The EU is facing a new challenge

The EU’s integration is increasing through crises. This is happening once again with the war in Ukraine. The EU is facing a huge foreign and security policy crisis, a humanitarian crisis and an energy crisis. There will be many implications for food security, security of supply and the economy – we are not yet able to grasp the full impact of war and sanctions.

On Tuesday 8 March, the Commission adopted a Communication entitled “REPowerEU: Joint European Action for more affordable, secure and sustainable energy”. The Communication will be followed by legislation and it will function as the basis for discussions between ministers and policy makers. The Communication is the Commission’s response to and preparation for the lurking energy crisis.

The Russian invasion makes the need for clean energy transition more urgent than ever. The Commission wants to move away from fossil fuels imported from Russia already in this decade and replace 2/3 of Russian natural gas imports by the end of this year. The Commission lists a wide range of ways to achieve this.

The coming winter will be very critical for Europe. Many of the measures put forward by the Commission focus on securing energy supply – especially gas – for the coming winter. This is understandable, as it will determine whether there is enough heat in people’s homes in Central Europe and whether many industries can continue to produce goods.

Gaining momentum for climate investment

The Commission wants to replace the pipeline gas imported from Russia with liquefied natural gas (LNG), which can be transported by carriers around the world. The Commission’s aim, together with the Member States, is to ensure that gas stocks are full at the start of the heating season. Gas storage facilities are defined as part of critical infrastructure so that the risks associated with their ownership can be managed. In April, the Commission will present a legislative proposal on gas resilience, which will give more details on how to achieve this. In the longer term, the key to decoupling from fossil energy imports from Russia is to improve the conditions for investment in clean energy, infrastructure, energy efficiency and diversification of gas supply. Although the impact of improvements in investment conditions will show results only a little further down the line, work needs to start immediately.

In its Communication, the Commission promises to simplify and speed up the authorisation of renewable energy. The Commission will make a proposal on this in May. Member States will have to quickly allocate sites for the construction of renewable energy on land and at sea. Currently, slow licensing of renewable energy installations and the infrastructure they require are the worst bottlenecks for investment in Central Europe. Other factors supporting clean investments are already visible. Firstly, there is money in the market. Secondly, the emission and electricity prices both indicate an obvious need for new clean electricity investments. Thirdly, the long-term prospect of electrification of society is clear. It is therefore crucial to get the investments moving.

Investment uncertainty should not be increased by policy interventions

Russia is a major global supplier of fossil fuels and other raw materials. The West has excluded Russia from the global economy, and there are ongoing discussions to rule out Russian fuels and raw materials as well.

The exclusion of Russia will increase the scarcity of fuel and raw material markets which tends to push prices up. This is already visible almost everywhere. Energy prices were already high before the Russian invasion and now the situation is only getting worse. Moreover, there is no prospect of a rapid easing of the situation.

It is very clear that people who cannot cope with their energy bills should be helped. The Commission is therefore giving Member States the tools – within the framework of state aid rules – to help citizens and businesses manage with high energy prices. Energy prices will also be passed on to the prices of other goods and services with a slight delay.

In the Communication, the Commission does not propose any new initiatives on price regulation, energy markets or price formation, but says it will investigate them. The Commission has been examining these since the autumn and is due to complete its analysis in April. It is welcomed that the Commission has the patience to wait for the studies to be completed, but its plans still cause great concerns for the companies in the European energy market.

A functioning electricity market and the price signals it provides, should be secured especially in times of crisis and post-crisis. A functioning market is the basis for much needed investment. If the electricity market model is changed dramatically or price regulation is introduced – the big concern is that the uncertainty brought by such policy intervention will slow down market-based investment. Investment threatens to stall not only in clean electricity generation, but also in energy efficiency and demand-side flexibility.

Comprehensive design of market model and market transformation are long processes. This is not the right time to do this, because right now investments should be accelerating and the current market model and situation are supporting this. Furthermore, changing the market model will not solve the problems of high prices, even in the short term – at worst the opposite.

The Commission is slightly opening the door to so-called windfall taxes at national level. Such taxes, even on zero emission generation, are highly detrimental to investment security. In the longer term, they also hamper the development of the internal market, as different taxes can exist in the same market. They are also technically very difficult to implement. The Commission has set conditions for taxes and stated that they should be temporary – this must be strictly adhered to if taxes are introduced in some countries.

In addition to licensing, political and regulatory risks are holding back investments. The Russian invasion has increased the risks, but the need for more carbon free energy has only become more apparent to policy makers. Unfortunately, the Commission, with its hints of electricity market interventions or windfall taxes, is increasing political uncertainty.

Solidarity and unity as a strength of the EU

In the two previous crises (the 2008 financial crisis and the 2020 interest rate crisis), the EU took joint economic actions to mitigate the effects of the crisis and showed solidarity. In its Communication, the Commission stated that Member States should discuss the need for a crisis framework programme also for the current crisis. In practice, the question is whether the EU will take joint debt, whether the EU will use common money to support those hardest hit by the crisis and on what basis the money will be distributed. This crisis will have different impacts on businesses and economies, as the need for energy investments will vary between Member States. Additionally, resources will be needed to deal with refugees and to ensure security.

It should be noted that many existing programmes are already funding the energy transition. These include Next Generation EU, Social Climate Fund, and the revenues of the Emissions Trading System that will be made available through various routes. When considering energy, it should be more appropriate to use and redirect these existing sources of money rather than inventing new instruments.

The EU leaders and various ministerial configurations have met and will meet several times in the coming weeks to discuss the current war and how to deal with the energy security issue in Europe. So far, the EU has faced the crisis more united than ever – let’s work together for the unity to remain.

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