EUROPEAN COMMISSION Brussels, 14.10.2020 COM(2020) 953 final REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL on progress of clean energy competitiveness {SWD(2020) 953 final}



Contents 1.Introduction 2.Overall competitiveness of the EU clean energy sector 2.1 Energy and resource trends 2.2 Share of EU energy sector in EU GDP 2.3 Human capital 2.4 Research and innovation trends 2.5 Covid-19 Recovery 3.Focus on key clean energy technologies and solutions 3.1 Offshore renewables – wind 3.2 Offshore renewables – Ocean energy 3.3 Solar photovoltaics (PV) 3.4 Renewable hydrogen production through electrolysis 3.5 Batteries 3.6 Smart electricity grids 3.7 Further findings on other clean and low carbon energy technologies and solutions Conclusions





1.Introduction The goal of the European Green Deal, Europe’s new growth strategy, is to transform the European Union (EU) into a modern, resource-efficient and competitive economy, which is climate neutral by 2050. The EU’s economy will need to become sustainable, while making the transition just and inclusive for everyone. The Commission’s recent proposal to cut greenhouse gas emissions by at least 55% by 2030 sets Europe on that responsible path. Today, energy production and use account for more than 75% of the EU’s greenhouse gas emissions. The delivery of the EU’s climate goals will require us to rethink our policies for clean energy supply across the economy. For the energy system, this means a steep decarbonisation and an integrated energy system largely based on renewable energy. By 2030 already, the EU renewable electricity production is set to at least double from today’s levels of 32% to around 65% or more and by 2050, more than 80% of electricity will be coming from renewable energy sources . Achieving these 2030 and 2050 targets requires a major transformation of the energy system. This however depends heavily on uptake of new clean technologies and increased investments in the needed solutions and infrastructure. However, as well as the business models, skills, and changes in behaviour to develop and use them. Industry lies at the heart of this social and economic change. The New Industrial Strategy for Europe gives European industry a central role in the twin green and digital transitions. Considering the EU’s large domestic market, accelerating the transition will help modernise the whole EU economy and increasing the opportunities for the EU’s global clean technologies leadership. This first annual progress report on competitivenessaims to assess the state of the clean energy technologies and the EU clean energy industry’s competitiveness to see if their development is on track to deliver the green transition and the EU’s long-term climate goals. This competitiveness assessment is also particularly crucial for the economic recovery from the COVID-19 pandemic, as outlined in the ‘Next Generation EU’ communication. Improved competitiveness has the potential to mitigate the short- and medium-term economic and social impact of the crisis, while also addressing the longer-term challenge of the green and digital transitions in a socially fair manner. Both in the context of the crisis, but also in the long run, improved competitiveness can address energy poverty concerns, reducing the cost of energy production and the cost of energy efficiency investments. It is possible to ascertain the clean energy technology needs for achieving the 2030 and 2050 targets on the basis of the impact assessment referred to in the European Commission’s Climate Target Plan scenarios. In particular, the EU is expected to invest in renewable electricity, notably offshore energy (in particular wind) and solar energy, . This large increase in the share of variable renewables also implies an increase in storage and in the ability to use electricity in transport and industry, especially through batteries and hydrogen, and requires major investments in smart grid technologies. On this basis, the present report focuses on the six technologies mentioned above, most of which are at the heart of the EU flagship initiatives, aimed at fostering reforms and investments to support a robust recovery based on twin green and digital transition. The remaining clean and low-carbon energy technologies included in the scenarios are analysed in the staff working document with the title ‘Clean Energy Transition – Technologies and Innovations Report’ (CETTIR) that accompanies this report. For the purpose of this report, competitiveness in the clean energy sector is defined as the capacity to produce and use affordable, reliable and accessible clean energy through clean energy technologies, and compete in energy technology markets, with the overall aim of bringing benefits to the EU economy and people. Competitiveness cannot be captured by a single indicator. Therefore, this report proposes a set of widely accepted indicators that may be used for this purpose (see table 1 below) capturing the entire energy system (generation, transmission and consumption) and analysed at three levels (technology, value chain and global market). Table 1 Grid of indicators to monitor progress in competitiveness

