recent trends in the global supply chains of materials and resources have highlighted the urgency to strengthen the EU’s resilience and its energy supply security through materials and resources independence, and technology sovereignty. The availability of materials and the resilience of supply chains is a prerequisite for delivering on REPowerEU, because the increased demand for clean technologies goes hand in hand with a higher demand for resources such as metals and minerals. Technologies that are heavily reliant on imported raw materials, or components containing these materials include wind (permanent magnets, rare earth elements), solar PV (silver, germanium, gallium, indium, cadmium, silicon metal), and batteries (cobalt, lithium, graphite, manganese, nickel). The International Energy Agency (IEA) forecasts that the total global demand for minerals, due to the announced renewables rollout, is set to double or even quadruple by 2040. Surging raw material prices affect the costs of clean energy technologies. The prices of commodities needed for these technologies, like lithium and cobalt, more than doubled in 2021, while those for copper and aluminium increased by around 25% to 40%. In the same year, the decade-long trend of cost reductions for wind turbines and Solar PV modules was reversed: compared to 2020, their prices increased by 9% and 16% respectively. Battery packs will be at least 15% more expensive in 2022 than in 2021. An emerging challenge is to avoid replacing fossil fuel dependency with a dependency on imported raw materials and the technological expertise for their processing and for manufacturing components. For instance, China has a near monopoly in mining and processing the rare earth elements crucial for clean energy technologies, combined with a strong market position within their production chain. The resource dependency challenge comes in three parts. Firstly, the EU faces an increased competition for access to critical raw materials as other countries increase their own efforts to build up their capacity and potentially restrict their exports. Half of the 30 Critical Raw Materials listed by the EU are imported in proportions above 80% in volume, which is especially concerning when supply is concentrated in very few countries. Secondly, despite the significant progress made in terms of circular economy and recycling rates (more than 50% of some metals are now recycled, covering more than 25% of their consumption), secondary raw materials alone will not be sufficient to address high - and still growing - demand. Secondary raw materials also present additional challenges (e.g. higher recycling costs for some materials, technical feasibility and the insufficient availability of end-of-life assemblies). However, the economics of recycling will improve as the cost of primary sourced materials and the volume of available end-of-life assemblies increase. Secondary raw materials will therefore be an important source of supply after 2030 - provided that the necessary investment starts now. Innovative recyclability design is also very important. Thirdly, there is theoretical potential to cover between 5 and 55% of Europe’s 2030 needs by extracting raw materials from European soils. However, fostering domestic mining capabilities faces obstacles due to long permitting procedures and environmental concerns, insufficient refining capacity, and a lack of skilled labour and expertise. The new proposal for a Battery Regulation is an example of a flagship initiative which will help Europe to become a leader in the circular economy of batteries - starting with sustainable mining and ending with recycling. Scarcity of resources, such as land and water – whether for siting of solar, wind or bioenergy, or for water electrolysis to produce renewable hydrogen – could constrain the further deployment of clean energy technologies at the desired level in the EU. Facilitating multiple uses of space such as agri-PV (combining agriculture and solar PV production) and designating sites in maritime spatial planning for simultaneous activities such as fisheries and offshore renewable energy can help in overcoming these constraints. At the same time, taking into account water availability is of outmost importance for Member States to consider when designing the energy mix. An effective approach to the EU’s dependency on imports of the raw materials required for the manufacturing of clean energy technologies will be crucial to ensure the sector’s future competitiveness (in terms of costs, technology sovereignty and resilience) and to deliver on the twin green and digital transition. The Commission published an action plan in 2020 to alleviate supply risk. This included actions to diversify sourcing outside the EU (e.g. through strategic raw materials partnerships); fostering the circular economy (e.g. through eco-design, R&I or mapping the availability of critical raw materials in the urban mine or tailings); and enabling domestic potential (e.g. using earth observation technology). In addition to securing supply, the EU may also have to build up strategic reserves where supply is at risk. The President of the European Commission therefore announced a European Critical Raw Materials Act in her State of the Union address on 14 September 2022.

2.1.2Impact of COVID-19 and recovery COVID-19’s mixed economic impact was a major threat to the EU’s clean energy sector in 2020-2021. On the one hand, with a turnover of EUR 163 billion in 2020 and a gross value added (GVA) of EUR 70 billion, the EU’s renewable energy industry increased by 9% and 8% respectively by comparison with 2019 figures. Overall, it generated approximately four times more value added per euro of turnover than the fossil fuel industry, and nearly 70% more than the EU’s overall manufacturing sector . However, this ratio worsened slightly in 2020, indicating an increased leakage (e.g. in the form of imports). In 2021, the EU‘s manufacturing of most clean energy technologies and solutions largely increased, reversing the trend seen in 2020. The EU’s production of batteries had a bumper year with production value quadrupling by comparison with 2020 values as more capacity came online. Heat pump, wind and solar PV production grew by 30% in 2021 (heat pumps had a record year; wind bounced back to pre-pandemic levels; and solar PV reversed the declining trend seen since 2011). Production of biofuels, mainly biodiesel, grew by 40% and increased widely across Member States, while production of bioenergy (e.g. pellets, starch residues and wood chips) increased by 5%. Hydrogen production rose by nearly 50% as the Netherlands more than doubled its production in 2021. The simultaneous increase of prices that started in 2021 may nevertheless give an overly positive picture of production growth. In addition, some technologies experienced an increase of imports to meet the growing demand in the EU. For example, 2021 was the year with the greatest relative increase in the EU trade deficit in heat pumps (EUR 390 million in 2021 as compared with EUR 40 million in 2020, with 2020 being the first year in which the EU trade surplus turned into a deficit), followed by biofuels (EUR 2.3 billion in 2021; EUR 1.4 billion in 2020) and solar PVs (EUR 9.2 billion in 2021; EUR 6.1 billion in 2020). Nonetheless, the EU maintained a positive trade balance in wind energy technology (EUR 2.6 billion in 2021; EUR 2 billion in 2020) and in hydropower technology, despite a decreasing trend observed since 2015 (EUR 211 million in 2021; EUR 232 million in 2020). The EU’s economic recovery policies, such as the Recovery and Resilience Facility (RRF) within the NextGenerationEU, are a key driver for refocusing and enhancing investments in the clean energy sector. In October 2022, the Council agreed on the European Commission proposal to add a dedicated REPowerEU chapter into Member States’ Recovery and Resilience Plans (RRPs) in order to finance key investments and reforms which will help achieve the REPowerEU objectives. The reforms and investments proposed by the Member States in their RRPs have exceeded both the climate and digital expenditure targets so far (at least 37% and 20% of the RRPs’ expenditure respectively). In the 26 RRPs approved by the Commission by 8 September 2022, measures worth approximately EUR 200 billion have been dedicated to the climate transition and EUR 128 billion to digital transformation, representing 40% and 26% of the total allocation of these Member States (grants and loans) respectively. The 25 RRPs approved by the Council 8 September 2022 include measures related to R&I for a total budget of EUR 47 billion (including both thematic and horizontal investments). Within this figure, EUR 14.9 billion have been allocated to investments in Research, Development and Innovation (R&D&I) in green activities ( Figure 2 ). 2.1.3Human capital & skills The latest data on worldwide human capital show that, while the clean energy sector has been resilient during the COVID-19 pandemic, skills gaps and shortages increased in 2021 and are expected to continue in 2022. Employment in the EU’s broader clean energy sector reached 1.8 million in 2019, with an average annual growth of 3% since 2015 and representing 1% of total EU employment. By comparison, employment in the overall economy grew by 1% a year on average , while employment in the fossil energy industry declined by 2% on average in the last decade . China ranked first in the world in 2020 (39%) followed by the EU (11%) in worldwide employment in the “Renewable Energy” sector, which in total accounted for 12 million jobs . The composition of jobs in the EU broader clean energy sector has changed in several ways . The heat pump industry is overtaking the solid biofuels and wind energy sectors, as the largest employer. This is mainly due to the increase in installation of heat pumps. This trend is likely to continue with the REPowerEU plan and new product offerings available for the renovation sector . In addition, the clean energy sector is 20% more productive than the overall economy on average. Since 2015, labour productivity has been increasing faster in the clean energy sector (2.5% annually) than in the overall economy (1.8% annually). This increase has been driven by the e-mobility sector (5% annually) and renewables (4% annually), with different trends observed depending on the technologies. However, nearly 30% of EU businesses involved in electrical equipment manufacturing have experienced labour shortages in 2022, reaching even higher levels than in 2018. This is mainly due to the overall economic recovery from the pandemic combined with the clean energy sector’s slowness in building the skills capacities required by the green and digital transition. With over 70% of EU businesses involved in electrical equipment manufacturing facing materials shortages in 2022, these trends show the growing risk of clean energy supply chain disruptions ( Figure 3 ).

