From Energy crisis to opportunity: regulation as a driver for renewable fuels

*Disclaimer: This article reflects solely the views of its authors and does not necessarily reflect those of the Florence School of Regulation, of which the Lights on Women initiative is part.

The Strait of Hormuz: a crucial point for global energy security

According to the latest statements from the International Energy Agency (IEA), the global economy faces one of the greatest threats to energy security in history due to the closure of the Strait of Hormuz. 

Indeed, the Strait of Hormuz is one of the world’s most critical chokepoints for the transport of crude oil and natural gas. Nearly 25% of the global maritime oil trade passes through this strait. In 2025, approximately 20 million barrels per day of crude oil and other petroleum products transited through it. Qatar and the United Arab Emirates (UAE), which together account for 20% of the world’s liquefied natural gas (LNG) exports, will also be seriously affected by the closure of the Strait (IEA, 2026). 

With limited options to avoid it, Saudi Arabia and the UAE have some oil export routes that do not pass through this strait (e.g., via the Saudi Arabian pipeline to the Red Sea or the UAE pipeline to the port of Fujairah); however, other countries, such as Iran, Iraq, Kuwait, Qatar, and Bahrain, depend on it to export the vast majority of their oil and gas production. 

Households and industrial competitiveness are the most affected

The evolution of energy prices, particularly fossil fuel prices, has once again become a cause for concern for global economies, especially in the European Union (EU). Just five years ago, between 2021 and 2023, the world suffered another major energy crisis following Russia’s invasion of Ukraine. This drove oil, gas, and electricity prices to unprecedented levels, with significant repercussions for the economy (IEA, 2022). 

At the microeconomic level, the share of energy expenditure (electricity, gas, and others) relative to total disposable income increased, as did the percentage of disposable income spent on private vehicle use, particularly among lower-income households. At the macroeconomic level, the energy trade deficit widened, inflation reached double-digit levels for the first time in over two decades, savings declined, and the cost competitiveness of European industry was undermined by rising energy prices (Larrea-Basterra and Badajoz-López, 2024). 

Renewable energy as a path to reducing dependence on fossil fuels

In this context, to address climate change, achieve the decarbonization goal, and improve energy security, power generation from fossil fuels must be curtailed in favor of increasing the share of renewable energy. In recent decades, the integration of renewable energy sources (RES) into the energy mix has become a reality. According to IRENA (2025), RES penetration increased by 140% between 2015 and 2024.  

At the EU level, in 2023, 45.3% of electricity generation was renewable; 10.8% of energy consumption in transport and 26.2% in heating and cooling came from renewable sources. Yet, 57.3% of final energy consumption still depended on fossil fuels (European Commission, 2025). These figures represent a major challenge for decarbonization and reducing external dependence. 

However, the intermittent and seasonal nature of these energy sources poses significant challenges for the electricity sector. Furthermore, certain applications, given the current state of technology, are difficult to decarbonize through direct electrification, such as heavy-duty transport, air transport, and energy-intensive industries that rely on high-temperature heat processes. 

In these cases, other alternatives to electrification are being considered (IEA, 2025b), such as renewable liquid and gaseous fuels, which can play a complementary role in improving energy security, reducing emissions, and stimulating industry and employment, especially in rural areas. 

Challenges in the Development of Biofuels

Currently, renewable fuels face three major challenges: (i) technological, (ii) economic, and (iii) regulatory, which hinder the achievement of the targets committed by the EU for 2030 and 2050. 

Among the technological barriers, Cheng & and Timilsina (2010) identified the difficulties and complexity of many renewable fuels production processes (e.g., those from green hydrogen or synthetic fuels), the slow development of the ad-hoc infrastructure, the high demand for resources (water and carbon dioxide), and the scarcity of data at the industrial scale. Furthermore, R&D activities entail significant risks as a result of the uncertainties related to the success or failure of the new developments related to renewable fuels. 

Economic obstacles include market price volatility, high production and capital costs, operating expenses that hinder competitiveness relative to fossil fuels, difficulties in infrastructure development, and demand uncertainty. For example, Paula (2026) noted that the project between the Spanish Government and Maersk to develop green methanol production for maritime transport was ultimately abandoned, among other reasons, due to its high costs. Similarly, Reisdorf et al. (2025) reported that many experts and European airlines consider the ReFuelEU regulation to negatively affect the competitiveness of international airlines. 

Regulatory challenges include complex blending mandates and restrictions in fuel regulations (e.g., limits on the proportion of renewable fuels that can be blended with conventional fuels). Hajek et al. (2019) argue that existing regulations can hinder the promotion of renewable energy consumption. Similarly, Rokem & Greenblatt (2015) contend that setting targets alone is insufficient to stimulate the development of renewable fuels; instead, long-term policy stability is essential to encourage the investments required. Furthermore, political uncertainty and a complex regulatory landscape create significant risks that can undermine a project’s economics, delay financial close and deter investment (Rushton & Patonia, 2026). These challenges are often compounded by insufficient incentives and limited support for innovative projects (IEA, 2025). 

These three types of challenges are interdependent and mutually reinforcing. Regulatory issues can be addressed in the short or medium-term. However, technological and economic challenges typically require innovations and efforts over the medium to long term. Consequently, regulatory uncertainty and the lack of incentives exacerbate economic risk and further slow technological progress and the scaling of projects. 

Robust EU Regulations for National Developments

At the EU level, regulations related to renewable fuels can be classified into three main groups: (i) regulations on renewable energy sources, (ii) regulations on the internal market for renewable gas, natural gas, and hydrogen, and (iii) other regulations (e.g., related to agriculture, air transport, or maritime transport). 

