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New EU Pharma Legislation Is It a Win-win for All Stakeholders by EOS Intelligence
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New EU Pharma Legislation: Is It a Win-win for All Stakeholders?

The revision of the EU pharmaceutical legislation represents a major achievement for the pharmaceutical sector within the European Health Union. The European Health Union, established in 2020 as a collaboration among EU member states, aims to effectively respond to health crises and improve healthcare systems across Europe. This revision provides an opportunity for the pharmaceutical sector to adapt to the demands of the 21st century, enabling greater flexibility and agility within the industry. The updated EU pharmaceutical legislation places a strong emphasis on patient-centered care, fostering innovation, and enhancing the competitiveness of the industry.

Limited market exclusivity to offer indirect opportunities to generic drug manufacturers

The Covid-19 crisis in 2020 raised a significant concern related to the accessibility and availability of life-saving medicines. The pandemic highlighted the significance of establishing effective incentives for the production of medicines to address medical needs during health emergencies.

Therefore, revised EU pharmaceutical legislation includes several rules and regulations to incentivize pharmaceutical companies to create a single market for medicines to ensure equal access to affordable and effective medicines across the EU. This is to be achieved through reducing the administrative burden by shortening authorization time, the duration required to review and grant approval for a new medicine ensuring efficacy, safety, quality, and regulatory requirements. For example, the EU Commission will have 46 days instead of 67 days for authorization of medicine, whereas EMA (European Medicine Agency) will have 180 days instead of 240 days for the assessment of new medicine.

The new directive incentives are expected to help in improving access to medicines in all member states, in developing medicines for unmet medical needs, and in conducting comparative clinical trials (CCT). Comparative Clinical Trials are clinical research studies aimed at comparing the efficacy and safety of distinct medical treatments. Such trials usually entail two or more groups of participants, each receiving a different treatment in order to ascertain the more effective, safer treatment that offers better outcomes for a specific condition.

The legislation also focuses on maintaining the availability of generic drugs and biosimilars to help countries with more affordable and accessible medicines across the EU. It also aims to provide enhanced rules for the protection of the environment, such as mandatory ERA (environmental risk assessment) of medicines which focuses on discarding medicines properly by ensuring minimization of environmental risks that are associated with the manufacturing, use, and disposal of medicine on the EU market, promoting innovation, and tackling antimicrobial resistance (AMR).

The revised pharmaceutical legislation introduces a shortened period of regulatory protection, reducing it from 10 to 8 years, in order to establish a unified market for new medicines. This protection encompasses 6 years of regulatory data protection and 2 years of market protection. Companies can also benefit from an additional 2 years of data protection if they launch their medicine in all 27 EU member states, and an extra 6 months of protection if their medicine addresses unmet medical needs or undergoes comparative clinical trials.

The revised EU pharma legislation also includes provisions for 2 years of market exclusivity for pediatric medicines and 10 years of market exclusivity for orphan drugs. The limited market exclusivity for branded drug manufacturers is expected to give the generic medicine makers more opportunities for production, hence improving the affordability and accessibility of medicines across the EU.

New EU Pharma Legislation Is It a Win-win for All Stakeholders by EOS Intelligence

New EU Pharma Legislation Is It a Win-win for All Stakeholders by EOS Intelligence

Assessing changes for the European Medicines Agency

The EMA is responsible for the evaluation and approval of new medicines while monitoring the safety and efficacy of the medicine. The revised EU pharmaceutical legislation has bestowed significant responsibilities upon the EMA. These responsibilities encompass expediting data assessments and providing enhanced scientific advice to pharmaceutical companies. The legislation has both positive and negative impact on the EMA.

On the positive side, it aims to harmonize regulatory processes across member states, leading to a more streamlined and efficient system. This is expected to improve the agency’s ability to assess medicines promptly, facilitating faster access to innovative treatments. Additionally, the legislation encourages collaboration among regulatory authorities and promotes international partnerships, which strengthen the EMA’s regulatory capacity and scientific expertise. Further, the new regime is likely to foster EMA to prepare a list of critical medicines and ensure their availability during shortages.

The challenges that EMA might face if the new pharma legislation is passed include increased workload and resource requirements, which may necessitate additional staff, expertise, and funding. Complex areas such as pricing, pharmacovigilance, data transparency, and reimbursement could pose difficulties, potentially leading to delays and discrepancies.

Balancing affordability and access to medicines while incentivizing pharmaceutical companies’ investment in R&D under strict regulations, health technology assessments, and data transparency could be a challenge. EMA might face obstacles in training, resource allocation, and maintaining regulatory consistency. Both positive and negative impact should be considered while implementing the revised legislation.

Overriding drug patents could ensure supply, albeit with challenges

Overriding a drug patent is a legal mechanism allowing governments to bypass patent protection of medicines and medical technology during emergency situations.

Although it poses challenges to the original patent holder company including implications on revenue streams, investments, and profitability, it enables the granting of compulsory licenses to generic drug manufacturers, which increases production and reduces prices, particularly during health emergencies, while still considering the rights and interest of patent holders (through compensation for the use of their invention during emergency period). It also encourages voluntary licensing that allows generic manufacturers to produce and sell product with patent holder’s permission while respecting patent rights, instead of overriding the patent as it is in compulsory licensing.

Amidst concerns pertaining to intellectual property (IP) rights and the fact that this move might potentially discourage pharma companies from investing in R&D initiatives, the revised EU pharmaceutical legislation proposes overriding drug patents, as it would enhance the availability of affordable and cost-effective medicines throughout the EU. The production of generic drugs and biosimilars is likely to help increase market competition, drive innovation, and introduce improved treatments across the EU maintaining a competitive edge.

Overriding drug patents might also have ramifications on international trade and relationships, leading to disputes and strained ties between countries. While considering these laws, policymakers need to exercise caution to ensure both accessibility of medicines and adequate investments in R&D.

New EU pharma legislation to benefit Eastern European countries

The difference in access to medicines between Eastern and Western European countries is evident from the fact that from 2015 to 2017, EMA approved 104, 102, and 101 medicines for Germany, Austria, and Denmark, respectively, compared to only 24 in Poland, 16 in Lithuania, and 11 in Latvia. These distinct differences in the availability of medicines between Eastern and Western European countries could be attributed to factors such as stronger healthcare systems in the Western region, higher healthcare budgets, and a greater ability to negotiate pricing and reimbursement agreements with pharmaceutical companies.

Western European countries have relatively better funded and more advanced healthcare infrastructure, including clinics, hospitals, and specialized healthcare services compared to Eastern European countries. Western European countries have a larger capacity to invest in research and development and contribute to the development of new medicines.

Moreover, differences in national healthcare policies contribute to the variation in pharmaceutical benefits and outcomes. The presence of a robust and extensive pharmaceutical manufacturing industry in Western European countries allows for faster production and distribution of medical supplies. Consequently, Western European countries generally have better access to medicines and medical supplies compared to Eastern European countries.Top of Form

The new EU pharmaceutical legislation helps Eastern European countries by reducing the exclusivity period of newly introduced drug. This measure can prevent branded drug manufacturers from selling drugs exclusively to more affluent countries.

Moreover, according to experts, branded drug manufacturers are likely to only theoretically benefit from a competition-free market for 12 years because majority of medicines launched by them are unlikely to meet all the new criteria in order to be granted this extended competition-free market access. This might compel branded medicine manufacturers to expand their sales base and sell in Eastern European countries as well to maximize their revenues.

New EU pharma legislation to spur a changing investment landscape

With the approval of new EU pharmaceutical legislation, it is expected that investment plans within the pharmaceutical sector will undergo significant changes. The regulatory changes, which aim to reduce the time and administration burden, could help in attracting lucrative investments by offering faster returns for pharmaceutical companies.

The new legislation can be expected to bring more investments in the R&D and manufacturing sectors by addressing critical healthcare challenges. Furthermore, the availability of generic and biosimilars would also help by creating opportunities for investment in the production/manufacturing of cost-effective medicines.

Moreover, enhancement in transparency and data sharing can also lead to increased collaboration and partnerships in R&D, attracting investments from public and private sectors in the medical space.

However, investment plans could vary depending upon various factors such as intellectual property rights, market dynamics, competitive landscape, etc. Pharmaceutical companies need to assess new legislation in order to adjust their investment strategies to navigate potential challenges.

EOS Perspective

Analyzing the winning stakeholders of the revised EU pharma legislation could be challenging at this point in time owing to the fact that the new regime focuses on addressing issues of affordability and innovation across the EU which tend to be contradicting. These aims are to be achieved by incentivizing R&D and manufacturing sectors, enhancing market competition, and promoting collaboration.

It cannot be denied that there will be several challenges while enforcing these changes. A few of these challenges include maintaining intellectual property rights, marrying affordability with innovation, and addressing specific needs of various patients in different countries. Specific resources and coordination will be required to overcome these hurdles. As a result, the success or failure of the EU pharmaceutical legislation for stakeholders will depend on the legislation’s actual implementation, adaptation to changing market dynamics, stakeholder engagement, as well as whether balance between accessibility, affordability, and innovation while maintaining competitiveness, is achieved and maintained in the long term.

Nuclear Fusion – Reality or a Fairy Tale by EOS Intelligence
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Commercial Nuclear Fusion – Reality or a Fairy Tale?

Nuclear fusion has recently gained attention as a potential source of clean energy. It was a result of the US National Ignition Facility in California achieving a major milestone in December 2022 in which researchers were able to produce more energy than was used to ignite it for the first time. Several countries are cooperating in the world’s largest fusion experiment project called ITER, focused on the construction and operation of an experimental fusion reactor located in France. Large cap companies such as Google and the ministries regulating energy policies across the globe are also investing in fusion energy projects and start-ups to promote fusion energy generation. Despite huge investments, commercializing fusion energy still has a long way to go due to certain technological and operational challenges associated with generation of this type of energy.

Ever-increasing carbon emissions due to the ongoing rise in energy consumption are driving the need for accelerating energy generation from renewable sources. As of October 2022, over 40% of global carbon emissions were caused by power generation. As per the International Energy Agency, carbon emissions from energy generation increased by 0.9% in 2022 in comparison with 2021, to reach 36.8GT.

Additionally, the energy crisis caused by the Russia-Ukraine war, particularly in Europe further augmented the need for energy generation using renewable sources. The surge in energy demand from households and industries is putting pressure on the existing energy supplies, thus resulting in high energy prices.

So far, solar and wind energy sources have been prominently used across countries to meet the rapidly increasing energy demand. Nuclear fusion is another alternative renewable source as it does not emit carbon emissions or produce long-lived radioactive waste products, unlike nuclear fission.

Nuclear fusion is an energy-intensive process and requires high temperatures for fusion reaction. In nuclear fusion process energy is released by combining two atomic nuclei into one heavier nucleus. The released energy is then captured and converted into electricity by a fusion machine. This process is also the key source of energy in the sun and other stars.

Nuclear fusion releases around four million times more energy as compared to coal, gas, or oil, and four times more than nuclear fission technology. Nuclear fusion can provide energy to an extent that can power up homes, cities, and whole countries.

