October 2022

By Lucie Gonçalves

Since the Russian invasion of Ukraine begun in February this year, soaring energy prices, risks of shortages, and rising inflation have affected the European Union particularly severely. With several member states, first and foremost Germany, having relied on cheap imports of Russian hydrocarbons for decades, weaning the EU off Russian gas requires a deep rethink of the bloc’s economies. The involvement of alternative suppliers, notably the United States, has softened the blow in the short-term and allowed EU gas reserves to be filled at 88% of their capacity as of September 27. However, Moscow shows no sign of backing down in Ukraine and ever-rising energy prices have fed into EU-wide inflation that threatens the social stability of the bloc in coming months. It’s not all bad news. If its member states pull together, the EU’s current woes could yet provide the impetus for the bloc to improve its energy security and accelerate the green transition, reinforcing its strategic sovereignty in the long-term.

 

Strong response from the EU and its partners

 

The EU has already taken several decisions to offset soaring energy prices for households and businesses. In March 2022, the leaders of the 27 EU member states jointly decided to reduce, and eventually eliminate, the EU’s dependency on Russian fossil fuels. They issued the Versailles Declaration, in which they agreed to progressively cut gas imports from Russia, diversify energy supplies and routes, speed up the development of renewables and hydrogen, improve interconnections between EU energy networks, and to increase energy efficiency. In May 2022, the European Commission presented its REPowerEU plan to concretely implement the objectives defined in the Declaration.

From the outset, the EU also reached out to its allies and partners to alleviate the economic consequences of cutting off Russian energy imports. The United States played a particularly significant role in this effort. In March 25, Brussels and Washington published a joint statement on European energy security and set up a joint working group to define the parameters of their cooperation. In the joint statement, the two partners pledged “their strategic cooperation on energy” and committed to “ensuring adequate levels of gas storage before the next winter.” They also affirmed that they would “accelerate the transition to green energy” and reduce “energy consumption, and (…) dependence on fossil fuels.”

Following the joint statement, the United States committed to work with international partners to provide at least 15 billion cubic meters of liquified natural gas (LNG) to the EU in 2022. In addition, Washington pledged to work with partners to ramp up deliveries to the EU to eventually reach about 50 billion cubic meters per year until at least 2030. This would amount to roughly a third of the gas imported from Russia before the war. Nevertheless, some EU leaders have voiced concern about excessive reliance on the United States. On October 10, France’s Finance Minister Bruno Le Maire told French lawmakers that the conflict in Ukraine should not be allowed to result in “American economic domination and a weakening of Europe.”

The EU also entered into energy supply agreements with other international partners. As a result of those efforts, Canada increased deliveries of LNG to the bloc, Norway agreed to provide more gas, and a memorandum of understanding for increasing gas deliveries was signed with Azerbaijan. As of October 7, new deliveries were planned from Israel and Egypt. The diversity of partners to whom the EU has reached out echoes Le Maire’s concern not to swap dependency on Russia for dependency on any other given country or region.

Individual member states have also supplemented EU-level efforts. For instance, over the past two months, both Emmanuel Macron and French Prime Minster Elisabeth Borne have travelled to Algeria. Borne explained that France aimed to increase Algerian gas production’s effectiveness to “increase export capacity to Europe.” On the demand side, Germany has pitched a ‘G7 plus’ alliance with large LNG importers like Japan and South Korea. The alliance would prevent its members from outbidding each other and allow them to approach big exporters jointly to obtain better prices.

In parallel to its international diplomatic efforts to diversify energy suppliers, the EU has also continued working on new internal measures to alleviate the crisis. At the end of September, member states adopted an emergency regulation to help households and businesses cope with soaring energy prices. Concrete measures in the legislation included reducing electricity use, capping revenues of electricity producers, and setting up a “mandatory temporary solidarity contribution” on the profits of fossil fuel businesses. The President of the European Commission, Ursula von der Leyen, anticipated that these measures would raise more than €140 billion “for member states to cushion the blow directly.”

 

 Simmering disagreements

 

On top of these emergency measures, 15 EU countries including France, Italy, Spain, and Poland have demanded that the EU cap gas prices. However, this proposal has been met with significant opposition from several other member states. Germany, alongside with Austria, the Netherlands, Hungary, and Denmark, opposed the measure on the grounds that it would increase gas consumption. These countries also fear that a cap on gas prices would push even ‘reliable partners’ such as Norway and the United States to supply other destinations over the EU. The informal meeting of EU leaders that concluded on Friday 7 October in Prague failed to materialize a consensus on the question of price caps.

Following the informal meeting, several leaders deplored the European Commission’s lack of brinkmanship. They saw the letter sent by Ursula von der Leyen two days before the meeting to outline the modalities for a cap as too little too late. In a press conference given after the informal meeting, President Macron explained that no agreement had been reached in part because the Commission had failed to provide sufficient detail on how a cap would work in practice. Belgian Prime Minister Alexander De Croo expressed “impatience” after Prague and singled out Germany, Denmark, and the Netherlands as the lone holdouts on price caps.

Adding fuel to the fire, Germany caused an uproar at the end of September by adopting a so-called ‘energy shield’ worth €200 billion over the next two years. Designed to help cushion the impact of soaring energy prices for German consumers, this decision prompted a worried response from the Italian and French Commissioners to the EU, Paolo Gentiloni and Thierry Breton. In a joint op-ed, they explained that Germany’s plan risked placing state-funded German companies at an unfair advantage over their European competitors. Ursula von der Leyen similarly warned that “without a common European solution, [the EU] seriously risk[s] fragmentation.”

 

A time for European unity

 

In parallel to the reforms it has already passed in the energy market, the EU intends to accelerate its green transition by actively implementing the Green Deal to cut the bloc’s greenhouse gas emissions and achieve climate neutrality by 2050. In particular, Brussels aims to speed up the shift toward renewable energy sources. For instance, on September 21, the European Commission greenlit a €5.2 billion project put together by 13 member states to fund research, deployment, and construction of hydrogen infrastructure. In a sign that many in the bloc understand the need for a deep rethink of Europe’s energy architecture, the hydrogen coalition includes EU countries who support a cap on gas prices as well as several who oppose such a measure.

With EU leaders having failed to show a united front after the informal meeting in Prague last week, all eyes now turn to the Brussels Summit of October 20 and 21. All EU member states face similar challenges in the short term as energy prices continue to weigh on inflation and European households’ purchasing power. It is crucial that individual leaders resist the temptation to go at it alone and take decision that harm the long-term cohesion of the EU. In addition, the current trajectory of Moscow makes it unlikely that Russian gas will flow back to Europe anytime soon. In this context, the EU needs to persevere with its efforts beyond the diversification of gas suppliers. A successful green transition that takes into account different member states’ varying ability to transition away from fossil fuels is the only way to secure the EU’s strategic sovereignty in the long-term.