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Europe’s energy plan: is it enough to get through winter?

Emmanuel Macron had a simple message last week for French businesses preparing to sign punishingly costly energy contracts: don’t do it.

Companies should spurn the “crazy prices” currently on offer, the French president said, insisting that European governments would succeed in making markets work again and bringing costs back down to reasonable levels.

Aymeric Le Jemtel, chief executive of Veta France, a small company that manufactures cladding for buildings at a factory in northern France, finds it hard to share Macron’s confidence. The brick suppliers that Veta relies on across Europe have been raising their prices to offset the high cost of the natural gas they use to power their ovens. Some have even been cancelling orders that have become unprofitable.

“It is really hard to deal with since we have very little visibility on prices,” says Le Jemtel. “We don’t want to shut down this winter, but I’m getting worried.”

With temperatures now dropping as the winter months approach — and gas imports from Russia at a fraction of their former levels — European energy ministers are due to convene on Friday to discuss an EU-wide package of national windfall taxes aimed at raising funds to curb prices paid by households and businesses.

While EU capitals can point to some successes in efforts to wean the union off Russian gas in recent months — including filling gas storage to levels beyond 85 per cent — a growing number of capitals warn that the latest proposals simply do not go far enough.

“There are definitely people around the table who think this is not enough and more needs to be done,” one EU diplomat says of the commission plans being discussed by ministers on Friday. “We have no interest in energy prices causing instability in member states — it would be a recipe for disaster.”

Some 15 member states wrote to the EU energy commissioner, Kadri Simson, this week demanding an EU-wide ceiling on wholesale gas prices as businesses buckle under the weight of costs that remain around five times their levels a year ago.

Analysts now warn that a deep recession is inevitable, with Deutsche Bank predicting real gross domestic product in the euro area will fall by close to 3 per cent in aggregate between the second quarter of this year and the same period in 2023 — a larger peak-to-trough decline than during the euro crisis. In the wake of the electoral victory of a far-right-led alliance in Italy this month, other EU capitals are watching intently for signs that the soaring cost of living might drive popular unrest and push voters towards more extreme parties.

“Europe’s energy crisis is only now really starting to hit home, because increases in wholesale prices are still feeding through into firms’ and households’ bills,” says Simone Tagliapietra, an energy specialist at Bruegel think-tank. “The cost for the economy will get way bigger.”

Threat from the right

France has been one of the most aggressive EU member states in its attempts to protect consumers and businesses from rising energy costs. Yet some in government worry that social unrest will break out this winter. The French government’s efforts have kept the country’s year-on-year inflation rate of 6.5 per cent markedly below those in many other euro area member states — most notably below the Baltic countries, where inflation is between 20 and 25 per cent.

France has been better able to insulate its citizens from price rises than elsewhere in Europe to the extent that it relies little on natural gas and gets most of its electricity from nuclear power plants operated by the state-owned EDF. The government moved to protect households and small businesses in February with a “tariff shield” that capped the electricity price rises to 4 per cent and kept natural gas prices flat for 2022.

Further aid has since been rolled out, such as €100 cheques for poor households, heating oil subsidies and petrol and diesel discounts applied at the pump. The total tab this year is about €24bn, according to the French finance ministry, with €7.5bn going to drivers alone.

Line chart of TTF front-month contract (€ per MWh) showing European gas prices were on a rising trend before the Russian invasion

The government recently announced that the protections will be extended next year by capping the increases in natural gas and electricity prices to 15 per cent for households and small businesses. The gross cost to the state will run to €45bn, but once money is clawed back from energy producers the net cost will be €16bn.

Such an interventionist approach aligns with French political culture, in which the government often sets industrial policy and acts to protect citizens from economic crises. But it also reflects fears in the Élysée Palace that voter discontent could bolster the fortunes of Marine Le Pen’s far-right National Rally, which won an unprecedented 89 seats in the National Assembly this summer.

