Europe must urgently find an agreement on energy prices –

Europe must urgently find an agreement on energy prices –

Since the Russian invasion of Ukraine, Europe has taken important steps to ensure the security of energy supplies and to help households and businesses cope with rising energy prices. Gas storage facilities were filled, demand for gas and electricity fell and gas prices fell from their August peaks. However, energy prices remain extremely high compared to last year elThe EU is divided on the best approach to reduce them in the coming months, while ensuring security of supply. France, Italy, Spain, Poland, Portugal, Greece and nine other EU countries would like to set a ceiling on the price of wholesale gas, or the infamous FTT, arguing that in this way the problem can be tackled at source, avoiding a race for subsidies and helping to reduce inflation. An opposing camp, led by Germany and the Netherlands, argues that a gas price cap carries the risk of increasing gas demand in Europe and the risk of making it more difficult for Europe to secure gas supplies next year. which is expected to be difficult on this front.

From an energy policy perspective, energy price caps are not a good idea. Even if they do not increase energy demand compared to previous years, these caps would remove the incentives to reduce energy demand, which is unfortunately a necessity for a continent that has lost about 40% of its historic supplies this year. gas (due to Russia) and about 10% of its electricity supplies (due to French nuclear power and the drop in hydroelectricity due to the drought in the summer). Furthermore, the gas price cap could damage Europe’s ability to attract gas to global markets, jeopardizing the necessary supply during 2023.

That said, proponents of gas price caps are right to fear that national subsidies aren’t a sustainable solution either. A run on subsidies could indeed put fiscally weaker European countries at a competitive disadvantage compared to countries with large fiscal space. So how to square the circle?

In our opinion, the EU should abandon the idea of ​​a gas price ceiling and instead address the distribution issue of the energy crisis in a more efficient and transparent way. This could take the form of a European fund to protect consumers from high gas prices, while boosting energy savings and accelerating the introduction of renewable energy solutions. Furthermore, the EU should pool its gas demand in a strong joint purchasing program in order to have more bargaining power over foreign suppliers such as Norway, Qatar, Algeria and so on.

A European Energy Crisis Fund should support three essential objectives. First, it should promote energy saving. The energy crisis is basically an imbalance between supply and demand, and therefore it is imperative to reduce demand to return to a sustainable balance. Secondly, provide a minimum level of support to all European industry, so as to ensure a level playing field in the single European market – the so-called level playing field. Thirdly, the fund should be used for help accelerate the deployment of renewables, to accelerate Europe’s decoupling from fossil fuels. The use of a European fund would reduce the growing gap in capital costs for investments in clean technologies, due to interest rate differentials within the EU.

The European Fund for the Energy Crisis could mainly be financed with the 40 billion euros already made available by President von der Leyen drawing on the residues of the European cohesion funds. Contributions from member states or common European loans could then add to the amount and expand the fund’s firepower.

A complementary measure to reduce gas prices then that ofjoint gas procurement through the European Energy Platform tool recently created. The European Commission has proposed that the joint purchase should cover at least 15% of EU countries’ storage needs for 2023, but this point is still subject to discussion by energy ministers. This initiative must be ready for the 2023 storage replenishment operations, to put Europe in a better position at a time when the global LNG market could be even tighter than in 2022. Some mutualisation of the costs of the Joint procurement could make it possible to increase the benefits of joint procurement for companies that choose to participate, without making it strictly mandatory. This could reduce the risk of European countries overbidding each other to secure LNG cargoes and would facilitate the cross-border allocation of scarce volumes of gas in the event of major supply problems. This would reduce the risk of fragmentation of the EU energy market and the consequent economic, political and energy security spillovers.

The current disagreement over price caps is reviving old divisions in Europe, blocking agreement on a coordinated solution and undermining EU unity in the face of Russian aggression on Ukraine. Europe must go further – and fast. The creation of a European fund for the energy crisis and the start of the joint purchase of gas is a solution that could make all countries feel better. A better solution than that of a cap on the price of gas, really of dubious effectiveness.

The authors are
Simone Tagliapietra, senior fellow at the Bruegel and professor at the Catholic University of Milan.
Georg Zachmann, senior fellow at the Bruegel
Jeromin Zettelmeyer, director of the Bruegel

November 23, 2022, 3:37 pm – change November 23, 2022 | 3:47 pm

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