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A harmonised EU energy market – an illusion?

07 Nov, 2022

Key Points:

  • Europe’s official heating season just started, and the EU seems to have won its first challenge to secure enough energy supplies for the winter. The race, however, will be a marathon rather than a sprint.
  • Recent energy reduction demand measures should help lower the EU’s energy needs in the coming weeks; gas storage levels are full at around 90%, and the EU is actively securing additional energy deals with third countries, but that doesn’t mean all our energy problems are solved.
  • The recent agreement on EU emergency energy measures paves the way for discussions on the next big battle that the EU Member States will have to fight – a price cap on gas. So far, the Commission has been cautious about proposing such a cap, with many experts arguing that it would actually drive-up demand.
  • Despite several sanctions packages, the EU still sends far too much money to Russia for its gas, ultimately financing Putin’s war. Moreover, the recent annexation of seized territory in Ukraine has raised the stakes between Europe and Russia. EU Leaders might finally be ready to cut ties with Moscow, but at what price?

Is Europe shifting its approach toward energy policies?

Last week, EU energy ministers approved new emergency measures to curb record-high energy prices and mitigate against the impact on citizens and particularly vulnerable households. The new measures focus on three key areas:

  • reducing electricity demand
  • capping energy companies’ “excess profits”, and
  • redistributing them to vulnerable households and businesses

The European Commission has been keen not to repeat mistakes made this summer when they had to recall their initial proposal on gas reduction demand following public backlash. Instead, the Commission and Council have worked together, taking a collaborative approach to soften the initial emergency measures by giving more flexibility to Member States, at the risk of adopting a fragmented approach at European level.

After all, is the idea of a harmonised EU energy market an illusion? The European Commission, as the guardian of a functioning single EU energy market, is between a rock and a hard place. There is no perfect solution. The fragmented approach that the EU is inevitably shifting toward might be the best, or even only, realistic option, considering the intrinsic differences between Member States’ energy mixes and electricity grids. According to energy regulator ACER, a fragmented market is not a real problem as it tends to function quite well under normal conditions. A patchwork of solutions implemented at EU and national levels could hence help bring prices down, but risks creating an unlevel playing field for energy companies across the EU.

What’s next?

EU Leaders are also looking at improving the functioning of the market and energy trading. While energy trading has been criticised by many as a catalyst for the current crisis, the EU believes such measures should help avoid a repeat of past mistakes. That said, strong interventions in financial markets are unlikely, as overall financial stability must be maintained. On a less contentious basis, the joint purchasing of gas is also among the options envisioned by the European Commission to mitigate against the current effects of the energy crisis, preventing EU countries from driving prices up by bidding against each other.

In parallel, discussions are (re)starting on a price cap on gas. While the oil price cap has been adopted quite smoothly in Brussels, the price cap on gas remains a thorny issue, with the Commission blowing hot and cold on the matter. A future price cap implemented EU-wide could be dynamic, limited to gas used for electricity production, or see some European countries exempt. However, a deal is still far away. Ultimately, the EU might settle for a patchwork of gas price caps implemented at the national level, with or without the EU. None of these options solves the risk of energy leakage and potential downside effects.

Since the very beginning of the crisis, the Commission has called for solidarity to ensure no country is left in the dark this winter. Member States differ not only in the degree of their reliance on Russian gas but also in their ability to cushion the impact of high prices on households and businesses. The German government’s decision to implement a €200 billion double bazooka to shield its citizens and businesses from rising gas prices has raised questions among countries that do not have much fiscal leeway to do the same. The EU economy is still recovering from the consequences of the Covid-19 pandemic, and national budgets are tight. Nevertheless, EU Member States have pledged billions of euros to support vulnerable consumers from the crisis, a difficult move to oppose in Brussels. There is no doubt that European financial solidarity will be further tested in the coming months.

What about democratic guarantees?

The crisis we are experiencing is not only a test for European unity but also for the broader European project. Are European Institutions solid enough to tackle such crises?

Since the beginning of the war in Ukraine and the energy crisis, the Commission and EU Member States have adopted emergency measures at record speed. While the Commission has been in the driving seat in the beginning, Member States seem to have taken back control more recently. The fiasco of the initial reduction in the summer gas demand package is a perfect example of the battle between the Commission and the Council in shaping these emergency measures and EU capitals jealously watching the Commission not to grab too much power.

In its current state of what is a disorganised European Union, there is an element one should not forget: A potential backlash from the European Parliament. Frustration is growing within the European Parliament about the democratic nature of these measures. The situation led the Commission to use a special EU emergency procedure that does not require consultations with the co-legislator, the Parliament, or the Council’s unanimity voting. While Members of the European Parliament have mostly welcomed the recent measures taken by the Commission, they have some reservations about the method. Any future reform of the EU electricity market will face strong scrutiny in the European Parliament, which is keen to be involved in the talks about the future of our energy market.

Energy security at risk?

Energy security has never been higher on Europe’s priority list. Following the crisis, the EU will have to rethink how to ensure its critical infrastructure is protected and what other EU weaknesses could be targeted in the future.

Europe has to find solutions to complex challenges, and the way out is proving difficult given the many differences between the individual Member States. These challenges are a big test for EU solidarity. They will undoubtedly be a defining moment in the history of the Union. However, previous crises showed that every challenge also brings opportunities to change for the better. It remains to be seen whether the EU will succeed in using this opportunity to the fullest extent possible and pave the way for a more integrated, resilient and sustainable Union.

Authors

Ivana Bartolac is a Consultant in the Flint Brussels office working on sustainability and energy policies and a former political advisor on Green Deal issues for the Party of European Socialists. Corentin Lescroart is a Consultant and expert on EU energy and geopolitics at Flint. To find out more about how Flint can help you navigate the risks and opportunities of these developments get in touch

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