Competitiveness of EU clean energy industry 1. Technology analysis Current situation and outlook 2. Value chain analysis of the energy technology sector 3. Global market analysis Capacity installed, generation (today and in 2050) Turnover Trade (imports, exports) Cost / Levelised cost of energy (LCoE) (today and in 2050) Gross value added growth Annual, % change Global market leaders vs. EU market leaders (market share) Public R&I funding Number of companies in the supply chain, incl. EU market leaders Resource efficiency and dependence Private R&I funding Employment Real Unit Energy Cost Patenting trends Energy intensity / labour productivity Level of scientific Publications Community Production Annual production values Analysis of competitiveness of the clean energy sector can be further developed and deepened over time, and future competitiveness reports may focus on different angles. For example by looking in more detail at policies and instruments to support R&I and competitiveness at the Member State level, how these contribute to the Energy Union and the Green Deal objectives, looking at competitiveness at subsector, national or regional level, or by analysing the synergies and trade-offs with environmental or social impacts, in line with the European Green Deal objectives. Given the lack of data for a wide range of competitiveness indicators,, some approximations of a more indirect nature are used (e.g. the level of investment). The Commission calls on Member States and stakeholders to work together in the context of the National Energy and Climate Plans (NECPs) and the Strategic Energy Technology plan to continue developing a common approach to assessing and boosting the competitiveness of the Energy Union. This is also important for the national recovery and resilience plans that will be prepared under the Recovery and Resilience Facility. 2.Overall competitiveness of the EU clean energy sector 2.1 Energy and resource trends Over 2005-2018, primary energy intensity in the EU decreased at an average annual rate of nearly 2%, demonstrating the decoupling of energy demand from economic growth. Final energy intensity in industry and construction followed the same trend, albeit at a slightly slower annual average rate of 1.8%, reflecting the sector’s efforts to reduce its energy footprint. Enabled by energy policy, the share of renewable energy in final energy consumption rose from 10% towards the 2020 target of 20%. The share of renewable energy in the electricity sector rose to just over 32%. It increased to just over 21% in the heating and cooling sector, while the figure for the transport sector was slightly over 8%. This shows that the energy system has been shifting gradually towards clean energy technologies (see Figure 1). During the last decade, industrial electricity prices in the EU have remained relatively stable, and are currently lower than Japan’s, but double those of the US and higher than those of most non-EU G20 countries. Though industrial gas prices have fallen, and are lower than those in Japan, China and Korea, they remain higher than those of most non-EU G20 countries. Relatively high non-recoverable taxes and levies in the EU and price regulation and/or subsidies in the non-EU G20 play an important role in this difference. Despite a short-term improvement and reduction in energy import dependency between 2008 and 2013, the EU has since experienced an increase. In 2018, net import dependency was 58.2%, just over the 2005 level, and almost equalling the highest values over the period. Resource efficiency and economic resilience are key in being competitive and enhancing the open strategic autonomy of the EU in the clean energy technology market. While clean energy technologies reduce dependence on imports of fossil fuels, they risk replacing this dependence with on raw materials. This creates a new type of supply risk. However, unlike fossil fuels, raw materials have the potential to stay in the economy through the implementation of circular economy approaches, like extended value chains, recycling, reuse and design for circularity, affecting the capital expenditures and decreasing the energy need for extraction and processing of virgin materials but not the operational expenditures of energy production. The EU is very dependent on third countries for raw and processed materials. For some technologies, however, it has a leading position in the manufacture of components and final products, or high technology components. Specific, often high-tech materials show high supply concentration in a handful of countries. (For instance, China produces over 80% of the available rare earths for permanent magnet generators). 2.2 Share of EU energy sector in EU GDP The turnover of the EU energy sector was EUR 1.8 trillion in 2018, nearly the same level as in 2011 (EUR 1.9 trillion). The sector contributes 2% of total gross value added in the economy, a figure that has remained largely constant since 2011. The turnover of the fossil fuel sector shrank from 36% (EUR 702 billion) of the overall energy sector turnover in 2011 to 26% (EUR 475 billion) in 2018. At the same time, the turnover from renewables increased over the same period from EUR 127 billion to EUR 146 billion ,. The value added of the clean energy sector (EUR 112 billion in 2017) was more than double that of fossil fuel extraction and manufacturing activities (EUR 53 billion), having tripled since 2000. The clean energy sector thus generates more value added that stays within Europe than the fossil fuel sector. Over 2000-2017, annual growth in the gross value added of renewable energy production averaged 9.4%, while that of energy efficiency activities averaged 22.3%, far outpacing the rest of the economy (1.6%). The labour productivity of the EU (gross value added per employee) has also improved significantly in the clean energy sector, especially in the renewable energy production sector, where it has risen by 70% since 2000. 2.3 Human capital Clean energy technologies and solutions provide direct full-time employment for 1.5 million people in Europe , of which more than half million in renewables (growing to 1.5 million when indirect jobs are also included) and almost 1 million in energy efficiency activities (in 2017) . Direct jobs in renewable energy production for the EU grew from 327,000 in 2000 to 861,000 in 2011, falling to 502,000 in 2017. As Figure 3 shows, there was a decrease after 2011, probably explained by the effect of the financial crisis, including the subsequent relocation of manufacturing capacity, as well as by increased productivity and a decrease in job intensity. The number of direct jobs in energy efficiency increased steadily from 244,000 in 2000 to 964,000 in 2017. Direct jobs in these sectors (RES and EE) represent about 0.7% of total employment in EU, but their growth has outpaced the rest of the economy, with average annual growth of 3.1% and 17.4% respectively.