Gender imbalances in the energy sector’s workforce and in the energy-related research and innovation continue, although consistent and continuous gender-disaggregated data is largely lacking. The under-representation of women in the decision-making of energy companies and in higher education in science, technology, engineering, and mathematics (STEM) sub-fields is reflected in a lower share of patent applications with women inventors (only 20% in all patent classes in 2021 and just over 15% for climate change mitigation technologies ), a lower share of start-ups founded or co-founded by women (less than 15% in the EU in 2021) and lower amounts of capital invested in women-led companies (only 2% in all-female start-ups and 9% in mixed teams in the EU in 2021 ). The EU is stepping up its efforts to ensure a balanced and equal ecosystem. Initiatives include the gender equality strategy for 2020-2025 , the Women TechEU initiative launched in 2022 , the new eligibility criterion included under Horizon Europe , and the concrete target measures in the 2022 New Innovation Agenda. Bridging the gender gap will not only help address the EU’s jobs and skills challenges in order to achieve the twin green and digital transition, but will also support the inclusion of women in these work fields and thus address societal challenges. 2.2Research and innovation trends The rising environmental, geopolitical, economic and social instability in the world requires an agile EU R&I policy that can effectively respond to a crisis situation and at the same time ensure the implementation of the European Green Deal. The EU’s R&I policy shapes the direction of innovation and the portfolio of clean energy technologies. The world’s largest R&I programme, Horizon Europe (with its budget of EUR 95.5 billion dedicated to R&I in 2021-2027), and other EU funding programmes (e.g. the innovation fund and the cohesion policy funding) are intended to strengthen the EU R&I’s ecosystem and help achieve the EU’s policy objectives. Together with joint and coordinated efforts across the Member States (notably through the Strategic Energy Technology Plan (SET Plan)), R&I activities increase the resilience of the EU’s clean energy sector. Most EU Member States increased their public R&I investments in the EU Energy Union priorities in 2020 , , with more than EUR 4 billion reported so far. The final total figures for 2020 are expected to be comparable with pre-financial crisis values in absolute terms. Nonetheless, when measured as a proportion of Gross Domestic Product (GDP), investment in public R&I, at the national and EU levels, remains below 2014 levels ( Figure 4 ). In 2020, Horizon 2020 funds supporting Energy Union R&I priorities added EUR 2 billion to the Member States’ national programmes’ contributions. While national contributions alone remain low among major economies, with the inclusion of Horizon 2020 funds, the EU ranked second among major economies in public clean energy R&I investment in 2020 ( Figure 5 ), both in absolute spending (EUR 6.6 billion, with the US leading at EUR 8 billion) and as a share of GDP (0.046%, with Japan leading with 0.058%, but just ahead of the US and South Korea). According to global assessments, the corporate sector invests on average at least three times as much in clean energy R&I as the government sector. Investment by the EU’s business sector accounts for 80% of the R&I spending in the Energy Union R&I priorities. In 2019, estimated private R&I investment in the EU amounted to 0.17% of GDP ( Figure 5 ), and 11% of the business and enterprise sector’s total R&D spending. Estimates for the EU show that investment in absolute terms (EUR 18-22 billion per year) has been comparable with the US and Japan since 2014. In terms of percentage of GDP, however, despite the EU’s investment being above the US, the EU remains lower than other major competing economies (Japan, South Korea, and China). Since 2014, half of the EU Member States have increased their patenting activity in line with the Energy Union R&I priorities, with green innovation champions such as Germany and Denmark performing strongly both in absolute numbers and in the share of green patents in their overall innovation portfolio. The EU remained the top worldwide patent applicant in the fields of climate & environment (23%), energy (22%) and transport (28%). Worldwide, there were slightly fewer scientific publications addressing low carbon energy technologies in 2020 than in 2016-2019. In the EU, this number increased more modestly in 2016-2019 (when compared to the global average), and declined more strongly in 2020. The EU contributed just over 16% of scientific articles worldwide, but did continue to produce more than twice the global average number of publications per head of population . This trend is mostly due to the increasing number of scientific publications in other domains and to the fact that high-income economies no longer seem to dominate in topics related to clean energy and innovation. The EU was leading in energy research 10 years ago, but the massive improvement in the quantity and quality of Chinese output in energy research has pushed the EU down into second position. Chinese researchers are in the lead when it comes to the most cited publications related to energy (with a 39% share). Nonetheless, EU scientists collaborate and publish internationally in clean energy topics, to a degree that is well above the global average and there is a higher level of collaboration between the public and private sectors in the EU. The Horizon 2020 R&I framework programme, the European Regional Development Fund and the seventh framework programme for R&I were ranked among the global top 20 acknowledged funding schemes supporting clean energy science in the period 2016-2020. The need to improve the monitoring of public and private clean energy R&I activity and the quantitative assessment of competitiveness was highlighted in the last edition of the report and has since become even more crucial. The review of the SET Plan and the planned update of the National Energy and Climate Plans (NECPs) due in June 2024, are together creating the momentum to reinforce the dialogue on clean energy R&I and competitiveness between the EU and its Member States. 2.3The global clean energy competitive landscape

