Europe divided over response to soaring, ‘unbearable’ energy prices

European ministers had energy prices on the agenda when they met in Luxembourg on Monday.

Driven by growing international demand and a sudden economic recovery, natural gas prices have steadily increased since the turn of the year and then began soaring during the summer, when sweltering temperatures pushed people to use air conditioning and cooling systems.

At the Dutch Title Transfer Facility, Europe’s leading benchmark, prices have risen from €16 megawatt per hour in early January to €98 by late September, a six-fold hike in less than one year. The willingness of East Asian countries to pay more for fuel has exacerbated the trend.

The energy crunch is resulting in ballooning bills for citizens across the continent, particularly those who have a variable-price contract (as opposed to fixed-price) with their electricity providers and are therefore subject to the fluctuations of the market.

The situation has become even more worrisome after September’s reading of inflation in the eurozone, which took observers by surprise after reaching 3.4 per cent – far from the European Central Bank’s target of a 2% annual rate. Inflation for energy prices exceeded 17 per cent.

The increase in energy prices has become “unbearable” for EU citizens and companies and requires a “European response”, said Bruno Le Maire, France’s economy and finance minister, before meeting his counterparts in Luxembourg for a Eurogroup meeting.

“It’s clearly a matter of huge concern that is unfair, inefficient and very costly for our citizens,” he said.

Le Maire argued that the EU energy market has one key advantage – it ensures supplies for all EU countries at all times – but also a “major downside”: it links the overall cost of electricity to the price of natural gas, something that is “totally inefficient”.

The French minister joined forces with his Spanish colleague, Nadia Calviño, to push for EU-wide action against the ongoing crisis, including a review of the EU market regulation to crack down on speculation and ensure greater accuracy in pricing.

Calviño went as far as suggesting the creation of a “strategic reservoir of gas” for the whole bloc – a common procurement scheme that would mimic the collective purchase of anti-coronavirus vaccines. Despite its bumpy start, the vaccine strategy is now considered a success, with over 75% of the EU’s population fully inoculated.

“We have learned with the negotiation of the vaccine supplies that we are stronger when we speak with one voice, and we think it would be very appropriate if EU institutions speak with one voice, with 27 members, when dealing with big, large, international suppliers,” Calviño said.

But not every member state appears to share the same appetite for far-reaching joint measures to curb the soaring prices.

“We have to take care of it very carefully,” said Annika Saarikko, Finland’s finance minister, adding that supporting vulnerable households should be a domestic competence.

Saarikko also pointed out that the energy mix across the bloc varies significantly, with some member states enjoying advanced renewable system while others still dependent on fossil fuels, the majority of which come from non-EU exporters. Russia has been blamed for exacerbating the price crisis over its apparent reluctance to increase natural gas exports on par with global demand.

The Finnish viewpoint was echoed by the two representatives from the European Commission who attended the Eurogroup: Vice-President Valdis Dombrovskis and Commissioner Paolo Gentiloni.

Both officials urged governments to coordinate their national measures and avoid contradiction with the EU’s climate goals, a veiled piece of advice against resorting to coal, the most polluting fossil fuel, in a bid to make up for the gas shortage. The EU is committed to slashing greenhouse gas emissions by at least 55 per cent by the end of this decade.

“We should react but not overreact,” Gentiloni said.

The Commission is preparing an official communication to address the energy crunch and offer member states a “toolbox” they can use to palliate the crisis. The executive is expected to lay out measures and proposals to protect consumers but only at national level.

Dombrovskis and Gentiloni were quick to dismiss the critical voices who claim the soaring energy bills are a consequence of the EU’s climate policy, which includes an Emissions Trading System (ETS) that puts a price on CO2 emissions.

Carbon permits under the ETS have also seen its price skyrocket this year: from €31 in mid-January to over €64 in late September. Electricity suppliers can pass the extra cost of the permits onto consumers. The Commission estimates the ETS is contributing to a fifth of the energy crunch.

Paschal Donohoe, the Irish finance minister and current Eurogroup president, also asked for caution and suggested the energy crunch was a temporary phenomenon linked to the recent uptick in inflation. His comments followed those of European Central Bank President Christine Lagarde, who said there were no signs of the trend becoming “broad-based” across the bloc.

“The key challenge is to ensure that we do not overreact to transitory supply shocks that have no bearing on the medium term, while also nurturing the positive demand forces that could durably lift inflation towards our 2% inflation target,” Lagarde said last week.

Le Maire, however, seemed unconvinced by those urging moderation instead of market intervention. “They should say the same to our fellow citizens, our poorest citizens who are facing an unbearable increase in gas prices,” he remarked.

The French official predicted the high costs associated with the green transition will turn energy prices into one of the “main political issues” for the coming years.

According to the Commission, the European Union will need around €350 billion euros of annual extra investment in energy systems to achieve its 2030 emissions target, with an extra €130 billion to meet other environmental goals.

The energy crunch is poised to shape the debate on whether nuclear energy, which is far less reliant on foreign suppliers, should be labelled as a green source under the EU taxonomy. The Commission has delayed the decision until the end of the year due to profound disagreements between member states.

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