Share

EU’s winter energy plans: European unity tested

29 Jul, 2022

Key Points:

  • Europe is facing the worst energy crisis in its history, affecting the entire European economy and beyond. According to the latest predictions, if Russia completely cuts off gas supplies in the coming months, the EU's GDP could shrink by 1.5%. These economic disruptions could have far-reaching political consequences for EU Member States, both internally and with regard to their posture toward Russia.
  • On 22 July, after months of turmoil in the energy markets and further price volatility, the European Commission decided to unveil a new EU emergency plan to address potential gas shortages ahead of the winter season. Recent EU concerns are reinforced by the uncertainty around Nord Stream 1. After ten days of planned maintenance, Russia turned Nord Stream 1 back on, allowing supplies to fall to 20% of pre-crisis levels following further supposed maintenance works. The EU is concerned that Russia could further reduce or interrupt gas supplies, with Nord Stream 1 considered Russia's main leverage over the EU.
  • Potential shortages, price volatility and rationing will be particularly disruptive for the EU over the coming months. Moreover, the relative exposure of Member States, both in terms of gas storage levels and dependency on Russian imports, is expected to affect the dynamics of the EU's response while further testing European unity.

Is Europe ready for winter?

While the EU acted fast and in a coordinated way to diversify its oil and gas supplies and cut its energy dependency on Russia, it still finds itself in an incredibly precarious situation when it comes to energy security. The recent efforts around gas storage might not be enough to ensure Europe is ready for winter. In a rushed attempt to reduce gas demand in the EU, the European Commission has proposed moving from a voluntary to a mandatory approach – an initiative highly criticised by some Member States who were not consulted beforehand.

To palliate any potential future disruption of Russian gas imports, the European Commission decided to unilaterally publish a set of emergency measures. It proposed a new EU Regulation establishing a voluntary (pre-alert level) and a mandatory (EU alert level) gas demand reduction target of 15% under a newly created EU emergency mechanism. After pushback from several EU Member States (Greece, Portugal, Hungary, Cyprus, and Poland), led by Spain, the Commission revised its proposal ahead of the EU energy Council this week. The EU's plans outline various measures to encourage Member States to reduce gas demand and consumption by the public sector, businesses, and households. Ultimately, under this new (revised) EU emergency system, the Council, upon the Commission's request, would be able to mandate binding consumption cuts from EU Member States.

The many exemptions and loopholes in the revised proposal will make it hard for the EU to implement mandatory gas cuts. Gas demand reductions will rely on Member States' willingness to implement voluntary measures to reduce gas consumption ahead of the winter, with most EU Member States confident in their ability to reduce gas consumption and fill gas storage levels to at least 80%. Analysts reckon that if all the exemptions are employed, it could result in a reduction of only 33 bcm (instead of 45 bcm initially envisioned by the Commission), which would not be enough to face a cold winter. The proposal is now left looking like an energy supply management plan rather than a strategic security policy decision to stop Russian aggression. EU Member States might have to return this Autumn to further upgrade their plans.

In addition, the EU has been facing an energy dilemma, or trilemma, since the Russian invasion of Ukraine (energy transition; energy security; energy savings). The crisis has reinforced the use of coal, fracking gas and nuclear. Germany just announced a possible postponement of its nuclear power plant phase-out; Poland implemented a coal subsidy scheme; while other Member States such as Austria and the Netherlands are returning to coal. The International Energy Agency forecasts an 8% increase in electricity generated from coal in Europe this year. Consequently, Europe will be the only region worldwide to see overall emissions from power generation increase. Such developments run the risk of the EU undermining its European Green Deal ambitions and credibility.

Still, under pressure from the European Commission, most Member States recognise the importance of the European Green Deal and the role of renewables as a mid-term solution to the current crisis. As a result, the EU will notably increase its hydrogen and biomethane production ahead of its 2030 target and further incentivise renewable energy such as solar and wind. This puts additional pressure on EU countries when European unity is more needed than ever.

Is European unity crumbling?

While, in principle, a cut of up to 10-15% of gas consumption should be possible in every EU Member State without any significant damage to their economy, the reaction from Southern countries is symptomatic of the current "malaise" between the European executive institution and EU Member States. Since the beginning of the crisis, some EU countries, in particular Spain, have been criticising the Commission's handling of the situation, and the lack of prior consultation with Member States, especially on recent measures taken to mitigate the impact of the crisis on consumers. The watered-down EU regulation (with many exemptions: for countries with no gas connection with the rest of the EU, no electricity connection with the rest of the EU, or countries using gas for critical industries) reflects a loss of influence from the Commission in managing the energy crisis.

The Commission has so far adopted a bold stance, with its powerful German President, Ursula von der Leyen, seeking to shield Germany from the impact of the crisis. Meanwhile, a complete disruption of Russian imports could have dramatic consequences for German industry and weaken Olaf Scholz's leadership. As a result, Germany will need to count on European solidarity more than ever.

What's next?

Energy is Russia's main leverage on Europe. Putin is using it to his advantage. His calculation is that economic and social pressures caused by the energy crisis will test the support of European public opinion for Ukraine. This, in turn, could lead some European countries to look for a way out of the Ukraine crisis, possibly in more favourable terms for Russia.

Any EU-wide cooperation regarding an energy solidarity system will depend on whether countries less dependent on Russian fossil fuels cut back more than needed to help those most impacted. The latter countries have benefitted from many years of cheap energy from Russia but are now confronted with the consequences. For many years, the reproach has been made to these countries that they shouldn't rely on a single energy supplier. Will they pay the (fair) price now?

In any event, higher energy prices could lead to massive economic and social problems across Europe. Social unrest is already brewing in the Netherlands, France and Spain. Many countries are already in a precarious political situation – Macron has no majority in the French Parliament, Scholz heads a fragile coalition in Germany, Italy is going to the polls in September, and Spain in 2023. Mario Draghi is arguably the first European political leader to fall victim of the incoming crisis. He might not be the last.

Author:

Corentin Lescroart is a Consultant in the Flint Brussels office and an expert on EU energy and climate regulations. The piece was written with input from Flint Senior Adviser Claus Grube and Specialist Partner Julian King. To find out more about how Flint can help you navigate the risks and opportunities of these developments get in touch

Flint Insight

Subscribe to receive analysis and insight from Flint’s expert team on the latest political, policy and regulatory developments.
[wpforms id="109" title="false"]
© Flint Global 2022 | Privacy Policy
Website by Saifee Creations
cross