Worldwide, the urgent commitment to accelerate the energy transition has led to the development of many clean energy solutions, ranging from niche technologies to global industry and international value chains. It is estimated that global markets will be worth EUR 24 trillion for renewable energy and EUR 33 trillion for energy efficiency by 2050. The EU’s leadership in science, its strong industrial base and its ambitious clean energy framework conditions provide a good technology base for the anticipated market development of several clean energy technologies. The EU has maintained its good position in internationally protected patents since 2014, thus confirming the trend highlighted in last year’s report. The EU remains second only to Japan in high-value inventions, it leads in renewables, and shares the lead with Japan in energy efficiency, thanks mainly to the EU’s specialisation in materials and technologies for buildings. The EU’s patenting data also show its leadership in renewable fuels; batteries and e-mobility; and carbon capture, storage and utilisation technologies. Within this framework, international cooperation in R&I will not only further accelerate the clean energy transition, but will also counteract disruption of the global energy market. EU programmes and policies, such as Horizon Europe and Erasmus+, have consistently supported R&I cooperation with trusted global partners. The Commission’s Communication on “The global approach to research and innovation” provides an improved framework for developing international cooperation. The Commission’s Communication on “EU external energy engagement in a changing world” envisages the intensification of such cooperation and the development of partnerships to support the green transition on crucial topics such as renewable and low carbon hydrogen, and access to raw materials and innovation. In addition, the Commission’s Communication “A new ERA for research and innovation” calls for the guiding principles for knowledge valorisation to be updated and developed. A code of practice for the smart use of IP is expected by the end of 2022. The Commission is helping to advance international cooperation on energy innovation and technology by continuing to engage in Mission Innovation and the Clean Energy Ministerial. Furthermore, the new EU global connectivity strategy, the Global Gateway, the Commission’s Communication “Trade policy review” and the International Just Energy Transition Partnership with South Africa underline the importance of deepening international cooperation and trade relations in order to leverage the competitiveness of clean energy technologies in synergy with the openness and the attractiveness of the EU’s single market. International research cooperation, technology transfer, trade policy and energy diplomacy will need to work together to ensure undistorted trade and investment in the technologies, services and raw materials that are needed for the transition both inside and outside the EU. The EU will also need to further exploit its potential to upscale innovation in order to avoid the risk of increasing its dependency on other major economies for imported technologies needed in the energy transition and in the new energy system architecture. 2.4The innovation funding landscape in the EU Climate tech solutions are fostering the EU’s competitiveness and technology sovereignty. Together with the adoption of more mature generation technologies, they will play a crucial role in achieving carbon neutrality by 2050. The EU climate tech domain has over the last 6 years attracted an increasing amount of venture capital (VC) investment that is at the forefront of innovation. Climate tech can require long lead times before reaching maturity, so there is a crucial need for a significant amount of capital throughout start-ups’ funding lifecycles; investments in R&I; government action to de-risk the development of climate tech solutions, and further encouragement for private sector participation. Worldwide, VC investment in the climate domain has shown impressive resilience to the pandemic, with already higher levels of investments in 2020 (EUR 20.2 billion) and new all-time highs in 2021 (EUR 40.5 billion, a 100% increase compared to 2020 ). Within this figure, EU-based climate tech start-ups and scale-ups attracted EUR 6.2 billion of VC investment in 2021, more than double the 2020 level. This accounts for 15.4 % of global climate tech VC investment. 2021 was also the first year in which later-stage investments in EU-based climate tech were higher than in China. However, early-stage investment reached new highs in the US and China in 2021, but peaked in the EU ( Figure 6 ). The energy domain accounted for 22% of global climate tech VC investments in 2021 (clean energy generation and grid technologies accounted for 13.2% and 8.7% respectively). With levels almost four times higher (x 3.8) than in 2020, the energy domain remains behind the Mobility and Transport domain (46%), but has for the first time overtaken the Food and Land use domain (19.6 %). In the EU, VC investments in energy firms confirmed the sustained growth seen over the past 4 years (up by 60% on 2020). Despite this good performance, the relative share of the EU’s VC investments in energy halved in 2021. With 10% of VC investment in energy firms, the EU ranks third, far behind the US (62%) and China (13.3%), which both displayed outstanding 2021 investment levels driven by megadeals in clean energy generation. Despite the positive VC funding dynamics in the EU and the attraction of EU-based climate tech for VC investors, structural barriers and societal challenges are still holding back EU-based climate tech scale-ups by comparison with other major economies. The EU taxonomy for sustainable activities nevertheless provides a framework to facilitate durable investment and defines environmentally sustainable economic activities. In addition, the EU’s innovation policy has expanded over the years and the institutional landscape has changed with it. Horizon Europe’s pillar III on “Innovative Europe” has provided tools to support start-ups, scale-ups and Small and Medium-Sized Enterprises (SMEs). Within this context, the European Innovation Council (EIC) is, with its EUR 10.1 billion budget between 2021 and 2027, the EU’s flagship innovation programme for identifying, developing and scaling-up breakthrough technologies and game-changing innovations. Horizon Europe also supports the European Innovation Ecosystems initiative and the European Institute of Innovation and Technology (EIT). EIT InnoEnergy has built the largest sustainable energy innovation ecosystem in the world and is also spearheading the move to a decarbonised EU by 2050 through the leadership of three industrial value chains (the European Battery Alliance, the European Green Hydrogen Acceleration Centre and the European Solar Initiative). As regards EU funding programmes, the Innovation Fund is one of largest in the world for demonstrating clean innovative technologies and deploying them at an industrial scale. The InvestEU programme is a major element of the EU’s recovery plan, supporting access to, and availability of, finance for SMEs, mid-caps and other enterprises. The cohesion policy provides large scale and long-term investments, especially for SMEs, in innovation and industrial value chains in order to boost the development of renewable and low-carbon technologies and business models. Moreover, the European Investment Bank (EIB) and the European Investment Fund (EIF), effectively support the deep-tech development that the EU needs to achieve its sustainability goals. Other funding programmes, such as the Modernisation Fund and the proposed Social Climate Fund, aim at helping to funnel revenues from climate-related policies in support of the energy transition. These programmes and other EU initiatives, such as the capital market union (CMU), aim to further mobilise private investors in the funding of climate tech and deep climate-tech start-ups. For instance, the pioneering partnership between the European Commission and Breakthrough Energy Catalyst is another example on how to boost investments in critical climate technologies bringing together the public and private sectors.

