Tackling the crisis and ensuring energy security in the EU

Michele Masulli

Energy prices started rising during the second half of 2021 when the world economy picked up after COVID-19. Russia’s invasion of Ukraine has heavily exacerbated this trend and found the European Union very exposed on the energy side.

EU vulnerability in the energy system

There are several factors underlying Europe’s vulnerability to the current energy shock. Briefly, first of all, the high share of natural gas in the EU gross available energy mix (just under 24% in 2020). Moreover, Eleven European nations had over 30% gas in their energy mix, while only five had less than 10%. Second, closely related, is the high incidence of natural gas in the electricity generation mix, on average around 20%, but with shares above 30% (even much higher) in six Member States (MSs). Third, the high energy dependency rate. In fact, since 2013 EU energy dependency rate has been on an upward trend until it peaked in 2019, when 60.5 % of Europe’s gross available energy came from extra-EU imports. Finally, the high share of Russia in the import of all fossil fuels. In 2020, 24.4% of all energy products consumed within the EU came from Russia (41% of natural gas).

The growth of energy prices

All these factors, combined, created considerable exposure of the European Union to the current crisis. As known, gas and electricity prices have hit all-time highs in 2022. After the peak at the end of August, the winter contract on the Dutch trading point TTF touched € 350/ MWh, the price of gas underwent a very significant drop, shrinking by two-thirds in just over a month. Several factors have influenced this trend. Amongst these, undoubtedly, the full achievement of storage targets, the considerable drop in gas consumption, especially in European industry, and the mild weather in October which reduced the demand for heating. In addition, the fact that gas imports continued at high volumes despite the drastic cut in Russian supplies and reduction in LNG demand from China, which allowed Europe to buy the “spare” LNG, certainly had a positive impact. After the decline in September and October, energy prices started to rise again due to the winter demand for heating.

Governments’ responses

In order to protect households and businesses from the growth in energy spending, Member States have allocated more than 600 billion euros in the period September 2021 to October 2022. Germany, with 264 bn €, represents 44% of the total, Italy (91 bn €) and France (79 bn €) follow. If we consider that the Recovery and Resilience Facility amounts to 723 billion euros, there is the clear risk that measures to address the energy crisis will soon offset the funds allocated until 2026 to help recover from the Covid-19 crisis. This is another reason why the agreement on the inclusion of REPowerEU measures in national recovery and resilience plans (NRRPs) recently reached between the European Parliament and the Council is positive. It provides that MSs applying to receive additional funds through an amended NRRP will be required, to include measures to save energy, produce clean energy and diversify supplies, as foreseen in REPowerEU plan. The measures adopted by governments so far are of various kinds, including the reduction of VAT and energy taxes, the regulation of retail and wholesale prices, monetary transfers to the most vulnerable groups of the population, support for businesses, taxation of windfall profits from energy companies, mandate to State-owned firms, etc.

Europe’s gas balance for 2023-2024

Furthermore, massive interventions in the gas market have produced various results. Certainly the reduction in gas demand, as well as the full achievement of the storage targets. Equally important is the marked reduction in the share of imports from Russia, thanks to the diversification of suppliers and the higher contribution of LNG. EU gas storage facilities are at 95% for the approaching winter, but the concerns turn to the following months. According to IEA estimates, between April and September 2023, in case of full cessation of Russian flows and limited LNG availability (due to the return of Chinese LNG imports to their 2021 levels), the gap between EU and UK gas demand and supply would amount to about 30 bcm of gas. Again according to the IEA, this shortage can be avoided by implementing further actions on energy efficiency, renewables, heat pumps, energy saving and gas supplies.

Measures implemented and to be taken

The European Union, for its part, has already adopted several additional extraordinary measures and still others are being studied. Among the former, we can mention joint purchases of natural gas, which would be binding for 15% of the filling needs. The goal is to avoid internal competition in procurement and aggregate EU demand (which in this case would be at least 13.5 bcm of gas) in order to strengthen its market power on the global stage. Besides, in August, the European Council adopted a voluntary reduction of natural gas demand by 15% this winter. Specifically, MSs agreed to reduce their gas demand by 15% compared to their average consumption in the past five years, between 1 August 2022 and 31 March 2023, with measures of their own choice. However, there are several exemptions and possibilities to apply a partial or, in some cases, a full derogation from the mandatory reduction target, in order to take into account the particular situations of MSs. The EU has also asked countries to voluntarily reduce their overall electricity demand by 10% and has imposed an obligation to reduce consumption by at least 5% during peak hours, considered 10% of hours with the highest expected price.

Among the measures under debate, furthermore, there is a complementary gas price index that would act as a more accurate benchmark in reflecting market conditions and intervention mechanisms on intra-day trading of derivatives (the elaboration of which has been entrusted to ESMA) and further measures to simplify the development of renewable sources and electricity grids, including through emergency measures, which received parliamentary support. The Commission’s work program for 2023 also includes the reform of the EU’s electricity market, including decoupling electricity and gas prices, in order to guarantee consumers to a greater extent the benefits of integrating an increasingly significant share of renewables into the electricity mix. However, there is still no agreement on the market correction mechanism, aimed at avoiding price peaks in the gas market, on which the Commission made a proposal and which has agitated discussions among governments and European institutions. Given the prolongation of the discussion on the subject without reaching an effective point of agreement, one would think that the stability of the European gas market will not depend on the implementation of this measure.

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