Current state of the nuclear fusion energy

The potential of generating nuclear fusion energy has been recognized since the 1950s. Countries across geographies have been involved in nuclear fusion research, led by the EU, USA, Russia, and Japan along with vigorous programs underway in China, Brazil, Korea, and Canada. Various experimental fusion devices have been designed and constructed to advance and transform the way fusion energy is generated. These includes tokamaks, stellarators, and laser-based technology devices. Tokamaks and stellarators have been used more commonly for fusion energy research experiments.

Some of the tokamaks and stellarators built across countries for generating fusion energy include the Joint European Torus (JET) started in the UK in 1978, Wendelstein 7-X stellarator started in Germany in 1994, Korea Superconducting Tokamak Advanced Research (KSTAR) started in South Korea in 1995, the Mega Amp Spherical Tokamak- (MAST) initially started in the UK in 1997 and further upgraded to MAST-U in 2013, and Experimental Advanced Superconducting Tokamak (EAST) started in China in 2000, among others. Six countries including China, India, Japan, Korea, Russia, the USA, as well as the EU are cooperating in the world’s largest fusion experiment, ITER, an experimental fusion reactor currently under construction in France through EURATOM, the European Atomic Energy Community. ITER idea was first launched in 1985 and established in 2007. Its first experiment was scheduled to start in 2025 but is delayed due to Covid-19 disruptions. It is aimed at producing 500MW of fusion power from 50MW of input heating power.

Further, in 2017, China launched the China Fusion Engineering Test Reactor (CFETR) project as a follow-up to the ITER. This tokamak device is aimed at producing an extremely powerful magnetic field to confine plasma and generate fusion energy. This magnetic field can contain and control hydrogen gas ten times hotter than the core of the sun. CFETR is aimed at producing a peak power output of 2GW once completed in 2035, bridging the gap between scientific experiments and commercial use.

Extensive progress has been noticed in studying laser-based technology for fusion energy generation. Some of the facilities that use laser technology to produce fusion energy include the National Ignition Facility (NIF) at the Lawrence Livermore National Laboratory (LLNL) in the USA and the Laser Mégajoule (LMJ) in France.

The International Atomic Energy Agency (IAEA) also supports its member states in research activities related to fusion energy generation. It also organizes various workshops on fusion power plant concepts demonstration, technical meetings, and coordinates research activities.

Nuclear Fusion – Reality or a Fairy Tale?by EOS Intelligence

Nuclear Fusion – Reality or a Fairy Tale? by EOS Intelligence

Some of the breakthroughs achieved in fusion energy experiments to date

There has been significant progress in the research and development activities focused on nuclear fusion energy generation. Researchers are continuously emphasizing optimizing the condition of plasma through changes in density, temperature, and confinement time to achieve the required level of performance for a power plant. Several nuclear reactors were able to sustain high temperatures during the fusion process. For instance, in January 2022, the EAST reactor in China sustained temperatures of 126 million degrees Fahrenheit, which is nearly five times hotter than the sun, for 17 minutes, and thus, broke the record for longest sustained nuclear fusion.

In February 2022, the Joint European Torus (JET) achieved a record performance for sustained fusion energy of 59MJ over five seconds.

Also, in September 2022, the Korea Superconducting Tokamak Advanced Research (KSTAR) experiment achieved plasma temperatures of 120 million kelvins for up to 20 seconds, a key demonstration of simultaneous high temperatures and plasma stability.

Recently in December 2022, a major breakthrough was achieved at the US National Ignition Facility in California by using inertial confinement fusion which released more energy than was pumped in by the lasers for the first time in the world. The laser shot released 3.15MJ of energy in comparison with the 2.05MJ pumped to the hydrogen isotope pellet by lasers. This breakthrough is likely to pave the way for the abundant clean energy in the future.

Breakthroughs driving further investment in fusion energy R&D

Breakthroughs achieved over the past years in various projects have attracted significant investment by both government and private sector in the research and development of fusion energy. For instance, in February 2023, Israel’s Ministry of Energy (MoE) proposed to provide US$11.5 million to establish a national nuclear fusion institute in Israel. This initiative includes major universities of Israel namely the Hebrew University of Jerusalem, Ben-Gurion University of the Negev, the Technion and Tel Aviv University, the Weizmann Institute of Science, as well as NT-Tao, an Israel-based start-up which is engaged in the development of a compact system for nuclear fusion.

Similarly, in October 2022, the UK government announced to provide US$249.6 million of funding for the Spherical Tokamak for Energy Production (STEP) project’s first phase which will include concept design by the UK Atomic Energy Authority by 2024. STEP is a program aimed at designing and constructing a prototype fusion energy plant by 2040.

In March 2022, the US Department of Energy (DOE) proposed to provide around US$50 million of federal funding to support US scientists involved in conducting experimental research in fusion energy science. Of this, US$20 million was to support tokamak facilities and US$30 million to support fusion research to improve the performance of fusion and increase the duration of burning plasma. In addition to this, the US government’s budget for the financial year 2023 included US$723 million for the Office of Science Fusion Energy Sciences research in enabling technologies, materials, advanced computing and simulation, and new partnerships with private fusion efforts. This amount included US$240 million for the ongoing construction of ITER tokamak. Also, the budget for the financial year 2024 includes US$16.5 billion to support climate science and clean energy innovation including US$1 billion to advance fusion energy technology.

Private funding in fusion companies has also increased significantly in the recent past. As per the Fusion Industry Association Report 2022 published in July, private sector funding amounted to about US$4.8 billion in total, witnessing an increase of 139% since 2021. Fusion companies also received an additional US$117 million in grants and other funding from governments. Big resource groups such as Equinor based in Norway, Google and Chevron based in the USA have also invested in fusion energy research. For instance, in July 2022, Chevron together with Google and Japan-based Sumitomo Corporation invested in TAE Technologies, a US-based nuclear fusion start-up, in a US$250 million fundraising round to build its next-generation fusion machine.

In addition to this, entrepreneurs including Bill Gates and Jeff Bezos are also providing financial support. In December 2021, Commonwealth Fusion Systems (CFS) raised around US$1.8 billion in series B funding from various key investors including Bill Gates, DFJ Growth, and Emerson Collective among others, to commercialize fusion energy.

Companies engaged in nuclear fusion energy generation

More than 35 companies are engaged in fusion energy generation for commercial use, such as Tokamak Energy, General Fusion, Commonwealth Fusion Systems, Helion Energy, Zap Energy, and TAE Technologies, among others. These fusion companies are increasingly emphasizing collaborations and experimenting with new technologies to produce fusion energy and make it available for commercial use.

In March 2023, Eni, an energy group based in Italy, and Commonwealth Fusion Systems (CFS) based in the USA, a spin-out of the Massachusetts Institute of Technology (MIT), signed a collaboration agreement aimed at accelerating the industrialization of fusion energy.

In February 2023, TAE Technologies achieved a breakthrough in its hydrogen-boron fusion experiment in magnetically confined fusion plasma. This experiment was a collaboration between Japan’s National Institute for Fusion Science (NIFT) and TAE Technologies.

Also in February 2023, Tokamak energy proposed to build new fusion energy advanced prototype at the United Kingdom Atomic Energy Authority’s (UKAEA) Culham Campus, UK, using power plant-relevant magnet technology. It also built the first set of high-temperature superconducting magnets for testing nuclear fusion power plants. This super magnet can confine and control extremely hot plasma created during the fusion process.

Certain breakthroughs achieved over the years in the nuclear fusion energy field have encouraged the entry of various start-ups across geographies. For instance, Princeton Stellarators, a US-based start-up focused on building modular, utility-scale fusion power, was founded in 2022. Another start-up named Focused Energy, a Germany-based fusion company was founded in 2021 to develop a fusion power plant based on laser and target technology. In September 2021, the company raised US$15 million in seed funding led by Prime Movers Lab along with additional investment from various entrepreneurs.

Start-ups are also emphasizing raising funds to create new fusion technologies and make a significant impact on the industry. In February 2023, NT-Tao, an Israel-based nuclear fusion start-up founded in 2019 raised US$22 million in a series A funding round aimed at developing a high-density, compact fusion reactor to provide clean energy.

Additionally, in January 2023, Renaissance Fusion, a France-based start-up founded in 2020, raised US$16.4 million in a seed funding round led by Lowercarbon Capital. The company is engaged in the development of a stellarator reactor for fusion energy generation.

Challenges to nuclear fusion energy generation

Although a lot of companies and governments across geographies are investing in nuclear fusion energy generation experiments, building full-scale fusion generating facilities requires advanced engineering, advanced vacuum systems, and superconducting magnets. One of the key challenges in fusion process is the requirement of extremely high temperature to produce energy. Also, it becomes difficult to control plasma at such high temperatures.

Additionally, lack of availability of materials that can extract heat more effectively while withstanding their mechanical properties for a longer duration is another challenge affecting the fusion energy generation process.

Moreover, fusion research projects are also facing capital and financing challenges due to high upfront costs, return uncertainty, and long project duration. Capital investment involved in building and operating a fusion reactor is high due to complex technology that requires significant investment in R&D, high energy requirement, use of advanced materials, and regulatory requirements aimed at ensuring the safety and low environmental impact of the fusion reactor. The cost of building a fusion reactor ranges between tens to hundreds of billions of dollars. It can vary depending on various factors such as size, design, location, materials, and technology used.

Since fusion energy is a new technology, there is uncertainty about when nuclear fusion will become a viable and cost-effective energy source such as other energy sources including wind and solar. This makes it difficult for investors to invest in fusion projects and predict the return on investment.

However, ongoing research and development activities aimed at building advanced, highly efficient, and cost-effective fusion reactors, and commercializing fusion energy generation at a large scale are likely to overcome these challenges in the long term.

EOS Perspective

Accelerating climate crisis is driving the investment in nuclear fusion research and development as it does not create carbon emissions and long-lasting nuclear waste products. Over the past several years, various fusion research projects, university programs, and start-ups have achieved breakthroughs in the fusion energy field. The most recent breakthrough at US National Ignition Facility in California, which released more energy than was pumped in by the lasers, has paved the way to the nuclear fusion gold rush and sparked excitement among investors, companies, and researchers.

Many fusion companies such as Commonwealth Fusion Systems and TAE Technologies are claiming to exceed breakeven by 2025 and commercialize fusion energy by 2030. Billions of dollars have been invested in nuclear fusion energy generation experiments but no company or projects have been able to achieve breakeven yet.

Several new fusion projects are planning on using advanced materials and putting a new generation of supercomputers to tweak the performance of ultrahigh-temperature plasma, but commercializing fusion energy is still far from reality. Moreover, the fusion process is very complex, requires extreme temperature for fusion reactions, and involves huge energy costs. Thus, other alternative clean energy sources such as wind and solar are likely to remain the near-term methods to meet sustainable energy demand. At the same time, it should be expected that the increasing government support and investment by large cap organizations and entrepreneurs are likely to help set up viable fusion power plants in the future.

by EOS Intelligence EOS Intelligence No Comments

China’s BRI Hits a Road Bump as Global Economies Partner to Challenge It

In 2013, China launched its infamous Belt and Road Initiative (BRI), which has gone about developing several infrastructure projects across developing and underdeveloped countries across the globe. However, BRI has faced significant criticism as it brought heavy debt for several countries that are unable to pay the loans. Moreover, it is believed that China exercises significant political influence on these countries, thereby building a sort of dominance across the globe. To counter this, several developed economies have come together to launch alternative projects and partnerships that facilitate the development of infrastructure across developing/underdeveloped countries without exerting significant financial and political bindings on them. However, the main aim of these deals seems to be to keep a check on China’s growing might across the Asian and African continent.

