The need to future-proof support for European energy infrastructure

The creation of a single market for people, products and services has been central to the European project since the forerunner of the European Union was founded in 1951. In the energy sector, such a single market requires not only the integration of different marketplaces and potential buyers and sellers of energy but also, crucially, the establishment of a seamless European energy system. In the absence of a dedicated integrated infrastructure, transporting electrons and molecules from where they are produced or imported to where they are consumed would be impossible.

Long story short – without infrastructure, no single market.

Market integration can be measured through improved competition on the buy and sell sides, greater market liquidity and depth and, ultimately, price convergence across countries and zones. It is worth noting that even where some cross-border infrastructure exists, the pursuit of perfect integration will still be hampered if there is not enough available capacity. If the electricity price is low in France and high in Germany, the difference will persist if only insufficient electricity can flow from France to Germany in response to these market conditions. The two markets will remain separate, as explored by  Catherine Galano and Stefan Rohm.

Selected projects win EU seal of approval, pleasing investors…

To remove the infrastructure barriers to energy market integration, the European Commission has created the status of Project of Common Interest (“PCI”), which is grounded in the Trans-European Network–Energy (“TEN-E”) regulation.

Energy infrastructure projects that have obtained PCI status benefit from:

• accelerated planning and granting of permits;
• a single national authority for obtaining permits;
• improved regulatory conditions;
• lower administrative costs due to streamlined environmental assessment processes;
• increased public participation via consultations;
•  increased visibility to investors; and
• the possibility to apply for funding from the Connecting Europe Facility (CEF).

In addition to these benefits, the PCI status also sends an important signal to private investors, increasing the attractiveness of projects and thus further lowering the financing costs that form a barrier to selected projects.

Project promoters can apply roughly every two years to join the list of Projects of Common Interest, i.e. those that are deemed to significantly improve cross-border connectivity between EU member states (the application process for the current list is ongoing until 18 November  or 18 December). Processing each application lasts about six months and involves representatives from the EU, national regulatory authorities (including the EU Agency for the Cooperation of Energy Regulators, ACER) and member states. The European networks of transmission system operators for gas and electricity – ENTSOG and ENTSO-E – play supporting roles. The EU has so far drawn up six lists of approved projects since the PCI status was introduced in 2013.

…but need to satisfy a range of technical and economic criteria

However, obtaining the PCI stamp of approval is not easy. In addition to technical standards a project must meet specific eligibility criteria. These are intimately linked to wider EU energy policy and include the following (as per Article 4 of the recast TEN-E regulation 2022/869):

• Cross-border impact. The project creates or significantly improves cross-border capacity between at least two member states (or a member state and a third country, in which case a PCI becomes a Project of Mutual Interest);
• Net benefit. The project creates an economic benefit to society that outweighs its costs;
• Sustainability. The project supports the reduction of greenhouse gas emissions and the phasing out of fossil fuel generation; and
•  Energy policy alignment. The project supports security of supply, market integration and system efficiency and competition.

While PCI status was originally intended for electricity, gas and CO2 transport projects, a revision of the TEN-E regulation in 2022 made gas infrastructure ineligible and extended the range of possible candidates to the whole hydrogen value chain, from electrolysers to transmission to import terminals. More generally, this change has also led to a stronger focus on sustainability in the list of criteria above.

The need to future-proof the PCI status and the wider approach to infrastructure planning

The energy transition creates new challenges for policymakers…

While the award of the PCI status and associated funding through the Connecting Europe Facility has led to tangible improvements in cross-border integration in electricity and natural gas, the climate emergency is confronting EU policymakers with new challenges:

• Ambitious net zero targets mean the green transition needs to ramp up much more quickly than the incremental pace at which Europe’s electricity and natural gas networks evolved over the last 70 years.
• A more complex mix of substitutability and complementarity of energy vectors (e.g. electricity and hydrogen, hydrogen and natural gas) at both the infrastructure and use case levels is creating significant uncertainty about future market developments. This requires careful balancing of the risks of both underinvestment and overinvestment that are associated with this uncertainty: insufficient spending could stifle the market but wasteful outlays on unneeded infrastructure could strain public finances.
• Technological uncertainty remains across the value chain of the “new” vectors (e.g. green hydrogen or carbon capture, use and storage) with regard to cost curves and lead times to commissioning. Doubts also persist in some cases about the sheer technical feasibility of some types of projects. Such concerns may make it difficult to be sure that the needed infrastructure to reach specific milestones, such as those related to the REPowerEU plan in 2030 will actually be delivered (for instance on the ambition to make 20 million tonnes of green hydrogen available to the EU industrial sector by 2030).

