The EU energy crisis: facts, actions and challenges

First of all, I would like to stress that in this article, I do not wish to analyse the war in Ukraine, question the EU’s sanctions against Russia or the geopolitical creation of a multipolar world. All of those are facts and the reason for (more than) the current energy crisis in the EU. I wish, however, to look at the facts, the EU actions (taken thus far), the current European-level discussions, and above all, the biggest challenges.

The Financial Times recently reported that since Russia’s attack on Ukraine, EU Member States have passed the €100 billion milestone spent on fossil fuels (coal, gas, oil). According to Eurostat, overall gas consumption in the EU has fallen by 11% in this period, while consumption of oil products and coal has risen (by 8% and 19%, respectively). The sanctions on coal came into force in August and supplies have been completely cut off. The sanctions on petroleum products will enter into force at the beginning of next year — with some exceptions for eastern countries. Meanwhile, the EU has not introduced any sanctions on gas, which Russia is skilfully using in its hybrid energy war waged against the EU, or rather the West. Recently, the European Commission revealed that the EU has cut Russian gas deliveries through pipelines from around 40% to 7.5% of total EU consumption. As we know, a significant volume of gas still flows through the pipeline crossing Ukraine and leading to Central Europe, Italy and other countries, while deliveries to some countries were cut off some months ago. It is less well known that Russian LNG (liquefied natural gas) sales have reached a record high this year, with 80% sold to the countries in Europe and Asia that imposed sanctions on Russia. LNG, in addition to gas from Norway and Algeria, has generally been the largest substitute for Russian pipeline gas and in the coming years, the trend is expected to increase, given that a complete phase-out of Russian gas is expected.

While Member States have to a large extent filled up their storage facilities and reduced gas consumption ahead of the winter, this year, storages were partly replenished with the otherwise limited gas inflow from Russia. In 2023, the target will be harder to reach. Unreasonable pricing and market dysfunction are, of course, having a major impact on the competitiveness of our economy and on the social situation of Europeans. But at the same time, it is worth pointing out that this year, Member States, including Slovenia, have collectively allocated €500 billion of public funds to energy measures to mitigate such hardship, according to Bruegel’s calculations. This figure does not include Germany’s recent announcement of a €200 billion aid package, which has upset other Member States because it could lead to the distortion of the internal market. Germany’s fiscal capacity would allow it to subsidise its companies more and thus make them more competitive than companies in those Member States that might not have such fiscal headroom. What is more, at the same time, Germany with some other countries and (apparently) the European Commission have been blocking the gas price cap proposal for several months. The fear was that the cap could lead to gas shortages, although Belgium, which has been pushing for this proposal at least since March, has been maintaining that the cap would be made flexible, that the price would still be higher than, say, in Asia, and that it would also send out sufficiently clear ‘price signals’ to keep the gas flowing. Indeed, not long ago, the price of gas in the EU was ten times the US price and twice the Asian price. This, of course, has an additional impact on the price of electricity, as has been explained ad nauseam. However, the reason for such a high price in the EU is not only linked to a shortage of gas, but to Member States outbidding each other, trying to fill their storage facilities, which was first revealed by some European newspapers, and has recently also  been publicly stated by senior representatives of the European Commission on several occasions, and was also mentioned in a joint Dutch-German non-paper.

But first, let us return to the distortion of the single market. As a result of this, the EU quite rightly relaxed the rules on subsidising the economy and on the budget deficit under The State Aid Temporary Framework, i.e. the temporary rules on state aid, during the epidemic. Since then, these loose rules have only been extended — in the face of constant crises. Germany has, however, separately committed to respecting its fiscal rule next year and will now, in fact, be borrowing the aforementioned 200 billion in advance as a precaution.

Perhaps the most meaningful and articulate response to the German plans was the joint column by French Commissioner Breton and Italian Commissioner Gentiloni in several European newspapers, examining the problem of the race for subsidies and calling for preservation of the “principles of solidarity and unity of the Union”. In order to overcome the obstacles created by the differing fiscal headroom within national budgets, we should think of common tools at the European level. One example would be the replication of the SURE mechanism, which was used by the Member States to finance furlough measures in the form of joint borrowing and loans to Member States. Another, more ambitious option would be to replicate the Recovery and Resilience Facility, but at the time several (frugal) countries made a commitment to their electorates that this would be a one-off mechanism. Moreover, many Member States now claim that only 20% of this Facility has been drawn down. Another problem looming in the background is that any new EU fiscal capacity would boost inflation. Personally, I do not believe this line of argument, and Germany’s €200 billion fund proves that the fear is unfounded and that we are only deluding ourselves.

Be that as it may, in the heat of the moment, Germany has conceded in some respects and opened the door to possible joint borrowing, but again only in the form of loans. This would mean loans from the EU to the Member States, which, and here again we must be very honest, are not very popular among the Member States. Firstly, because they can take out loans on the markets themselves, and secondly, because the Commission supervises the use of these funds. This may not be the case for a mechanism similar to SURE, but it is very much the case with the Recovery and Resilience Facility, because through this so-called NextGeneration EU fund the Commission has been given considerable additional power, and in addition to making the release of funds conditional on whether the targets and milestones are met, it has the possibility of making the previously non-binding European Semesters more or less binding for the Member States. The Commission can utilise the leverage provided by the fund in various ways: from not endorsing a plan (the case of Hungary) to making the fund explicitly conditional on the protection of judicial independence (the case of Poland). Or the leverage can be applied by the European Central Bank itself, when it establishes a conditional link for bond purchases within the new Transmission Protection Instrument to the Recovery and Resilience Facility.