Read our previous related Perspectives: OBOR – What’s in Store for Multinational Companies? and China’s Investments in Africa Pave Way for Its Dominance

China’s BRI program has signed and undertaken several projects since its inception in 2013. As per a 2020 database by Refinitiv (a global provider of market data and infrastructure), the BRI has signed agreements with about 100 countries on projects ranging from railways, ports, highways, to other infrastructure projects and has about 2,600 projects under its belt with an estimated value of US$3.7 billion. This highlights the vast reach and influence of China under this project and its growing financial and political power across the globe.

China’s BRI – looked as a debt trap

Over the years, BRI initiative has been criticized for being a debt-trap for developing and underdeveloped nations, by imposing heavy debt through expansive projects over the host countries, the non-payment of which may lead to significant economic and political burden on them. While the USA, the EU, India, and Japan have been some of the most vocal critics of the BRI program, several participating countries now voice a similar message as they have enveloped in high debt under these projects.

In one such example, the Sri Lankan Hambantota Port was built under the BRI scheme by China Harbor Engineering Company on a loan of nearly US$1.26 billion taken by Sri Lanka from China. The project was questioned for its commercial viability from the very beginning, however, given China’s close relationship with the Sri Lankan government, the project pushed through. As expected, the project was commercially unsuccessful, which along with unfavorable re-payment plan resulted in default by Sri Lanka. Thus, in 2017, the Chinese government eventually took charge of the port and its neighboring 15,000 acres region under a 99-year lease. This transfer has given China an intelligence, commercial, and strategic foothold in a critical water route.

In a similar case, Montenegro is also facing a difficult time repaying its debt to China for a highway project under BRI. In 2014, Montenegro contracted with China Road and Bridge Corporation (CRBC) for the construction of a highway to offer a better connection between Montenegro and Serbia. However, the feasibility of the project was questionable. The Montenegro government took a loan of US$1.59 billion (85% of the first phase of the project) from China Exim Bank at a 2% interest rate over the next 20 years. However, the project, which is being undertaken by Chinese companies and workers using Chinese materials, has faced unplanned difficulties in completion, has put significant financial pressure on the Montenegro government. This is likely to further degrade the country’s economy, delay its integration with the EU, and leave it vulnerable to Chinese political influence. While the EU has refused to finance the loan altogether, it is offering special grants and preferential loans to the country from the European Investment Bank to facilitate the completion of the highway.

Moreover, as per a 2018 report by Center for Global Development, eight BRI recipient countries – Djibouti, Kyrgyzstan, Laos, the Maldives, Mongolia, Montenegro, Pakistan, and Tajikistan – were at a high risk of debt distress due to BRI loans. These countries are likely to face rising debt-to-GDP ratios of more than 50%, of which at least 40% of external debt owed to China in association to BRI related projects.

Owing to the growing concern over increasing Chinese investment debt, several countries are now looking to reduce their exposure to Chinese investments and financing. In 2018, the Myanmar government, in an attempt to avoid falling deep into China’s debt-trap and becoming over-reliant on the country, scaled down China-Myanmar Kyaukpyu port project size from US$7.5 billion to US$1.3 billion.

Similarly, in 2018, the Malaysian government cancelled three BRI projects – the East Coast Rail Link (ECRL) and two gas pipelines, the Multi-Product Pipeline (MPP), and Trans-Sabah Gas Pipeline (TSGP) as these projects significantly inclined towards increasing the Malaysian debt to China to complete these projects.

China’s long-term ally, Pakistan, also opted out from China’s BRI in 2019, exposing some serious flaws with the project. In 2015, the two countries unveiled a US$62 billion flagship project under BRI, called the China-Pakistan Economic Corridor (CPEC). While it was started with an ambition to improve Pakistan’s infrastructure (especially with regards to energy), this deal resulted in severe debt woes for Pakistan as the nation started to face a balance-of-payment crisis. This in turn resulted in Pakistan turning to International Monetary Fund (IMF) for a three-year US$6.3 billion bailout package. Pakistani officials have even claimed that the CPEC project is equally (if not more) beneficial for China in terms of gaining a strategic advantage over India and by extension the USA. Thus, given its partial failure and increasing financial pressure on Pakistan, many ongoing projects under CPEC have been stalled or being rebooted in a slimmed-down manner.

Similarly, more recently, in April 2021, Australia scrapped off its deal it had with China under BRI, stating the deal to be over ambitious and inconsistent with Australia’s foreign policy.

Developed nations come together to offer alternatives

Given the push against BRI, several developed nations have come out with alternative infrastructure plans, either individually or in partnership with each other. The key purpose of this is to not only offer more viable options to developing and underdeveloped nations but also to keep a check on China’s growing global influence.

In one such move, in May 2015, Japan launched a ‘Partnership for Quality Infrastructure’ (PQI) plan, which came out as a direct competitor to China’s BRI. The PQI Japan (in collaboration with Asian Development Bank (ADB) and other organizations and countries) aimed at providing nearly US$110 billion for ‘quality infrastructure investment in Asia from 2016 to 2020. Although, on one side, this initiative is intended to secure new markets for Japanese businesses and strength export competitiveness to further bolster its economic growth, on the other side, politically PQI is a keen measure to counter China’s influence over its neighboring countries.

Just like Japan, India has also been a staunch critic of China’s BRI as it feels that the latter uses the BRI to expand its unilateral power in the Indo-Pacific region. Thus, to counter it, India, formed an alliance with Japan in November 2016, called ‘Asia-Africa Growth Corridor’ (AAGC).

The alliance aims at improving infrastructure and digital connectivity in Africa and connecting the continent with India and other Oceanic and South-East Asian countries through a sea passageway. This is expected to boost economic collaborations of India and Japan with African countries by enhancing the growth and interconnectedness between Asia and Africa.

The alliance claims to focus on providing a more affordable alternative to China’s BRI with a smaller carbon footprint, which has been another major concern in BRI project execution across Indo-Pacific region. The emphasis has been put on providing quality infrastructure while taking into account economic efficiency and durability, inclusiveness, safety and disaster-resilience, and sustainability. The countries do not have an obligation of hiring only Japanese/Indian companies for the infrastructure development projects and are open to the bids from the global infrastructure companies.

In more recent times, in May 2021, the EU and India have joined hands for a comprehensive infrastructure deal, called the ‘Connectivity Partnership’. This deal aims at strengthening cooperation on transport, energy, digital, and people-to-people contacts between India and the EU and developing countries in regions across Africa, Central Asia, and the Indo-Pacific region. Moreover, it aims at improving connectivity between the EU and India by undertaking infrastructure development projects across Europe, Asia, and Africa. It also focuses on providing a more reliable platform to the already ongoing projects between the EU and India’s private and public sectors.

While the two partners claim otherwise, the deal seems to be their collective answer to China’s BRI and its growing influence in the Asian, African, and European belt. Unlike BRI, the EU-India Connectivity Partnership aims to follow a clear rule-based approach to have greater involvement from the private sector with backend support from the public sector of both sides. This protects the host country against heavy debt and in turn restricts the level of political influence that both sides may have on the host country. This advantage over China’s infrastructure deal makes this project a serious competitor to the BRI in this region as host countries are most vary of falling into a debt-trap with China.

Another recent initiative to dethrone the BRI has been the ‘Build Back Better World’ (B3W), which has been undertaken by the Group of Seven (G7) countries in June 2021. This project, led by the USA, is focused on infrastructure development in low- and medium-income countries, and aims to accomplish infrastructure projects worth US$40 trillion in these countries by 2035. Further, the project is intended to mobilize private-sector capital in areas such as climate, health, digital technology along with gender equity and equality involving investments from financial institutions of the countries involved.

This project claims to be based on the principles of ‘transparency and inclusion’ and intends to cease China’s rising global influence (through BRI) as it aims to make B3W comparatively more value-driven, market-led, and a higher-standard infrastructure partnership for the host country. To ensure inclusivity and success of the project, the USA invited other countries such as India, Australia, South Korea, and South Africa to join the project. However, considering the nascent stage of the B3W development, the proceedings and details of the project are not explicitly clear, however, given that its intention is to help the USA compete with the BRI, it is expected to be well-funded, robust, and inclusive.

EOS Perspective

China’s BRI started on a very high note, garnering multi-billion-dollar infrastructure projects across a host of Asia, African, and European countries. However, over the last couple of years, increasing number of countries have become wary of its inherent problems, such as looming debt, increasing Chinese influence, and incompletion of projects. This has helped shift the momentum towards other developed countries that have for long wanted to counter China’s growing global influence. Using this opportunity, Japan, India, the EU, and the USA have come up with alternative infrastructure deals to compete with the BRI.

That being said, BRI will not be easy to shove aside as China has been in this game for several years now and has a significant time advantage. While countries such as India can try to compete, they do not have the financial might to take up projects that are strategically important and commercially viable.

Further, several of the alternative projects, such as India-EU Connectivity Partnership and G7 B3W aim to significantly involve the private sector for investments. While this is good news for the host countries where the project will be undertaken, private players will definitely be more concerned about financial viability of their investment and may not be able to match the BRI investment values, debt rates, etc. Moreover, geographic location puts China in an advantage for projects in the Asian region (when compared with the USA and the EU).

Therefore, while the attempt to dethrone China’s BRI has gained significant momentum and found proper backing, it is something that cannot happen in the short term. However, given the growing anti-China sentiment, it can be expected that with the right partnerships and project terms, BRI may start facing some serious competition from global powers across the globe.

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Commentary: Europe’s Energy Woes – The Way Forward

Europe is struggling to build up energy supply ahead of anticipated growth in demand due to economic rebound after pandemic outbreak and the winter months. Considering the knock-on effect of the energy crisis on industrial growth and consumer confidence, the prime focus for Europe is not only to respond to the mounting energy issues in the short term, but to also establish energy sustainability and security for the future.

In October 2021, the European Commission published an advisory for the member states to take some immediate steps to ease the effect of the energy crisis. Governments were urged to extend direct financial support to the most vulnerable households and businesses. Other recommended ways of intervention included targeted tax reductions, temporary deferral of utilities bill payments, and capping of energy prices. About 20 member states indicated that they would implement the suggestions outlined by the European Commission at a national level. While these measures may aid the most vulnerable user segment, there is not much that can be done to safeguard the wider population from the energy price shocks.

Energy security and sustainability is the key

While a magical quick-fix for Europe’s energy crisis does not seem to exist, the ongoing scenario has exposed the region’s vulnerabilities and serves as a wake-up call to move towards energy security and self-sufficiency.

Diversify energy mix

In general, petroleum products and natural gas contribute significantly to Europe’s energy mix, respectively accounting for about 35% and 22% of the total energy consumed in the EU. The remaining energy needs are fulfilled by renewable sources (~15%), nuclear (~13%), and solid fossil fuels (~12%).

The high dependence on fossil fuels is one of the main reasons behind Europe’s ongoing energy crisis. In order to mitigate this dependency, Europe has made concerted effort in the development of renewable energy production capabilities. In 2018, the European Commission set a target to achieve 32% of the energy mix from renewables by 2030, but in July 2021, the target was increased to 40%, clearly indicating the region’s inclination towards renewables.