Source 3 (JRC based on Eurostat data [env_ac_egss1], [nama_10_a10_e] and EurObserv'ER) The growing trend of employment in the clean energy sector is global, although the technologies that offer more employment opportunities vary by region. In general, jobs have been created mainly in the solar PV and wind energy sectors. China, which has almost 40% of all global jobs in renewables, employs most in solar PV, solar heating and cooling, and wind energy; Brazil’s employment is in the bioenergy sector; and the EU employ most people in bioenergy (about half of all RES jobs) and wind energy (about a quarter), see Figure 4. Source 4 (JRC based on IRENA, 2019 ) The clean energy technology sector continues to face challenges, in particular availability of skilled workers at the locations where they are in demand., The skills concerned include, in particular, engineering and technical skills, IT literacy and ability to utilise new digital technologies, knowledge of health and safety aspects, specialised skills in carrying out work in extreme physical locations (for example at height or at depth), and soft skills like team work and communication, as well as knowledge of the English language. As regards gender, women accounted for an average of 32% of the workforce in the renewables sector in 2019. This figure is higher than in the traditional energy sector (25%) but lower than the share across the economy (46.1%) and furthermore gender balance differs to a higher extend for certain job profiles. 2.4 Research and innovation trends In recent years, the EU has invested an average of nearly EUR 20 billion a year on clean energy R&I prioritised by the Energy Union,. EU funds contribute 6%, public funding from national governments accounts for 17%, and business contributes an estimated 77%. The R&I budget allocated to energy in the EU represents 4.7% of total spending on R&I. In absolute terms, however, Member States have reduced their national R&I budgets for clean energy (Figure 5); in 2018 the EU spent half a billion less than in 2010. This trend is global. Public sector R&I spending on low-carbon energy technologies was lower in 2019 than in 2012, while countries continue to allocate large amounts of R&I funding to fossil fuels. This is the opposite of what is needed: R&I investments in clean technologies need to increase if the EU and the world want to meet their decarbonisation commitments. Today the EU has the lowest investment rate of all major global economies measured as a share of GDP (Figure 5). EU research funds have been contributing a larger share of public funding and have been essential in maintaining research and innovation investment levels over the last four years. In the private sector, only a small share of revenue is currently being spent on R&I in the sectors most in need of large-scale adoption of low-carbon technologies51. The EU have estimated that private investment in Energy Union R&I priorities has been decreasing: it currently amounts to around 10% of businesses’ total expenditure on R&I. This is higher than the US and comparable to Japan, but lower than China and Korea. A third of this investment goes on sustainable transport, while renewables, smart systems and energy efficiency receive about a fifth each. While the distribution of private R&I in the EU has changed only slightly in recent years, there has been a more significant shift globally towards industrial energy efficiency and smart consumer technologies.

On average, major listed companies and their subsidiaries make up 20-25% of the main investors, but account for 60-70% of patenting activity and investments. In the EU, the automotive sector is the biggest private R&I investor in absolute terms in the Energy Union R&I priorities, followed by biotechnology and pharmaceuticals. Figure 7 shows that among the energy industries, the oil and gas sector is the largest investor in R&I. Other energy sectors, such as electricity or alternative energy companies, have much lower budgets for R&I, although they spend more of it on clean energy. It is worrying that a major share of the private budget for R&I in the energy sector is not spent on clean energy technologies. According to the IEA, less than 1% of oil and gas companies’ total capital expenditure has been outside their core business areas, on average,, and only 8% of their patents are in clean energy. Source 7 JRC49 Venture capital (VC) investment in clean energy had been increasing in recent years, but remains low (just over 6-7%) compared with private-sector investment in R&I. So far, 2020 marks a significant global slowdown in VC investment in clean energy technologies. Patenting activity in clean energy technologies peaked in 2012, and has been in decline since. Within this trend, however, certain technologies that are increasingly important for the clean energy transition (e.g. batteries) have maintained or even increased their levels of patenting activity. The EU and Japan lead among international competitors in high-value patents on clean energy technologies. Clean energy patents account for 6% of all high-value inventions in the EU. The EU’s share is similar to that of Japan, and higher than China (4%), the US and the rest of the world (5%), and second only to Korea (7%) in terms of competing economies. The EU host a quarter of the top 100 companies in terms of high-value patents in clean energy. The majority of inventions funded by multinational firms headquartered in the EU are produced in Europe and, for the most part, by subsidiaries located in the same country. The US and China are the main IPO offices – and by extension markets – targeted for protection of EU inventions. 2.5 Covid-19 Recovery During the pandemic, the European energy system has proved to be resilient to shocks stemming from the pandemic and a greener energy mix has emerged, with coal power generation in the EU falling by 34% and renewables providing 43% of power generation in Q2 2020, the highest share to date . At the same time, the stock market performance of the clean energy sector has seemed less affected and recovered more quickly than fossil-fuel sectors. Digitalisation has helped companies and sectors respond successfully to the crisis, also boosting the emergence of new digital applications. Although the EU energy value chains are recovering, the crisis has brought to the forefront the question of optimising and potentially regionalising supply chains, to reduce exposure to future disruptions and improve resilience. In response, the Commission aims to identify the critical supply chains for energy technologies, analyse potential vulnerabilities and improve their resilience. The key energy priorities in recovery are energy efficiency in particular through the renovation wave, renewable energy sources, hydrogen and energy system integration. There is a further concern that the pandemic is affecting investments in and resources available for R&I, as has demonstrably happened in previous economic crises. Recovery measures can take advantage of the job creation potential offered by energy efficiency and renewable energy , including that of the R&I sector, to boost employment while also moving towards sustainability. Support for R&I investment, including corporate R&I, has a greater positive impact on employment in medium- to high-technology sectors such as cleaner energy technology. At the same time, breakthrough low-carbon technologies are needed, for instance in energy-intensive industries, which will require faster R&I investment for their demonstration and deployment. 