Energy Crunch Time at Upcoming Extraordinary Summit
But also — Unemployment, Spare parts, Supply chains
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Focus — Heat Waves Make Way for a Chilly Winter
Following a three-day interruption, Gazprom announced the suspension of gas deliveries via the Nord Stream pipeline on 2 September, citing technical reasons. On 30 August, the Russian gas giant announced the suspension of gas deliveries to Engie from 1 September, citing a default in payment by the French group.
EU energy ministers are due to meet on Friday 9 September in Brussels for an extraordinary EU Council summit.
BACKGROUND • Shortly after the G7 supported the introduction of a price cap on Russian oil exports, Russia announced that it would halt gas deliveries through the first of the Nord Stream pipelines through the Baltic Sea.
The technical reasons given by Gazprom are disputed by Siemens, which manufactures and maintains the turbines in question. Gazprom has also announced that it will increase gas deliveries through Ukraine.
"Gazprom’s announcement this afternoon that it is once again shutting down NorthStream1 under fallacious pretenses is another confirmation of its unreliability as a supplier", reacted Eric Mamer, chief spokesman for the Commission.
CONSEQUENCES • While the EU is on track to fill its stocks to 80% as foreseen in the REPowerEU plan presented in the spring of 2022, the scenario of a winter without any Russian gas could complicate things. Doing without Russian gas would force the EU to cut its consumption by 15% of average demand between 2019-2021, according to a policy paper by Ben McWilliams and Georg Zachmann of the Bruegel think tank.
Turning off the tap will be a further blow to Germany, which is heavily dependent on gas transported via Nord Stream and whose industry – a major energy consumer – is already running at low levels despite 84% full stocks.
In France, it is the state of the nuclear fleet that is worrying, with 32 out of 56 reactors undergoing maintenance. EDF's low electricity production is driving electricity prices up and casting doubt on France's ability to get through the winter without importing, rationing, and blackouts.
COUNCIL • EU energy ministers will meet in Brussels on 9 September for an extraordinary meeting on the energy crisis. Many issues will be on the table: gas stocks, price caps, reform of the electricity market, and taxes on "super-profits".
REFORM? • The meeting, under Czech Presidency, could potentially see the announcement of a future decoupling of electricity and gas prices, although a decision will be hard to reach by this Friday. The Commission has acted quickly on this issue, after Ursula von der Leyen's statements on 29 August at the Bled Strategy Forum.
The statements of German Finance Minister Christian Lindner in favour of decoupling electricity and gas prices have revived the debate on this very sensitive subject. The reform has long been supported by southern countries such as Spain, but faced strong opposition from Germany and Austria.
As a reminder, soaring gas prices have a direct effect on electricity prices, due to the marginal pricing system at the European level. The price of electricity is set according to the price of the last unit produced — based on gas, for example, which is used for 20% of electricity production in the EU.
WHAT MEASURES? • While it is unlikely that an operational reform of the functioning of the EU energy market will emerge from this Council, short-term measures will be dealt with. As revealed by the Financial Times, the European Commission's recommendations to energy ministers include the idea of a "windfall tax" – a tax on "super-profits" – applied to all electricity producers except those with gas-fired generation units.
This group of producers – who benefit from artificially high prices due to the functioning of the European market – would be assigned price caps, and the difference between these prices and the current price of electricity would be collected by Member States and redistributed to consumers in order to reduce their energy bills.
While Germany and France are expected to support this measure, countries such as Italy, Spain and Greece will need to abandon similar taxes they have previously adopted themselves, in order to make room for EU-wide harmonisation – a potential point of tension. Measures to reduce energy demand will also be discussed.
NEW SOURCES • EU member states are also encouraged to find new trading partners for natural gas and to invest in renewable energies. Visiting Algiers, European Council President Charles Michel described Algeria as a reliable energy partner – a country that France and Italy already rely on to diversify their gas imports.