Expediting renewable energy projects could help Europe to get closer to energy self-sufficiency, although the intermittency issue must also be accounted for. This is where nuclear energy can play a critical role.

After Fukushima disaster in 2011, many countries in Europe pledged to phase-out nuclear energy production. France, Germany, Spain, and Belgium planned to shut down 32 nuclear reactors with a cumulative production capacity of 31.9 gigawatts by 2035. However, in the wake of the current crisis, there is a renewed interest in nuclear power. In October 2021, nine EU countries (Czechia, Bulgaria, Croatia, Finland, Hungary, Poland, Romania, Slovakia, and Slovenia) released a joint statement asserting the expansion of nuclear energy production to achieve energy self-sufficiency. France, which generates about three-fourth of its electricity through nuclear plants, is further increasing investment in nuclear energy. In October 2021, the French government pledged an investment of EUR 1 billion (~US$1.2 billion) in nuclear power over the period of 10 years.

Look beyond Russia

More than 60% of EU’s energy needs were met by imports in 2019. Russia is the major partner for energy supply – in 2019, it accounted for 27% of crude oil imports, 41% of natural gas imports, and 47% of solid fossil fuels imports. While Europe is accelerating the development of renewable energy production, fossil fuels still remain an important source of energy for the region. In the face of escalating political differences with Russia, there is a need to reduce energy reliance on this country and to build long-term partnerships with other countries to ensure a steady supply.

EU has many options to explore, especially in natural gas imports. One of them is natural gas reserves in Central Asia. The supply link is already established as Azerbaijan started exporting natural gas to Europe via Trans-Adriatic Pipeline (TAP), operational since December 31, 2020. In the first nine months, Azerbaijan exported 3.9 billion cubic meters of gas to Italy, 501.7 million cubic meters to Greece, and 166 million cubic meters to Bulgaria. Trans-Caspian Pipeline (TCP) is a proposed undersea pipeline to transport gas from Turkmenistan to Azerbaijan. This pipeline can connect Europe with Turkmenistan (the country with the world’s fourth-largest natural gas reserves) via Azerbaijan. As a result, Europe has heightened its interest in the development of this pipeline.

Eastern Mediterranean gas reserve can also prove to be greatly beneficial for the EU. In January 2020, Greece, Cyprus, and Israel signed a deal to construct a 1,900 km subsea pipeline to transport natural gas from the eastern Mediterranean gas fields to Europe. This pipeline, expected to be completed by 2025, would enable the supply of 10 billion cubic meters of gas per year from Israel and Cyprus to European countries via Greece.

Africa is another continent where the EU should try to strengthen ties for the imports of natural gas. Algeria is an important trade partner for Europe, having supplied 8% of natural gas in 2019. Medgaz pipeline connects Algeria directly to Spain. This pipeline currently has the capacity to transport 8 billion cubic meters of gas per year, and the ongoing expansion work is expected to increase the capacity to 10.7 billion cubic meters per year by the end of 2021. In addition to this, Nigeria is planning the development of a Trans-Sahara pipeline which would enable the transport of natural gas through Nigeria to Algeria. This will potentially open access for Europe to gas reserves in West Africa, via Algeria. Further, as African Continental Free Trade Agreement came in to effect in January 2021, the natural gas trade within countries across Africa received a boost. Consequently, liquefied natural gas projects across Africa, including Mozambique’s 13.1 million tons per annum LNG plant, Senegal’s 10 million tons per annum Greater Tortue Ahmeyim project, and Tanzania’s 10 million tons per annum LNG project, could help Europe to enhance its gas supply.

Business to strive to achieve energy independence

While governments are taking steps to reduce the impact of the energy crisis on end consumers, this might not be enough to save businesses highly reliant on power and energy. Therefore, businesses should take the onus on themselves to achieve energy independence and to take better control of their operations and costs.

Some of the largest European companies have already taken several initiatives in this direction. Swedish retailer IKEA, for instance, has invested extensively in wind and solar power assets across the world, and in 2020, the retailer produced more energy than it consumed.

There has also been growing effort to harness energy from own business operations. In 2020, Thames Water, a UK-based water management company, generated about 150 gigawatt hours of renewable energy through biogas obtained from its own sewage management operations.

However, a lot more needs to be done to change the situation. Companies not having any means to produce energy on their own premises should consider investing in and partnering with renewable energy projects, thereby boosting overall renewable energy production capacity.

Energy crisis is likely to have repercussions on all types of businesses in every industry. Larger entities with adequate financial resources could use several hedging strategies to offset the effect of fluctuating energy prices or energy supply shortage, but small and medium enterprises might not be able to whither the storm.

Economist Daniel Lacalle Fernández indicated that energy represents about a third of operating costs for small and medium enterprises in Europe, and as a result, the ongoing energy crisis can trigger the collapse of up to 25% of small and medium enterprises in the region. Small and medium enterprises need to actively participate in government-supported community energy initiatives, which allow small companies, public establishments, and residents to invest collectively in distributed renewable energy projects. By early 2021, this initiative gained wide acceptance in Germany with 1,750 projects, followed by Denmark and the Netherlands with 700 and 500 projects, respectively.

EOS Perspective

Europe must continue to chase after its green energy goals while developing alternative low-carbon sources to address renewables’ intermittency issue. This would help the region to achieve energy independence and security in the long term. In the end, the transition towards green energy should be viable and should not come at a significant cost to the end consumers.

On the other hand, immediate measures proposed so far do not seem adequate to contain the ongoing energy meltdown. Further, energy turmoil is likely to continue through the winter, and, in the worst-case scenario, it might result in blackouts across Europe. If the issue of supply shortages remains difficult to resolve in the short term, a planned reduction in consumption could be the way forward.

In view of this, Europe would need to actively encourage energy conservation among the residential as well as industrial sectors. Bruegel, a Brussels-based policy research think tank, suggested that the European governments could either force households to turn down their thermostats by one degree during the winter to reduce energy consumption while not compromising much on comfort, or provide financial incentives to households who undertake notable energy saving initiatives.

This is perhaps a critical time to start promoting energy conservation among the masses through behavioral campaigns. Like businesses, it is necessary to enhance consumers’ participation in the energy market and they should be encouraged to generate their own electricity or join energy communities. The need of the hour is to harness as well as conserve energy in any way possible. Because, till the time Europe achieves self-sufficiency or drastically strengthens the supply chain, the energy crunch is here to stay.

UK Paves The Way for A Greener and Carbon-Free Future
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UK Paves The Way for A Greener and Carbon-Free Future

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The UK is working to create a policy for building a more sustainable future for itself through the New Green Industrial Revolution, aiming to attain net-zero emissions in the UK by 2050. As the country separated itself from the EU through Brexit, it is also setting its own environmental goals and in that, its own version of the EU’s 2019 Green Deal (we wrote about it in The EU Green Deal – Good on Paper but Is That Enough? in March 2020). With highly ambitious targets, the proposed investments are worth GBP12 billion, creating 250,000 jobs in the process. While this seems like a promising funds allocation, the plan’s success will actually depend on significant investments in next-generation technologies, which have currently not been proven commercially. Moreover, a lot will depend on an equal involvement from the private sector that might be more cautious with investments than the public sector.

The UK is in a bid to position itself at the forefront of global markets for green energy and clean technologies. To achieve this, it proposed a 10-point Green Industrial Revolution in November 2020, which aims to mobilize GBP12 billion funds and create 250,000 jobs in the UK. Through this plan, the UK aims to achieve net zero carbon emissions by 2050. The key areas covered under the plan include offshore wind, hydrogen, nuclear, electric vehicles, public transport, jet zero and greener maritime, homes and public buildings, carbon capture, nature, and innovation and finance.

UK Paves The Way for A Greener and Carbon-Free Future

Offshore wind

The new Green Industrial Revolution outlines the UK government’s commitment to put offshore wind energy at the forefront of the country’s electricity needs. It has increased the offshore wind targets from previous 30GW to 40GW by 2030, aiming to produce enough energy to power all homes in the UK by 2030.

In addition to this, the government plans investments of about GBP160 million to upgrade ports and infrastructure in localities that will accommodate future offshore wind projects (e.g. Teesside, Humber, Scotland, and Wales).

This investment in developing offshore wind energy is expected to support about 60,000 direct and indirect jobs by 2030 in construction and maintenance of sites, ports, factories, etc.

While the government’s plan is great on paper, meeting the 40GW target will require 4GW of offshore wind projects to be commissioned every year between 2025 and 2030, which is extremely ambitious and challenging. Moreover, just developing offshore wind projects will not be enough until works are also done to update the electricity grid. Further, the target 40GW generation is calculated based on current electricity demand by households, which in reality is bound to increase as a shift towards electric vehicles is being encouraged.

Hydrogen

With the help of industry partners, the UK government plans to develop 5GW of low carbon hydrogen production capacity by 2030 for industries, transport, and residences. The government is expected to publish a dedicated Hydrogen Strategy in 2021, to position the UK as a front runner in production and use of clean hydrogen. It plans to develop 1GW (of the planned 5GW) hydrogen production capacity by 2025.

A central part of the UK’s Hydrogen Strategy is expected to have hydrogen potentially replace natural gas for the purpose of heating. The government is undertaking hydrogen heating trials, commencing with building a ‘Hydrogen Neighborhood’ and potentially developing a plan for the first town to be heated completely using hydrogen by 2030.

In addition to this, works with industry partners are under way to develop ‘hydrogen-ready’ appliances in 2021, such that new gas boilers can be readily converted to hydrogen if any future conversion of the gas network is commissioned. To facilitate this, the government is working with Health and Safety Executives to enable 20% hydrogen blending in the gas network by 2023. However, this is subject to successful trials.

In transportation, an investment of GBP20 million in 2021 is planned to test hydrogen and other zero emission freight truck technologies in order to support the industry in developing zero-emission trucks for long-haul road freight.

To achieve these targets, a GBP240 million Net Zero Hydrogen Fund is planned to be set up. It will provide capital co-investment along with the investment from private sector to develop various technologies. These will include carbon capture and storage infrastructure for the production of clean hydrogen that can be used in home, transport, and industrial requirements. The policy is expected to support 8,000 jobs by 2030 and push private investment worth GBP4 billion by 2030.

However, the government’s ambitious 2030 hydrogen policy requires significant investment and participation from the private sector. While several global companies such as ITM Power, Orsted, Phillips 66, etc., have come together to collaborate on the Gigastack project in the UK (which aims to produce clean hydrogen from offshore wind), such private participation will be required on most projects to make them feasible and meet the targets.

Nuclear power

In search of low-carbon electricity sources, UK plans to invest in nuclear energy. In addition to development of large-scale nuclear plants, the investments will also include small modular reactors and advanced modular reactors.

To this effect, the government has set up a GBP385 million Advanced Nuclear Fund. Of this, GBP215 million is to be used towards small modular reactors, i.e., to develop a domestic smaller-scale nuclear power plant technology that could be built in factories and assembled on site. Apart from this, GBP170 million is to be used towards research and development of advanced modular reactors. These are reactors that could operate at over 800˚C, and as a result, unlock efficient production of hydrogen and synthetic fuels. These are also expected to complement the government’s other investments and initiatives with regards to hydrogen and carbon capture.