3.Focus on key clean energy technologies and solutions In the section below, the most relevant competitiveness values for each of the six technologies analysed above, and the status, value chain and global market are analysed, based on the indicators outlined in Table 1. The EU's performance is compared as far as possible with other key regions (e.g. USA, Asia). A more detailed assessment of other important clean and low carbon energy technologies needed to reach climate neutrality is set out in the accompanying Clean Energy Transition – Technologies and Innovation Report. 3.1 Offshore renewables – wind Technology: the EU cumulative installed capacity of offshore wind (OW) amounted to 12 GW in 2019. At the 2050 time horizon, EU scenarios foresee approximately 300 GW of wind offshore capacity in the EU. Globally, costs have fallen steeply in recent years, and demand has been stimulated by new tenders implemented worldwide and the building of subsidy-free wind parks. OW has benefited considerably from onshore wind developments, especially economies of scale (e.g. material developments and common components), thereby allowing efforts to focus on the technology’s most innovative segments (such as floating offshore wind, new materials and components). Recent offshore wind projects have observed much increased capacity factors. The average power capacity of the turbines has increased from 3.7 MW (2015) to 6.3 MW (2018), thanks to sustained R&I efforts. R&I in offshore wind revolves mainly around increased turbine size, floating applications (particularly substructure design), infrastructure developments, and digitalisation. About 90% of EU R&I funding for wind comes from the private sector. At EU level, offshore wind R&I has been supported since the 1990s. Offshore wind, in particular floating, have received substantial funding in recent years ( Figure 8 ). These R&I patterns highlight that through the development of new market segments the EU could establish a competitive edge. For example, a fully-fledged EU OW supply chain (extended also to untapped EU sea basins), leadership in floating offshore industry targeting markets with deeper waters or new emerging concepts e.g. airborne wind systems or the development of a port infrastructure capable to deliver the ambitious targets (and synergies to other sectors e.g. hydrogen production in ports). Patenting trends confirm Europe’s competitiveness in wind energy. EU players are leading in high value inventions and they protect their knowledge in other patent offices outside their home market. Figure 8 Evolution of EC R&I funding, categorised by R&I priorities for wind energy under FP7 and H2020 programmes and the number of projects funded over 2009-2019.

Other recent innovations target the logistics/supply chain, e.g. the development of wind turbine gearboxes compact enough to fit into a standard shipping container as well as applying circular economy approaches along the life-cycle of installations. Further innovations and trends expected to increase most over the next ten years include superconducting generators, advanced tower materials and the added value of offshore wind energy (system value of wind). The SET Plan Group on OW identified most of these areas as key for Europe to remain competitive in the future. Currently, Europe is leading in all parts of the value chain of sensing and monitoring systems for OW turbines, including research and production. Value chain: On the market side, EU companies are ahead of their competitors in providing offshore generators of all power ranges, reflecting a well-established European offshore market and the increasing size of newly installed turbines. Currently, about 93% of the total offshore capacity installed in Europe in 2019 is produced locally by European manufacturers (Siemens, Gamesa Renewable Energy, MHI Vestas and Senvion). Global market: the EU share of global exports increased from 28% in 2016 to 47% in 2018, and 8 out of the top 10 global exporters were EU countries, with China and India being the key global competitors. Between 2009 and 2018, the EU trade balance remained positive, showing a rising trend. In terms of global markets projections, within Asia (including China), offshore wind capacity is expected to reach around 95 GW by 2030 (out of a projected global capacity of almost 233 GW by 2030). Nearly half of global offshore wind investment in 2018 took place in China. At the same 2030 time horizon, the CTP-MIX scenario projects 73 GW of wind offshore capacity in the EU. Currently, the NECPs project 55 GW of offshore wind capacity by 2030. Floating applications seem to become a viable option for EU countries and regions lacking shallower waters (floating OW farms for depths between 50 and 1000 metres) and could open up new markets based on areas such as the Atlantic Ocean, the Mediterranean and, potentially, the Black Sea. A number of projects are planned or underway that will lead to the installation of 350 MW of floating capacity in European waters by 2024. Moreover, the EU wind industry aims to install floating OW farms with 150 GW of capacity by 2050 in European waters with a view to achieving climate neutrality. The global market for energy from floating OW farms represents a considerable commercial opportunity for EU companies. A total of about 6.6 GW from this source are expected by 2030, with significant capacities in certain Asian countries (South Korea and Japan), in addition to the European markets (France, Norway, Italy, Greece, Spain) between 2025 and 2030. Since China has abundant wind resources in shallow waters, it is not expected to build floating wind farms with significant capacity in the medium term. Floating applications can also reduce under-water environmental impacts, notably during the construction phase. Offshore wind is a competitive industry on the global market. Emerging global market demands, such as that for energy generated by floating wind farms, may become key to EU industry if it is to be competitive in the growing offshore wind industry, and remain so. A key consideration is whether Member States will commit to wind energy. The current mismatch between the 2030 NECP projection (55 GW of offshore wind) and the EU’s scenario (73 GW) means that investment must be stepped up. The positive impact of offshore wind development on supply chains in sea basins is relevant to regional development (location of manufacturing, assembly of turbines close to the market, impact on port infrastructure). The offshore renewable energy strategy will define a set of measures to overcome challenges and boost offshore prospects. 