Europe’s energy crisis

Tuesday 20 Sep 2022

European governments are acting to reduce the prices paid by individuals and businesses for energy against a background of spiralling prices.

Europe s energy crisis
Leyen (photo: AFP)


Delivering her State of the Union address before the European Parliament in Strasbourg last week, President of the European Commission Ursula von der Leyen outlined measures designed to help Europeans face up to the rising energy prices that have seen gas and electricity bills spiral upwards for many businesses and consumers.

Under the proposals, yet to be agreed by EU member states, European governments will be obliged to reduce electricity consumption by at least five per cent during peak hours and aim to reduce overall consumption by at least 10 per cent until March 2023.

Electricity producers using less costly fuels such as nuclear and renewables will see their revenues capped as soon as prices reach 180 Euros/MWh, with any revenues above this being collected by European governments. Producers using fossil fuels to generate electricity will see profits that are 20 per cent or more above the average for the last three years subject to an additional tax of 33 per cent.

The measures are expected to raise €140 billion that can be used by EU member states to subsidise the electricity used by businesses and consumers. “In these times, profits must be shared and channelled to those who need it most,” von der Leyen said.

The announcements came against a background of similar measures by European governments.

News earlier this month that the government of newly installed Prime Minister Liz Truss in Britain intends to introduce a cap on the price of energy for individual and business customers was greeted with sighs of relief across the country.

Earlier projections had shown average energy bills rising for most households to around £3,500 a year, with £6,000 being projected by some commentators. Before the announcement of a cap on prices, intended to hold the bill for an average household at less than £2,500 a year until 2024, the government had promised a £400 rebate for households.

The scheme provides less help for business customers, whose bills will be capped for only the next six months.

In France, the government announced in July that it would be nationalising the country’s largest energy provider, EDF, bringing the company under full public ownership by buying the 16 per cent of shares that it does not own.

The move came in addition to an earlier announcement that it would be obliging EDF to limit rises in electricity wholesale prices to four per cent and charge only limited increases to consumers, effectively slapping it with additional costs of some €8.4 billion.

In Germany, the coalition government of Chancellor Olaf Scholz also earlier announced that it would be making a flat-rate payment of €300 to all taxpayers to help them pay rising energy bills, with additional payments being available to people on social security and other benefits in a scheme costed at some €30 billion.

Value-added tax (VAT) on natural gas is being lowered from 19 per cent to seven per cent in Germany until the end of March 2024 in a bid to help businesses.

The moves, echoed in one way or another in other European countries, are intended to protect consumers and businesses from unprecedented rises in energy costs, effectively subsidising consumption by spending large sums of public money.

The British scheme sets a limit to the unit price energy companies are allowed to charge consumers, with the government refunding the difference between rising wholesale costs and what the companies charge to their customers.

It is expected to cost some £150 billion and will see the Truss government handing over large amounts to energy companies that are likely to make £170 billion in excess profits over the next two years, according to a leaked, and disputed, analysis said to have come from the UK Treasury.

Handing them £150 billion will significantly add to the UK’s public spending and steadily increasing debt.

Even so, the scheme may not be enough to protect British businesses. Warning of the prospect of “mass bankruptcies” should energy costs continue to rise, Director-General of the British Chambers of Commerce Shevaun Haviland said that the six-month cap on energy bills for businesses was welcome, but clarity was needed in the medium term.

The French scheme is expected to cost less, though the nationalisation of EDF will see the taxpayer being burdened with a company already struggling with debts. It will mean a significant reversal of policy, since recent years have seen the privatisation of French energy providers, with shares in EDF itself having been put up for sale in 2005.

The French provider, already struggling with debts of upwards of €60 billion largely owing to problems with its nuclear power stations, is expected to accumulate further debts as a result of the government’s decision to force it to sell electricity at below market prices in order to protect consumers.

Speaking to the press last week, French Prime Minister Elisabeth Borne said the government intended to cap gas and electricity price increases at 15 per cent for all categories of consumers aside from larger businesses.

Twelve million French households would receive a cheque of €100 or €200 before the end of the year to help them pay their energy bills, she said, with this expected to cost €16 billion. Plans would also be announced in early October to reduce energy consumption across the country by 10 per cent over the next two years.

Small businesses could expect to benefit from the same price guarantees as other consumers, Finance Minister Bruno Le Maire said. Larger businesses, particularly industries consuming large amounts of energy, would benefit from special measures to be outlined in October, explaining that subsidies would have to be agreed with the EU.

The German scheme to reduce energy prices will see government revenues from energy sales significantly reduced, not only because of the large reduction in VAT, but also because of the programme of public subsidies.

German consumers have been told to expect additional costs of €500 a year as a result of a levy on gas bills in October in order to help out providers struggling with rising wholesale costs.

European energy costs have spiralled upwards in the wake of increasing demand and cuts in supply as a result of the reduction or halting of Russian fossil-fuel exports, especially exports of natural gas, to the European countries in the wake of the ongoing war in Ukraine.

With Germany particularly exposed to reductions in Russian gas imports, small businesses have seen their gas bills more than double and large businesses, including the industrial giants on which the country’s economy depends, being told to reduce their consumption or even close down production.

Countries that do not import significant quantities of Russian fossil fuels have also been impacted by the crisis, since in the context of rising demand and falling supply the international energy companies have not hesitated to raise their prices.

Natural gas prices across the EU have risen by upwards of 200 per cent this year, with the Dutch TTF (Title Transfer Facility) price, a European industry benchmark, showing a 220 per cent rise since January, peaking at 345 Euro/MWh in August and up from 64 Euro/MWh last September.

However, prices are still expected to remain high owing to the Russian decision to close its Nord Stream 1 pipeline that delivers gas to Germany and other countries and the prospect of increasing demand for energy ahead of the winter season.

The sharp rises in European energy prices have been putting additional pressure on European consumers already struggling with the rising cost of living amid generally stagnating or declining incomes.

In the UK, the consumer price index, a measure of inflation, has been running at over 10 per cent since July, with the Bank of England, the country’s central bank, predicting rates of over 13 per cent by the end of the year, the highest in nearly four decades.

This is against a background of rising taxes, stagnating incomes, and zero or anaemic growth.

Similar conditions have been seen in other European countries, with France recording inflation rates of 5.5 per cent this year, not seen since the 1980s, against a background of anaemic growth and significant stress on incomes.

In remarks in August, French President Emmanuel Macron, reacting to the darkening economic situation and the ravages of drought and wildfires across the country, spoke of what he called “the end of abundance,” warning that France was entering a new period marked by “a series of serious crises.”

Reacting to the British measures, opposition MPs said the government was mortgaging the prospects of future generations and handing a blank cheque to multinational energy companies.

There was similar scepticism about the measures introduced by France’s centre-right government, with Communist Party leader Fabien Roussel mocking Macron on Twitter. “It’s as if the French people lack problems and have simply been having a good time. But ten million French people are living in poverty because of Macron’s actions and the greed of the rich.”

“Why the refusal to raise salaries, to end the environmentally and financial wasteful consumption of the ultra-rich, and to tax the excess profits of the multinationals,” asked La France Insoumise (LFI) Party MP Manuel Bompard in a comment on the measures.

   *A version of this article appears in print in the 22 September, 2022 edition of Al-Ahram Weekly.

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