While the government expects the design and development of small modular reactors to result in private sector investment of up to GBP300 million, these next generation small reactors are currently considered a long shot as no company has created them yet. While Rolls Royce has offered the government to design one, it is conditional on them receiving a subsequent order worth GBP32 billion for 16 such reactors as well as the government paying half of the GBP400 million design cost.

Moreover, nuclear power plants are expensive and long-term investments and are considered to be one of the most expensive sources for power. Thus it is very important to evaluate their economic feasibility. While the government is bullish on the role of nuclear power in decarbonizing electricity, it is very important for large-scale projects to be economical, while small-scale projects still remain at a conceptual stage.

Electric vehicles

It is estimated that cars, vans, and other road transport are the single largest contributor to the UK’s carbon emissions, making up nearly one-fifth of all emissions emitted. Thus the government is committed to reducing carbon emissions produced by automobiles. To achieve this, the country plans to ban the sale of all new petrol and diesel cars and vans by 2030 (10 years earlier than initially planned). However, hybrid cars will be allowed to be sold till 2035.

The government has planned a support package of GBP2.8 billion for the country’s car manufacturing sector, which in turn is expected to create about 40,000 employment opportunities up till 2030. Of this, GBP1 billion will be used towards the electrification of vehicles, including setting up factories to produce EV batteries at scale. In addition to this, GBP1.3 billion is planned to be spent to set up and enhance charging infrastructure in the country by installing a large number of charge points close to residential areas, office and commercial spaces, highways, etc., to make charging as convenient as refueling. The government plans to have a network of 2,500 high-power charging points by 2030 and about 6,000 charging points by 2035. Lastly, grants are planned to the tune of about GBP582 million up till 2023 to reduce the cost of EVs (cars, vans, taxis, and two-wheelers) for the consumer. In addition to the investment by the government, private investment of about GBP3 billion is anticipated to trickle into the sector by 2026.

While this is considered to be a very important step in the right direction, it is estimated that it will still leave about 21 million polluting passenger vehicles on the UK roads by 2030 (in comparison to 31 million in 2020). Moreover, the government continues to allow the sale of hybrid cars for another five years beyond 2030, which means that carbon emissions-producing vehicles will still be added to UK roads even after the target dates set in the New Green Industrial Revolution plan.

Green public transport

In addition to reducing carbon emissions from passenger cars, the government also wants to make public transport more approachable and efficient. It plans to spend about GBP5 billion on public transport buses, cycling- and walking-related initiatives and infrastructure.

In addition, funding of GBP4.2 billion is planned on improving and decarbonizing the cities’ public transport network. This will include electrifying more railway lines, integrating train and bus network through smart ticketing, and introducing bus lanes to speed up the journey. The plans also include investment in about 4,000 new zero-emission buses in 2021, as well as funding two all-electric bus towns (Coventry and Oxford) and a completely zero-emission city center. While York and Oxford have shown interest in becoming the UK’s first zero-emission city center, the government has not yet formally announced the city for the same.

Improvements in public transport networks in other cities are also planned to bring them on par with London’s system. A construction of about 1,000 miles of segregated cycle lanes is in plans to encourage people to take up this mode of transportation for shorter distances.

While it is expected these investments will encourage people to use public transport more, the current COVID pandemic has created apprehensions when considering such shared transportation. Although this is expected to be a short-term challenge, it may be a slight damper to the government’s plan for the next year or so.

Jet zero and green ships

Apart from road transport, the government also aims at decarbonizing air and sea travel. It plans to invest GBP15 million in FlyZero – a study by Aerospace Technology Institute (ATI) aimed at identifying and solving key technical and commercial issues in design and development of a zero-emission aircraft. Such an aircraft is expected to be developed by 2030. In addition to this, the government plans to run a GBP15 million competition for the development of Sustainable Aviation Fuel (SAF) in the UK. The plans also include investing in upgrading airport infrastructure so that it can service battery and hydrogen fueled aircrafts in the future.

In addition to aviation, the government is also investing GBP20 million in the Clean Maritime Demonstration Programme to develop clean maritime technology.

While the plans to develop greener fuel for aircraft and ships is a step in the right direction, it is still somewhat of a long shot as a lot more investment is required into this than proposed. Moreover, the shipping industry in particular has shown little interest in wanting to reform in the past and it is likely that both the sectors will continue to follow international standards (that are high in carbon emissions) to remain competitive globally.

Greener buildings

The UK has a considerable number of old and outdated buildings that the government wants to put in the center of its Green Industrial Plan, thus making existing and new buildings more energy efficient. The plan is to slowly phase out carbon-heavy fossil fuel boilers currently used for heating buildings and instead promote the use of more carbon efficient heat pumps. For new buildings, an energy efficiency standard is to be developed, known as the Future Home Standard. To achieve this, the domestic production of heat pumps needs to be ramped up, so that 600,000 heat pumps are installed annually by 2028. This is expected to support about 50,000 jobs by 2030. In addition to this, the government is providing GBP1 billion to extend the existing Green Home Grant (launched in September 2019) by another year, which is aimed at replacing fossil fuel-based heating in buildings with more energy efficient alternatives.

While the subsequent shift to heat pumps from gas boilers will definitely help reduce the buildings’ carbon footprint, heat pumps are currently much more expensive and more difficult to install. Thus, the government must provide ongoing financial incentives for consumers to make the switch.

Carbon capture, usage, and storage

Carbon capture, usage, and storage (CCUS) technology captures carbon dioxide from power generation, low carbon hydrogen production, and industrial processes, and stores it deep underground, such that it cannot enter the atmosphere. In the UK, it can be stored under the North Sea seabed. A the technology has a critical role to play in making the UK emission free, a GBP1 billion investment is planned to support the establishment of CCUS in 4 industrial clusters by 2030 to capture 10Mt of carbon dioxide per year by 2030. Developed alongside hydrogen, these CCUS will create ‘SuperPlaces’ in areas such as the North East, the Humber, North West, Scotland, and Wales. The development of the CCUS is expected to create 50,000 jobs by 2030.

CCUS is a very new technology, with no large-scale or commercially successful projects operational across the world. While the technology has been proved in pilot projects, its feasibility is yet to be seen. Also, a significant amount of private investment will be required to carry through the proposed project. While some private players, such as Tata Chemicals Europe have begun constructing the first industrial-scale CCU plant (expected to capture 40,000 tons of CO2 per year) in Northwich, the government needs several more private players to step up to meet its ambitious targets.

Nature

In addition to the above mentioned programs, the government plans to safeguard and secure national landscapes as well as restore several wildlife habitats to combat climate change. To achieve that, it plans to reestablish several of the nation’s landscapes under National Parks and Areas of Outstanding Beauty (AONB), as well as create new areas under these two heads. The National Parks and AONB program is expected to add 1.5% of natural land in the UK and will help the government in reaching the target of bringing 30% of the UK’s land under protected status by 2030.

In addition to this, the government plans to invest GBP40 million in nature conservation and restoration projects, which in turn is expected to create several employment opportunities across the country. Moreover, it plans to invest GBP5.2 billion over six years into flood defenses, which will help combat floods and damage to homes as well as natural environment. This is also expected to create about 20,000 jobs up till 2027.

Green finance and innovation

The last agenda on the 10-point Green Industrial Revolution entails developing new sources of financing for supporting innovative green technologies. To this effect, the government has committed an R&D investment of 2.4% of its GDP by 2027. This will extensively be used towards developing high risk, high reward green technologies, which will help the UK attain net zero emissions by 2030.

Additionally, the government launched a GBP1 billion Net Zero Innovation Portfolio that will focus on commercialization of low-carbon technologies mentioned in the 10-point agenda, including development of floating offshore wind, nuclear advanced modular reactors, energy storage, bioenergy, hydrogen, greener buildings, direct air capture and advanced CCUS, industrial fuel switching, and other disruptive technologies. In November 2020, the government launched the first phase of this investment, GBP100 million, towards greenhouse gas removal and in the coming year it plans to invest another GBP100 million towards energy storage. It also plans to invest GBP184 million for fusion energy technologies and developing new fusion facilities. Moreover, GBP20 million will be directed towards development and trials of zero emission heavy goods vehicles.

Apart from this the government plans to issue the UK’s first Sovereign Green Bonds in 2021. These bonds, which are likely to be first of many, are expected to finance sustainable and green projects and facilitate the creation of ‘green jobs’ in the country. Furthermore, similar to the EU Green Deal, the government plans to implement a green taxonomy, which helps define economic activities into two categories – the ones that help limit climate change and others that are detrimental to the environment – to help investors make better investment choices.

EOS Perspective

The UK’s Green Industrial Revolution seems to be a comprehensive policy with a multi-pronged approach to tackle climate change, promote green technology and investments, and achieve net zero emissions by 2050. With Brexit in action, it seems like a worthy counterpart to the EU’s Green Deal, which the UK was initially a part of. Moreover, it is an important framework for the UK to show its commitment towards controlling climate change, especially with the country hosting the upcoming 26th session of the Conference of the Parties (CoP 26) to the United Nations Framework Convention on Climate Change summit in Glasgow in 2021.

However, currently the UK’s Green Industrial Revolution is not a legally binding policy document but more of a proposal, which would need to go through several legislative procedures to become binding. Moreover, while the plan is ambitious, it depends heavily on next generation innovative technologies that require hefty investments to achieve the targets. Thus, its success depends on whether the government is seriously committed and prepared to spend heavily on commercializing these technologies along with managing to attract significant amount of private investment to complement own efforts. While few aspects of the 10-point approach have already received investment from the private sector and first phase of funding from the government, it is yet to be seen if the UK’s ambitious net zero emission goals are truly feasible.

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The EU Green Deal – Good on Paper but Is That Enough?

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The EU, which has always been ahead of the curve in tackling climate change and ensuring emission control, has rolled out a new EU Green Deal in December 2019. The Green Deal is the most ambitious environmental policy devised by the EU and encompasses several targets and policy measures that will require a complete overhaul in how business across sectors is currently done in the region.

In the beginning of December 2019, European Commission President, Ursula von der Leyen, unveiled a suite of policies known as the EU New Green Deal and called it Europe’s ‘man on the moon moment’. EU’s Green Deal is aimed at decarbonizing the economy and encompasses a host of policy measures including a plan to ensure EU reaches net-zero emissions by 2050.

To this effect, it has also increased its carbon emission reduction targets from 40% to 55% for 2030. This is the ubiquitous goal for the Commission and all its measures and policies are to be aligned to achieve this objective. Thus, the EU Commission is expected to review and align laws and regulations, such as the Renewable Energy Directive, Energy Efficiency Directive, and Emissions Trading Directive among many others, over the next couple of years to ensure that they are tuned to support the ambitious climate goals. Moreover, taxation will also be aligned with climate objectives to ensure effectiveness.

Policy measures

In order to achieve this objective of carbon neutrality, the EU Commission is focusing on energy efficiency since the production and use of energy across the EU states accounts for 75% of EU’s greenhouse gas emissions. The EU member states are revising their energy and climate plans to ensure higher dependence on renewable sources (especially offshore wind energy production) and phasing out coal and gas-based energy. Moreover, the Commission has also guided member states to review and update their energy infrastructure to ensure the use of innovative and energy-efficient technologies such as smart grids and hydrogen networks.

