20.09.22 EU Review

The European Union needs a coordinated approach to address the energy crisis. instead, member States are Opting for inward-looking national policies

Gas blackmail by Russia remains Europe’s main economic and political problem. The European energy sector has not faced such pressure since the oil crisis in the 1970s, according to experts at Bruegel, the European institute for economic policy. As a result of Europe’s energy transition policy, investment into traditional energy has been on the decline, but has not been matched by increases in the production of renewable energy or reduced demand for fossil fuels. It was against this backdrop that Russia’s gas supply manipulations provoked a crisis. The experts at Bruegel insist that in order to balance the energy market in the next 18 months and get through the next two winters, EU countries need to coordinate their energy policies. Member states opting to come up with their own strategies to combat the crisis are unlikely to solve the overall problem. So far, however, instead of implementing a coordinated strategy, European governments have been focusing on the political fallout of the crisis in their respective countries, according to the Bruegel report.

Russian manipulation of European gas markets began in the summer of 2021. However, according to experts at the Bruegal think tank, this is only one of three shocks that the European energy system is currently experiencing. In recent years, European countries have been implementing various incentives to reduce investment into the development of new fossil fuel deposits. At the same time, they have not been appropriately stimulating the development of renewable energy alternatives. The situation was further complicated by a series of unfortunate coincidences: due to corrosion in France, several nuclear reactors were shut down, and a heat wave in Europe this summer led to the drying up of reservoirs and a subsequent decrease in the production of electricity.

Most measures aimed at reducing imbalances in the energy markets are currently being implemented nationally. These include price caps for consumers, the introduction of gas storage targets, etc. In order to address the energy crisis in the short term and at a lesser cost, Europe must adopt a series of coordinated energy policy measures across several areas, according to the Bruegel report. The current policies only work within the framework of national markets, and worsen the situation in neighbouring ones. The experts at Bruegel make several recommendations. 

Firstly, it is vital to ensure that the filling of gas storage facilities is synchronised across Europe. For example, an Austrian storage facility, which could help to quickly fill a regional gas shortage, remains relatively empty. 

Secondly, a reduction in energy consumption should be coordinated across the EU. In August 2022, a law was passed stating that by the spring of 2023, energy demand in Europe should be reduced by 15%. It is likely, however, that many countries will not actually comply with its requirements. In fact, various countries have already subsidised gas prices and intervened in their local markets in order to shield consumers from rising energy costs. This means that they are simply “burning money”, as consumers have not been stimulated to reduce their consumption of gas. For example, gas demand in Italy failed to decrease in the first half of 2022 (relative to last year's levels). In order to achieve the 15% reduction target, countries need to implement rules to limit inefficient consumption (in public buildings, for example) and promote energy saving through financial schemes (i.e prices), regulation policies and media campaigns. General subsidies for gas prices should be ended and support directed only to the most vulnerable households.

Thirdly, it is important to coordinate energy supply. For example, the debate about reopening nuclear power plants in Germany revolves around the domestic balance of energy sources. Operating the power plants will not affect the energy balance of the country itself, since it will not be able to replace gas in its power system. However, reopening them could reduce gas consumption in neighbouring countries such as the Netherlands and thus improve Europe's overall energy mix.

Finally, it is vital to increase the connectivity of Europe's energy markets, effectively turning them into a single entity. This applies to both gas and electricity markets, as they are closely interconnected. Gas flows between different markets are restricted due to a lack of critical infrastructure, meaning that they do not currently respond to price incentives. It is also important to avoid electricity market fragmentation: subsidising electricity consumption in some countries can potentially lead to lower exports and higher prices in others. To prevent the fragmentation of energy markets in general, governments must be prepared to provide energy companies with liquidity so that they can avoid bankruptcy.

The conclusions and recommendations of the report are consistent with the findings of a large IMF study published in July, which also spoke of the need for a coordinated energy policy in Europe in response to the crisis. However, as the Bruegel report shows, European governments remain largely focused on solving the problems of their own voters.