Implications Of RED III Directive For Businesses And Investors

Taylor Wessing PartG mbB


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The European Union's Renewable Energy Directive, adopted on 9 October 2023 as part of the "Fit for 55" package, marks another legislative effort of the European Union towards enhancing sustainable energy use and combating climate change.
European Union Energy and Natural Resources
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The European Union's Renewable Energy Directive (RED III), adopted on 9 October 2023 as part of the "Fit for 55" package, marks another legislative effort of the European Union towards enhancing sustainable energy use and combating climate change. This directive is integral to the EU's strategy to cut net greenhouse gas emissions by at least 55% by 2030 and will - subject to appropriate transformation into national legislation - impact businesses throughout the EU. Based on previous experiences, delays and inadequate implementation acts are not a rarity. Member States shall bring the laws, regulations, and administrative provisions necessary to comply with this Directive into force by 21 May 2025.

1. A new threshold in renewable energy goals

RED III establishes a new goal for the EU to increase the share of renewable energy in its total energy consumption to 42.5% by 2030, supplemented by an additional indicative target of 2.5%. This is an upgrade from the previous target of 32%, indicating the EU's heightened focus on combating climate change and promoting energy security.

2. Sector-specific targets and opportunities

RED III lays out specific targets for different sectors, notably transport, buildings and industry. For companies in the transport sector, RED III introduces dual options for compliance: a minimum of 29% renewable energy use by 2030 or a reduction in greenhouse gas intensity by 14.5% within the same timeframe. In the buildings sector, RED III establishes a goal for Member States to achieve at least 49% of their energy consumption in buildings from renewable sources by 2030. Waste heat and waste cooling can be offset up to an upper limit of 20%. Waste heat and waste cooling are by-products that are generated as part of industrial processes and should be further utilized. In the industrial sector, RED III aims to increase the share of renewable energy sources for end-use and non-energy purposes (energy used in industrial production processes) by an average of 1.6% annually for the periods 2021-2025 and 2026-2030. Additionally, RED III sets a target for renewable non-biogenic fuels in the industry, stipulating that by 2030, at least 42% of the hydrogen used for these purposes should come from renewable sources, increasing to 60% by 2035. These targets intend to promote the switch to more environmentally friendly energy sources and should create potential for innovation in the field of renewable fuels and hydrogen-based technologies.

3. The hydrogen factor

A significant aspect of RED III is the emphasis on renewable fuels of non-biological origin (RFNBOs), primarily hydrogen. By 2030, a combined sub-target of 5.5% for advanced fuels and RFNBOs in the transport sector is set, with a minimum requirement of 1% from RFNBOs, aiming to bolster the hydrogen economy.

4. The nuclear energy debate

RED III also addresses the role of nuclear energy. The indirect acknowledgement within the framework of its provisions for hydrogen being produced by using nuclear power (as "other non-fossil fuel source") to count as part of the renewables targets in the industry sector, is a modest but hard-fought concession to the growing number of pro-nuclear Member States (e.g. France and Sweden). This inclusion has led to debates among Member States, reflecting differing national strategies and priorities in achieving climate goals.

5. Legal and market implications

For businesses, RED III is intended to be a legal and market driver that will shape future investments, technological advancements, and market dynamics. The targets of RED III necessitate a strategic reassessment of energy sources, supply chains, and production processes. Moreover, the simplified regulatory environment and the designation of renewables as an "overriding public interest" are poised to facilitate quicker project approvals and potentially less legal resistance.

RED III also means that a considerable number of investments will be required to achieve the ambitious targets. Financing these projects needs the commitment of banks, private sponsors and public players. Hence the number of project financings will significantly increase in the upcoming years. As Member States must identify areas for the acceleration of renewables, where projects will undergo a simplified and fast-track audit procedure, rapid implementation will be possible. In addition, the deployment of renewables will be of "overriding public interest", limiting possible legal objections to new installations.

6. Looking ahead: challenges and prospects

While RED III presents both challenges and opportunities, the transition to a more sustainable energy mix requires innovation, collaboration, and proactive political engagement from companies. Companies that adapt swiftly and align with these new regulatory landscapes, will not only contribute to a greener future but also benefit from the burgeoning market for renewable energy technologies and solutions. Above all, the drive to engage and invest in sustainable economic activities pursuant to the EU-taxonomy is backed by respective reporting requirements which demand from an increasing number of corporates as well as financial institutions to publicly disclose their respective activities in this field.

In conclusion, RED III is a transformative policy that requires (i) Member States and relevant national players to adequately transpose it into national law, (ii) sponsors and developers to plan ahead for adequate projects and (iii) companies to review and adapt their energy strategies in light of changing legal and environmental conditions. This Directive goes beyond mere compliance and offers the opportunity to actively participate in the further development of the renewable energy sector, which can be beneficial for both companies and the environment.

Originally published 29 January 2024

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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