Macron’s government was also scarred by the gilets jaunes protests that exploded in the winter of 2018 over a proposed fuel tax hike. Some ministers fear a revival of that diffuse, leaderless movement, especially since prices at the pump have been higher in recent months than they were back then.

There have been a smattering of gilets jaunes protests on Saturdays this September in Paris, and near Cannes and Toulouse, but they have so far lacked the fervour of the huge crowds of the past. Labour unions have planned a national strike on Thursday to pressure for salary hikes.

Because of unexpected outages at EDF’s nuclear fleet, the government has warned of the risk of energy rationing on companies. Some public services such as swimming pools and museums have begun to cut back their opening hours. “Combating inflation is an economic and political priority,” French finance minister Bruno Le Maire said this week. “Inflation is a poison for democracies, history has shown that.”

Protestors in high-vis yellow vests shout slogans as material burns behind them and black clouds of smoke billow
The gilets jaunes protests started in winter 2018 over a proposed fuel tax increase. Prices at the pump have been higher in recent months than they were back then © Francois Guillot/AFP/Getty Images

Despite France’s energy interventions to date, businesses and households are appalled at the costs they are facing. Stephanie Pauzat, an official at the CPME, says the business group representing small- and medium-sized companies has received a number of calls in recent weeks from chief executives alarmed about the new prices they are being quoted by their energy suppliers.

Two-thirds of companies in France buy energy on the open market, since they do not qualify for the regulated rate set by the government and charged by EDF. Only companies with fewer than 10 employees and less than €2mn in sales are protected by the energy price caps that the French government has put in place this year and plans for next.

In a poll conducted by CPME in July, Pauzat says, 93 per cent of 2,400 business owners in France said rising energy prices had pushed up their cost of goods by more than 10 per cent. One-third said they could not pass on these costs to their customers.

“We are hearing from companies that are facing 10 or 20 times higher costs for electricity or gas starting in January,” says Pauzat. “It can call into question a whole business model, and threaten their very survival.” She cites the examples of a wholesale supplier for industrial companies that was given a quote from EDF for an annual contract that would cost €40,000 — up from €5,000 last year. Then there was a woodworking company near Saint Etienne employing 35 people that was offered an electricity contract for €200,000 — more than three times last year’s contract.

Beyond winter

Yet despite such local horror stories, Tagliapietra of Bruegel says the EU in general is in a much better position now than it was two or three months ago.

Aggressive efforts since spring have helped to diversify its gas supplies away from Russia and towards alternatives — including liquefied natural gas from the US. Pipeline gas from Russia is now down to 9 per cent of EU gas imports, from 41 per cent last year, according to the European Commission.

Line chart of Gas in storage in the EU (TWh) showing Current levels of gas storage in Europe are relatively high

But the crisis is by no means over, he warns. Building up gas storage levels next year could be even tougher than in 2022, given that this year’s stocks were built via Russian imports, which could by next year be entirely cut off.

Concerns about a total rupture of Russian gas supplies intensified this week when Gazprom warned it could impose sanctions on Ukraine’s state gas company, a step that could lead to flows through the country being stopped. Separately, leaks in two Russian gas pipelines in the Baltic Sea on Tuesday were widely blamed on sabotage, underlining the vulnerability of European energy infrastructure.

Meanwhile capitals need to do much more to collectively restrain demand for both gas and electricity this winter and beyond. Insufficient efforts to damp down gas consumption could leave EU storage levels at “dangerously low levels”, according to an OECD report this week, putting the economy in a parlous state in coming months. A cold winter could make the supply shortfall much worse, leading to “substantially higher” global prices.

EU member states rejected commission plans for mandatory gas consumption reductions this summer, opting instead for a voluntary approach. European governments have spent half a trillion euros cushioning citizens and companies from soaring energy prices, but many of those measures have masked the effect of sky-high prices, undermining incentives to lower consumption.