The Commission is also working towards adopting a new EU industrial strategy along with a new circular economy action plan. The plan will focus on decarbonizing and modernizing several energy-intensive industries, such as steel, chemicals, and cement. It will also include a ‘sustainable product policy’ that will prioritize reducing and reusing materials before recycling them. Moreover, while the circular economy action plan will be applied across all sectors, it will be most relevant for resource-intensive sectors such as textiles, construction, electronics, and plastics.

The plan will focus on fostering new business models that drive sustainable use of resources, set regulations and minimum standards to prevent environmentally harmful products from being sold in EU markets, as well as set a regulatory framework to ensure that all packaging in the EU is reusable or recyclable in an economically viable manner by 2030. In addition to this, the Commission aims at achieving ‘clean steelmaking’ by 2030 by using hydrogen for the process and introduce new legislation by 2020 to ensure that all batteries are reusable and recyclable.

Understanding that construction, use, and renovation of buildings account for a significant part (about 40%) of energy consumed in the EU, the Commission aims at improving energy efficiency in this sector by focusing on more frequent renovations. A quicker renovation rate helps improve the energy performance of buildings and is effective in lowering energy bills and reducing energy poverty. Currently, the annual renovation rate of buildings in the EU states ranges between 0.4% and 1.2%. However, the Commission is looking to at least double the renovation rate to reach its energy efficiency and climate objectives.

In addition to this, the Commission is also working towards curbing carbon emissions from transportation, which accounts for about 25% of EU’s total greenhouse gas emissions. In order to achieve carbon neutrality by 2050, the current transport emission levels would be needed to be cut down by about 90%. To attain this, the Commission has planned for significant investment in boosting electric vehicles and plans to deploy 1 million public recharging stations across the EU states by 2025. Moreover, in July 2021, the Commission plans to revise the legislation on CO2 emission performance standards for cars and vans to achieve its target of zero-emission mobility by 2025.

With regards to commercial transport, the EU Commission aims at pushing automated and digitized multimodal transport. It aims at shifting 75% of inland freight currently carried by road to rail and inland waterways. Moreover, it aims at deploying smart traffic management systems and sustainable mobility services that will facilitate a reduction in congestion and pollution.

The EU Green Deal – Good on Paper but Is That Enough by EOS Intelligence

The Commission also plans to align agriculture and food production with its climate goals. To this effect, the Commission is expected to present a ‘Farm to Fork’ strategy in spring 2020, which aims to introduce and strengthen policies in the agriculture and fisheries space so that they are well equipped to tackle climate change and preserve biodiversity. As per the Commission’s new proposal, 40% of the agricultural policy’s budget and 30% of the maritime fisheries fund within the EU 2021-2027 budget will contribute to climate action and objectives. In addition to this, the ‘Farm to Fork’ strategy aims at significantly reducing the use of chemical pesticides, fertilizers, and antibiotics and in turn increase the area under organic farming.

In addition to agriculture, the EU Commission also aims at preserving and restoring biodiversity. To this effect, the Commission will present a new ‘Biodiversity Strategy’ by March 2020, which will be shared at the UN Biodiversity Summit to be held in China in October 2020. The biodiversity strategy is expected to be brought to action in 2021 and will cover measures aimed to address the key drivers of biodiversity loss such as soil and water pollution. The policy will also encompass a new EU forest strategy that will focus on afforestation, forest preservation, and restoration, which in turn will increase CO2 absorption and aid EU’s ambitious climate goals.

Lastly, the EU Commission plans to reach a ‘pollution-free environment’ by 2050. For this purpose, it plans to review and revise measures that monitor pollution from large industrial installations. Moreover, to ensure a toxic-free environment, the Commission will present a sustainable chemicals strategy that will protect the environment (and citizens) against hazardous chemicals and encourage innovation for the development of safe and sustainable alternatives.

Global trade

The EU’s Green Deal is ambitious, with measures in place to achieve this goal. However, the economic bloc cannot realize this goal in isolation. To get other countries to act on climate change and also prevent the influx of cheaper imports from countries that do not have similar strict policies on carbon emissions, the EU plans to propose a border adjustment carbon tax. This carbon tax is expected to be introduced by 2021 with an initial focus on industries such as steel, cement, and aluminum. The tax may hamper imports from the USA and China as well as smaller countries that cannot afford such climate-based policy measures. However, there is still some ambiguity regarding the tax as it may breach WTO rules, which require equal treatment for similar products, whether domestic or international.

Investment

To achieve this arduous goal, the EU will require a significant amount of additional investment. For starters, the Commission will require additional investment of about EUR260 billion (~US$288 billion) per annum only to achieve the 2030 goal (of reducing carbon emissions by 55%). This is about 1.5% of the EU’s 2018 GDP. Thus it is safe to assume that the investment required for achieving zero emissions by 2050 will be much higher.

The magnitude of the investment requirement will call for participation from both the public and private sector. To achieve this, the commission will present a Sustainable Europe Investment Plan, which will help meet the additional funding needs. The Plan will provide dedicated financing to support sustainable projects in addition to building a proposal for an improved regulatory framework. The commission has also proposed to dedicate at least 25% of the EU’s long-term budget towards achieving climate-based objectives. Moreover, the European Investment Bank (EIB), which has about EUR550 billion funds in its balance sheet, has also pledged to increase its lending towards green projects, thereby becoming a climate bank of sorts. While EIB is already in the process to phase out financing fossil fuel dependent projects by 2021, the bank aims for 50% of its financing to go towards green projects by 2025 (up from 28% in 2019).

In order to ensure an easy and fair transition to climate neutrality, the Commission plans to mobilize a EUR100 billion fund to help regions most dependent on fossil fuels or carbon-intensive sectors. The fund, also called the ‘Just Transition Mechanism’ fund will be funded from the EU’s regional policy budget as well as the EIB. The fund will be used primarily to support and protect citizens most vulnerable to the transition by providing access to re-skilling programs, technical assistance, jobs in new sectors, or energy-efficient housing.

Moreover, the Horizon Europe research and innovation program will also contribute to the Green Deal. As per a new agreement between the EU members in May 2019, 35% of the EUR 100 billion (US$110 billion) research budget for 2021-2027 will be used for funding clean tech and climate-related projects.

With regards to the private sector participating in this green transition, the commission will present a Green Financing Strategy in Q3 2020, which is expected to incentivize the private sector to invest in sustainable and green projects.

To this effect the Commission has created a classification system that for the first time defines what is considered as ‘green projects’ or ‘sustainable economic activities’. This classification is also termed as the ‘green list’ or ‘taxonomy’. This will help redirect private and public capital to projects that are actually sustainable and in turn help the transition to climate neutrality and prohibit ‘greenwashing’, i.e. the practice of marketing financial products as ‘green’ or ‘sustainable’ when actually they do not meet basic environmental standards.

Moreover, it will be made mandatory for companies and financial institutions to provide full disclosure on their climate and environmental impact to clearly lay out how their portfolio stands with regards to the set taxonomy criteria. This is expected to not only increase the transparency of the financial markets but also steer more private investments towards financing an economy that is aligned towards a green transition.

 

The Taxonomy Criteria

The EU Commission set out a basic framework to define what can be termed as a sustainable economic activity. It sets out six environmental objectives and four requirements that need to be complied with in order to make it to the green list.

Six objectives are as follows:

1.       Climate change mitigation

2.       Climate change adaptation

3.       Sustainable use and protection of water and marine resources

4.       Transition to a circular economy

5.       Pollution prevention and control

6.       Protection and restoration of biodiversity and ecosystems

 

Four requirements that need to be met to qualify are as follows:

1.       Must provide a substantial contribution to at least one of the six environmental objectives

2.       Must not provide ‘any significant harm’ to any of the other environmental objectives

3.       Must have compliance with robust and science-based technical screening criteria

4.       Must have compliance with minimum social and governance safeguards

While this provides a general framework, detailed rules and thresholds along with a list of sustainable economic activities will be assessed and developed based on recommendations from a ‘Technical Expert Group on Sustainable Finance’, which is advising the European Commission on this matter.

 EOS Perspective

The Green Deal makes EU the world’s largest economic bloc to adopt such ambitious measures that aim to cease or offset all emissions created by them by mid-century. As per climate scientists, this is necessary to ensure that global temperatures do not rise by more than 1.5-2˚C above the 1990 levels.

While these goals sound promising, they are rarely achieved because they are usually not binding. However, in this case the commission announced that the net-zero emission target would be made legally binding. While that does make achieving the Green Deal objectives more promising, many experts still remain skeptical about the bloc’s capability to achieve it. This is given the fact that the EU has failed to meet 29 (out of 35) environmental and climate targets for 2020. These include energy savings, air, water, and soil pollution, etc.

Moreover, the plan can only be achieved if the EU Council, Commission, and the Parliament, come together and work in tandem and in a timely manner and also work individually with member states to ensure guidelines are converted into actions. For instance, currently CO2 are taxed at different levels across member states (EUR 112 (US$123) per ton in Sweden, EUR 45 (US$50) per ton in France and tax-exempt in Germany). To get all member states to agree at a common point and have a pan-EU strategy is a difficult task. Thus, while the EU has devised an all-encompassing strategy and dedicated significant funds to the same, results will only materialize if there is inclusive and credible implementation of the plans.

In addition to this, there is also some criticism of the policy at a global level, with some nations indicating that it has more to do with protectionism rather than climate goals, owing to its policy on border adjustment carbon tax. Since the EU has more measures and flexibility to cut emissions in its own region, it creates an unfair disadvantage for its trade partners (some of who are still in the developing stage and cannot afford such measures). Moreover, given the technical and political complexities of the carbon tax (with regards to WTO and other trade treaties), it is unlikely that it will be implemented before 2024, which is when the current President Ursula von der Leyen’s term gets over. This will further make its implementation dicey.

However, all being said, the EU Green Deal is a policy in the right direction. With the blueprints being laid down, now it all depends on the implementation. While few measures may be difficult to achieve, there is a lot of unanimous backing for green finance. An increasing number of investors is moving away from ‘brown’ assets towards climate-friendly investments. Irrespective of the outcome or success of the Green Deal, green investments are definitely the future. Thus companies, both within the EU as well as globally, must look at innovating their processes as well as products/services to align them with climate goals to lure both public and private funding in the long run.

by EOS Intelligence EOS Intelligence No Comments

Growing Appetite for Plant-Based Foods Disrupts the Meat Market

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Not many years ago, veganism or consumption of only plant-based foods, was considered an extreme form of lifestyle. Food options that were available for vegans were very limited and meat alternatives were based mainly on tofu, tempeh, and nuts. However, this is not the case anymore. Not only has the mindset regarding vegan food changed in the recent times, but also plant-based alternatives have become the fastest growing food category in the USA. This is also driven by a greater number of meat eaters experimenting with plant-based meat alternatives, whether due to health benefits, growing awareness regarding animal cruelty, or environmental reasons. Moreover, tremendous amount of investment and research in this space has resulted in wide range of food options, including vegan cheese and vegan meats that taste similar to animal-based proteins.

Vegan food has been around for quite some time now, but it was largely considered to be a niche market having a separate shelf in the supermarkets or being served in vegan-only restaurants and cafes. Moreover, it was considered an extreme lifestyle by many. However, over recent years, vegan meal options have found their way into the mainstream, with more and more people embracing veganism and meat-eaters adding plant-based food options in their diet. This is clearly evident from the steep growth witnessed by this food category, especially in the western world.

