EU's energy transition will be a bumpy road

Nuying Huang, Taipei; Peng Chen, DIGITIMES Asia 0

Credit: AFP

The European Union is actively reviewing its reliance on other countries for energy supplies. It has paid a hefty price to stop using Russia's gas. However, it also depends on lithium and fuel-cell batteries made in China. The situation has alarmed the EU member states.

According to Reuters, EU leaders will gather in Spain next month to discuss economic security issues. A document related to the meeting shows that if the EU does not restrict itself from heavily relying on Chinese lithium and fuel-cell batteries, it will repeat the same mistakes it made in terminating the use of Russia's gas, including triggering an energy crisis, causing inflation and forcing central banks to raise interest rates, which impacted economic growth.

Supply chain sources said the EU will face multiple challenges in the energy transition due to its low power self-sufficiency. EU thought it can transition to renewable energy when it stopped buying gas from Russia. However, the economic body has over-relied on other countries for solar and wind power.

In 2013, the EU tried to induce trade barriers to stop China's dumping of solar energy modules. The strategy did not cause the expected effect and became voidable in 2018, which struck Europe's solar energy supply chain. As the zero-carbon emission issue has heated up in recent years, European solar energy companies are trying to make a comeback. However, they are not strong competitors against Chinese companies.

Wind and solar generation have to be connected with energy storage systems to enhance power distribution in the grid and use the power more efficiently. Chemical energy storage systems are mostly supported by lithium batteries, for which the EU also depends on China.

The EU is striving to localize lithium battery production, but the negative effects caused by stopping the use of Russia's gas have increased the costs. Moreover, the US offers more attractive battery production incentives than the EU through the Inflation Reduction Act (IRA), prompting many projects to be suspended or transferred to America. For example, Volkswagen has cut investment in self-made batteries in Europe. Tesla halted its plan to make lithium batteries in Germany.

Europe used to be more open than the US about foreign investment, making it appealing to China-based battery makers. The growing number of Chinese battery plants in Europe is said to be the main reason why Tesla supplier Panasonic refused to set up a factory on the continent. The company will likely be dragged into the over-competition that Chinese players dominate.

According to the European Commission's data, Russia supplied 40% of the EU's imported gas in 2021 before the Russia-Ukraine war started. Russia also provided the EU with 27% of its petroleum and 46% of its coal. The EU still highly depends on China for the fuel cells and lithium batteries used in EVs.