Creating synergies between EU programmes and instruments and increasing cohesion between the EU’s local innovation ecosystems can help the EU to become a global leader in climate tech, thus closing the scale-up gap between the EU and other major economies by leveraging its diverse talents, intellectual assets and industrial capabilities. The 2022 European Innovation Scoreboard highlights the importance of establishing a pan-European innovation ecosystem, and the 2022 Commission Communication “the New European Innovation Agenda” represents already a step forward because it aims at leveraging the strengths of the EU innovation ecosystem. 2.5Impacts of systemic change To achieve the twin green and digital transition and deliver on the European Green Deal and Fit for 55 objectives, the EU clean energy sector needs to accelerate a paradigm-shift already in motion: the need to break down the silos between sectors and to strengthen cooperation in horizontal areas (e.g. the critical role of raw materials, the digitalisation of the energy system and the interaction of different technologies in industrial processes, individual buildings, and cities). Examples of this systemic transformation include: building-related clean energy technologies; digitalisation of the energy system; and energy communities and sub-national cooperation. Building-related clean energy technologies: compulsory solar PV installations on roofs and doubling the current rate of deploying individual heat pumps will help to achieve climate and energy targets. Achieving these targets will also require the building sector to integrate a broad set of complementary solutions for new buildings, such as efficient insulation methods and control systems, but also resource efficient measures. This should go hand in hand with increasing the renovation rate and fostering deep renovation. On-site energy storage (batteries) is another important element to enable higher shares of heat pumps and avoid extreme peaks in electricity generation and transmission/distribution. In addition to product availability, installation skills and operational services for the different technologies is crucial for the EU’s clean energy sectors and its competitiveness. Digitalisation of the energy system: digitalisation is expanding exponentially: internet traffic has tripled in the last 5 years alone, and around 90% of the data in the world today were created over the last 2 years. Decentralisation of energy - at the generation level as well as through millions of connected smart appliances, heat pumps and electric cars - is transforming the local energy system. An assessment for Hamburg (Germany) indicated a significant cost savings potential: investing EUR 2 million in smart charging to decrease peak demand can avoid the need to invest EUR 20 million for the necessary grid reinforcement to cater for a share of 9% of electric vehicles in the city. Without intelligent management of local energy needs, capacity limits in distribution networks can slow clean energy transformation. However, some digital solutions may increase energy consumption and GHG emissions without appropriate efficiency measures, like recovering heat waste from data centres. Energy communities and sub-national cooperation: at least two million European citizens have engaged in more than 8 400 energy communities and carried out over 13 000 projects since the year 2000 . Energy communities represent an important test bed and application field for clean energy technologies and solutions. The total renewable capacities installed by energy communities in Europe is currently estimated to be at least GW 6.3 (i.e. around 1-2% of installed capacity at national level). Solar PV constitutes the lion’s share of installed capacity. Onshore wind comes next. Developing participatory models for more clean energy technologies, in particular targeted for lower income households, can trigger the development of more energy communities across the EU and, at the same time, contribute to addressing energy poverty. Enhancing the interaction across horizontal areas, while factoring in the interdependencies between different sectors both at Member States and EU level is key for accelerating the deployment and upscale of clean energy technologies and for strengthening the EU’s competitiveness in the global clean energy market . 3.Focus on key clean energy technologies and solutions This section presents the competitiveness assessment of a range of clean energy technologies and solutions that are key for energy generation, storage and system integration. It also provides insights into how the technology and the market are evolving to meet the European Green Deal and REPowerEU objectives. This section includes an analysis of solar photovoltaics, wind, heat pumps for building applications, batteries, hydrogen production through electrolysis, renewable fuels, and digital infrastructure. It also provides an overview of other important technologies. This evidence-based analysis - based on the indicators listed in Annex I - was performed within the framework of the Commission’s in-house Clean Energy Technology Observatory (CETO), which is executed by the Joint Research Centre. The in-depth technology-specific reports are available on the CETO web site . 3.1. Solar photovoltaics Solar Photovoltaics (PV) has been the fastest growing power generation technology in the world over the last decade. All the scenarios towards a climate neutral energy system assign a central role to PV. The recent European solar energy strategy communication calls for about 450 GWac of new photovoltaic system capacity between 2021 and 2030. Given the current trend of installing a DC capacity 1.25 to 1.3 times the AC capacity to optimise the use of the grid connection, this would bring the total nominal PV capacity in the EU to approximately 720 GWp. The EU solar energy strategy addresses the main bottlenecks and barriers to investment with a view to accelerating deployment, ensuring security of supply and maximising the socio-economic benefits of PV energy throughout the value chain. The European Solar PV Industry Alliance, one of the concrete initiatives of the EU solar energy strategy, was formally endorsed by the Commission in October 2022, and it aims at scaling up manufacturing technologies of innovative solar photovoltaic products and components. Technology analysis: The average efficiency of silicon cell-based modules has increased from 15.1% in 2011 to 20.9% in 2021. This is thanks to the use of larger cut wafers and higher efficiency solar cells, including multi-junction cells designs. Europe has notable expertise and a lead in the promising perovskites technology, for which several EU companies such as Evolar (Sweden), Saule Technologies (Poland) and Solaronix (France) are currently setting up production lines. The EU’s solar strategy aims to reverse the declining trend observed in public and private funding in the PV industry. The EU remains nonetheless a strong innovator in the field, with a significant number of publications and patent applications recorded in 2017-2019. Germany alone ranks fifth in the world in the patenting of high-value inventions in PV. Value chain analysis: Both production data and new investment projects confirm the dominance of Asia, and in particular China, in the PV manufacturing landscape. All of the additional polysilicon manufacturing capacity of 80 000 t announced at the beginning of 2021 (to be added to a total capacity of ~650 000 t in 2020), as well as the 118 000 t already under construction, is being built in China. Silicon solar cells, which are mostly produced in China, represent over 95% of worldwide production. The EU nonetheless retains a considerable share in the production equipment (50%) and inverter (15%) manufacturing segments of the PV value chain. Global market analysis: Worldwide investment in new solar generation increased by 19% in 2021 to reach USD 205 billion (EUR 242.5 billion). However, 2021 saw a further deterioration of the EU’s trade balance, because its imports increased while its exports remained stable, representing 13% of global exports. Higher material costs experienced in many industrial sectors in 2021 and 2022 led to an exceptional and unprecedented increase in production costs for cells and modules, reversing a decade-long cost reduction trend. Nevertheless, the competitiveness of PV further improved by comparison with non-renewable electricity sources. The number of countries where photovoltaic electricity generation is the cheapest source is therefore growing. Increases in fossil fuel prices due to natural disasters, accidents or international conflicts, can only reinforce this trend. In conclusion, the latest available data for 2021 and 2022 confirm the previously observed trend. The EU has confirmed its position as one of the largest markets for PV and as a strong innovator especially in emerging PV technologies and applications (such as agri-PV, building-integrated PV and floating PV). However, the EU is heavily dependent on imports from Asia for several crucial components (wafers, ingots, cells and modules), and retains significant presence only in the production equipment and inverter manufacturing segments (which are currently facing a bottleneck due to the shortage of chips ). Additional bottlenecks due to affordability limitations (especially for low-income households and SMEs), excessively long waiting times (e.g. linked with insufficient skilled PV installers) are already impacting the large deployment of PV. The measures and flagship actions announced in the EU’s solar energy strategy provide the main opportunities to invest in PV assets and develop PV manufacturing capacities in the EU, as well as the diversification of imports. In parallel, continuous technological advances towards more efficient and sustainable cell designs and manufacturing processes have made it possible to further improve the competitiveness of PV technologies by comparison with non-renewable energy sources – even though raw material costs have risen. These elements strengthen the business case for boosting both production and deployment in the EU, including innovative applications. 3.2.Offshore and onshore wind Wind energy has a central role in the EU’s climate and energy policy, as the acceleration of wind energy deployment is essential to deliver on the European Green Deal, the Fit for 55 and the REPowerEU objectives. REPowerEU calls for the faster installation of wind energy capacities, with 510 GW of wind to be installed by 2030, projected to correspond to a 31% share of EU installed power production capacities. The EU has been a worldwide leader in wind energy R&I since 2014, with public spending accounting for EUR 883 million in the period 2014-2021, and it currently hosts 38% of all innovating companies, with the biggest pool of start-ups and innovating corporates. In 2021, however, only 11 GW of wind energy (10 GW onshore wind; 1 GW offshore wind) was installed in the EU, and perspectives for 2022 are still below the pace needed to achieve the REPowerEU targets. China is currently leading in terms of cumulative wind energy installations, with a capacity of 338 GW, mainly due to increased deployment rates in 2021. In the same year, the EU reached about 190 GW of cumulative installed capacity.