A key element, highlighted in both the Draghi report (European Commission, 2024) and its 2025 update, is the need for technological neutrality across energy sources (e.g., electricity vs. renewable fuels) and across renewable fuels (e.g., biofuels vs. Renewable Fuels of Non-Biological Origin—RFNBO). 

Indeed, it is essential to have common guidelines for all renewable fuels, as well as specific ones tailored to their nature. Furthermore, it is necessary to ensure regulatory coherence to avoid misalignments among energy, climate, and other relevant sectoral regulations. 

Currently, the Renewable Energy Directive (EU) 2023/2413 (RED III) is strategic for accelerating the deployment of renewable fuels and generating demand, but progress must be made considering the economic and industrial context and the degree of technological maturity of the various solutions. Likewise, the delegated acts derived from Directive (EU) 2018/2001 on renewables (RED II) are fundamental. Nevertheless, part of the industry questions some regulatory provisions as they’d continue to hinder investment in renewable fuels projects,  particularly the sustainability criteria of additionality (electricity used to produce renewable hydrogen must originate from new renewable capacity that would not otherwise have been developed), temporal correlation (renewable energy and hydrogen production must occur simultaneously), and geographic correlation (both activities must take place within the same geographic area or adjacent grid zone). For instance, the additionality criterion prevents the use of surplus renewable electricity to produce renewable fuels. 

Another object of criticism is the so-called ‘sunset clause’, applicable to sustainable CO₂. According to some stakeholders, this clause would even hinder the decarbonization of industries with currently unavoidable CO₂ emissions, such as the cement industry; limits access to an adequate supply of CO₂ for sectors such as chemicals or renewable fuels; and disrupts the development of the carbon capture, storage, and utilization value chain. Therefore, better regulation on industrial carbon would, among other aspects, facilitate the identification of the source of greenhouse gas (GHG) emissions and promote more efficient RFNBO value chains. It would also facilitate the decarbonization of industries such as the cement and chemical industries, as well as the renewable fuels sector. 

In this sense, the future revision of the delegated acts on hydrogen, including the sustainability criteria (scheduled for 2028), is expected to create new opportunities by relaxing the additionality, temporal, and geographical correlation requirements, which currently act as barriers to the development of renewable fuels projects, as has been mentioned before. Therefore, a more flexible framework could improve project viability and accelerate the deployment of renewable hydrogen and renewable fuels.  

Finally, while the RED III Directive grants Member States flexibility in its transposition, regulatory cooperation and dialogue among all stakeholders are necessary to advance the creation of a competitive market for renewable fuels at both the national and EU levels. 

References

Cheng, J. J., & Timilsina, G. R. Advanced Biofuel Technologies: Status and Barriers. Policy Research Working Paper, WP5411. (2010)

Directive (EU) 2023/2413 of the European Parliament and of the Council of 18 October 2023 amending Directive (EU) 2018/2001, Regulation (EU) 2018/1999 and Directive 98/70/EC as regards the promotion of energy from renewable sources, and repealing Council Directive (EU) 2015/652

European Commission. The future of European competitiveness Part A | A competitiveness strategy for Europe. Brussels. https://commission.europa.eu/document/download/97e481fd-2dc3-412d-be4c-f152a8232961_en (2024)

European Commission.  EU energy in figures – Statistical pocketbook 2025. EU energy in figures – Statistical pocketbook 2025 – EU Agenda (2025)

Hajek, M., Zimmermannova, J., Helman, K., & Rozensky, L. (2019). (2019). Analysis of carbon tax efficiency in energy industries of selected EU countries. Energy Policy, 134, 110955. https:// doi.org/10.1016/j.enpol.2019.110955

IEA. World Energy Outlook 2022. The global energy crisis. The global energy crisis – World Energy Outlook 2022 – Analysis – IEA (2022)

IEA. Delivering Sustainable Fuels. Pathways to 2035. https://www.iea.org/reports/delivering-sustainable-fuels (2025)

IEA. Strait of Hormuz Factsheet. Strait of Hormuz – About – IEA (2026)

IRENA. Renewable Energy Statistics. Renewable Energy Statistics 2025 (2025)

Larrea-Basterra, M. and Badajoz López, A. Analysis of the socio-economic impact of the energy crisis. Orkestra. Bilbao. Analysis of the socio-economic impact of the energy crisis – Orkestra Basque Institute of Competitiveness (2024)

Paula, M. El mayor proyecto verde de Moncloa, un plan de 10.000 millones y 85.000 empleo, lleva cuatro años bloqueado. El Mundo https://www.elmundo.es/economia/empresas/2026/01/27/6977545bfc6c836a0d8b458e.html (2026, 27/01)

Reisdorf, A. R., Kummer, S., & Soklaridis, S. Opportunities and challenges arising from European sustainable aviation fuel regulations: A case study approach. Journal of the Air Transport Research Society, https://doi.org/10.1016/j.jatrs.2025.100085 (2025)

Rokem, J., & Greenblatt, C.L. (2015). Making Biofuels Competitive: The Limitations of Biology for Fuel Production. JSM Microbiology, 6.

Rushton, H., & Patonia, A. Bankability of Hydrogen Projects: Key Risks, Financing Challenges and Mitigation Solutions. OIES Paper: ET 52 https://www.oxfordenergy.org/wpcms/wp-content/uploads/2026/01/ET52-Bankability-of-Hydrogen-Projects.pdf (2026)