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Has the EU passed the energy crisis test?

For many in the CEE region, this year’s State of the Union address by the European Commission’s President Ursula von der Leyen – “We should have listened to the voices inside our Union, in Poland, in the Baltics and all across Central and Eastern Europe” – was a long sought-after sign of unity and hope for a paradigm shift in the EU’s energy policy, following the Russian invasion of Ukraine on 24 February 2022.

Since the return of the war in Europe, we have witnessed a wave of new EU-level initiatives and reforms in the area of energy. From the introduction of a joint procurement mechanism, a strategy on diversifying gas supplies, EU-wide price caps on oil and gas, to the acceleration of regional projects under the Connecting Europe Facility – all pushed through with the message of strengthening energy solidarity against the Russian aggressor.

In many ways, the European Union’s post-24/2 energy policy landscape draws clear parallels to the persistent calls of current and past CEE governments for greater energy security. Poland’s Energy NATO Initiative in 2006; Donald Tusk’s calls for an “EU Energy Union” in 2014; the persistent efforts by the Baltic States to develop a “common gas market”; Lithuania’s use of renewables as a tool for lessening Russian energy dependence; or the region’s acceleration of LNG imports in recent years – certainly come to mind.

Assessing the continent’s new chapter of energy unity and the opportunities and challenges it presents for the CEE region, could bring us closer to understanding whether the EU has mastered its crisis toolset in responding to the weaponisation of energy, soaring bills and regional instability.

What’s missing in the EU’s energy ambitions?

Alex Barnes, Visiting Research Fellow at the Oxford Institute for Energy Studies recently published an extensive assessment paper on the Commission’s proposal for joint gas purchasing, price caps and collective allocation of gas. Looking at the impact of the latest EU policies on the region, he tells CEENERGYNEWS: “the only measure in the proposed package which will have a positive impact on CEE is making sure that there are agreed processes in place for the collective allocation of gas in the case of an emergency.”

“Such agreements should already have been in place but, as the Commission points out, only a handful of agreements between Member States have actually been put in place,” he adds. “However, as I point out in the paper, basing the price of gas in such agreements on the previous 30-day average could be an issue as it will not necessarily reflect the cost of gas in the run-up to an emergency.”

As Mr Barnes emphasises, whilst energy solidarity measures have made a positive impact, most of the EU’s recent initiatives in the area of energy “are at best irrelevant. And at worst harmful.”

Unveiling the flagship REPowerEU initiative in May, Ursula von der Leyen said that we were taking our ambition to “yet another level” to become independent from Russian fossil fuels as quickly as possible. With the announcement now over six months old, two key questions naturally emerge: to what extent has “the new level of ambition” been successful and what further steps or changes ought to be considered?

Mr Barnes believes that the EU’s strategy should prioritise a “rapid roll-out of measures which reduce gas demand” in preparation for the next winter which is “likely to be even tougher”. As part of this, he proposes a “replacement of older inefficient boilers with newer more efficient ones, insulation of buildings, investment in electricity storage and flexibility to reduce the reliance on gas as the backup when renewables are not generating.”

Price caps are not the solution

Indeed, some of the proposed measures will require capital investment “which may be difficult for less wealthy consumers”. However, government loans could “help bridge the gap,” according to Mr Barnes.

“Aid for energy bills should be targeted at poorer consumers and at energy-intensive industries which have no alternative [for example, kilns, glass furnaces],” Mr Barnes continues. “Price caps disproportionately help rich and inefficient consumers who use more gas than poor or efficient consumers. Consideration should also be given for help between Member States – they all pay the same gas prices but some Member States are much wealthier than others.”

Notwithstanding the selective benefits of the bloc’s new shift towards energy solidarity and key policies that are missing in the recent initiatives, Alex Barnes believes that the EU has “overall” passed the test in responding to the ongoing energy crisis:

“The liberalised gas and electricity markets have meant that the market has adapted quickly to a massive supply shock without having gas cut-offs. As I quote in my paper, many companies have reduced gas demand without reducing output and consumers have also responded.”

“The market has also attracted new gas supplies,” he continues. “The Security of Supply Regulation ensured that gas can flow from West to East much more easily than a few years ago by requiring investment in infrastructure which is bidirectional and which can cope with a major supply interruption.”

Mr Barnes adds that “whilst there are still some constraints, these are much less than before, so we haven’t seen physical interruption of customers in Eastern Europe as we did during previous crises when flows via Ukraine were curtailed. Measures encouraging gas demand reduction and putting gas into storage are also helpful, although it is arguable that market forces encouraged such behaviour anyway.”

However, whilst praising the EU for strengthening energy supply resilience as well as the shift towards focusing on diversification and commitment to energy solidarity, Alex Barnes reiterates his criticism towards the recent measures concerning the energy price gap, LNG benchmarks and joint purchasing.

“They cannot resolve the central cause of the crisis, namely a big reduction in gas supply, which can only be resolved by a mix of demand reduction and additional LNG supply to Europe – diverting LNG from other markets – until new supplies of LNG come on stream in the next few years.”

An impressive response with key areas for improvement?

It is clear that while the EU’s current energy crisis strategy is not perfect, demonstrated in, for instance, the need for stronger energy efficiency policies – it nonetheless looks to have brought forward timely reforms, on both the practical and ideological levels, which were perhaps difficult to envisage mere 10 months ago.

A resilient European energy market predicated on diversification of supply, competitiveness and solidarity is clearly good news for the CEE region and its potential investors. Indeed, what we have to consider now is whether this paradigm shift is here to stay and how resilient will Europe be for the next winter season. For now, we wait for December 2023 to hopefully present us with an answer.

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