3.2 Offshore renewables – Ocean energy Technology: tidal and wave energy technologies are the most advanced of the ocean energy technologies, with significant potential located in a number of Member States and regions. Tidal technologies can be considered as being at the pre-commercial stage. Design convergence has helped the technology develop and generate a significant amount of electricity (over 30 GWh since 2016). A number of projects and prototypes have been deployed across Europe and worldwide. Most of the wave energy technological approaches, however, are at technology readiness level (TRL) 6-7, with a strong focus on R&I. Most improvements in wave energy results stem from ongoing projects in the EU. Over the past five years, the sector has shown resilience and significant technology progress has been achieved thanks to the successful deployment of demonstration and first-of-a-kind farms. The LTS scenarios foresee limited uptake of ocean energy technology. The high cost of wave and tidal energy converters and the limited information available on the performance limit the capture of ocean energy in the model. At the same time, the European Green Deal emphasises the key role marine renewable energy will play in the transition to a climate-neutral economy, with a significant contribution expected under the right market and policy conditions (2.6 GW by 2030 and 100 GW in European waters by 2050). Ongoing demonstrations show that costs can be reduced fast: data from Horizon 2020 projects indicate that the cost of tidal energy fell by over 40% between 2015 and 2018,. Value chain: European leadership spans the whole ocean energy supply chain and innovation system. The European cluster formed by specialised research institutes, developers and the availability of research infrastructure has enabled Europe to develop and maintain its current competitive position. Global market: the EU maintains global leadership despite the UK’s withdrawal from the bloc and changes in the market for wave and tidal energy technologies. 70% of global ocean energy capacity has been developed by EU-based companies. Over the next decade it will be vital for EU developers to build on their competitiveness position. Global ocean energy capacity is expected to increase to 3.5 GW within the next five years, and an increase of up to 10 GW can be expected by 2030. Within the EU, 838 companies in 26 countries filed patents or were involved in the filing of patents to do with ocean energy between 2000 and 2015. The EU has long maintained technological leadership in developing ocean energy technologies, thanks to the sustained support provided for R&I. Between 2007 and 2019, total R&I expenditure on wave and tidal energy amounted to EUR 3.84 billion, most of which (EUR 2.74 billion) came from private sources. In the same period, national R&I programmes contributed EUR 463 million to the development of wave and tidal energy, while EU funds supported R&I to the tune of almost EUR 650 million (including NER300 and Interreg projects (co-funded by the European Regional Development Fund)). On average, EUR 1 billion of public funding (EU and national) leveraged EUR 2.9 billion of private investments in the course of the reporting period. Significant cost reduction is still needed for tidal and wave energy technologies to exploit their potential in the energy mix, for which intensified (i.e. increased rate of projects in the water) and continued (i.e. continuity of projects) demonstration activities are necessary. Despite advances in technology development and demonstration, the sector faces a struggle in creating a viable market. National support appears low, reflected by the limited commitment to ocean energy capacity in the NECPs compared to 2010 and the lack of clear dedicated support for demonstration projects or for the development of innovative remuneration schemes for emerging renewable technologies. This limits scope for developing a business case and for identifying viable ways to develop and deploy the technology. Specific business cases for ocean energy therefore need more focus, in particular when its predictability can enhance its value, as well its potential for decarbonising small communities and EU islands. The upcoming offshore renewable energy strategy offers an opportunity to support the development of ocean energy and enable the EU to exploit its resources across the EU to the full.

3.3 Solar photovoltaics (PV) Technology: solar PV has become the world’s fastest-growing energy technology, with demand for solar PV spreading and expanding as it becomes the most competitive option for electricity generation in a growing number of markets and applications. This growth is supported by the decreasing cost of PV systems (EUR/W) and increasingly competing cost of electricity generated (EUR/MWh). Figure 11 European players across the PV industry value chain Value chain: EU companies are competitive mainly in the downstream part of the value chain. In particular, they have managed to remain competitive in the monitoring, control and balance of system (BoS) segments, hosting some of the leaders in inverter manufacturing and in solar trackers. EU companies have also maintained a leading position in the deployment segment, where established players like Enerparc, Engie, Enel Green Power or BayWa.re have been able to gain new market share worldwide. Furthermore, equipment manufacturing still has a strong base in Europe (e.g. Meyer Burger, Centrotherm, Schmid). Global market: the EU has lost its market share in some of the upstream parts of the value chain (e.g. solar PV cell and module manufacturing). The highest value added is located both a long way upstream (in basic and applied R&D, and design) and a long way downstream (in marketing, distribution, and brand management). Even though the lowest value-added activities occur in the middle of the value chain (manufacturing and assembly), companies have an interest in being well positioned in these segments, to reduce risks and financing costs. The EU still hosts one of the leading polysilicon manufacturers (Wacker Polysilicon AG), whose production alone is sufficient to manufacture 20 GW of solar cells, and which exports a significant part of its polysilicon output to China. Currently, global production of PV panels is valued at about EUR 57.8 billion, with the EU accounting for EUR 7.4 billion (12.8%) of that amount. The EU still accounts for a relatively high share of the segment’s total value, thanks to the production of polysilicon ingots. However, it has fallen back dramatically in the manufacture of PV cells and modules. All the top 10 producers of PV cells and modules now produce most of their output in Asia. Capital expenditure costs for