The invasion of Ukraine by Russia has opened the door to a new ‘State of the World’, worsening the crises we were already experiencing in the areas of climate, energy and global supply chains. In this new context characterised by a growing concern for energy security, European policymakers must ensure climate and energy policies are aligned and able to deliver. A strategy distinguishing the short and long-term priorities is needed. Equally needed is the definition of a governance system enabling a profound transformation of an increasingly multi-level and multi-vector energy system.
Russia is the main energy supplier to the EU. The weaponisation of energy by Russia and the decision of the EU to phase-out its dependence on Russian energy as soon as possible have disrupted normal flows and introduced a significant source of uncertainty in energy markets, with prices showing extreme volatility and a remarkable increase in average terms. Consumers are feeling the pain, particularly those with strained budgets and limited alternatives in terms of how to satisfy their demand for energy services. Calls for interventions by governments to ensure energy security have been widespread, while policies promoting the decarbonisation of the energy system have been questioned, despite the fact they are not at the origin of the supply shock.
THE PRIORITIES IN THE SHORT TERM
In the short term, the EU cannot change the structure of its energy supply significantly. However, it can address the socio-economic consequences of the dramatic price surge and promote a reduction in energy demand. Targeted lump-sum transfers can be used to relieve the strain for the energy poor and vulnerable consumers, without removing the price incentives for using energy efficiently. Where the public budget cannot sustain the burden of these transfers, a temporary tax on the windfall profits earned by the ‘winners’ of the price crisis can be used to finance them. Awareness campaigns should be put in place at any level to nudge consumers towards more frugal consumption choices, while rationing plans should be prepared in case the worst scenarios materialise during the next winter. Extensive interventions in the design of energy markets should be examined with caution, as they may have unintended consequences and undermine the efficient allocation of scarce resources within the EU.
THE PRIORITIES IN THE LONG TERM
In the longer term, the transition towards a low-carbon economy reduces the need for fossil fuels and provides a remedy to the current EU dependence on imports from Russia. Therefore, it must be accelerated. However, the magnitude of the required acceleration questions the ability of the EU and its Member States to make it happen. The recent disruptions to global supply chains, the precarious state of international relations among the main geopolitical blocks, the frequent shortages in labour markets recorded after the end of the Covid-19 pandemic, and the slow expansion of European energy grids in the past decade make these concerns even more relevant. Hence, it is of paramount importance that the EU and its Member States monitor the available stocks and production capacity of raw materials and industrial components; coordinate with the industry to relocate key critical production processes within Europe; adopt targeted vocational training and policies facilitating the mobility of workers; and promote new approaches to infrastructure planning and operation that rely on the benefits of digitalisation. Finally, the EU must carefully review its electricity market design and complement its currently well-functioning short-term markets with two reinforcements: one fostering adequate long-term arrangements for investments and another one boosting trade on local marketplaces. These extensions to the market design would enable Europe to address energy security concerns better and fully exploit the deep decarbonization potential associated with electrification and energy system integration.
WHAT PROCESS AND GOVERNANCE TO MAKE IT WORK?
The EU must establish a long-term collaborative process to re-build its strategic climate and energy roadmap in light of the new state of the world ushered in by the invasion of Ukraine. To boost integration and coordination between the different governance layers of energy demand and supply, the EU will be required learn how to manage all levels of action simultaneously, from the local to the pan-European one. This is crucial if we want to achieve the targets set for 2030. Nevertheless, considering the inevitable delays deriving from such a process, it is urgent to begin with the re-organization efforts as soon as possible. Once the most acute phase of the current price crisis is over, hopefully in late 2023 or early 2024, the EU will also have to start discussing what to do in the decade 2030-2040.
In order to ensure the success of this big leap, Europe will have to evolve towards a new, multi-level governance system capable of dealing with a multi-vector and highly integrated energy system.
- Policy manifesto this blog post is inspired in: https://fsr.eui.eu/publications/?handle=1814/74737.
- Recording of the presentation of the policy manifesto for general public: https://www.youtube.com/watch?v=rkrSpu3LXW8.
- Podcast summarising the key points of the presentation of the policy manifesto: https://soundcloud.com/fsregulation-energy-and-climate/several-crises-leading-to-a-new-state-of-the-world-for-policymaking-laurence-tubiana-ecf.
About the authors:
Written by Jean-Michel Glachant (Director of the Florence School of Regulation), Nicolò Rossetto (Florence School of Regulation Research Fellow) and Sofia Nicolai (Florence School of Regulation Research Associate).
Dr. Jean-Michel Glachant is the Director of the Florence School of Regulation, Holder of the Loyola de Palacio Chair and President-elect IAEE 2022. Glachant took his Ph.D. in Economics at La Sorbonne in France. He worked in the industry and private sector before becoming professor at La Sorbonne. He has been advisor of DG TREN, DG COMP and DG RESEARCH at the European Commission and of the French Energy Regulatory Commission (CRE). He has been coordinator and scientific advisor of several European research projects. Jean-Michel has been the founding editor-in-chief of EEEP: “Economics of Energy and Environmental Policy” (an IAEE journal) and is member of the Board of Editors of ‘Energy Journal’ since 2012.
Nicolò Rossetto is a Research Fellow in electricity markets and regulation at the Florence School of Regulation, European University Institute in Italy. His main research interests are the digitalisation of energy, energy communities, peer-to-peer energy trading, and the integration of renewables in the electricity system. Before joining FSR in September 2016, Nicolò was an external advisor to the World Bank, founding member of the Energy Watch at ISPI (Milan) and teaching assistant at the University of Pavia (Italy). Graduated first in Political Science and then in International Economics, Politics and Institutions, Nicolò holds a PhD in Law and Economics.
Sofia Nicolai is a Research Associate at the Florence School of Regulation and she is part of the FSR research team in electricity regulation and policy. Currently, her main research interests are decarbonisation of the energy sector and current energy price crisis. Before joining FSR in January 2022, she was a trainee in the electricity department at the European Union Agency for the Cooperation of Energy Regulators, working in the electricity wholesale market monitoring team. She graduated in law from Bologna University, Italy and completed the Master in Sustainability and Energy Management at Bocconi University.
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Neither the European Commission nor any person acting on behalf of the Commission is responsible for the use that might be made of the information in the article. The opinions expressed are those of the author(s) only and should not be considered as representative of the European Commission’s official position.
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- 23 Lúnasa 2022
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