As per a study commissioned by the Good Food Institute (GFI) and the Plant Based Food Association in the USA, the retail market for plant-based foods was valued at about US$4.5 billion in April 2019, registering a year-on-year increase of about 11% and a growth of 31% in the two-year period from April 2017 through April 2019. The largest segment of vegan food market in the year ending April 2019 was the plant-based milk segment, which comprised about 40% of sales (US$1.9 billion). This category witnessed a y-o-y increase of about 6%. To put this in further perspective, animal-derived milk sales for the same period declined by 3%. While plant-based meat alternatives, cheeses, yogurts, eggs, and creamers are relatively new and smaller categories, they are driving growth in the vegan food segment too.

The growing sales across most vegan food segments indicate a momentous shift towards a vegan diet, which is not only propelled by an increasing number of people turning purely vegan but also a rise in meat eaters that prefer plant-based alternatives in some food categories, such as milk and milk-based products. This is due to growing lactose intolerance among consumers, with about 65% of the world’s population estimated to be lactose intolerant. The environmental benefits (i.e. lower carbon footprint) of maintaining a vegan diet and a growing uproar regarding animal cruelty have also driven conscious consumers to adopt a vegan lifestyle.

The environmental benefits (i.e. lower carbon footprint) of maintaining a vegan diet and a growing uproar regarding animal cruelty have also driven conscious consumers to adopt a vegan lifestyle.

The trend is further supported by the launch of vegan meat substitutes that resemble meat products in taste, look, and even texture. US-based players, Impossible Foods and Beyond Meat, are leading this space with the latter having received investments from the likes of Bill Gates, Leonardo DiCaprio, and Twitter co-founders Biz Stone and Evan Williams.

Industry players are diversifying into plant-based foods

Understanding that this trend is more than just a fad, several food companies (including large meat producers) have started entering this space, by either buying or investing in plant-based food start-ups.

Tyson Foods, USA’s leading meat producer, invested in Beyond Meat in 2016 and 2017, by acquiring a 6.52% stake in the company. However, in April 2019, Tyson Foods sold its stake in Beyond Meat with an intention to develop its in-house line of alternative (plant-based) protein products.

Nestle, which is one of the largest food companies globally, has also been expanding its portfolio with a keen focus on plant-based alternatives. In 2017, the company purchased Sweet Earth, a California-based producer of vegan meals and snacks, while in 2018, it purchased majority stake in Terrafertil, a plant-based organic food player that was founded in Ecuador and has presence across the USA, UK, and Latin America.

In January 2019, Nestle expressed its plans to launch its in-house vegan burger patty, called the Incredible Burger under its Garden Gourmet brand. The company is also looking to develop a portfolio of dairy-free beverages, such as purple milk (which is made with walnuts and blueberries) and blue latte containing spirulina algae. It is also adding vegan options to its existing brands, such as Haagen-Dazs (which launched a range of dairy-free ice creams in July 2017) and Nescafe (which introduced vegan protein-based coffee smoothies in December 2018).

Similarly, Marfig, Brazil-based leading meat processor, also entered the plant-based food alternatives market through a partnership with Archer Daniels Midland in August 2019. Under the partnership, Archer Daniels Midland will produce the raw material while Marfig will produce and sell the end product through foodservice and retail channels.

Canada-based Maple Leaf has also made significant investments in plant-based food players to expand its product portfolio and brand positioning. In February 2018, it acquired US-based plant protein manufacturer, Lightlife Foods, for US$140 million. Through this acquisition, it added Lightlife’s refrigerated plant-based products, such as hot dogs, breakfast foods, and burgers, to its portfolio and garnered a strong footprint in the US plant-based food market. To further strengthen its hold in this market, in December 2018, the company entered into an agreement to buy US-based Field Roast Grain Meat Co. for US$120 million. Field Roast Grain Meat supplies grain-based meat alternatives (including sausages, burgers, etc.) and vegan cheese products to the North American market.

Danone, a global food company with large number of dairy products is also bullish on the growing popularity of plant-based foods. In April 2017, it purchased WhiteWave Foods, a US-based leading player in plant-based food and beverage for US$10 billion. It rebranded the company to DanoneWave and in October 2017, further invested US$60 million into its plant-based milk operations. In 2019, the company expressed plans to triple its revenue (to about US$5.6 billion) from its plant-based food line by 2025.

In addition to these, many other large food processors and retailers have entered the plant-based food market either through acquisitions or the launch of in-house products and brands. These include Brazil-based JBS Foods, US-based Smithfield Foods, UK-based Hilton Food Group, Germany-based Wiesenhof, UK-based Heck Food, Canada-based Saputo, and US-based Dean Foods Company, among many others.

In addition to these leading food producers, many other large food processors and retailers have entered the plant-based food market either through acquisitions or the launch of in-house products and brands.

Fast food chains have also joined the vegan bandwagon. In April 2019, Burger King introduced a vegan version of its classic sandwich, called the Impossible Whopper. Similarly, Dunkin introduced a vegan breakfast sausage made by Beyond Meat, while KFC launched vegan fried chicken also made by Beyond Meat. In 2017, McDonald’s launched a vegan burger in Finland and Sweden and has plans to launch the same in Germany. In 2016, UK-based café, Pret a Manger opened a vegan pop-up store in central London and later made it permanent in 2017. Over the years, it opened three more stores (two in London and one in Manchester) under the name Veggie Pret. In April 2019, the company purchased rival food chain, Eat, and aims to convert about 90 of its stores into its vegan chain, Veggie Pret.

Just like the food producers and quick service restaurant chains, supermarkets have also been quick to respond to the vegan trend. In 2018, Tesco, a leading UK-based supermarket chain, launched its own range of vegan foods under the name Wicked Kitchen. Similarly, British department store chain, Marks & Spencer has also introduced a vegan food range in its food department. Vegan options have been introduced and are easily available across a wide range of US-based departmental stores such as Whole Foods, Target, and Kroger.

However, the key shift seen in departmental stores regarding plant-based meals is their placement. Traditionally, vegan food including plant-based meats and dairy were stocked together in a ‘vegetarian’ or ‘vegan’ isle or section. However, recently, these options have begun to be stored alongside their animal-based counterparts. For instance, plant-based dairy has now been moved to the beverage or dairy case. This exposes shoppers to a wider range of options for milk and increases the shopper’s chances of trying plant-based alternatives. This thereby opens the category to shoppers who otherwise would have not explored the separate vegan section in the store.

Similarly, plant-based meat options are also being increasingly stored along with traditional meat items, widening the choice for consumers who are flexitarians (i.e. consumers who are not completely vegan but do also consume vegan food from time to time). UK-based department chain, Sainsbury, was the first supermarket in the UK to place vegan products that are designed to look and taste like meat within the meat section.

Challenges ahead

While the number of vegan consumers is on the rise, it is still very low when compared with people consuming a meat-based diet. Moreover, while a great number of people are exploring vegan options, vegan meals are still largely perceived as offering limited nutritional value when compared with traditional meat-based meals, especially with regards to protein intake. While there is limited truth to this, companies offering vegan options have to invest substantially to educate consumers regarding the nutritional value of vegan meals.

In addition to this, vegan or plant-based meal options face another mindset block. Meat eating has long been associated with masculinity. This by contrary gives vegan meals a perception of being less ‘manly’ and thereby limiting the number of men who are open to embracing this meal option. To counter this, market leaders such as Impossible Foods and Beyond Meat have been avoiding terms such as vegan and vegetarian in their marketing strategy and have been promoting their burgers at male-centric locations such as sports events. Instead of pushing men to eat less meat, they are working towards expanding the definition of meat in the consumer’s mind to include plant-based options. They have also included ingredients (such as beet juice) in their burger to resemble a bleeding beef, making it clone the beef burger in terms of appearance, texture, and experience of consuming.

Other than mindset, price is also currently a considerable barrier for consumers. Plant-based meat substitutes are more expensive when compared with animal meat. While the Beyond Burger sells for about US$12 a pound at Whole Foods (a leading retail chain), its beef counterpart retails for about US$5. Similarly, Beyond Meat’s, Beyond Sausage retails for US$10.30 a pound, charging a premium of about 70% over a comparable pork sausage. Higher price points are off-putting for a big chunk of consumers, who may otherwise be willing to change eating habits owing to health or environmental reasons. While currently, the prices differ greatly, it is expected that the price difference will reduce in the long run (or be wiped off completely). Understanding price to be a big limiting factor, companies such as Beyond Meat are researching and investing into alternative plant protein sources that would lower the cost.

Price is also currently a considerable barrier for consumers. Plant-based meat substitutes are more expensive when compared with animal meat. While the Beyond Burger sells for about US$12 a pound at Whole Foods (a leading retail chain), its beef counterpart retails for about US$5.

However, one of the biggest roadblocks faced by the vegan food producers in making them mainstream is the backlash from the meat industry, which has in some cases resulted in labeling regulations that are damaging for the growth of the plant-based food sector.

In 2017, the EU banned the use of the term ‘milk’ and other dairy products, such as ‘cheese’, ‘yogurt’, etc., for plant-based alternatives (however, traditional versions such as almond or coconut milk and peanut butter are excluded from the ban).

In April 2018, France banned meat names for plant-based alternatives, such as vegetable ‘steak’, soy ‘sausage’, and ‘bacon-flavored strips’. Similarly, in May 2019, the European Parliament’s agriculture committee proposed a ban on the use of meat-related terminology on their labels and product description for vegetarian or vegan products. This includes terms such as ‘steak’, ‘sausage’, and ‘burger’. The proposal will be voted upon by the Members of the European Parliament in autumn 2019 and if passed, will be a big setback to the vegan industry as they would be required to remove the word burger from any product that does not contain meat.

In the USA, a Dairy Pride Act, which requires FDA to stop all plant-based dairy alternatives from being labeled as ‘milk’, was reintroduced in Congress in March 2019 (after being squashed earlier in 2017). While the chances of the bill being passed remain slim, if passed, it could seriously dampen growth in the vegan dairy market in the USA. Most of these legal actions are likely to have stemmed from strong meat and dairy lobbies that are directly impacted by the growth witnessed in the vegan market.

EOS Perspective

There is no doubt that the plant-based food market is growing exponentially and the food industry is taking notice. Meat producers and animal-based dairy companies are currently at a fork, where they may face some level of cannibalization of sales (especially in case of dairy) when they introduce vegan alternatives to their portfolio. The cases of Kodak and Apple are important examples when discussing the prospects of cannibalization of sales. While Kodak failed to innovate at the time of camera digitalization due to a fear of cannibalizing sales of its then popular camera films, Apple has made this one of its strength by innovating and launching new products that have (to an extent) cannibalized its own sales (IPhone for IPods and IPad for Mac).

While most players in the food industry have been quick to understand the potential of plant-based food market and have started to invest in this segment, several others still remain resistant to change. This may cost them dearly. Moreover, evaluating the future prospects of this industry, it may be prudent for meat producers to be focusing more on their plant-based food section than their long existing meat business. In a first of its kind case, in May 2019, Vivera Foodgroup, a leading European meat company sold off its meat business retailed under the brand name, Enkco, to Netherland-based Van Loon Group so that it could solely focus on its vegan food line.

