Blog 10 January 2023

The Energy Crisis – A Defining Moment for the EU

Today’s energy quandary is redefining tomorrow’s sustainability policy

The European Union (EU) was hit by a perfect storm in 2022 as geopolitical tensions, dependence on Russian gas, scarce alternative energy solutions and infrastructure capacity, and inability to roll out renewable energy quickly led to an energy crisis and likely recession.

Crises are often powerful impetuses for change. Indeed, as Jean Monnet, a founding father of the EU, once said: “Europe will be forged in crises.” This saying is as true today as it was back then, and we believe this crisis in retrospect will prove a defining moment for EU energy policies in the future.  

Policymakers have moved to address short and long-term challenges, including adopting key emergency measures such as the regulation on coordinated demand-reduction measures for gas or the regulation on an emergency intervention to address high energy prices. The crisis also sets conditions for further EU reforms, including additional amendments to the Renewable Energy Directive II or the upcoming revision of the internal electricity market.

For businesses seeking to navigate the volatility, it is important to understand the implications of the crisis for EU policies and how lawmakers may refocus their attention as we head into the European elections in 2024.

Two areas likely to see the most significant change are the European Green Deal and the Single Market.

Reinventing the Green Deal in the wake of the energy crisis

Adopted in 2019, the European Green Deal is the European Commission’s plan to transform and the EU’s economy by making it more competitive and resource-efficient. All sectors – from energy and construction to transport and technology – have been required to cut their greenhouse gas (GHG) emissions by 55% by 2030 in a bid to meet the 2050 net-zero objective.

Green Deal versus realpolitik

During the crisis, the European Commission highlighted the Green Deal’s ability to increase the EU’s resilience in the short-term while advancing sustainability in the long-term. In fact,  European Commission Vice-President for the European Green Deal Frans Timmermans, said: “It would be a historic mistake, to [conclude] that the Green Deal can go on the backburner.”

But that position is being challenged by the “energy trilemma” – sustainability, security, and affordability – which has been exacerbated by the energy crisis. While the EU Green Deal initially aimed at gradually restricting what the Commission has been willing to describe as “unsustainable” energy sources like coal, gas, nuclear, or even bioenergy – sparking heated debates across Europe we have seen them continue to be subsidised. Today, sustainability is being deprioritised in the name of energy security and affordability.

Member States have had little choice but to rely on the existing energy mix. For instance, the International Energy Agency (IEA) reports that coal use in Europe increased by 6% in 2022 on top of the 2021’s 14% increase – a development at odds with the Green Deal’s net-zero targets.

Putting teeth in the Green Deal

Currently, IEA forecasts European renewable electricity capacity is set to rise by 60% by 2027. A study by Rystad estimates that the EU could replace Russian gas by 2027 if it can secure new gas supplies, establish a well-integrated energy market, and develop more interconnected infrastructures.

These policy initiatives feature in the May 2022 REPowerEU Plan – the EU’s energy policy response to Russia’s invasion of Ukraine. Amongst other measures, it includes the accelerated rollout of renewable energy. However, replacing the so-calledunsustainableenergies will depend on the willingness of Member States and private actors to invest in renewable energy and collectively addressing any potential “carbon lock-in” that could result from any medium-term investments pivoting back toward fossil fuels.

Fundamentally, the energy crisis poses an ideological challenge for the Green Deal. Its realisation depends on the political will of EU institutions and EU Member States. But with European elections on the horizon and the potential consolidation of the right wing in the European Parliament, there is a risk that policy priorities will be reshuffled further and that a so-called more “pragmatic” and perhaps less far-reaching version of the Green Deal may emerge.

Modernising the Single Market: State Aid and beyond

State Aid policy at EU level has been a key pillar for the functioning of the Single Market, which will soon celebrate its 30th anniversary. It has prevented Member States from entering into a subsidy race and distorting competition by propping up their own national industries. However, recent crises have tested these mainstays.

The Single Market fragments as the crisis unfolds

The energy crisis is only the latest in a series of challenges to the European Commission’s State Aid policy. With consumer prices for electricity, gas, and other fuels increasing by nearly 55% in the EU between December 2020 and July 2022, more and more public intervention is needed to control prices. Facing the risk of a downturn, the German Federal government adopted a €200 billion rescue package to tackle soaring energy prices. This move has sparked concern amongst policymakers about the long-term distortive effects of emergency interventions. Several Member States described this subsidy program as an anticompetitive move that would grant unfair advantages to German industries and lead to further market fragmentation – a development at odds with EU Single Market rules.

Towards a more strategic approach to the Single Market

Nevertheless, the trend reveals that policy towards state intervention becomes increasingly lax. Under pressure to loosen the EU State Aid policy scheme, the European Commission made a far-reaching revision to its State Aid Temporary Crisis Framework in October, quadrupling the maximum amount of State Aid that a firm can receive to €2 million and extending applications to December 2023. This framework is expected to be amended even further in the coming months.

Beyond State Aid, we see signs of “modernisation” in other areas of the EU’s Single Market. One indicator has been the European Commission’s decision to reform the EU electricity market, decoupling the effect of gas prices on electricity prices and enhancing renewable energy demand integration. Elsewhere, economy ministers for both France and Germany have called for a “European Green Industrial Policy, partly as a response to the US Inflation Reduction Act.

The 30th anniversary of the Single Market in 2023 will offer further opportunity for policymakers to reflect on its future. Under a changing political landscape and new European Commission, we may see a significantly different approach to the Single Market.

Leveraging policy to shape the business environment

These two scenarios demonstrate that in times of crisis, priorities shift rapidly and that policymakers become increasingly open to alternative ideas. This crisis, together with the upcoming 2024 election, will lead to significant changes in energy, sustainability, and competition policy. This moment will ultimately define Europe’s preparedness for future crises, impact solidarity between Member States, and influence the investments dedicated to the green transition, while demarcating the future of many economic sectors.

Driving change by setting the tone for the next mandate

These changes present risks for businesses, but also opportunities to engage with policymakers to create legal certainty, protect market operations, and secure investment, as regulation is reshaped in response to evolving crises and priorities.

At Kekst CNC, we believe 2023 will bring an opportunity for businesses to leverage this momentum, but also position themselves as a trusted adviser throughout the 2024-2029 mandate and help set the tone for the policy agenda toward 2030 and beyond.