European governments must deal with soaring energy prices

(Bloomberg) — Europe is grappling with one of the worst energy crises in history, forcing politicians to intervene as soaring prices threaten to leave millions of households unable to pay their bills.

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

Ministers from Europe’s five biggest economies – Germany, the UK, France, Italy and Spain – have so far offered 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 that the problem goes away while relying more on businesses. Shares of Electricité de France SA fell by a record on January 14 as the French government confirmed its intention to force the company to sell more electricity at a steep discount.

Gas has more than tripled in the past year and energy companies, analysts and traders all say high prices are set to persist, already a key driver of now runaway inflation. Contracts have been declining since their peak, but the weather may still cool down. Tension is also rising with Russia over a possible invasion of Ukraine, which could disrupt vital supplies.

Read more: Europe’s energy crisis worsens with risk of war adding to gas problems

“The scale of the crisis makes government measures insufficient to cover all the impacts on the economy,” said Simone Tagliapietra, a member of European economic think tank Bruegel. “The longer this situation persists, the more governments will be forced to target their support to specific segments of society – a difficult sorting out, both economically and politically.”

Bank of America Corp. estimates that European households will pay on average 54% more for energy this year than in 2020, with the biggest increases in the UK and Italy, where average annual bills are expected to rise by the equivalent of more than $1,000.

The aid deployed so far also reflects different political cultures: Bank of America estimates plans announced so far include 337 euros annualized ($389) per household in Italy, more in France and yet zero in the UK. .

The problem is that all of this comes as governments must tighten their belts after nearly two years of state largesse to protect businesses and workers through Covid-19. They must also balance the impact of state intervention on the energy companies they rely on to meet ambitious national climate goals to phase out carbon emissions.

Then there are the more acute political implications which come to a head in April. French President Emmanuel Macron faces an election as pressure on the cost of living in the UK 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 tripartite coalition makes joint policy development difficult. While Chancellor Olaf Scholz’s Social Democrats favor state subsidies to the poorest households, the business-friendly liberal FDP is generally skeptical of big subsidies.

Economy Minister Robert Habeck, co-leader of the Greens, made it clear that his priority was not to fight against rising energy prices. The aim is rather to finance an ambitious climate protection program, in particular by increasing the share of renewable energies in the German electricity mix.

As a result, the Berlin government has so far only been able to agree on a package of €130 million in one-off subsidies for low-income households to be paid in the summer when customers receive their utility bills. energy. There are also plans to transfer a renewable energy surcharge of around 300 euros per household from energy bills to the state budget from next year.

France

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

Prime Minister Jean Castex froze gas prices in November until the end of 2022, with the government pledging to compensate suppliers with loans until prices fall. The government also distributed 4.4 billion euros at the end of the year to help citizens cope with rising gas and petrol prices.

Finance Minister Bruno Le Maire has said he does not want electricity bills to rise by more than 4%. The proposal is based on reductions in electricity taxes which the government had initially estimated at €4 billion – a figure which has since doubled. But that won’t be enough, so the government has also asked state-controlled EDF to sell more power to rivals at low prices, Le Maire told Le Parisien newspaper. The move would cost the utility 7.7 billion euros at January 13 market prices, sending its shares plummeting.

UK

In Britain, by contrast, ministers have been more frugal. They allowed market forces to prevail within the limits of a cap on bills which is adjusted twice a year by the regulator. The government is also highlighting 4.2 billion pounds ($5.8 billion) of existing measures, including grants, winter fuel payments and a discount for people on low incomes.

Chancellor of the Exchequer Rishi Sunak announced wider aid of £500million in September to help struggling households better cope with the cost of living over winter, including food and clothing. The price ceiling was raised by 12% the following month and the trajectory of wholesale prices means that it should jump another 50% in April. It will also reflect the costs stemming from dozens of small energy providers that have gone out of business.

The government has spent months in talks with energy-intensive industrial users, including discussions on state-guaranteed loans. It looks at ways to help domestic consumers by expanding subsidies and rebates for retirees and low-income households, and industry loan proposals to delay some of the cost hike coming into April. Johnson 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 reduced the gas tax for all consumers in addition to paying bonuses to low-income families and reducing charges that fund renewable energy subsidies. Overall, the state is supporting households in difficulty with 8.5 billion euros until March this year.

Ministers are also assessing legislation to require energy companies to contribute to measures that reduce electricity bills for low-income people, Development Minister Giancarlo Giorgetti said on January 12. measures will be necessary from the second trimester. The discussion is either about changing the tax code to target renewable energy producers or finding ways to force companies to guarantee lower bills for users.

Meanwhile, Italian businesses are also pushing for help to avoid closures and potential bankruptcies. Trade association Confindustria has estimated that companies’ energy bills will reach 37 billion euros in 2022, up 85% on last year and more than four times what they were in 2019.

Spain

Prime Minister Pedro Sanchez’s government officials have repeatedly said they have limited room to control energy prices given the structure of the wholesale market and European regulations. What it has done, however, is levy more taxes on energy companies and reduce the burden on bill payers.

In September, the cabinet approved a one-off utility tax that is expected to raise more than €2 billion. On December 21, the government then extended the temporary cuts to the levy on invoices by 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 January 14, the measures put in place by the government have a significant financial impact “and therefore they are not a long-term solution”. .

Read more: Soaring energy prices squeeze Europe’s economy

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