In short, Germany is opening the door to joint borrowing and, last week, instead of a price cap on gas, it at least proposed joint gas purchases, which would allow us to use the economic strength of the entire Union in negotiations with suppliers and to improve the price. Something along these lines was expected to emerge from the European Commission’s proposal, and this is what the leaders of EU Member States are discussing in the Council right now. In addition to joint purchases, which will probably be accompanied by mandatory rationalisation, we can expect the introduction of an alternative index to replace the TTF on the Dutch stock exchange and other measures to reduce the volatility of the gas market, including, for example, the so-called circuit breakers. The latter were proposed by Slovenia and have been supported by both the Commission and ESMA, as has also been reported in foreign press. In any case, it is essential to put in place a mechanism to reduce the price of gas, but I would still prefer to see a price cap and long-term reform of the energy market to decouple, among other things, the price of electricity from the price of gas.

A European problem calls for European solutions, and this is not only true for price reductions, but also for state aid rules and the social hardship of European citizens. So far, the Member States have agreed on a price cap of €180 per MW/h for energy producers other than gas-fired power stations, which could generate up to €140 billion in windfall profits, although the windfall profits collected by Member States will vary greatly, depending on current prices and how they produce energy. Other, I would say main, measures can be found within REPowerEU, which is the Commission’s response to the EU’s energy crisis aiming to reduce energy consumption, diversify energy sources and accelerate the use of clean alternative energy sources. The plans’ objectives are well designed, but it should be pointed out that, in terms of the financing, it only means a transfer of existing resources. REPowerEU is an investment package worth €210 billion, but a significant part of it is already taken up by the existing loans under the Recovery and Resilience Facility, i.e. loans that have not yet been drawn down by the Member States. New funding only amounts to €20 billion. Slovenia is expected to receive 116 million of these funds, which is a very favourable result, since, compared to the Commission’s original proposal (which followed the RRF methodology), we managed to increase our share from 0.40% to 0.58%. This can be complemented by unused loans or by transferring Cohesion funds, common agricultural policy resources, and the Just Transition Fund. Nevertheless, it’s worth noting that the total of 20 billion for the entire EU comes from the ETS (emission allowances) in one way or another. The Commission has proposed taking them from the Market Stability Reserve, which would negatively affect the climate policy, the Council is proposing to take 75% from the Innovation Fund and 25% from frontloading the Member States’ allowances, while the Parliament’s ENVI Committee has opted for the latter option to cover 100%. In any case, the money is taken from the ETS which supports good programmes such as the Innovation Fund and climate funds in the Member States.

The NextGeneration EU fund was a historic achievement for the EU, transforming the Union’s architecture and allowing huge progress in the area of the common fiscal policy. It proves that politics is the art of the possible, and that what is conceivable is possible. For the first time, the Union as a whole has taken out a common loan of this size on the financial markets, which is still slowly flowing to the Member States in the form of grants or loans. But it turns out that there is only demand for grants, and in my opinion, this component should be increased or else a similar scheme should be developed for the current energy crisis to provide a common European response complementing the existing and future measures that I have described above. It is important to remember, however, that grants, like loans, are also to be returned or repaid by 2056. The Parliament has long been pushing in the direction of the Union’s ‘new own resources’, which could, in theory at least, make this Fund permanent or at least allow its multiple use in one form or another. But progress in the area of ‘new own resources’ is painfully slow. During the negotiations on the RRF and the MFF, the Parliament has managed to set a binding timetable for the ‘new own resources’. Their main sources will again partly be based on revenues from the ETS, from the “digital tax” under the OECD agreement on minimum taxation of multinational enterprises, and the carbon tax on imports.  The legislation for all these measures has been drafted, we just need to find the political will to see it through. Together, this would yield an estimated €17 billion a year. In the long term, however, the ETS will not be able to finance everything that European institutions might come up with. It is also expected partly to finance the Social Climate Fund. I might also point out that the interest on the existing Recovery and Resilience Facility is being paid from the current European Union budget. This year, the interest is expected to amount to just over a billion, and next year it is expected to go up by another 500 million.

This week, ahead of the European Council, the Commission proposed redirecting 40 billion of unspent Cohesion funds from the previous financial perspective into immediate support for households and small and medium-sized enterprises. A similar move was made during the COVID-19 crisis with the CARE programme. Of course, this flexibility is a welcome, perhaps a necessary solution, but it will not be enough. To sum up: I do not think that one can always simply redirect funds within the same framework, as this impoverishes certain other programmes or policies. We need new, innovative solutions, so that in the situation of the current energy crisis, we would have a new fund providing grants for long-term investments into a green future and allowing for short-term, uniform mitigation of the economic and social crisis in the EU. Perhaps it is not even necessary to create a new fund; a solution could be found within the existing mechanism, by, for example, increasing its grant component and reducing its loan component, which could complement the REPowerEU and the reallocation of Cohesion funds.  But unfortunately, at the moment, this is politically a very difficult, if not impossible solution. In reality the EU has a budget to which Member States contribute just over 1% of GNI, while the solutions that the Union is supposed to offer are increasingly complex and demanding. The Union’s budget is already very tight, with the war in Ukraine (and the aforementioned interest payments) having greatly increased the EU’s budgetary needs. Without a new fund, the permanent multiannual budget will either have to be increased or radically restructured. Neither of these options, and least of all additional contributions, would be more easily acceptable to Member States.

– Irena