A big ‘M’ is lit up outside a metro station while Paris City Hall is in darkness behind it
As part of its energy saving plan, Paris is switching off lights in public buildings, including City Hall, at 10pm © Teresa Suarez/EPA-EFE/Shutterstock

In France, the government has set a goal for companies and public sector entities to cut energy use by 10 per cent this winter versus last year in an effort to avoid outages. Companies from luxury giant LVMH to retailer Carrefour have unveiled energy savings plans, while the city of Paris has said it will turn off the sparkling night time lights of the Eiffel Tower earlier at night.

Other solutions are also being rolled out, such as a national alert system called Ecowatt from grid operator RTE. It will classify days as green, orange or red depending on the stress on the electricity system, sending push notifications to consumers and companies at times of peak demand to ask them to curb consumption. France’s biggest TV broadcaster has pledged to include the Ecowatt rating in their daily weather reports so as to enlist people’s help.

Uneven impacts

Electricity savings targets will form part of the EU-wide package due on Friday, alongside windfall taxes on low-carbon power companies and a levy on fossil fuel producers. The commission has estimated that member states could raise a total of €140bn from energy companies’ profits, recycling them into efforts to reduce bills.

Yet despite the fanfare, the commission’s new measures will amount only to a partial road map, rather than a comprehensive answer to the energy crisis. Industry executives have questioned whether the levies would raise as much as Brussels predicts.

Countries including Italy, Greece, Belgium and Malta are seeking the imposition of a ceiling on gas prices in the hopes that this could short-circuit the damaging cycle of rising prices in the union. For some of them, the structure of their energy industries means the existing commission package will be of limited direct help. While others, such as France, have already implemented their own bespoke national schemes.

charts showing European governments’ moves to shore up utilities

French officials add that windfall taxes alone will not solve the deeper dysfunction in electricity and gas markets, arguing that interventions including so-called circuit breakers are needed to prevent energy markets from going haywire.

Miriam Dalli, Maltese minister for environment, energy and enterprise, says while she supports the commission package, it would not be of assistance to Malta given that the EU’s smallest state imports a substantial share of its power via an interconnector with Italy, while domestic generation comes primarily from a gas-fired power plant. “We fully understand the collegiality of this — member states need to support one another,” she says.

Eduard Heger, the Slovak prime minister, warned the energy situation is getting so dire in his country that its heavy industry would be forced to shut down within weeks unless there is a more far-reaching answer from Brussels. His country will spend €24bn, one-fifth of GDP, subsidising energy costs, but the commission proposal would net it only €100mn. “The most wounded country will be the country getting the least,” he says.

Brussels set out an options paper on Wednesday with ideas on how to achieve a gas price cap, but some commission officials remain wary of the idea. If the level is set too low it risks deterring suppliers from selling to the EU because better rates are available elsewhere. That in turn would undermine efforts to shore up gas supplies.

A big circle of white on in the sea as gas bubbles up the surface from the broken pipeline
Gas bubbles up from damaged Russian pipelines under the Baltic Sea. The leaks, widely blamed on sabotage, have highlighted the vulnerability of European energy infrastructure © Danish Defence/AFP via Getty Images

The enormous cost of energy interventions is having an uneven impact on member states, given their differing capacities to weather rising public borrowing. Some diplomats have started quietly talking about additional help to even out the burdens, with Slovakia calling for windfall taxes to be steered into a common fund to be divided evenly among countries according to population.

In France, consumers are preparing for the worst. Saliha Sadelli, a nurse who works in the poor northern neighbourhood of Marseille, says she has been hard-hit by the rising cost of petrol because she drives a lot to carry out home visits. Her own bills have also been climbing, despite the government’s moves to limit electricity price rises.

“They tell us that households have been protected, but of course I’m worried when I see our bills have gone in a short time from €200 a month to €350,” she says. “I ask myself what to do. In the summer I can cut off the air conditioning at home — it’s a luxury. But heating is not a luxury.”

Additional reporting by Alice Hancock and Andy Bounds in Brussels, and Domitille Alain and Akila Quinio in Paris


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