polysilicon, solar cell and module manufacturing plants fell dramatically between 2010 and 2018. Together with innovations in manufacturing, this should offer an opportunity for the EU to take a fresh look at the PV manufacturing industry and reverse the situation. The EU’s presence in the far upstream and far downstream parts of the value chain could well provide a basis for rebuilding the PV industry. This would require a focus on specialisation or high-performance/high-value products, such as equipment and inverter manufacturing and PV products tailored to the specific needs of the building sector, transport (vehicle integrated PV) and/or agriculture (dual land use with AgriPV), or to the demand for high-efficiency/high-quality solar power installations to optimize use of available surfaces and of resources. The modularity of the technology makes it easier to integrate PV in a number of applications, especially in the urban environment. These novel PV technologies, which are now reaching the commercial phase, could offer a new basis for rebuilding the industry. The strong knowledge of the EU research institutions, the skilled labour force, and the existing and emerging industry players provide a basis for re-establishing a strong European photovoltaic supply chain. To remain competitive, such industry needs to develop a global outreach. Building a sizeable EU PV manufacturing industry would also reduce the risk of supply disruptions and quality risks. 3.4 Renewable hydrogen production through electrolysis This section focuses on renewable hydrogen production and on the competitiveness of this first segment of the hydrogen value chain. Hydrogen is key to to store energy produced by renewable electricity and to decarbonise sectors that are hard to electrify. The aim of the EU hydrogen strategy is to integrate 40 GW of renewable hydrogen electrolysers and the production of up to 10 Mt of renewable hydrogen in the EU energy system by 2030, with direct investment of between EUR 24 billion and EUR 42 billion,. Technology: the capital cost of electrolysers has fallen by 60% in the last decade, and is expected to halve again by 2030, compared to the present day, thanks to economies of scale. The cost of renewable hydrogen currently lies between EUR 3 and EUR 5.5 per kilo, making it more expensive than non-renewable hydrogen (EUR 2 (2018) per kilo of hydrogen). Today, less than 1% of world hydrogen production comes from renewable sources. Projections for 2030 locate the cost of renewable hydrogen in the range of EUR 1.1-2.4/kg, which is cheaper than low-carbon fossil-based hydrogen, and nearly competitive with fossil-based hydrogen. Between 2008 and 2018, the Fuel Cells and Hydrogen Joint Undertaking (FCH JU) supported 246 projects across several hydrogen-related technological applications, reaching a total investment figure of EUR 916 million, complemented by EUR 939 million of private and national/regional investments. Under the Horizon 2020 programme (2014-2018), over EUR 90 million was allocated to developing electrolysers, complemented by EUR 33.5 million of private funds,. At national level, Germany has deployed most resources, with EUR 39 million allocated to projects devoted to electrolyser development between 2014 and 2018. In Japan, Asahi Kasei received a multimillion dollar grant supporting the development of their alkaline electrolyser. Asia (mostly China, Japan and South Korea) dominates the total number of patents filed between 2000 and 2016 for the hydrogen, electrolyser and fuel cell groupings. Nevertheless, the EU performs very well and has filed the largest number of ‘high-value’ patent families in the fields of hydrogen and electrolysers. Japan, however, has filed the largest number of ‘high-value’ patent families in the field of fuel cells.

Value chain: the main water electrolysis technologies are alkaline electrolysis (AEL), polymer electrolyte membrane electrolysis (PEMEL) and solid oxide electrolysis (SOEL): -AEL is a mature technology with operational costs driven by electricity costs and high capital cost. The research challenges are high-pressure operation and the coupling with dynamic loads. -PEMEL can reach signiﬁcantly higher current densities than AEL and SOEL, with the potential to further reduce capital cost. In recent years, several large (MW-scale) plants have been installed in the EU (in Germany, France, Denmark, and the Netherlands), enabling the EU to catch up on AEL. It is a market-ready technology with research mainly focused on increasing aerial power density, while guaranteeing the simultaneous reduction of critical raw material use and durability performance. -SOEL exhibits greatest efficiency. However, plants are relatively smaller, usually still in the 100 kW capacity range, require steady operation, and need to be coupled to a heat source. Overall, SOEL is still in the development phase, although it is possible to order products on the market. In 2019, the EU had around 50 MW of water electrolysis capacity installed (about 30% AEL and 70% PEMEL), of which about 30 MW were located in Germany in 2018. AEL has no critical components in its supply chain. Thanks to technical similarities with the chlor-alkali electrolysis industry, which deploys much larger installations, it can exploit technology overlap and benefit from well-established value chains.. PEMEL and SOEL share some cost and supply risks with the respective fuel cell value chains. This applies in particular to critical raw materials in the case of PEMEL, and to rare earths in the case of SOEL. PEMEL has to withstand corrosive environments and therefore requires the use of more expensive materials, such as titanium for bipolar plates. The main system-cost contributors are the electrolyser stack (40-60%), followed by the power electronics (15-21%). The core components driving up the stack cost are the layers of membrane electrode assemblies (MEA), which contain noble metals. Cell components based on rare earths that are used for SOEL electrodes and electrolyte are the main contributors to stack cost. It is estimated that stacks account for about 35% of overall SOEL system cost. Global market: European companies are well-placed to benefit from market growth. The EU has producers of all three main electrolyser technologies, and is the only region offering a well-defined market product for SOEL. The other players are located in the UK, Norway, Switzerland, the US, China, Canada, Russia and Japan. The global turnover for water electrolyser systems is currently estimated to be in the range of EUR 100 to EUR 150 million per year. According to 2018 estimates, water electrolysis production could reach a capacity of 2 GW per year (globally), within a very short space of time (one to two years). European manufacturers could potentially supply about one third of this increased global capacity. The aim of the EU’s hydrogen strategy is to achieve a significant renewable hydrogen production capacity by 2030. This will require a tremendous effort to scale up from the 50 MW of water electrolysis capacity currently installed to 40 GW by 2030, with the setting up of the capacity required for a sustainable value chain in the EU. This effort should build on the innovation potential offered by the whole spectrum of the electrolyser technologies and on the leading position EU companies have in electrolysis in all technology approaches, along the whole value chain, from component supply to final integration capability. Important cost reductions are expected as a result of scaling up industrial scale manufacturing of electrolysers. 