Europe’s governments face a reckoning as energy prices soar

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(Bloomberg) – Europe is being gripped by one of the worst energy crises in history, forcing politicians to step in as rising 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 the winter, leaders face the dilemma that their stopgap measures are unlikely to be enough. The cost of electricity and gas across the continent already appears to be one of the biggest challenges nations are facing as they navigate the pandemic.

Ministers in Europe’s five largest economies – Germany, Britain, France, Italy and Spain – have so far devised a patchwork of grants and time-limited tax cuts to help consumers heat their homes and get electricity. In fact, the common thread seems to be hoping the problem goes away while leaning more on the companies. Shares in Electricite de France SA plunged a record January 14 as the French government confirmed plans to force the company to sell more electricity at a hefty discount.

Gas has more than tripled over the past year, and energy companies, analysts and traders are all saying high prices will persist, already a major driver of inflation now rampant. Contracts are past their peak but the weather could get even colder. There are also rising tensions with Russia over a possible invasion of Ukraine that could disrupt vital supplies.

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

“Due to the scale of the crisis, government measures are not sufficient to cover all the impacts on the economy,” said Simone Tagliapietra, fellow of the European economic think tank Bruegel. “The longer this situation lasts, the more governments will be forced to target their support to specific segments of society – a difficult sighting, 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 coming in the UK and Italy, where average annual bills will increase by the equivalent of more than $1,000.

Aid deployed so far also reflects differing political cultures: Bank of America estimates plans announced so far include 337 euros ($389) per household per year in Italy, more in France and still zero in the UK

The problem is that after nearly two years of state generosity, governments are having to tighten their belts to protect businesses and workers through Covid-19. They also need to balance the impact of government intervention on the energy companies they rely on to meet ambitious national climate targets of progressively reducing carbon emissions.

Then there are the more acute political implications, which come to a head in April. French President Emmanuel Macron faces an election while pressure on the cost of living in the UK is set to mount with a hike in the energy price cap, adding to the turmoil under Prime Minister Boris Johnson.

So what are governments doing about it?

Germany

The diverse nature of the three-party coalition makes joint policymaking difficult. While Chancellor Olaf Scholz’s Social Democrats advocate state subsidies for poorer households, the economically liberal FDP is generally skeptical about large alms.

Economy Minister Robert Habeck, co-leader of the Greens, has made it clear that his priority is not to fight rising energy prices. Rather, it is about financing an ambitious climate protection program, including increasing the share of renewable energies in the German electricity mix.

So far, the government in Berlin has only been able to agree on a EUR 130 million package of one-off grants for low-income households, which will be paid out in the summer when customers receive their bills from the energy suppliers. There are also plans to shift a surcharge for renewable energies of around 300 euros per household from the electricity bill to the state budget starting next year.

France

France has intervened more aggressively than its European counterparts. Macron’s first term was overshadowed by protests by the so-called “yellow vest” movement against rising diesel taxes, making the president particularly sensitive to the potential impact of rising energy costs on his popularity.

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

Finance Minister Bruno Le Maire said he wanted to make sure electricity bills didn’t rise by more than 4%. The proposal comes on the back of cuts in electricity taxes that the government originally estimated at €4 billion – a figure that has since doubled. But that won’t be enough, so the government also asked state-controlled EDF to sell more electricity cheaply to rivals, Le Maire told Le Parisien newspaper. The move would cost the utility €7.7 billion at Jan. 13 market prices and see its shares tumble.

United Kingdom

By contrast, ministers in Britain were more frugal. They have allowed market forces to prevail within the confines of a bill cap that is adjusted twice a year by the regulator. The government also touts existing £4.2 billion ($5.8 billion) of measures, including grants, winter fuel payments and a rebate for low earners.

Chancellor of the Exchequer Rishi Sunak announced in September £500million in increased help for struggling households to better cope with winter living expenses, including food and clothing. The price cap was raised by 12% the following month and wholesale price developments mean it is expected to rise another 50% in April. This also reflects the costs incurred by dozens of smaller utilities that have gone out of business.

The government has held talks with energy-intensive industrial users for months, including discussions about government-backed loans. It is examining ways to help domestic consumers by extending grants and rebates to retirees and low-income households, and industry proposals for loans to delay some of the cost jump coming in April. Johnson has said cutting VAT on invoices is too crude a tool and would benefit those who don’t need it.

Italy

Prime Minister Mario Draghi’s government disagrees. Italy has cut gas taxes for all consumers, in addition to paying bonuses to low-income families and lowering fees that fund renewable energy subsidies. All in all, the state will support needy households by March of this year with 8.5 billion euros.

Ministers are also considering legislation to oblige energy companies to contribute to policies that reduce utility bills for those on lower incomes, Development Minister Giancarlo Giorgetti said on January 12. And given the energy regulator’s warning of sharp price hikes this quarter, Draghi said further action will be needed from the second quarter. The discussion focuses on either changing the tax code to appeal to renewable energy producers or finding ways to require companies to guarantee users lower bills.

Meanwhile, Italian companies are also campaigning for support to stave off potential closures and bankruptcies. Industry body Confindustria estimates that energy bills for businesses will rise to €37 billion in 2022, up 85% year-on-year and more than fourfold compared to 2019.

Spain

Officials in Prime Minister Pedro Sanchez’s government 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 tax energy companies more heavily and ease the burden on billpayers.

In September, the cabinet approved a windfall tax on utilities that it expected would raise more than €2 billion. Then, on December 21, the government extended the temporary bill levy cut by four months, a decision that will cost the state more than two billion euros.

But as Spain’s Economy Minister Nadia Calvino warned in an interview on January 14, the measures taken by the government have a significant financial impact “and are therefore not a long-term solution”.

Read more: Rising energy prices weigh on Europe’s economy

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