To deliver on the REPowerEU objectives, speeding- up wind energy deployment will be crucial and will require clear investment pipelines and translating political objectives into actual implementing measures, including the enactment of commitments to facilitate permitting for wind farms. Technology analysis: Total global installed onshore wind capacity was 769 GW in 2021, almost three times higher than a decade earlier, with 72 GW capacity installed in 2021 alone. 2021 was also a record year for offshore wind, with 21 GW of new capacity installed globally, more than triple the previous record in 2020. Total global installed capacity accounted for 55 GW in 2021. China led the increase in the global installed capacity with 30.6 GW of onshore wind capacity and 16.9 GW offshore wind capacity installed in 2021. The EU had a total installed onshore wind capacity of 173 GW and total installed offshore wind capacity of about 16 GW at the end of 2021. Total wind capacity was equivalent to about 14% of the EU’s total electricity consumption. 2021 also saw the second highest annual contribution by onshore wind capacity in the EU since 2010 (10 GW annual deployment). However, only 1 GW of offshore wind was deployed in the EU in 2021. Industry players highlight the granting of permits as one of the main bottlenecks to the continuing and massive deployment of wind energy, because it causes delays and fewer completed projects. This in turn puts pressure on supply chain profitability. The Commission has made legal proposals and a guidance to accelerate permitting as part of the REPowerEU package. Value chain analysis: The wind energy sector has developed into a global industry with about 800 manufacturing facilities. Most of these are in China (45%) and Europe (31%). The EU has kept the lead in terms of high-value patents in wind energy technologies: its share of high-value inventions was 59% in 2017-2019. EU turbine manufacturers continue to lead in terms of quality, technological development and investment in R&I. The EU’s wind industry also has high manufacturing capabilities for high-value-added components (e.g. towers, gearboxes and blades) and for devices that can also be used by other industrial sectors (e.g. generators, power converters and control systems). The EU’s manufacturing value chain for offshore wind mainly sources its components from EU manufacturers. For onshore wind, by contrast, the EU’s original equipment manufacturers (OEMs) source their components from many different foreign suppliers. Many of the raw materials for generators are imported mostly from China. Potential difficulties in increasing raw materials production output to reach the 2030 targets could pose challenges for the EU wind industry. The increase in resources’ prices in 2021 and supply uncertainties also constitute an obstacle. The industry has also raised environmental concerns with respect to the recycling of composite blades. Both national and EU research programmes in wind energy therefore focus increasingly on circularity. Global market analysis: The EU has, over the last decade, maintained a positive trade balance with the rest of the world, ranging between EUR 1.8 billion and EUR 2.8 billion. However, the EU has had negative trade balances with China and India since 2018. Chinese OEMs for the first time overtook their EU counterparts in terms of global market share in 2020. The EU’s leading markets, nevertheless, host a substantial number of domestic manufacturers. In conclusion, the EU’s wind sector remains a world leader in terms of R&I and high-value patents. This is thanks to the manufacturing capacity, workforce and skills at its disposal. However, the industry will have to more than double the current annual rate of capacity installation in the EU in order to achieve the 2030 targets. The implementation of the Renewable Energy Directive, the recent proposal for its amendment as well as the respective 2022 Commission recommendation and guidance, are expected to overcome the main permit-related barriers to deployment. Clear advance indication of the Member States’ wind installation plans will also allow for the timely preparation of future capacities. In parallel, R&I on circularity will move the industry forward by addressing environmental concerns and supply disruptions, thus improving the competitiveness of the EU’s wind energy sector. 3.3.Heat pumps for building applications At EU level, heat pumps are increasingly supported within the framework of the European Green Deal, the Fit for 55 package, and by the REPowerEU plan . The REPowerEU plan calls for a doubling of the current deployment rate of individual heat pumps, which would result in a total deployment of 10 million heat pumps over the next 5 years and 30 million by 2030, and would be matched by the scaling-up of the EU’s manufacturing capacity. It also calls for faster deployment of large heat pumps in district heating and cooling networks. The widespread joint deployment of both rooftop PV (and solar thermal) and heat pumps, with smart controls responding to grid load and price signals, would contribute to heating decarbonisation and reduce grid integration challenges. Technology analysis: Heat pumps for building applications are commercially available products. They can be classified according to the source from which they extract thermal energy (air, water or ground), the medium to which they transfer heat (air or water), their purpose (space heating or cooling a space, domestic water heating) and market segments (commercial or residential buildings, and networks). As regards heat pumps that are mainly used for space and sanitary water heating, the installed stock measured for this sector reached nearly 17 million units in Europe at the end of 2021, while sales reached 2.18 million units in 2021, a compound annual growth rate of 17% over the last 5 years, and 20% over the last 3 years. R&I activities for individual heat pumps are driven by the demand for more efficient, compact and silent units; larger ambient temperature operating ranges; digitalisation for optimal integration with energy grids; and local energy generation and storage. They are also driven by evolving EU regulations for more energy efficiency and lower life-cycle environmental impact, including materials circularity and low global warming potential (GWP) refrigerants. R&I on commercial heat pumps addresses, for example, the integration of simultaneous supply of heat and cold with thermal storage. The EU’s R&I position is strong and improving. It leads in patents for ‘mainly-heating’ heat pumps for building applications. In 2017-2019, 48% of patents for ‘high-value inventions’ were filed in the EU, followed by Japan (12%), the United States (8%), Korea (7%) and China (5%). In 2014-2022, Horizon 2020 provided a total of EUR 277 million in funding for projects on heat pumps for building applications. Value chain analysis: Turnover for heat pumps manufacturing, installation and maintenance activities in the EU amounted to EUR 41 billion in 2020, and has grown at an average annual rate of 21% over the last 3 years. Direct and indirect jobs amounted to 318 800 in 2020, an average annual growth of 18% over the last 3 years. These data include all types of heat pumps, including air-to-air heat pumps used for cooling and/or heating. Heat pumps do not require critical raw materials for their production, but they are affected by the current worldwide shortage of semiconductors. Global market analysis: In the EU, the ‘mainly heating’ heat pump value chain consists of many SMEs and a few large players. The proportion of heat pumps that are imported is increasing and the trade deficit reached EUR 390 million in 2021, in contrast to the surplus of EUR 202 million recorded 5 years earlier. Imports from China doubled in 2021 to reach EUR 530 million. In conclusion, the deployment of heat pumps is already proceeding rapidly, but needs to accelerate still further in order to meet the REPowerEU objectives. EU-based suppliers need to ramp up production in order to partake in the EU’s growing demand for heat pumps. Some industry associations argue that a faster phasing-out of high GWP refrigerants would slow down the ramping-up for specific applications, but the prohibition dates in the proposal to amend the F-Gas regulation are designed to give industry sufficient time to adapt. A lack of trained installers and high upfront cost may slow deployment in the EU. Industry is calling for a ‘Heat Pump Accelerator’ platform that would bring together the Commission, Member States and the sector itself. The platform would be supported by clear and sustained policy signals that would create confidence in long-term planning; ensure a favourable regulatory framework; drive down costs through more cooperation and R&I; and develop a pact for skills focussed on heat pumps. As part of the REPowerEU plan, the Commission will support the Member States’ efforts to pool their public resources via potential Important Projects of Common European Interest (IPCEIs) focused on breakthrough technologies and innovation along the heat pumps value chain; and to establish a large-scale skills partnership under the pact for skills. 3.4.Batteries

