Electricity is almost playing the role of a ‘silver bullet’ on Europe’s path to climate neutrality. Across a wide range of applications in industry, transport and heating, electrification is the most mature and cost-effective option for decarbonizing energy consumption. However, the transition from fossil fuels to electricity in Europe has progressed only slowly in recent years, with virtually no investment momentum in key sectors such as energy-intensive industries. With a dedicated action plan on electrification published in July 2026, the European Commission aims to remove barriers to investment in electricity-based technologies.
The plan sets out, for the first time, a clear overall target for electrification: by 2040, the share of electricity in the EU’s final energy consumption is to double from the current 23% to 46%. The plan identifies a number of technical and behavioral barriers that stand in the way of achieving this objective. They rest on two major economic challenges. The first is the unfavorable cost-benefit balance of electricity use compared with fossil fuels, which continue to dominate. In 23 out of 27 EU Member States, electricity prices for industries in 2025 were more than twice as high as those for natural gas. This imbalance is partly due to insufficient tax incentives for electricity within the national frameworks of energy taxation. Above all, however, it is caused by the costs of coordinating the transformation of energy systems. The ongoing shift towards electricity supply from intermittent renewable sources is creating new balancing challenges in the face of a demand structure that remains largely inflexible. This has led to a sharp increase in the number of instances where grid operators have to intervene to maintain system stability. Furthermore, it is placing significant pressure on the expansion and digitalization of electricity grids. The associated grid management costs are passed on to electricity consumers via network charges.
In some Member States, network charges account for a third of the electricity bill. Against this background, the European Commission has supplemented the Action Plan with a proposal for an EU law that sets out a new European framework for calculating network charges. In particular, network charges are intended to reflect the system costs associated with electricity demand patterns. Electricity consumers are to be given incentives to align their consumption with the system’s time-dependent balancing requirements. However, the legal competencies for adjusting network charges remain at the national level.
The second major economic challenge is the high upfront cost of the necessary investments in end-use applications such as battery electric vehicles and heat pumps. In addition to high electricity costs, uncertainties regarding the timely roll-out of the necessary infrastructure, i.e. electricity grids and charging points, as well as regarding the long-term stability of the regulatory framework, make it difficult to finance this enormous investment requirement. Consequently, a lack of coordination in infrastructure planning and political support threatens to delay the roll-out of electricity-based end-use technologies. As remedial measures, the action plan provides for an expansion of public investment support through EU grants, as well as improved coordination of infrastructure planning.
Ultimately, tackling these complex coordination problems requires more than just investment grants and increased public oversight. In a future energy system characterized by the fluctuating availability of wind and solar power, harnessing the potential for short-term flexibility is of crucial importance. Firstly, this requires a well-developed backup infrastructure in the form of clean peak-load power stations, large-scale battery storage and smart grids. Secondly, the demand side must be prepared to make an effective contribution to system stabilization. To this end, the roll-out of smart meters in households must be accelerated. Battery-powered electric vehicles must be equipped with on-board chargers for bidirectional charging. The process of technological modernization must be accompanied by strong economic incentives. The systemic value of demand-side flexibility must be rewarded through time-variable pricing models.
Such a shift to time-of-use electricity prices is likely to result in undesirable distributional effects. Consumers in regions with highly volatile supply will come under greater pressure to adjust their consumption patterns. At sectoral level, basic industries that rely on a stable electricity supply will face higher costs, which will further intensify their already growing competitive pressure. Time-dependent pricing must therefore be accompanied by improved opportunities for market-based price hedging. To this end, the EU’s electrification strategy should place greater emphasis on the further development of markets for electricity futures contracts and long-term power purchase agreements (PPAs). Unlike regulatory interventions in the structure of electricity trading, these instruments offer a system-friendly and flexible form of risk hedging that avoids distorting market signals. However, liquidity and transparency in the PPA and futures markets continue to be hampered by barriers to market access, and market volumes are unevenly distributed across Europe. Risk-sharing instruments such as government counter-guarantees can contribute effectively to promoting liquid and competitive PPA markets. To better integrate small electricity consumers into such markets, publicly funded pooling platforms are an option worth exploring.
Finally, greater cooperation at the regulatory level is essential to ensure a fair distribution of the costs of electrification. To enhance the potential for cross-border price hedging, the EU must adopt a more ambitious approach to harmonizing national market regulatory frameworks. This should include both a joint approach to removing technical barriers to cross-border trade in long-term contracts and a harmonized strategy to promote electricity futures markets in all Member States.