These diversification measures are not without controversy: while pipeline projects linking the Iberian Peninsula to France are the subject of much dissent, scientists and activists criticise the relevance of investments in floating liquefied gas terminals planned by many EU countries.
In Case You Missed It
UNEMPLOYMENT & INFLATION • On 8 September, the ECB Governing Council will meet in Frankfurt. Markets are watching if Christine Lagarde will announce a rate hike of 0.5% (50bps) or 0.75% (75bps). Annual inflation was 9.1% in the Eurozone in August, according to Eurostat data. A 75bps hike would give a clear signal that the ECB intends to fight inflation, even if it means causing collateral damage in some more indebted economies.
Unemployment in the Eurozone reached 6.6% in July 2022, according to the latest Eurostat statistics. This low unemployment rate puts further pressure on the ECB, which is constrained to raise its key interest rates in order to remain credible in its fight against inflation, and to avoid the triggering of a difficult-to-control price-wage loop.
Unemployment in the eurozone has been falling steadily since peaking at 12% in 2013-2014 in the wake of the sovereign debt crisis.
SPARE PARTS • After USB-C chargers, the Brussels effect is on smartphone spare parts. The European Commission has published a proposal for legislation that would oblige manufacturers to supply at least 15 spare parts to professional repairers for up to five years after the device has been put on the market.
For the Commission, whose initiative is part of the 2020 Circular Economy Action Plan, the aim is to improve the sustainability of smartphones and tablets by ensuring that objects are repaired and therefore used for longer.
A study by the European Environmental Bureau, quoted by the FT, estimates that extending the lifespan of all smartphones sold in the EU by 5 years is equivalent, in CO2 equivalents, to taking 5 million cars off the road. You have until 28 September to give your opinion to the Commission.
SUPPLY CRUNCH • Details on the Commission’s planned Single Market Emergency Instrument (SMEI) are emerging. In case of an emergency, the instrument would give the Commission the power to intervene in the production and supply of critical goods. The new tool is the Berlaymont technocrats’ response to their perceived powerlessness at the height of the Covid-19 crisis, when supply chains were thrown into chaos, and member states were facing shortages of essential goods.
The instrument would allow the Commission to request internal data of companies to assess stocks, and, if necessary, to mandate what orders should be prioritised. Failure to comply could result in fines of up to “1.5% of the average daily turnover in the preceding business year for each working day of non-compliance,” according to a draft proposal quoted by Bloomberg News.
The Commission is also seeking to protect freedom of movement by placing stricter restrictions on member states’ right to close their borders, as it happened repeatedly during the pandemic.
The proposal is scheduled to be unveiled on 13 September. Bloomberg reports that nine EU capitals, including Copenhagen and The Hague, voiced their concerns during the summer, as they fear that the instrument will give too much power to the Commission.
Interview
We discussed the role of pesticides in the Common Agricultural Policy (CAP) with Tatiana Nemcova (BirdLife) and Eva Corral (European Environmental Bureau), who wrote a policy briefing on the subject. You can find it here.
What we’ve been reading this week
In EU Law Live, Guillermo Íñiguez comments Olaf Scholz’s 29 August Charles University speech, in which the Chancellor charted a reformist agenda for Europe. The author hails his ambitions, but finds his proposals come short of providing a convincing response to the challenges to the rule of law posed by the Hungarian and Polish governments.
For the CEPS, Daniel Gros argues against gas price caps and consumer subsidies, explaining that they only end up making energy more expensive for everyone. Instead, governments should incentivise consumers to reduce consumption.
Who’s racing ahead in the energy transition? In Bloomberg, Ira Boudway, Fritz Habekuss, and Todd Woody pit America against Europe, and name the indisputable leader.
The CER’s Zach Meyers warns that the legal instruments acquired by the Commission in recent years to protect the EU internal market could easily deter investment. They can be used as leverage in trade negotiations, but should not become a tool for misguided protectionism.
This week’s newsletter is brought to you by Maxence de La Rochère and Augustin Bourleaud. See you next Tuesday!