Faced with slowing productivity, rising global competition and high energy costs, the EU faces an ‘existential challenge’ unless it vastly increases investment and reforms its industrial policy, the report has warned. It says that European leaders could be ‘forced to choose’ between climate, economic and foreign policy goals if the EU does not become more productive.  

To boost growth and productivity gains, the EU will need both public and private investments of €750–800bn/y to keep pace with competitors such as China and the US, according to the report. As much as €450bn of this would go towards the energy transition.

The report outlines three major areas for action to reignite sustainable growth. First, Europe must profoundly refocus its collective efforts on closing the innovation gap with the US and China, especially in advanced technologies. The report notes that Europe is stuck in a ‘static industrial structure’ with few new companies rising up to disrupt existing industries or develop new growth engines.  

The second area for action is a joint plan for decarbonisation and competitiveness. If Europe’s ambitious climate targets are matched by a coherent plan to achieve them, decarbonisation will be an opportunity for Europe – ‘but if we fail to coordinate our policies, there is a risk that decarbonisation could run contrary to competitiveness and growth,’ the report notes.  

Even though energy prices have fallen considerably from their peaks, EU companies still face electricity prices that are 2–3 times those in the US, and natural gas prices paid are 4–5 times higher. This price gap is primarily driven by Europe’s lack of natural resources, but also by fundamental issues with the common energy market, the report finds.

Over the medium term, decarbonisation will help shift power generation towards secure, low-cost clean energy sources, but fossil fuels will continue to play a central role in energy pricing at least for the remainder of this decade. Without a plan to transfer the benefits of decarbonisation to end-users, energy prices will continue to weigh on growth, Draghi notes.  

The third area for action outlined in the report is the need to increase security and reduce dependencies. Security, it says, is a precondition for sustainable growth, and rising geopolitical risks can increase uncertainty and dampen investment, while major geopolitical shocks or sudden stops in trade can be extremely disruptive. ‘As the era of geopolitical stability fades, the risk of rising insecurity becoming a threat to growth and freedom is rising,’ the report says.  

Europe is particularly exposed, relying on a handful of suppliers for critical raw materials, especially China, even as global demand for those materials is exploding owing to the clean energy transition. The EU will need to coordinate preferential trade agreements and direct investment with resource-rich nations, build up stockpiles in selected critical areas, and create industrial partnerships to secure the supply chain of key technologies. ‘Only together can we create the necessary market leverage to do all this,’ the report says.  

What are the implications for the energy sector?

Key recommendations for the power sector include substantial investments in energy infrastructure, with a focus on upgrading transmission and distribution grids. Kristian Ruby, Secretary General, Eurelectric, praised the report for bringing power infrastructure to the forefront, alongside storage and flexibility solutions.

Eurelectric also emphasised the report’s commitment to maintaining Europe’s marginal pricing system, which prioritises dispatching the most competitive energy sources. This system has helped reduce price variation and delivered savings of €34bn annually to households and businesses. However, Ruby cautions against untested interventions like temporary price reliefs, which could harm long-term investment signals for clean energy projects.

In a related statement, SolarPower Europe welcomed the report’s focus on power purchase agreements (PPAs) and contracts for difference (CfDs). These tools are seen as crucial for passing the benefits of affordable renewable energy to consumers, thus making energy prices more competitive.  

WindEurope echoed similar sentiments: ‘The big picture is spot on – the energy transition needs a step-change in grids, permitting, finance, supply chains, level playing field and innovation. And the detail is admirable – piercing diagnosis of problems and clear recommendations to sort them.’

Despite these positive aspects, concerns remain. The report’s suggestion to impose predefined shares of publicly subsidised production to specific industries could dampen investment in clean energy. Ruby urged caution, warning that such market interventions could reduce the incentives for generators to enter long-term contracts, ultimately discouraging investment in renewables.  

Walburga Hemetsberger, Chief Executive Officer, SolarPower Europe, warned: ‘President von der Leyen, as she shapes her new College of Commissioners, should be clear: to structurally lower costs, the way forward is based on clean flexibility and smart electrification.’  

The EU says the findings of the report will be used to develop the new Clean Industrial Deal for competitive industries and quality jobs, which will be presented in the first 100 days of the new Commission mandate.