Batteries will play a crucial role in achieving the European Green Deal objectives and implementing the REPowerEU plan , because they can reduce dependency on fuel imports in transport as well as ensure maximum use of renewable electricity and reduce curtailments. Over 50 million electric vehicles (EVs) are expected to be operating on the EU’s roads by 2030 (with at least 1.5 TWh of batteries) and over 80 GW/160 GWh of stationary batteries. The EU is gradually moving towards zero-emission new cars by 2035, in line with the objective of an EU entire car fleet of 270 million vehicles that should be zero-emission (mostly electric) by 2050. E-mobility is the main driver of demand for batteries. Lithium-ion batteries are expected to dominate the market well beyond 2030, but other technologies are being developed in parallel. Technology analysis: Despite chip and magnesium supply disruptions, the deployment of battery technology in the EU has reached historic highs: 1.7 million new EVs were sold in 2021, reaching 18% of the market (compared to 3% in 2019 and 10.5% in 2020 ) and surpassing China (16%). National EVs sales ranged from 1.3% in Cyprus to 45% in Sweden. The stationary EU battery market is also growing rapidly and is forecast to reach 8GW/13.7GWh by the end of 2022. However, further acceleration is needed to reduce dependency on gas peaking plants, in line with the objectives of REPowerEU. In 2021, the average battery price fell by 6% to around EUR/kWh 116 in the global market and to around EUR/kWh 150 in the EU market. This continues a long-term trend. However, with prices rising in 2022 due to supply-side shocks, the trend is now reversing (for example, in spring 2022 the price of lithium carbonate was up by 974% on 2021). Battery packs will be at least 15% more expensive in 2022 than in 2021. The system cost of grid-scale Li-ion applications was around EUR/kWh 350 in 2021 and, for home storage systems, roughly twice that. Value chain analysis: Almost all the EU’s 2021 mass-production of lithium-ion batteries was still carried out by Asian manufacturers established in the EU (Hungary and Poland). The construction of new gigafactories means that the EU (particularly Germany and Sweden) is set to gradually gain importance on the market. Swedish Northvolt produced its first battery cell made with 100% recycled nickel, manganese and cobalt at the end of 2021, and started commercial deliveries in 2022. It states to have a highly efficient recycling process with recovery of up to 95% of battery metals. The EU is expected to reach over 75 GWh installed production capacity by the end of 2022 (compared to 44 GWh in mid-2021). The projects currently underway show that the EU is on track to meet 69% of demand for batteries by 2025 and 89% by 2030 . This is largely thanks to the European Battery Alliance’s initiatives. The upstream raw materials segment remains the least resilient in the battery value chain. Despite several EU initiatives, the supply gap for battery raw materials increased in 2021. Spent batteries are still mostly sent to Asia for recycling . The EU is rapidly advancing in Li-ion technology (notably the highest performing NMC strand), but it is progressing too slowly in stationary battery technologies based on abundant raw materials (e.g. flow batteries and sodium-ion batteries – the latter also have good EV potential given developments in China among other factors). The EU is also slower in embracing cheaper Lithium (ion) Iron Phosphate (LFP) technology, which are increasingly used in Asia and less dependent on critical raw materials. Global market analysis: China controls 80% of the world's Li-ion battery raw material refining capacity, 77% of cell production capacity and 60% of battery component manufacturing capacity . The EU’s trade deficit in Li-ion batteries continued to grow in 2021 and reached EUR 5.3 billion (up 25% on 2020). The EU carries out roughly 19% of global EV production, but it has very little of the upstream supply chain (with the exception of cobalt processing). Electric bus production and deployment in the EU (7 356 e-buses were in circulation at the end of 2021) is insignificant compared to China, which has over 90% of the global stock of 670 000 e-busses. In conclusion, the EU is increasingly building up the highly needed technological capability in cheaper storage/longer-term storage (e.g. technologies for sodium-ion; zinc based; flow batteries) and is strong in final products (especially EV production and deployment, with the exception of the electric buses segment). It is also quickly catching up in cell manufacturing when it comes to Li-ion technology and is on track to becoming nearly self-sufficient in battery production by 2030. The lack of domestic raw materials and advanced materials production is a persistent problem despite current ongoing initiatives. The EU aims to increase its effort to address these challenges from extraction to refining, from processing to recycling with e.g. the announced European Critical Raw Material Act. 3.5. Renewable hydrogen production through water electrolysis Renewable hydrogen has a great potential to contribute to the EU’s climate and energy objectives. It can be used as fuel for sectors that are difficult to electrify (e.g. long-distance and heavy-duty transport); as chemical feedstock (e.g. fertilisers and other chemicals); and in industrial processes (e.g. steel or cement production). Hydrogen and its derivatives are forecast to represent 12% of the global energy mix in 2050, yet renewable hydrogen using water electrolysis represents currently only 0.1% of the overall EU production. REPowerEU has further strengthened the policy objectives of the 2020 hydrogen strategy, setting the 2030 targets for renewable and low carbon hydrogen to 10 Mt of domestic production and 10 Mt of imports (partly in the form of ammonia). The setup of a European Hydrogen Bank will accelerate the production and the use of renewable hydrogen and help develop the necessary infrastructures in a coordinated manner. The Commission and leading EU electrolyser manufacturers committed themselves to increasing manufacturing capacity tenfold to 17.5 GW in hydrogen output by 2025. In addition, the Member States’ RRPs allocate around EUR 10.6 billion to hydrogen technologies and two IPCEIs were approved by the Commission in 2022 (July and September), for EUR 5.4 and 5.2 billion of investments, involving 15 and 13 Member States respectively. Technology analysis: Out of a worldwide capacity of 300 MW in 2020, Europe (including the UK and the EFTA countries) accounted for 135 MW of installed capacity in 2021. Proton Exchange Membrane (PEM) and alkaline electrolysers make up 55% and 44% of the installed capacity deployed on European territory respectively (including EFTA and the UK) . The levelised cost of electricity is the main factor impacting the economic viability of the electrolysers’ investments and rising electricity prices remain one of the key challenges for the economic viability of a competitive production of electrolyser hydrogen. The cost of European hydrogen production using renewable sources varies from a (2020) median of EUR/kgH2 6.8 (Solar PV-based production), to a median of EUR/kgH2 5.5 in (wind-based production). Costs of electrolysers are expected to fall due to high temperature electrolysis: from 2130 EUR/kW in 2020 to 520 EUR/kW in 2030. The 2030 cost targets for PEM and alkaline electrolysers are at EUR/kW 500 and 300 respectively . Value chain analysis: The 2021 manufacturing capacity for water electrolysers has been estimated at 2.5 GW/y in Europe. Global manufacturing capacity was estimated at around 6-7 GW/y (about two thirds alkaline and one third PEM for both European and global markets). Manufacturing volumes in Europe are lower than in China and the United States. It is estimated that Chinese companies have half of the world’s alkaline electrolysis manufacturing capacity, and that American companies have most of the world’s PEM electrolysis manufacturing. Europe leads in terms of number of manufacturing companies and in Solid Oxide electrolysis but depends on countries such as China, Russia and South Africa for the supply of necessary critical raw materials, and it is able to source only 1-3% of them domestically. Water consumption (currently around 17 l/kgH2) associated with the roll-out of more renewable hydrogen production will increase stress on freshwater resources, so new electrolyser locations should comply with the Water Framework Directive to also safeguard against water-related production bottlenecks.

