Europe faces a rare test of its energy resilience

Europe faces a rare test of its energy resilience

In the short term, electricity prices could remain high. In the medium term, the competitiveness of European industry is at stake.

Overall, electricity blackouts remain unlikely in Europe this winter, but limited load shedding cannot be ruled out to balance supply and demand in some countries if the weather turns particularly severe at the peak of winter. Europe’s efforts to wean itself off Russian gas and to compete for liquified natural gas (LNG) on international spot markets point to electricity prices remaining high. Indeed, European countries may have to rely even more than usual on gas for power generation this winter. The European Network of Transmission System Operators for Electricity (ENTSO-E) estimates that in order to maintain adequate power production, gas equivalent to one third of European usable gas storage may be needed. 

Governments in Europe have put a wide range of policy measures in place to shield consumers and firms from higher energy costs. According to Bruegel estimates, a total of around EUR600 bn in various forms has been earmarked by governments across European countries to help households and firms.

These measures have helped absorb the energy shock but Europe will probably not avoid a (mild) recession next year given the magnitude of the energy issues involved, which come on top of the European Central Bank’s monetary policy ‘normalisation’.

In the medium term, higher prices could hurt the competitiveness of European industry and lead to a downturn in investment if alternative energy sources are not found. Data for 2020 show that electricity and natural gas accounted for nearly two-thirds of European industry’s final energy consumption that year (33% and 32%, respectively). The biggest energy consumers are the ‘chemical and petrochemical’, ‘non-metallic minerals’ and ‘paper, pulp and printing’ industries. Industrial production has already begun to fall sharply in all these sectors.

Persistently high energy prices will also have several second-order effects on Europe, notably on the fiscal outlook. The energy crisis will further raise the debt burden of most European countries and generate concern about debt sustainability as interest rates rise. On a more positive note, the current situation could encourage greater energy efficiency and speed up the expansion of renewable power.

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