…which creates a number of shortcomings in the current PCI process

Having advised clients on both PCI application and assessment procedures, we consider there to be four shortcomings to the current process. These should be addressed by the EU and by national policymakers to ensure that the single energy market does not become an inconsistent patchwork of different infrastructure schemes:

• Lack of understanding of new value chains. H2 and CO2 are new energy vectors with use cases and production and consumption patterns that are quite different from a world focused on only gas and electricity. This has important implications for the interaction of various parts of the respective value chains.
  • However, these implications are not always fully reflected in the current PCI process, either because policymakers are not up to speed and/or because of practicalities such as insufficiently robust modelling tools.
  • This problem has been particularly acute in the case of H2 storage projects but also, more broadly, in the interaction between different infrastructure categories (e.g. between electricity and gas) and in how the EU defines project groups during the process (essentially collections of multiple PCI candidates) for the purpose of cost-benefit analyses.
• Ill-suited methodologies. While the EC has defined general timelines for the PCI process, the characteristics of the “new” energy system described above seem to pose practical challenges for policymakers.
  • Methodologies and assessment procedures that were fit for purpose for electricity and gas may be much less adapted to hydrogen or CO2 infrastructure and may require updating. Even though the current process is the second iteration under the recast TEN-E regulation, various stakeholders – first and foremost the Commission but also the European Network of Transmission System Operators for Gas (ENTSOG) – still seem to have lots to learn.
  • By way of example, timelines for modelling results, though central for the assessment of net benefits, continue to slip. And fundamental questions on how to approach an application remain unclarified. This creates a lack of visibility for project promoters but also a grey area of interpretation, which could ultimately lead to an inconsistent evaluation of candidate projects and a suboptimal list of retained PCI projects.
• Lack of appropriate criteria. While the general criteria used in the TEN-E regulation can be directly traced back to the principles of the EU’s overarching energy policy, the Commission defines a subset of eligibility and assessment criteria that are specific to each infrastructure category. It is interesting to note that the validity of at least some of the chosen thresholds for these criteria still needs to be proven as the Commission grapples with how they fit in with the project applications it receives.
  • For instance, the Commission has set out to support the development of smart gas grids, but recently it had to admit that during the previous application cycle in 2022-2023 not a single project had passed the eligibility checks, including, notably, the cross-border criterion. During a webinar in September 2024, Commission officials nevertheless insisted on retaining the exact same eligibility thresholds.
  • Similarly, some of the sub-criteria set out in the TEN-E regulation remain today effectively unassessed. This is either because member states have deemed them less relevant (often ignoring market sentiment) or because the appropriate modelling tools are lacking. As a consequence, the evaluation of certain criteria becomes either a higher or a lower priority than the TEN-E regulation itself suggests. This in turn effectively penalises some types of infrastructure. For instance, despite clear evidence of the significant potential of H2 storage, the number of projects included in the current PCI list remains relatively small.
• Gaps and planning: Finally, while the PCI status may serve as a useful tool for infrastructure development across borders, it only imperfectly addresses barriers for infrastructure development within countries as these are not supported by similar statuses or funding sources like PCI or CEF. Again, this may be less of an issue in mature networks such as electricity or natural gas. But ensuring that the complete value chain develops consistently within, as well as across, countries will be vital for the successful development of Europe’s hydrogen and CO2 markets. We can already see today how support for market development differs from one country to another (For instance, state aid support through the “Important Project of Common European Interest” (IPCEI) that amongst others was also used to support the development of national hydrogen projects, has been very strong in some countries (e.g. Germany), while other countries chose not to use this tool to support emerging hydrogen projects. Ultimately this risks creating a patchwork of inconsistent national networks with some international interconnections but not the efficient, integrated energy system that Europe needs.

In the long run, these barriers to a consistent European approach to planning limit the extent to which much-needed infrastructure can be delivered efficiently and on time. They also hamper innovation and risk harming EU competitiveness – a political and economic priority for the new Commission.

The current uncertain state of affairs is challenging for project promoters and officials alike. At Frontier Economics, our EU energy experts assist clients with the PCI application process with the aim of ensuring that socially optimal projects gain the public support they deserve and help Europe make the transition to a green energy future.