3.5 Batteries Batteries are a key enabler for the transition to the climate-neutral economy we aim to reach by 2050, for the roll-out of clean mobility, and for energy storage to enable the integration of increasing shares of variable renewables. This analysis focuses on lithium ion (Li-ion) battery technology. There are several reasons for this: -the very advanced state of this technology and its market readiness; -its high round trip efficiency; -its considerable projected demand; and -its expected broader use, be it in electric vehicles, future electric (maritime and airborne) vessels, or in stationary and other industrial applications, leading to considerable market opportunities. Technology: global demand for Li-ion batteries is projected to increase from about 200 GWh in 2019 to about 800 GWh in 2025, and to exceed 2 000 GWh by 2030. Under the most optimistic scenario, it could reach 4 000 GWh by 2040. Figure 12 Historical and projected annual Li-ion battery demand, by use

The projected growth, mainly based on electric vehicles (especially passenger vehicles), comes from the strong technological improvements that are expected and further decreases in cost. Lithium-ion battery prices, which were above USD 1 100/kWh in 2010, have fallen 87% in real terms to USD 156/kWh in 2020. By 2025, average prices are expected to be close to USD 100/kWh. As regards performance, lithium-ion energy density has increased significantly in recent years, tripling since their commercialisation in 1991151. Further potential for optimisation is expected with the new generation of Li-ion batteries. Value chain: Figure 14 shows the value chain for batteries together with the EU’s position in the various segments. EU industry is investing in mining, raw and advanced materials production and processing (cathode, anode and electrolyte materials), and in modern cell, pack and battery production. The aim is to become more competitive through quality, scale and, in particular, sustainability. Source 13 InnoEnergy (2019). Global market: the global market for Li-ion batteries for electric cars is currently worth EUR 15 billion/year (of which the EU accounts for EUR 450 million/year (2017)). A conservative estimate foresees that the market will be EUR 40-55 billion/year in 2025 and EUR 200 billion/year in 2040. In 2018, the EU had only about 3% of the global production capacity of Li-ion cells, while China had about 66%. European industry was perceived as being strong in the downstream, value-driven segments, such as battery pack manufacturing and integration and battery recycling, and generally weak in upstream, cost-driven segments such as materials, components and cell manufacturing,. The marine battery market is growing and estimated to be worth more than €800 million/year by 2025, more than half within Europe and a technological sector where Europe currently leads. Recognising the urgent need for the EU to recover competitiveness in the battery market, the Commission launched the European Battery Alliance in 2017 and adopted a strategic action plan for batteries in 2018. This is a comprehensive policy framework with regulatory and financial instruments to support the establishment of a complete battery value chain ecosystem in Europe. At the same time, large-scale battery and battery cell manufacturers are starting to establish new production plants (e.g. Northvolt). Currently, there have been announcements for investments in up to 22 battery factories (some of which are under construction), with a projected capacity of 500 GWh by 2030. The EU has strengths which it can build on to catch up in the battery industry, particularly in advanced materials and battery chemistries, and in recycling, where EU pioneering legislation has made it possible to develop a well-structured industry. The Batteries Directive is currently under revision. However, to capture a significant market share of the new and fast-growing rechargeable battery market, sustained action is needed over an extended period to ensure more investment in production capacity. This needs to be supported by R&I to improve the performance of batteries, while also guaranteeing that they meet EU-level quality and safety standards, as well as to guarantee the availability of raw and processed materials and the reuse or recycling and sustainability of the whole battery value chain. There also needs to be a new comprehensive EU legislative framework that sets out robust standards for performance and sustainability for batteries placed on the EU market. This will help industry to plan investments and ensure high standards of sustainability in line with the objectives of the European Green Deal. A Commission proposal will be adopted shortly. While improving the position on Li-ion technology is likely to be a core interest stream over the next few decades, there is also a need to look into other new and promising battery technologies (such as all-solid state, post Li-ion and redox flow technology). These are important for applications whose requirements cannot be met by Li-ion technology. 3.6 Smart electricity grids Electrification increases in all scenarios for 2050, so a smart electricity system is essential if the EU is to achieve its Green Deal ambitions. A smart system enables a more efficient integration of increasing shares of renewable electricity production and of increasing electricity storage and/or consuming devices (e.g. electric vehicles) in the energy system. The same applies to the growing numbers of devices that run on electricity, such as electric vehicles. Through comprehensive control and monitoring of the grid, smart systems also create value by reducing the need for curtailment of renewables and enabling competitive and innovative energy services for consumers. According to the IEA, investment in enhanced digitalisation would reduce curtailment in Europe by 67 TWh by 2040. In Germany alone, 6.48 TWh was curtailed in 2019, while grid stabilisation measures cost EUR 1.2 billion. Such systems need to be cyber-secure, which requires sector-specific measures. Investments in digital grid infrastructure are dominated by hardware such as smart meters and electric vehicle chargers. In Europe, investments remained stable in 2019 at nearly EUR 42 billion, with a larger portion of spending allocated to upgrading and refurbishing the existing infrastructure.

