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Brussels wants to extend rules that allow EU member states to subsidize energy prices. While the sentiment behind all this is laudable, the reality is that interventionism will ultimately distort the natural behavior of the EU market and undermine its very future, writes Szymon Kardaś.
While the cost of electricity in Europe has stabilized until 2023, the prospect of a new price increase remains high for many EU member states such as Poland, Hungary, the Czech Republic, Austria, Lithuania, Latvia and Romania.
Pan-European import dependency, coupled with growing energy demand, continues to threaten market stability.
Furthermore, unit costs, while not fluctuating at the extreme levels of last winter, are still stubbornly high in many countries including Denmark, Italy and the Netherlands, as well as in the EU’s largest economy, Germany.
To alleviate some of the risks posed to Member States, the European Commission recently extended the use of support instruments first introduced in 2022. On 20 November it agreed to extend several regulations, including the Temporary Crisis Framework, by six months and transition.
This will allow members to provide aid to national authorities if electricity prices rise above pre-energy crisis levels, and was followed by proposals that would extend other anti-crisis measures, such as gas solidarity measures, the gas correction mechanism market and the rules relating to the granting of permits for renewable energy projects, in the coming year.
Frustration with solutions to the crisis is growing
This interventionist approach has been successful in many Member States and, for some incumbent administrations, is being used for their political gain ahead of the European elections in May.
Last month, Germany’s ruling coalition agreed on rules to provide aid to energy-intensive industry; a program that will last until 2028, with an estimated budget of 28 billion euros.
Countries such as France and Poland are also among those in favor of maintaining subsidies, with the future Polish government announcing that it will maintain the freeze on electricity and gas prices for selected groups of consumers in 2024.
In addition to the protection of vulnerable groups of electricity consumers, one of the main arguments in favor of maintaining support measures is the fear of a loss of competitiveness and the risk that, due to high energy prices, European companies will take considering migration operations to the United States or China.
Yet in some EU countries, there is growing frustration with the continuation of solutions to the crisis, including Belgium, the Netherlands, Denmark, Estonia and Finland, where politicians have highlighted that electricity prices have firmly stabilized over the year and that the maintenance of special tariffs State aid rules are harmful to the EU market.
Subsidies favor richer countries
Although there is a risk of an increase in electricity prices in the EU next year and the extension of some anti-crisis measures until 2024 seems fully justified, in the long term Brussels should be oriented towards reducing the scope of subsidies. And there are several reasons for this.
First, subsidizing electricity prices is extremely expensive. According to the 2023 report on energy subsidies, they rose to €181 billion across the EU in 2022 and could reach €194 billion in 2023.
Secondly, maintaining the possibility to subsidize electricity prices in the long term could damage the EU energy market, deepening inequalities between Member States, as a consequence of a subsidy rush phenomenon, which disproportionately benefits consumers. richer countries.
This is well illustrated in the 2022 data, which shows that of the total amount of state aid approved by the EU, 53% went to Germany and 24% to France.
Divisions and headaches loom for 2024 and beyond if this behavior becomes commonplace.
It also threatens the very existence of the European market, if the European Commission signals its intention to further extend some anti-crisis rules without adequate evaluation.
If interventionism is to persist in the short to medium term, the political leadership in Brussels should ensure a rigorous assessment of the legitimacy of the provision of state aid in specific cases.
For Member States, however, the emphasis should be placed on completing the ongoing legislative changes to the electricity market structure as soon as possible.
The EU’s energy mix must strengthen
European Commission President Ursula von der Leyen outlined some of the reforms needed to ensure resilience in 2022.
The new electricity market design aims to create a more flexible, competitive and consumer-friendly electricity market, better able to accommodate the growing share of renewable energy in the EU energy mix.
It is now up to Member States to finalize the details of this proposed legislative change and to present regulations specifying, among other things, investment rules for the expansion of generation capacity, such as renewable energy storage and nuclear energy.
If they can do this, and move away from subsidies as the default response, there is an opportunity to stabilize electricity prices in Europe in the long term and reduce dependence on fossil fuels as primary sources of energy.
Such action, by members across the EU-27, would also encourage investment in Europe as a global green energy leader and, importantly, provide support to the EU and its ability to withstand future geopolitical shocks.
Szymon Kardaś is a senior policy fellow on energy within the European Power program at the European Council on Foreign Relations (ECFR).
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