Energy crisis cracks down EU, between a choice of immobility and solidarity at stake

26 January 2023 /

6 min

[This article was written before Council adoption of Regulation 2022/0393(NLE) on “Establishing a market correction mechanism to protect citizens and the economy against excessively high prices”]

Following the prompt, under the Next Gen EU, to  answer to the economic downturn due to the pandemic crisis, once again the European Union Member States find themselves at a turning point: whether to choose a solidarity or a self-centered approach to respond to the energy breakdown.

The shortage of energy supply is mainly deemed as the consequence of the Russian invasion of Ukraine, which ultimately compelled Europe to cut off Moscow’s supply from 40%, amounting to a total of  7.5% of the EU’s gas import. However, retrospectively speaking, the first warning bells indicated a plausible energy crisis followed by a supply/demand imbalance dating back to the time of Covid-19’s consequent  lockdown, with a fall in energy production  followed by a sudden rise caused by an unrestrained race for storage by European countries. Afterwards, the outbreak of the war in Ukraine brought forth an absurd upward gas price trend, as uncertainty over security of supplies fuelled speculation. In  August 2022, the TTF (Title Transfer Facility – a dutch  based virtual exchange trade platform of natural gas trade that  sets out its market price reflected in the EU) reached the all-time record price of €343 per MW/h (while one year earlier, in 2021, was merely €30 per MW/h).

It is evident  that EU Member States are called upon to act by implementing saving measures for householders and the industry sector. Now, after overcoming the ‘Covid test’ the EU still faces a further spillover challenge, even though at the moment there are greater concerns and doubts for opting solidarity and unitary measures. The eternal tug-of-war between frugal countries versus iberian model countries this time seems to be more profound as  the gaps widen.

Reflection on the EU’s coyness to set ambitious goals on a measure for common electricity

The EU slow responsiveness in addressing this  acute energy crunch is driving record-high inflation coupled with a threatening recession coming to the block. For the time being, quoting the Commissioner for Energy Kadri Simons there are different views among capitals on the adoption of a possible EU-wide measure to counteract rising gas prices. With different energy structures, EU Member States have different views on whether the gas price cap can achieve its goals in addition to solving the current energy crisis. Countries not heavily dependent on Russia’s gas can afford to be patient in finding alternatives, while those highly reliant on it  have expressed concerns that a gas price cap will not achieve its purpose. As a result, it is difficult for EU Member States to keep on the same page. Despite wrangling hours at EU Summits and Council Meetings during the last months, there is still no joint standpoint between the Member States.  

Although EU countries envisage the necessity to lower prices, secure the supply and market stability, the role at stake of the Member States  and its respective leaders showcase two clear different alignments: Germany and the Netherlands, followed by a small group of states that are reluctant to agree on a “whatever it takes” EU plan to freeze the surge of energy prices and are poised to water down any benevolent EU proposal. On the other side of the fence, France, Italy, Belgium as well as a dozen other Member States are keen to enforce a common measure that aims to limit the pressure on households and energy industries. As a result, under these circumstances it is difficult for EU Member States to keep on the same page.  

The current standoff is rekindling some old sparks: Berlin’s energy shield plan that will subsidize electricity for households and businesses amounting a total of €200bn, embodies an egoistic choice that risks to distort the EU single market, said the French President Emmanuel Macron, and that it shows a demonstration of isolation that jeopardizes the spirit of a European unity. To add onto the tensions, the EU Council President Charles Michel leveled accusations addressed to the President of the European Commission Ursula von der Leyen in a plenary speech, blaming her for delaying the European response to the energy crisis and inviting to come forward with an imminent necessary legal proposal. 

Between cautiousness and uncertainty: the EU Commission warns its own proposals might not  have intended effects 

Up to this date, the DG ENER (Directorate General for Energy) tabled a proposal for a Market Correction Mechanism to prevent extreme volatility and excessive prices reflected via the Dutch TTF by blocking gas transactions above a certain level (with a benchmark of €275/MWh ). The mechanism aims to operate as a price cap by setting a safety ceiling that would be automatically activated in the only circumstances where the following conditions are in place: first, in case the price of gas exceeds a certain threshold set at €275/MWh for two consecutive weeks; second, when the spread between the TTF price and the global LNG price (Liquified Natural Gas) overcomes €58/MWh for ten trading days. Hence, this temporary dynamic price corridor would be intended to instantly limit price spikes in cases of extreme volatility and just as a temporary solution for the short-term period, carefully points out the Commission. Despite the fact that the toolkit presented does not offer a solution capable of restoring gas prices to last year’s estimations, it avoids brutal speculation that would imperil the EU energy market.

Moreover, the Commission itself warned about the risk of the mechanism driving a shift towards over the counter trading and a lack of transparency, as well as provoking suppliers to divert gas elsewhere leading to a deterioration of security of supply and risks for financial stability. Given the uncertainty of its functioning effectiveness, the Commission has included within the proposal itself a legal reservation on the possible immediate suspension mechanism.

In the light of these hesitant statements, experts and representatives of the energy intensive sectors have shown their dissatisfaction with the proposal, blaming the lack of a common European response geared towards a structural long-term plan that solves a demand supply ratio imbalance. Many defend  that the EU should drop the price cap idea and meditate on a more efficient and transparent tool, which could take the form of an EU fund. Especially the energy-intensive industrial sector complains about a lack of a de facto support targeted at them, as under these conditions their only option is self-rationing. 

In a sign of just how toxic the discussion has become, the proposal almost sparked an open conflict between some EU countries with divergent views on the level of the cap proposed by the Commission. An alliance of countries (France, Belgium, Italy, Poland, Spain, Greece) vehemently made clear that “up to now what is tabled is insufficient, ambitions must raise  significantly”. Contrary but for opposite reasons, northern countries are reluctant for the envisaged risk that a ceiling on price would undermine the EU’s financial stability.

Energy crisis is thus a test of whether the EU’s set of rules, including its agenda and decision-making mechanisms, is capable of handling such a complex situation. It remains to be seen whether the EU will be able to find a better solution to turn these recent divisions into a spirit  of greater unity.

This article was first published in the issue 37 of the magazine

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