A brief on EU energy policy in the context of the 2022 war in Ukraine.
The energy crisis that Europe faced in 2022 was one which was already in the pipeline and proceeded to balloon as a result of the war in Ukraine. The EU response consisted of storage filling, new supply line creation and demand reduction. However, part of the success was due to fortunate circumstances such as lower Chinese demand and a warmer winter. Now the EU must look forward and ensure its policy is designed for the long-term considering security concerns as well as climate goals set by the European Green Deal (EGD). As part of a long-term strategy, focus must be on investing in renewable energy which will reduce energy imports and simultaneously support the EU’s 2030 and 2050 decarbonisation objectives. Current policies such as nuclear power station decommissioning, and price capping are risky and detrimental to European energy security. Instead, the EU needs to invest in nuclear energy and build strategic gas reserves to stabilise and secure the European energy system over the next few decades.
Context – Unpreparedness
The EU’s energy security policy showed its failings as the energy crisis of 2022 caught the EU off guard. Europe faced energy supply shock in 2006 and 2009 due to Russo-Ukrainian disputes and despite the fact that diversification was the ‘cornerstone’ of the 2014 European energy security strategy (Russell, 2020) Europe was poorly prepared (Prisecaru, 2022). Russia remained a major supplier of European energy due to it providing cheap gas and because the EU failed to find alternatives (Russell, 2020). Energy prices began to rise to levels not seen for decades in the second half of 2021 due to a confluence of factors such as exceptional weather situations, pandemic recovery-related increase in demand (post-covid inflation), technical challenges upstream (Mišík, 2022) and the failure of governments to support the ‘scaling up’ of renewables to replace the reduction of investments in fossil fuels (Carlos Fernández Alvarez and Molnar, 2021). Dependence on Russian energy hampered the EU’s ability to sanction Russia in an effective manner and thus impaired the EU’s foreign policy objectives. Due to Europe’s dependence on Russian gas the squeeze and cuts of gas supplies resulted in a mean additional payment of €146.34 billion in just Q2 and Q3 compared with the previous three years (European Commission, 2023). However, the total additional energy bill of Europe in 2022 is estimated to be around €1 trillion (Bloomberg News, 2022). This was due to the energy security issue forcing the EU to fill gas storage at any cost, reduce demand and diversify supply (Sgaravatti, Tagliapietra and Trasi, 2022).
The EU’s response has largely been short-term focused due to security and stability issues in energy markets, yet continued escalation of the war in Ukraine may result in further ‘adjustments’ and risk a complete ‘overhaul’ of energy policy (Osička and Černoch, 2022). This is evidenced by the price cap mechanisms implemented by the EU which are unsustainable and counter-productive (Tagliapietra, Zachmann and Zettelmeyer, 2022). In fact, such policies of capping wholesale markets are not guaranteed to work (Neely, 2022) and resemble a gamble as these caps are costly and can result in even-worse instability (Corbeau, 2023). In addition, the EU’s emergency response does not truly fit in with the energy security long-term goals because LNG is expensive and even more polluting than pipeline gas. However, it should be recognised, that gas will be required to supply and supplement ever growing demand in Europe during the decarbonisation process which is decades long and is targeted to end towards 2050 (European Commission, 2022a). As such the current gas storage policy which has changed to ensuring inventories remain above 90% before every November should help to maintain energy price stability, so long as there are no dramatic negative events or supply issues. The challenge Europe faces now is that its total gas storage capacity can only support 25-30% of winter demand (European Commission, 2022b) and so risks remain embedded in the European energy system wherein price stability cannot be truly guaranteed.
Policy options – Expensive and Essential
It is important to approach EU energy policy in a holistic manner that ensures that the policies are designed for the long term (Boehm and Wilson, 2023). EU energy policy is at the intersection of the climate, security and foreign (external) policy (Leonard et al., 2021). Given this context, this brief will focus on the longer horizon focused solutions while employing a pragmatic approach.
To ensure the long-term efficacy of the energy security and climate goals set by the EU, investment must be made into renewable energy (Ari et al., 2022). The war in Ukraine and the aftereffects of it must serve as the impetus that speeds up the energy transition (Calanter and Zisu, 2022). Utilising public money to invest in the green sector is only half of the solution. Major efforts must be made to increase investment via the private sector as the EU cannot achieve its climate and energy security goals without it (Silvestre, 2021; Ari et al., 2022). This will prove to be difficult given the competition from other global leaders such as China and the US for drawing in private capital (Valero, 2023). This is evidenced by Volkswagen putting plans to build a battery plant in Europe on hold after it found it could receive $10 billion in tax credits from the US (Espinoza and Fleming, 2023). The EU commission suggested that they would not increase the financing budget of the GDIP but would focus on reducing state-aid rules (Valero, 2023). Such a move can speed up private investment but brings with it the risks of fragmentation in the internal market as it would disadvantage the smaller EU member states (Fischer and Roharova, 2023; Valero, 2023). This must be avoided, and more public funds should be pooled in, to limit divergence and regional discrepancies within the EU.
Furthermore, the EU must place extra focus and direct more investment towards nuclear and hydro power stations because they are the only renewable energy sources which can operate 24/7 (Kirkegaard, 2023). This is essential for energy security as other (more popular) renewables such as solar and wind only provide intermittent supply of energy and cannot be relied upon to sustain the total European energy system baseload supply (minimum load) in a consistent manner. This should not however, steer investment away from solar or wind as they are considerably cheaper than nuclear power and so remain important sources for European energy which should also be expanded upon. But in the current context of some European nations phasing out of nuclear energy (Germany and Belgium) it should be stressed that these forms of energy generation are crucial to the European energy system despite their environmental flaws and safety risks (Saw, 2023). A major challenge is to repopularise nuclear energy by increasing safety regulation in the industry and demonstrating the energy security benefits to Europeans. The example of France being able to better manage its own energy security due to its nuclear energy power plants should serve as an example on how to achieve energy security (Żuk and Żuk, 2022).
Ensuring high gas storage levels is another crucial aspect of Europe’s short, mid, and long-term energy security. Because current storage capacity is very low (25%-30%), investment must be made to create a Strategic Gas Reserve not unlike the US Strategic Petroleum Reserve (Critchlow, 2021). This will have a material benefit to European energy security for the next few decades and is an emergency mechanism which severely reduces producer power (Maugeri, 2014). It can also seriously dampen volatility in markets and so it is a better alternative to any price cap mechanism which the EU currently employs.
Policy Recommendations – To the EU Commission, High Representative, and the European Council.
- Increase GDIP 2030 budget to ensure more public funds support the decarbonisation of the economy in the near term. This increased investment before 2030 will increase chances of achieving climate goals but also will decrease dependency on non-renewable energy from Russia faster.
- Incentivise companies by utilising investment-aid via the GDIP budget and by offering tax credits.
- Focus incentives on nuclear stations to maximise energy security and limit the need for gas while simultaneously reducing carbon emissions. This will also require work in educating individuals about the risks involved.
- Make efforts to prevent Germany from decommissioning its nuclear energy which is a low polluting reliable source.
- Increase gas storage capabilities by developing a strategic gas reserve system to ensure a stable and secure energy market for Europe. This will also increase EU strategic autonomy a decrease the power of international markets.
These policy recommendations will ensure an energy secure Europe which can also achieve its zero-carbon climate goals. It is an expensive proposition and is certainly not popular, but it can be carried out and reduces risks in the event of another energy crisis or disaster.
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