Global market analysis: Only 0.2% of the European total annual (non-renewable) hydrogen demand of 8.4 M tonnes is supplied via international trade. Even though international hydrogen trading is still not a reality, there are significant trade opportunities in the future supply of renewable hydrogen for the EU as identified in the REPowerEU plan. In conclusion, without bigger assembly systems, more automation and economies of scale, the EU cannot compete with China in alkaline technology. Currently high electricity prices and reliance on imports of critical raw materials concentrated in a few suppliers are fundamental weaknesses of the EU electrolysers’ value chains. Long-term cooperation agreements are needed. There is also a need for dedicated research into alternatives to the rare metals and other critical raw materials that are currently necessary for water electrolysis. Furthermore, long-term success depends on sustainable water supply and sufficient recycling capacity in the EU as well as a comprehensive approach to pull demand and supply. The support of EU regulatory and funding frameworks, as well as large investments through the recovery funding, IPCEIs, cohesion policy, Horizon Europe, the Clean Hydrogen Joint Undertaking and the Innovation Fund are crucial for the competitiveness of the EU renewable hydrogen industry. 3.6.Renewable fuels Renewable fuel technologies can significantly contribute in the short term to the decarbonisation of transport, and ensuring the security of energy supply and energy diversification. The REPowerEU plan identifies, in particular, biomethane, as key to diversify EU gas supplies by increasing its production twice above the EU 2030 target, thus putting biomethane on top of renewable energy priorities. The Fit for 55 legislative proposals would introduce a significant demand for renewable energy in the transport sector in 2030, considerably above the targets for the shares of advanced biofuels and renewable fuels of non-biological origin set in the revised RED II proposal . This is due to the greenhouse gas (GHG) saving target of 13% in transport (which is not likely to be met by electrification alone), and the higher GHG saving targets of 40% and 61% in the revised proposals for the Efforts Sharing Regulation and the Emission Trading System Directive respectively (if these are to be met with equal contributions from transport). The REPowerEU plan proposes to further increase required renewable fuel quantities. Contrary to road transport, whose decarbonisation is expected to rely for a large part on electricity and hydrogen, the RefuelEU Aviation and FuelEU Maritime proposals project that renewable fuels will supply 5% and 6.5% of the EU’s total jet and shipping fuel consumption in the aviation and maritime sectors, . Technology analysis: Commercial pathways do exist (e.g. anaerobic digestion to biomethane, hydrogenated vegetable oil and lignocellulosic ethanol production), but there is little installed capacity (0.43 Mt/y) and planned production is limited (1.85 Mt/y). A variety of innovative technologies (e.g. biomass gasification to Fischer-Tropsch synthetic fuels, pyrolysis-derived fuels and biomethanol production) have been demonstrated in industrial environment and are ready to take-off. Noticeable progress is being made with several next generation technologies. The EU focuses its actions on advanced biofuels, mainly based on non-recyclable waste and residues, and limits its support for biofuels based on food and feedstock. Technologies for other renewable synthetic fuels (solar fuels, 2nd generation microbial fuels and micro-algae fuels) are mostly still at lab-scale. Even for electro-fuels, the most advanced technologies are not yet commercial because of still existing technological challenges, currently high electrolysis costs, high conversion losses (50%) and high transportation and distribution costs. Value chain analysis: The main challenge for the market uptake of advanced biofuels is their competitiveness with existing conventional biofuels derived from food crops. The cost of advanced biofuels is estimated at 1.5 to 3 times the market price of traditional biofuels such as biodiesel and bioethanol (set at 50-100 €/MWh). Advanced biofuels also have high capital expenditures (up to EUR 500 million for a single plant) and are linked to the availability of sustainable biomass feedstock. There is significant potential to cut capital costs by 25-50% and feedstock costs by 10-20%, namely through R&I, large scale deployment and co-processing in existing plants. Private R&I Venture Capital biofuels funding was on average EUR 250 million per year in 2010-2021. The US and Canada dominated (albeit with different definitions of biofuels), while the EU’s share has been only 6% in the last 5 years. However, the EU is in the lead with twice as many high-value patents as the US. China holds most low innovation patents and EU’s patent applications are increasing in US and China. Global market analysis: The EU has roughly 7% of the global biofuel market worth (i.e. about EUR 105 billion in 2020) and is mostly generated from first-generation biodiesel. Turnover peaked at EUR 14.4 billion in 2018 with most being generated in France, Germany and Spain. 250 000 direct and indirect jobs were created along the value chain in the EU. The EU is also home to 29% of the world’s innovation companies, while the US and Japan have the most. The advanced biofuels sector is only just emerging. The number of commercial plants is still quite low and international trading is very limited. The EU is the world leader with 19 of the 24 operational commercial advanced biofuels plants. Sweden and Finland have the most (12 between them). All biofuels can be traded internationally. International trade is lower than for its fossil counterparts, and barely exists for advanced biofuels. The EU’s biofuel imports have been constantly increasing since 2014. It had a biofuel trade deficit of more than EUR 2 billion in 2021, with imports mainly coming from Argentina, China and Malaysia. The Netherlands and Germany are the biggest EU producers and global biofuel exporters. In conclusion, although the installed and planned renewable fuels production capacity for 2030 is minimal and the potential of advanced biofuels from sustainable feedstock in the EU is limited, this sector can nevertheless contribute to the Fit for 55 GHG emission savings targets and sufficiently cover any transport electrification lag. Some technical and economic risks must still be overcome in order to fully realise the potential of renewable fuels in transport. The cost of all renewable fuels and, in particular, of synthetic ones, are still high because they rely on renewable energy and hydrogen prices. Nevertheless, advanced biofuels rely on local sustainable biomass resources and short supply chains that create a large number of skilled jobs, reduce energy poverty and drive industrial competitiveness. The EU is the clear market leader in operational commercial advanced biofuels plants and high-value innovations. EU companies are currently among the world’s top ten but they risk losing their technological leadership due to the lack of private funding. Therefore, besides the energy domestically produced, the export potential of underlying European technologies should also be considered. 3.7.Smart technologies for energy management EU and national policymaking have clearly recognised the importance of smart electricity grids in recent years. The 2020 EU strategy for energy system integration acknowledged the importance of smart grids in achieving the EU’s energy and climate policy objectives. The 2022 revised Trans-European Energy Infrastructure Regulation refers to smart electricity deployment as a priority thematic area. In their Recovery and Resilience Plans (RRPs), Member States recognised the potential of digital solutions to upgrade the smartness of electricity grids. Electrification and smartening of the grid are progressing, but more is needed to reinforce the electricity infrastructure in order to implement the REPowerEU plan. The challenges include reduction, data-sharing between different players, flexibility, interoperability and technology readiness. The EU’s action plan on digitalising the energy system presents a series of measures to overcome these barriers. Given the large number and wide range of smart energy technologies, this section focuses on presenting an assessment of the relevant technological and market developments for just three key technologies: i) advanced metering infrastructure; ii) home energy management systems; and iii) smart electric vehicle charging. I)Advanced Metering Infrastructure (AMI) AMI systems offer many advantages for both energy service providers and consumers, including reduced electricity bills through better consumption management; better grid observability and therefore better outage management; reduced costs for grid updates due to better management of electricity peaks; and better customer control through the use of advanced customer infrastructure (i.e. smart applications and web portals). The roll-out of intelligent metering systems is progressing in the EU, although it needs to further accelerate. In 2020, only 43% of consumers had been equipped with a smart electricity meter (corresponding to about 123 million units in the EU and UK). Functionalities offered by AMI vary: in most countries, they offer detailed information via a meter interface about consumption data (e.g. consumption level/date/time) and/or information on cumulative consumption data.

