EU Sounds Alarm as Spiking Energy Prices Threaten Recovery

(Bloomberg) -- The European Union sounded the alarm on the potential of soaring energy prices to undermine the bloc’s economy, and pledged new guidance for member states struggling to contain the crisis.

The EU didn’t respond directly to respond to nations’ demands for action, and instead vowed to set out recommendations for member states next week on the measures they can take without undermining EU rules. They will include compensation for the most vulnerable households, tax cuts and state aid for companies, EU energy chief Kadri Simson said Wednesday. 

“This price shock cannot be underestimated,” Simson told members of the European Parliament in Strasbourg during a debate on the crisis. “It is hurting our citizens and in particular the most vulnerable households, weakening competitiveness and adding to inflationary pressure. If left unchecked, it risks compromising Europe’s recovery as it takes hold.”

To boost its resilience to market shocks in the longer term, the EU plans to strengthen rules on gas storage and energy supply security. Gas and power prices are soaring to all-time highs across the 27-nation bloc as rebounding demand coincides with limited gas imports from Russia and Norway. Analysts expect energy costs to keep rising in the coming months as Europe moves into the heating season.

The surge in prices comes as the EU started enacting sweeping reform to reduce emissions. Under the Green Deal, the bloc wants to clean up every sector, boosting the price on carbon, banning new combustion-engine cars from 2035 and putting its farming on a more sustainable path. The overarching goal is to reach climate neutrality by 2050.

With the crisis raising electricity bills across Europe, the challenge for politicians is to ensure that citizens don’t turn their backs on the green transformation, which carries its own costs. The EU’s planned shift away from dirty fossil fuels to renewables is the only lasting solution to the region’s energy challenge, Simson told lawmakers, adding that soaring prices have little to do with climate policies.

Divisions among leaders over how to tackle the energy crunch were on display as they gathered for the second day of a summit on the wooded Brdo estate in Slovenia. Hungarian Prime Minister Viktor Orban seized the opportunity of his arrival to express his frustration and slam the European Commission, the EU’s executive arm. Orban blamed spiking prices on the EU’s ambitious climate plan, saying it was “indirect taxation” on car and home owners. 

His Dutch counterpart Mark Rutte said last night that the high energy prices had only a “limited” connection to the energy transition.

Coordinated Response

To alleviate the impact of the crisis, the EU must respond with coordinated action, leveraging the strength of its single market and boosting future resilience, according to the bloc’s energy chief.  

“Providing targeted support to consumers, direct payments to those most at risk of energy poverty, cutting energy taxes, shifting charges to general taxation, are all measures that can be taken very swiftly, under EU rules,” Simson said. “Business and in particular SMEs can be given relief through state aid, or by facilitating longer-term power purchase agreements.”

Europe also needs to ensure that its energy markets work in a fair and transparent manner, she told lawmakers, flagging the role of competition authorities and national regulations in surveillance and preventing abuse. Some lawmakers and national governments have called on the Commission to investigate the role of Russian exporter Gazprom PJSC in the price spike, suspecting market manipulation. 

“We have to make sure that no state or non-state actor, be it Russian Federation, Gazprom, or anyone else manipulates or influences European energy prices,” said Siegfried Muresan, a lawmaker representing the European People’s Party, the biggest political group in the EU Parliament. “If this occurs then we have to take measures, then sanctions are obviously unavoidable against such entities, be it private companies or not.”

The crisis was caused by a mix of ingredients, including increased demand, lower supply and weaker renewable energy production in some regions due to less wind, according to the commissioner. 

Russian Supply

“While long-term contracts from Russia are respected, no extra capacity was booked, despite the rising prices, exacerbating the tight balance,” she said.

By the end of this year, Simson wants to propose a reform of the gas market, reviewing rules on storage and security of supply. The commission is also analyzing a proposal by member states including Spain and France to create a joint platform for purchasing emergency gas reserves. 

The underground gas storage level is currently above 75% across Europe, lower than 10-year average but adequate to cover the winter season requirements, according to Simson. The evolution during the cold months will be a key variable to watch closely, she said. 

“This price shock is an unexpected crisis, at a critical juncture,” she told the lawmakers. “We must respond together and stay the course towards a cleaner, more secure and more affordable energy future.”

(Updates with comments from EU leaders in seventh paragraph.)

More stories like this are available on bloomberg.com

©2021 Bloomberg L.P.