Energy Crisis: What is Next in Europe?

Since the summer of 2021, energy prices have seen unprecedented spikes and volatility across Europe. Global energy market disruption caused by Russia's invasion of Ukraine has put a strain on EU households and the economy.

The European Commission recommended an emergency intervention in Europe's energy markets to address recent price increases to reduce total energy demand across the EU.

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This includes exceptional electrical demand reduction policies, which can lower consumer electricity rates, as well as policies that redistribute excess profits from the energy business to end users. These actions are built on previously approved ones that involved increasing gas storage and decreasing gas use as part of the EU's "Save gas for a safe winter" initiative to get ready for supply interruptions throughout the winter. The relatively mild winter from 2022 to 2023 has unexpectedly helped the first objective. Since it has been a very cold year, the energy demand has been lower than expected.

Europe's consumers have seen cost reductions thanks to price controls, windfall taxes, and giveaways. All member states have implemented national budgetary policy measures to lessen the impact of energy price increases on consumers and businesses, according to the European Commission's Toolbox on Energy Prices, which was released in October 2022. Throughout the energy crisis since September 2021, 705.5 billion Euros has been granted and set aside across European countries to help shield consumers from rising energy costs. These policies aid in supporting household income, compensating businesses engaged in energy-intensive activities, and taxing energy companies' windfall gains. The Commission urged member states to make these interventions short and focused on the most disadvantaged to prevent market distortions.

Since the beginning of the energy crisis, proposals for new LNG shipping terminals and gas pipelines, as well as attempts to advance renewable energy projects and improve energy efficiency, have exploded in Europe. The European Commission is pushing for higher energy efficiency and to speed up the adoption of renewable energy sources to hasten the transition to clean energy. This will lessen Europe's reliance on fossil fuels and its vulnerability to unpredictable energy markets. The Commission unveiled the REPowerEU Plan in May as their solution to swiftly reduce the EU's reliance on Russian fossil resources. The European Parliament and Council came to a political agreement on REPowerEU on December 14, 2022. This is particularly crucial since the EU still needs to achieve its long-term carbon neutrality promise by 2050.

By further reducing electricity demand, implementing a cap on market revenue for less expensive energy sources like renewables, and launching a solidarity contribution from the fossil industry, the Emergency Intervention to Address High Energy Prices seeks to mitigate the current price increases for electricity and gas. The capital collected through these actions will be utilised to lower energy rates for both consumers and business entities. Concerns about the gas market are addressed by the regulations on increased solidarity for gas purchases, quicker deployment of renewable energy sources, and the market correction mechanism, all of which were implemented on December 19, 2022. This package includes a price restriction on wholesale gas trading inside the EU, new complementary LNG benchmarks, an intraday volatility management system, default solidarity rules between EU members, and collaborative purchasing mechanisms. The rules significantly simplified the renewable energy permitting process.

The European Scientific Advisory Board on Climate Change assessed how different types of policy responses to the energy crisis can affect the move towards climate neutrality and formulated several recommendations about how to address both the energy and climate crisis simultaneously.

Policymakers should concentrate on addressing the crisis's core cause. Energy supply and demand were out of balance, which led to rising prices and the energy crisis. To lower prices, it is, therefore, necessary to decrease energy demand while increasing the supply of safe, domestic, low-carbon energy. Further energy demand reductions should be pursued by the EU and its member states through both technical (energy efficiency, particularly through faster building stock renovations) and non-technical (behavioural changes) techniques.

Renewable energy deployment and investment rates require both to at least double. To do this, the EU and its Member States should make sure that the investment environment is secure, streamline the approval process, and improve the energy grid's flexibility and storage capabilities. To increase efficiency and cut back on the use of fossil fuels, national and EU policies should promote the electrification of energy end-use sectors. To achieve this, price signals should be in line with climate goals. For example, carbon emissions from all fossil fuels should be priced, and the tax burden on fossil fuels should be transferred from electricity. The advisory board appreciates the interim agreement on the EU ETS Directive change in this context and anticipates a bold conclusion to the current Energy Taxation Directive revision. To facilitate electrification in end-use industries, the EU's power market reform should also strive to encourage investments in renewables while enabling markets to benefit from affordable electricity.

The European Commission started a public consultation on the structural reform of the electricity market in the European Union last month. The Commission states that consumers are bearing the financial burden of the current crisis of high and fluctuating electricity prices, and as a result, reform is required to better protect them from such volatility and to support access to reliable energy from clean sources while strengthening the market.