The main source of support for R&I investments in smart grids at EU level is Horizon 2020, which provided almost EUR 1 billion between 2014 and 2020. EUR 100 million was invested in dedicated digitalisation projects, and many other smart grid projects assign a considerable proportion of their budget to digitalisation. Figure 16 shows that public investments in smart grids, including those made through Horizon 2020, account for a significant share of total investments by transmission system operations (TSOs). It is noteworthy that budgets for R&I by TSOs are low, at around 0.5% of their annual budget,. The TEN-E Regulation also supports investments in smart electricity grids as one of the 12 priority areas, but investments in (cross-border) smart grids could benefit from higher levels of support from regulatory authorities through inclusion in national network development plans and eligibility for EU financial assistance in the form of grants for studies and works as well as innovative financial instruments under the Connecting Europe Facility (CEF). From 2014 to 2019, CEF has provided up to EUR 134 million of financial assistance related to different smart electricity grids projects across the EU. The following two key technologies are assessed in more detail: High-voltage direct current (HVDC) systems, and digital solutions for grid operations and for the integration of renewables. I)High-voltage direct current (HVDC) systems Technology: higher demand for cost-effective solutions to transport electricity over long distances, particularly, in the EU, to bring power generated by offshore wind to land, increases demand for HVDC technologies. According to Guidehouse Insights, the European market for HVDC systems will grow from EUR 1.54 billion in 2020 to EUR 2.74 billion in 2030, at a growth rate of 6.1% ,. The global market is expected to be around EUR 12.5 billion (2020), with the main investments in HVDC taking place in Asia, where much of the market is taken up by Ultra-HVDC. HVDC equipment is very costly, and projects to build HVDC connections are therefore very expensive. Given the technological complexity of HVDC systems, their installation is generally managed by manufacturers. Value chain analysis: the value chain for HVDC grids can be segmented along the different hardware components needed to realise an HVDC connection. The cost of HVDC systems is accounted for largely by converters (about 32%) and cables (about 30%). In the converter stations’ value chain, power electronics play a key role in determining the efficiency and the size of the equipment. Energy-specific applications represent only a small part of the global market in electronic components, but offshore grids and wind turbines depend on their functioning well under offshore conditions. R&I investments in HVDC technologies are mainly private. Public funding at EU level through Horizon 2020 is modest, but has been boosted by the recently finished Promotion project. Global market: the global HVDC market is led primarily by three companies, namely Hitachi ABB Power Grids, Siemens, and GE. Siemens and Hitachi ABB Power Grids have around 50% of the market in most market segments, whereas cable companies make up around 70% of the market in the EU, and the main competitors are Japanese. In China, a further vendor, China XD Group, dominates the market. So far, vendors have sold turnkey systems independently, as they were installed as point-to-point HVDC connections. In the more interconnected offshore grid of the future, HVDC systems from different manufacturers will need to be interconnected. This brings technological challenges to maintaining grid control and, in particular, to ensuring the interoperability of HVDC equipment and systems. Moreover, as all components need to be installed on offshore platforms, it is important to reduce their size, and there is a need to develop power electronic solutions specifically for offshore energy applications. II)Digital solutions for grid operations and for the integration of renewables Technology & value chain: the market for grid management technologies is forecast to grow very rapidly. The IEA has estimated potential savings from these specific technologies at almost USD 20 billion globally in cost reduction of operation and maintenance (O&M) and almost USD 20 billion in avoided network investment. The market consists of different technologies and services in a value chain that is difficult to separate clearly, which seem to be integrating as the need increases for integrated solutions to manage storage, demand response, distributed renewables and the grid itself. This reports highlights two aspects. Software- and data-based energy services, which are key to optimising integration of renewables, including at local level, through remote control of different technologies, in particular renewables and virtual power plants (VPP). This is a fast-growing market, forecast to increase from EUR 200 million (globally) in 2020 to EUR 1 billion in 2030,. It forms the basis of a new industry that provides energy services to energy businesses (including network operators) as well as to business and household energy consumers. Thanks to a combination of increase in shares of renewables and market-supporting policies, Europe has been the driving force behind virtual power plant (VPP) markets, accounting for nearly 45% of global investments in 2020. Most of this in North-West Europe, including the Nordic countries. Within Europe, Germany is forecast to capture about one-third of the total VPP market’s annual capacity by 2028. Digital technologies for improved grid operation and maintenance (O&M), which is a market focused particularly on network operators. This is also a growing market, expected to reach EUR 0.2 billion in the EU by 2030 for software platforms for predictive maintenance, and EUR 1.2 billion for Internet-of-Things (IoT) sensors. The IoT market is expected to grow at 8.8% between 2020 and 2030. Global market: the EU holds a strong position in both parts. Many of the global companies are European (Schneider Electric SE and Siemens). Competition is strongest from US companies, including several innovative start-ups. The Internet-of-Things (IOT) sensor and monitoring device hardware market consists of several major players with broad portfolios, and dozens of medium and small companies in niche markets. A handful of global companies (Hitachi ABB, IBM, Schneider Electric SE, Oracle, GE, Siemens, and C3.ai) dominate the market for software solutions, which it is hard for new players to enter. The global market for digital services is shown in figure 17. Source 15 ASSET study on competitiveness