Exploiting AMI’s full potential will require further integration with home energy management systems and smart appliances (including smart EV charging) as well as with new energy services. II)Home energy management system (HEMS) The increasing roll-out of smart appliances indicates that HEMS should become the hub for data aggregation, optimisation and externalisation to third parties (e.g. energy brokers and service providers). The Commission is preparing a code of conduct for energy smart appliances manufacturers, which will define interoperability requirements and the principles for data sharing between appliances; home and building automation systems; EV chargers; aggregators; and distribution system operators. Current home energy management solutions range from direct-to-customer energy monitoring applications to white-label software platforms for utility customers, which can later be rolled out to end-users. In addition to “traditional” companies with track records in energy and/or electronics, large software companies such as Google, Apple, and Cisco now distribute HEMS products. This trend emphasises the increasing role of software engineering in Internet of Things (IoT) devices. Demand for HEMS is expected to grow significantly in the coming years. For example, the German market, which is the biggest national HEMS market in the EU, is expected to grow to nearly USD 460 million (EUR 544 million) by 2027, and the French HEMS market could have a compound annual growth rate (CAGR) of 20.3% between 2021 and 2027. This reflects global trends. The global HEMS market was estimated at USD 2.1 billion in 2021 (EUR 2.5 billion), and could grow to USD 6 billion (EUR 7 billion) by 2027 (with a CAGR of 16.5% during 2022-2027). At this stage, however, it remains unclear whether HEMS will only help consumers in optimising their consumption and comfort or whether they will also enable demand response and flexibility at scale. III)Smart EV charging Smart EV charging will be key to maximising synergies between EVs, renewable energy generation and grid services. The pace of EV roll-out means that EVs are not expected to create a power-demand crisis in the short to medium-term, but they could reshape the load curve. The impact of smart EV charging can be bigger in regions and local areas where a high EV concentration meets less robust grid infrastructure. Smart EV charging techniques can potentially provide balancing services for the grid and reduce renewable curtailment, thus reducing the need for grid upgrades. Smart charging includes a range of pricing and technical charging options, and comes in three forms: unidirectional vehicles-to-grid (V1G), bidirectional vehicles-to-grid (V2G), and vehicle-to-home or building (V2H-B). Key players in the smart EV charging market include ABB (Sweden/Switzerland), Bosch Automotive Service Solutions Inc. (Germany), Schneider Electric (France), GreenFlux and Alfen N.V. (Netherlands), Virta (Finland), Driivz and Tesla (US). The global smart EV charging market is clearly taking off, with an estimated value of USD 1.52 billion (EUR 1.77 billion) in 2020 and a compound annual growth rate (CAGR) of 32.42% between 2021 and 2031. However, unlike more mature V1G solutions, V2G and V2H-B have not yet reached the broad market deployment stage, although the number of pilots and demonstrations is growing. Rolling out smart charging infrastructure at scale will bring two challenges: firstly, standardisation of communication interfaces among charging points, EVs and the distribution grid will need to be consolidated; secondly, an increasing demand for raw materials will need to be met. AMI systems, HEMS and EV smart charging are expected to make further progress. The deployment of AMI systems has been slower than initially envisaged. Further integration with HEMS and smart appliances is required to fully exploit the opportunities of AMI systems. The increasing presence of smart appliances should result in a significant increase in demand for HEMS. The global market for smart EV charging should also take off, but challenges will need to be overcome. 3.8. Main findings on other clean energy technologies The above sections focus on those clean energy technologies and solutions analysed in 2021. The other main clean energy solutions presented in this section are covered in the accompanying CETO reports. These technologies are at different development stages and are evolving in diverse contexts. This means that they each have their own sets of competitiveness challenges and opportunities. Hydropower, for example, has been substantially deployed across the EU. Installed capacity was 151 GW in 2021, a +6 GW increase compared to 2011, corresponding to about 12% of the EU’s net electricity generation. The EU’s 44 GW of pumped hydropower represents nearly all the EU’s electricity storage capacity and ensures flexibility to the electric grid and water storage capacity. With an aging fleet, sustainable refurbishment of existing hydropower capacity steadily gains importance, as well as an opportunity to make the hydropower fleet more resilient to climate and market changes. The EU is a leader in R&I, holding 33% of all high-value inventions globally (2017-2019) and hosting 28% of all innovative companies. In a globally expanding market, it also held 50% of all global exports in hydropower, to a value of EUR 1 billion in 2019-2021. However, fully exploiting its potential will require the EU to overcome challenges linked to social acceptance and environmental impacts of new installations and reservoirs. The effects of climate change also impact hydropower in Europe in various ways and hydropower reservoirs may play a role mitigating some of these effects. It is essential to recognise the additional benefits (beyond energy generation) of multi-purpose hydropower reservoirs and to incentivise more sustainable (i.e. less impacting) hydropower technologies and measures. A growing number of deployments of ocean energy are taking place. In the long term, considering the resource potential, ocean energy can contribute up to 10% of the EU energy needs. The 2020 EU offshore renewable energy strategy proposed specific capacity targets for ocean energy with the long-term objective of at least 40 GW by 2050. EU companies are leading the ocean energy sector with most companies hosted in EU countries. Deployments inside and outside the EU are increasing in terms of installed capacity. Individual devices are already contributing to the grid for longer periods of time. However, continuing cost reductions and ensured sustainability are needed for wave and tidal energy technologies to be established in the electricity market and to be competitive with other renewable energy sources. Further funding dedicated to testing and market uptake is also necessary to allow their large-scale deployment. Geothermal energy has experienced growth both for power plants, and for district heating and cooling, although at a slow rate compared to other clean energy technologies. In 2021, two additional geothermal power plants were commissioned in Germany, with a capacity of 1 MWe and 5 MWe - thus, bringing the EU’s total capacity to 0.877 GWe – while total global installed capacity was around 14.4 GWe. In 2021, total installed geothermal district heating and cooling capacity reached 2.2 GWth in the EU, with over 262 systems. The largest growth is happening in France, the Netherlands and Poland. Enhanced geothermal systems (EGS) still face several innovation challenges that will require further R&I. Lowering the risk of investing in geothermal energy projects is crucial for tapping into the huge potential of geothermal energy. In the EU, the main challenges concern cost-efficiency and environmental performance. Concentrated solar power and heat (CSP) can substantially contribute to electricity generation in locations with high direct insolation, but only a fraction of its potential has been harnessed so far. In 2021, worldwide installed capacity was approximately 6.5 GW, with 2.4 GW installed in the EU. There is also a large EU market for industrial process heat, which can be partly exploited by concentrated solar heat systems. Exploring this potential for power and process heat with financial and other support measures would allow the EU to better face international competition. This is particularly important as Chinese organisations are emerging as international CSP project developers, a field where EU companies have traditionally been leaders. CSP has shown considerable progress in terms of cost reduction and in establishing itself as a reliable option. European organisations play a leading role in research and technological development. EU researchers are top publishers of scientific papers and authors of high-value patents increasing efficiency and reducing cost, as set out in the CSP implementation plan of the Strategic Energy Technology Plan (SET Plan). R&I will play a key role here and concrete support will continue to be provided at EU level as announced in the EU’s new solar energy strategy.