However, while plant-based foods seem to be the future now, things may stir up again when clean meat (also known as lab-grown meat) goes mainstream. Currently, a lot of industry players (such as Tyson Foods) and business tycoons (such as Bill Gates) have begun investing in companies that are researching and developing lab-grown meat. It is expected to become a reality very soon, however, it may still take some years for lab-grown meat to match the prices and volume of farmed animal meat as well as obtain the required regulatory approval. While clean meat will definitely upset sales of farmed meat, it may also have a considerable impact on the plant-based food market as several consumers (who turned to vegan options due to animal cruelty and environmental reasons), may switch to clean meat instead of vegan alternatives. Thus vegan companies must stay ahead of the curve in terms of pricing as well flavors and product range to not only thrive but also survive in the coming times.

by EOS Intelligence EOS Intelligence No Comments

EU New Medical Device Regulations: Cause of Ache for Medical Device Players

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Circling around patient care and improving overall healthcare services, the European Parliament has set new requirements for medical device and in vitro diagnostic manufacturers that distribute products in the EU. However, medical device manufacturers have realized that they are bound to face many challenges in order to make their products market-ready, not to forget the gigantic task of implementing new protocols in a timely manner, which will not be easy.

Need for a comprehensive updated medical device regulatory system

EU’s Medical Device Regulation (MDR) and In Vitro Diagnostic Medical Devices Regulation (IVDR) were made official in May 2017, with transition period of three years (fully applicable from May 26, 2020) for the former and five years (fully applicable from May 26, 2022) for the latter. These regulations will replace EU’s previous directives: Medical Device Directive (MDD), Active Implantable Medical Devices Directive (AIMDD), and In Vitro Diagnostic Directive (IVDD).

The need for new regulations of medical devices in EU arose from the growing demand for technologically advanced medical products which necessitated more stringent monitoring of these devices to ensure a high level of efficacy and safety among patients.

Unlike earlier version of the regulations where the main focus revolved around the pre-approval stage of medical device manufacturing, the new regulatory guidelines promote an overall product-life cycle approach, focusing on both device safety and performance.

Enhanced supervision, easy documentation of devices, more stringent clinical evidence requirement, and increased supervision on part of authorities providing medical device certifications are some of the key changes in MDR as compared to the EU’s previous directives.

Bumpy road ahead for medical device manufacturers

Reclassifying existing product line-up

Based on the risk factor, changes have been made to the way medical devices are classified. Under MDR, the number of classification rules has expanded from 18 to 22 intensifying the task of product re-classifications by the manufacturer.

For instance, products using software for monitoring purposes being implanted in the body has been reclassified to higher-risk class (from Class I to Class III) which would now require conformity assessment by a notified body (NB – an organization that assess the conformity of medical devices before they are placed on the market), unlike earlier, when Class I products did not require assessment via a NB. This is going to burden players with increased operational costs; thus, it is imperative that the manufacturers familiarize themselves with the classification changes and study the impact on their product portfolio.

New products are also being added to the list of medical devices that earlier were not part of the medical device regulatory framework. For instance, products manufactured utilizing human tissues or cells and devices incorporating nanomaterial, under new regulations, will be considered medical devices. Manufacturers of such products have work cut out for them – from conducting clinical investigations, preparing technical documentation and evaluation processes, to product certification. Though such products could only form a very small percentage of the company’s product range, the task to make them available in the market is great, especially under current circumstances.

Manufacturers who do not comply with the new regulations will no longer be able to market their products in Europe. Thus, a robust strategy in terms of resource allocation, time management, and budget is an absolute must for manufacturers to make this transition possible.

EU MDR Cause of Ache for Medical Device Players - EOS Intelligence

Distress over notified bodies

Strict parameters are also being applied on NBs. Since all devices will require new certification from a NB, only designated NBs will be able to certify a device. The designation process is a complex procedure as it involves audits and corrective actions (once a NB expresses interest). However, while the medical device manufacturers have been in the process of switching to newer protocols since mid-2017, the first designated NB (BSI United Kingdom, the national standards body of the UK) was announced in January, 2019, almost 18 months after the regulations were announced and 14 months into the formally started designation process.

Such time-consuming process raises concern among medical device companies about the ability to complete the necessary conformity assessments within the allotted time. The huge task of recertifying medical devices with only a handful of designated NBs is a cause of worry for companies, as it could potentially result in significant backlogs as the last date approaches. However, there is only so much companies can do – even though they are proactive to comply with the new regulations much ahead of the deadline, poor process planning and lack of supporting bodies (notified bodies in this case) results in a long halt for these players.

The companies are heavily dependent on NBs for auditing and product certification, and the insufficient number of designated bodies adds to the risk of many devices being non-compliant according to new regulations. As of May 2019, less than 40 NBs have filed application for designation procedure (out of 58 designated NBs under the directives); only two have actually received a designated status – BSI UK and Germany based TÜV SÜD Product Service GmbH Zertifizierstellen (certification received in May 2019). With very little time at hand to reassess and rectify issues (if any), this could jeopardize the product availability in the market, resulting in not only risking the patients’ life (due to non-availability) but also in huge financial losses for the players.

Detailed clinical evaluation of medical devices

Owing to reclassification of product categories, many devices will require changes to their existing clinical evaluation reports, another challenge for medical device manufacturers. Manufacturers that have not previously been required to perform clinical testing will have to do so now. For instance, mechanical heart valve sizers will be moved up from Class I to Class III, and unlike in MDD where clinical evaluation was based on literature analysis, new evaluation of valve sizers will require clinical investigation. This will require a huge deal of additional time, money, and expertise, further burdening the device manufacturers.

Medical devices already in the market that remain untouched by the reclassification criteria will still require reassessment of clinical data. If the data do not meet the new requirements, devices will need to undergo additional testing to be recertified, increasing the expense for manufacturers.

MDR also calls for inclusion of risk management within the clinical evaluation expecting clinical risks to be addressed in clinical investigations and evaluation studies – adding another task to the long list of activities to be accomplished before MDR fully rolls out.

Explore our other Perspectives on medical devices markets

Comprehensive demonstration of equivalence data

Unlike MDD, where device manufacturers were able to use clinical data of an equivalent device for their own product registration, under MDR, equivalence is going to be less accepted, particularly for higher risk devices.

There are two ways out – manufacturers can either conduct their own trials not having to deal with the equivalence commotion or they can demonstrate that they have access to the equivalent device (with respect to technical and clinical properties) data. The latter is highly unlikely to happen considering equivalent device would typically belong to a competitor unwilling to grant such access. Thus, with stern requirements for comparative evaluations, more effort, planning, money, and resources will be needed for device manufacturers to demonstrate product safety and performance.

As new medical devices are developed, multiple small incremental improvements (minor changes in design, addition or subtraction of small hardware parts such as bolts or screws) happen over time. Once the device is already in the market, it is practically impossible to conduct a re-trial to gain approval for such small changes. An expected solution to this would be a provision to accept such minor changes through pre-clinical evidence or prior trial results. However, with equivalence testing being reduced drastically under MDR, unless a solution for such cases is offered, manufacturers will have to conduct re-trial and re-document everything, which would result in significantly increased cost. Another issue that could arise from such situations is the reduction in R&D activities inclined towards product improvement.

Trouble galore for SME’s

While making amendments and prioritizing to comply with new regulations seems to be the top most priority for medical and diagnostic device manufacturers, it seems SMEs will be dramatically more impacted than large players – in Europe, a small-sized company employs less than 50 people and has a turnover of less than or equal to €10 million while a medium-sized company employs less than 250 people and has a turnover of less than or equal to €50 million. Owing to the increase in cost, time, and resources associated with the process, the new regulations may put smaller companies under pressure, possibly resulting in altering (such as merging with or being acquired by larger companies) the European medical device market structure, currently dominated by SMEs – there are nearly 27,000 medical technology companies in EU, 95% of which are SMEs.

SMEs also need to be more vigilant when it comes to being associated with a designated NB as not all currently functioning NBs are expected to get a designated status. With their already dwindling numbers married with an increased demand for their services, once the new regulations roll out, it is quite possible that small manufacturers are orphaned since NBs could be partial towards larger players and prioritize them over other small and medium players.

Smaller players will not only have to hire additional personnel for dealing with regulatory issues but also employ clinical trials specialists (for documenting insights to be presented and approved by the NB) for launching products in the market which means higher costs. Adjusting budgets to keep costs under control would hamper other critical business operations, e.g. reduce R&D activities or cut the number of products being launched in the market.

As a step to overcome these issues, players with limited financial resources should strategically study their product portfolio to determine which products are worth investing in for MDR compliance. For doing this, they should lay out a detailed plan for each product and decide whether to remediate, transition, or divest.

It is also advised that SMEs should devise a clear step-by-step approach plan to ensure compliance. As an alternative to hiring transition specialists, they could engage employees from various functions within the organization to take responsibility for specific processes thus keeping costs in check.

EOS Perspective

The changes and revisions required to be carried out under MDR are company-wide and require significant investment to plan and execute. This will lead to players devising a business strategy based on assessing risk associated with product portfolio (whether some products need to be pulled out from the market and what effect it would have on future revenue) or looking for acquisition partners. Based on these decisions, the medical device market topography in EU is expected to see some major changes in the coming years – small companies looking for partners to get acquired or for new partnership with a service provider (specializing in regulations compliance). This will also result in organizational restructuring, revamping design processes, and systems implementation.

Companies have to make crucial decisions around the product portfolio. For some of the already existing products, if reclassified, the cost of compliance could be much higher than actual market returns. In such cases, manufacturers may be compelled to pull away such products from the market resulting in high healthcare costs and ultimately burdening the patients, who (theoretically) form the center point of the MDR. Though this is unlikely to happen at a large scale, since there are always alternative products available, it cannot be denied that this may be a major loophole in MDR requiring immediate attention.

Since SMEs drive the EU medical device market, as an immediate consequence, MDR is not likely to have any positive effect on these players other than distorting their business operations. However, it can only be anticipated that, with time, MDR may adapt and amend to offer some relaxation in provisions especially for small and medium-sized players. Nonetheless, MDR also brings an opportunity for such players to audit their current offerings and come out with an enhanced product portfolio, which could be an opportunity to be capitalized on in the distant future.

Modifications being made in the functioning of NBs are also likely to have an impact on the device manufacturers. For high risk devices, manufacturers may expect deeper scrutiny of design records and data files leading to providing more credentials, in case any query arises. This, along with long wait time for product review (due to reduction in the number of designated NBs) and limited availability of resources (again on account of NBs), could lead to unknown delays for obtaining product re-certification. Thus, companies need to chalk out their market strategies very effectively and be prepared to address any concern that rises during product reviews.

The aim of implementing new regulations is to bring a transparent and robust regulatory framework for medical devices. However, there is no assurance that the new regulations are completely accurate and will apply seamlessly to live case scenarios. Therefore, once implemented, there is a possibility that MDR may see revisions in the initial months of coming into action.

These changes, though certainly positive from a healthcare point of view, are enormous. Transitioning to meet the new standards within the stipulated time frame is challenging for manufacturers. Not adapting to the changes is not a choice for manufacturers as non-compliance could result in losing license to operate in the EU market. And for players fearing stringent scrutiny in the future, operating in the European healthcare market will not be easy once the new regulations come into force.

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