Europe’s Governments Face a Reckoning as Energy Prices Surge

Author of the article: Bloomberg News Alex Morales and Rachel Morison (Bloomberg) — Europe is gripped by one of the worst energy crunches in history, forcing politicians to step in as soaring prices threaten to leave millions of households unable to pay their bills.  But with market forces signaling that the crisis will last way beyond…
Europe’s Governments Face a Reckoning as Energy Prices Surge

Author of the article:

Bloomberg News

Alex Morales and Rachel Morison

(Bloomberg) — Europe is gripped by one of the worst energy crunches in history, forcing politicians to step in as soaring prices threaten to leave millions of households unable to pay their bills. 

But with market forces signaling that the crisis will last way beyond the winter, the dilemma facing leaderships is that their stopgap measures are unlikely to be enough. The cost of electricity and gas across the continent already looks like one of the biggest challenges facing nations as they navigate their way out of the pandemic.

Ministers in the five biggest European economies — Germany, the U.K., France, Italy and Spain — have so far come up with a patchwork of grants and time-limited tax cuts to help consumers heat and power their homes. Indeed, the common thread seems to be to hope the problem goes away while also leaning more on companies. Electricite de France SA shares plummeted by a record on Jan. 14 as the French government confirmed plans to force the company to sell more power at a hefty discount. 

Gas more than tripled last year and energy companies, analysts and traders all say that high prices are set to persist, already a key driver of now rampant inflation. Contracts have eased from their peak, yet the weather may still get colder. There’s also mounting tension with Russia over a possible invasion of Ukraine, which could disrupt vital supplies.

Read More: Europe Energy Crisis Worsens With War Risk Compounding Gas Woes

“The scale of the crisis makes government measures insufficient to cover all impacts across the economy,” said Simone Tagliapietra, a fellow at European economic thinktank Bruegel. “The longer this situation persists, the more governments will be forced to target their support towards specific segments of society — a difficult triage, both economically and politically.”

Bank of America Corp. estimates European households will pay an average of 54% more for energy this year than in 2020, with the biggest increases in the U.K. and Italy, where average yearly bills are set to jump by the equivalent of more than $1,000.

Assistance deployed so far also reflects the different political cultures: Bank of America reckons that plans announced so far include an annualized 337 euros ($389) per household in Italy, more in France and yet zero in the U.K. 

The trouble is that it all comes as governments need to tighten their belts after almost two years of state largess to protect businesses and workers through Covid-19. They also have to balance the impact of state intervention on the energy companies they’re relying on to deliver on ambitious national climate goals to phase out carbon emissions.

Then there are the more acute political implications coming to a head in April. French President Emmanuel Macron faces an election, while the squeeze on the cost of living in the U.K. is set to tighten with an increase in the energy price cap, adding to the turmoil engulfing Prime Minister Boris Johnson.

So what are governments doing about it?

Germany

The diverse nature of the three-way coalition makes joined-up policymaking tough. While Chancellor Olaf Scholz’s Social Democrats favor state subsidies to poorer households, the business-friendly liberal FDP are generally skeptical of large handouts. 

Economy Minister Robert Habeck, the co-leader of the Greens, has made clear that his priority isn’t to fight rising energy prices. The aim is rather to fund an ambitious climate protection program, including increasing the share of renewables in Germany’s power mix.

As a result, the government in Berlin has so far only been able to agree on a 130 million-euro package of one-time grants to low-income households to be paid in the summer when customers receive their bills from energy suppliers. There’s also a plan to shift a surcharge for renewables of about 300 euros per household from energy bills to the state budget from next year.

France

France has weighed in more aggressively than its European counterparts. Macron’s first term was marred by protests by the so-called “yellow vests” movement against rising taxes on diesel, so the president is particularly sensitive to the potential impact on his popularity caused by soaring energy costs.

Prime Minister Jean Castex froze gas tariffs in November until the end of 2022, with the government pledging to compensate suppliers with loans until prices recede. The government also distributed 4.4 billion euros at the turn of the year to aid citizens cope with higher gas and gasoline prices.

Finance Minister Bruno Le Maire said he wants to ensure electricity bills increase by no more than 4%. The proposal relies on cuts to electricity taxes that the government initially estimated as costing 4 billion euros — a figure that’s since doubled. But that won’t be enough, so the government also asked state-controlled EDF to sell more power to rivals on the cheap, Le Maire told the Le Parisien newspaper. The move would cost the utility 7.7 billion euros at Jan. 13 market prices, sending its shares tumbling.

U.K.

In Britain, by contrast, ministers have been more frugal. They have allowed market forces to prevail within the confines of a cap on bills that’s adjusted twice a year by the regulator. The government also points to 4.2 billion pounds ($5.8 billion) of existing measures, including grants, winter fuel payments and a discount for lower earners.

Chancellor of the Exchequer Rishi Sunak announced 500 million pounds of wider aid in September for hard-up households to cope better with the cost of living over winter, including food and clothing. The price cap was lifted by 12% the following month and the trajectory of wholesale prices means it’s projected to jump by another 50% in April. That also will reflect the costs stemming from dozens of smaller energy suppliers that have gone out of business.

The government has spent months in talks with energy-intensive industrial users, including discussions about state-backed loans. It’s examining ways to help domestic consumers by expanding grants and discounts to pensioners and low-income households, and industry proposals for loans to delay some of the jump in costs coming in April. Johnson has said a cut in value-added tax on bills is too blunt an instrument and would benefit those who don’t need it.

Italy

Prime Minister Mario Draghi’s government disagrees. Italy has cut the tax on gas for all consumers in addition to paying bonuses to low-income families and reducing charges that finance subsidies for renewable energy. Overall, the state is backing struggling households to the tune of 8.5 billion euros through March this year. 

Ministers are also weighing legislation to require energy companies to contribute to measures that reduce power bills for those on lower incomes, Development Minister Giancarlo Giorgetti said on Jan. 12. And with the energy regulator warning of steep price rises this quarter, Draghi has said further measures will be needed from the second quarter. The discussion is focused on either changing the tax code to target renewable energy producers or finding ways to require companies to guarantee lower bills for users.

Meanwhile, Italian companies are also lobbying for assistance to fend off potential shutdowns and bankruptcies. Industry association Confindustria estimated energy bills for businesses will rise to 37 billion euros in 2022, up 85% from last year and more than four times what they were in 2019.

Spain

Officials in Prime Minister Pedro Sanchez’s government have repeatedly said they have limited leeway to control energy prices given the structure of the wholesale market and European regulations. What it’s done, though, is to levy more tax on energy companies and reduce the burden for bill payers.

In September, the cabinet approved a windfall tax on utilities that it expected would raise more than 2 billion euros. On Dec. 21, the government then extended temporary cuts on the levy on bills for four months, a decision that will cost the state more than 2 billion euros. 

But as Spanish Economy Minister Nadia Calvino warned in an interview on Jan. 14, the measures put in place by the government have a significant financial impact “and so they are not a long-term solution.”

Read More: The Energy Price Surge Is Squeezing Europe’s Economy

©2022 Bloomberg L.P.

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