The Energy Crisis – a Marathon or a sprint for the EU?

As Russian forces entered Ukrainian territory in late February 2022, the energy markets correspondingly surged. However, while the energy crisis we are experiencing today is arguably a result of Russia’s war on Ukraine, high energy prices were already recognized by the EU last year. Now the EU is scrambling to balance its diplomatic interests to stop our dependency on Russia with staggering energy prices for EU citizens. “Price cap” has been the phrase on everyone´s lips this autumn in Brussels – much is still to be decided however, the EU is tirelessly working to agree on a method to cut both Russia´s funding, and consumers´ bills.

Price cap on oil

As a part of the eighth package of sanctions on Russia, the EU finally managed to agree on a price cap on oil on 6 October to stop Russia from earning big on energy. The price cap on oil originates from a G7 agreement and encompasses a full ban on Russian oil exports priced over the cap. Since the war began, Russia´s profits from both oil and gas have been a twofold concern of Western governments – first as a resource to fund the aggression against Ukraine and second as a mean to impact global energy prices. As a synchronized action between the G7 and the EU, both crude and refined oil will be targeted in two installments. The cap on crude oil applies from 5 December and the cap on refined oil products follows shortly from 5 February 2023.

On the EU level disagreements arose in late September during negotiations with the EU ambassadors on the impact on certain Member States´ shipping industries. Greece, Malta, and Cyprus voiced concern about the financial impact of the price cap, as their tanker fleets transport most of the oil from Russia. If the Member States affected would be restricted in transporting Russian oil, they were concerned that competitors such as Turkey would take over their business. To mitigate these effects, the Commission proposed a monitoring system of the reflagging of vessels to circumvent the price cap. If the affected Member States suffered significant economic loss because of these evasive methods, the Commission would attempt to mitigate the losses.

While the inclusion of the price cap on oil in the eighth sanctions package has been decided, this merely provides a legal basis for the measure. The actual price, or price range is still to be determined.

Price cap on gas

Following immense pressure both from business and citizens, a price cap on gas was discussed at the EU leaders’ summit in Prague on 6 October. This is largely due to the high dependency on natural gas from external sources such as Russia. In fact, in 2019, according to Eurostat the EU´s external dependency on natural gas was 90% and expected to rise yearly. While natural gas is not as widely used in the Nordic Member States, in countries such as Germany, natural gas is the most prevalent source of energy in the overall mix. The traditional heating season began on 1 October and thus, many European citizens are worried about their energy bills. In Prague, the EU leaders struggled to agree, and a wide range of proposals have come to light. Meanwhile, the price cap on gas is a race against the clock as winter approaches.

One of the suggestions to come out of the recent summits is to partially subsidize the gas purchasing price. The EU Member States would agree upon a price for gas which they believe that businesses and consumers could afford, then subsidize the remainder of the bill. While this would keep the market intact, as the EU would still be purchasing gas at the actual cost, it would become incredibly expensive. Last year, the EU Member States consumed more than €640 billion worth of gas. This method could also become a problem for gas exported from the EU – where companies could make a significant profit from the price cap. Germany has already jumped on the bandwagon for this method – investing €200 billion into its own economy to cushion its consumers and businesses. Spain and Portugal have implemented a similar, yet less invasive measure, where the subsidy on gas is funded by certain consumers and commercial contracts over an agreed upon price, and not financed through the state budget. This measure has received attention in Brussels and the EU is considering temporarily applying a similar scheme to the EU electricity market.

Another suggestion out of Prague is to establish a hard ceiling for how much gas can be both bought and sold for, also referred to as the “rigid cap”. This would place the burden on the energy companies instead of the state by forcing companies to renegotiate their supply contracts. In turn, both buyers and sellers know how much the EU bloc is willing to pay. Suggestions have also included a “dynamic” price cap, connecting the EU´s price to what the Asian market is willing to pay. A point of concern with this solution is if the EU set a price that is too low, suppliers would be encouraged to sell elsewhere, which would lead to gas shortages across Europe. Italy, Greece, and Belgium have expressed support for this measure, while the Commission is critical.

According to a draft proposal published on 17 October, a “dynamic price corridor” is currently on the Commission´s radar. The details of this proposal are still to be decided however, if adopted it would allow the Commission to set “a maximum dynamic price … under specific conditions” only to be used as a last resort. The draft proposal provides an ambiguous picture of the Commission´s plan, more is yet to come, however it also mentions a plan to develop a temporary joint gas purchasing tool by spring 2023, as well as measure to increase efficiency on the EU gas market. On Thursday 20 October, the EU leaders are meeting yet again to discuss the Commission´s suggestions.

All for one, and one for all – or not?

Following staggering energy prices on the German market, Chancellor Olaf Scholz injected €200 billion into German economy to relieve the impact of the increasing energy prices. Scholz faced major scrutiny from Brussels following this measure, both from colleagues and EU officials. The Italian and French Commissioners Gentiloni and Brenton who are not supposed to act as national spokesmen, criticized Scholz’ actions, fearing it will distort the common market by putting German companies at an unfair advantage. Since then, the dissent has been growing from the EU.

The Commission made a statement on 3 October calling for the Member States to coordinate their measures to avoid fragmentation on the common market and voices from Brussels are waving a red flag for state aid. Additionally, if German companies are shielded from surging energy prices, this could catalyze a subsidy race among the Member States and heighten debt levels. It is still unclear if this measure from Scholz will at all be investigated for state aid or, if so, be approved by the Commission. It is clear, however, that the Member States are desperate to cushion the crisis for their citizens – both nationally and on the EU level.

On 18 October, the European Parliament debated energy bills and the MEPs are unimpressed with the Commission´s actions thus far. Renew Europe sent a letter to the Commission asking for a joint approach and a proposal for an EU debt to finance a “European Energy Assistance Plan”. In addition, the letter takes a jab at both Germany and von der Leyen, pushing for greater financial solidarity, echoing the criticism of Commissioners Brenton and Gentiloni.

A way forward

The current energy crisis is a balancing act; between support for Ukraine in light of their future accession to the EU, concern from European citizens and businesses over unmanageable energy prices, and achieving and furthering the goals of the European Green Deal. During the State of the Union speech, Commission President Ursula von der Leyen echoed these three goals for the working year ahead.

Meanwhile, energy intensive companies, for example in the steel, fertilizer, paper, recycling, and aluminum industry are being forced to shut down or decrease their operations due to the energy prices. The energy crisis is thus not only invading household budgets, but also the larger European economy. Experts say the solution is not found by simply reducing prices, there must be a comprehensive reboot in how we make and use energy. A solidary approach from the European bloc is essential to fulfill this, with a wider scope than the duration of the war.

Critics say the EU´s response is moving too slowly. The robustness of the EU institutions gained significant credibility in the management of the coronavirus crisis – now, when faced with a new challenge, some are becoming impatient, like Germany, while others with less fiscal space are rooting for another great EU plan.

The Miltton office in Brussels closely monitors the current EU energy policy and advises clients on long-term business strategies, as well as challenges in their daily operations.

Märta Iversen Ohlsson is a Trainee at Miltton Europe and is fresh out of university, where she studied European Union law.