The EU leadership seeks to starve Russia of the funds it needs to finance its war with Ukraine, but that comes at a high cost.
European energy ministers are meeting on September 9 to discuss new measures proposed by the European Commission to confront the energy crisis that is increasingly bearing on consumers and industry.
The most controversial among the EU proposals - and the least politically feasible - is the introduction of a price cap on Russian gas, which EU leaders say is aimed at starving Russia of funds it needs to finance its war in Ukraine, where Ukrainian forces are currently mounting a counteroffensive.
But the move has already prompted a harsh response from Russian President Vladimir Putin, who threatened the EU with a complete shutdown of all energy supplies from Russia.
Some European countries, such as Germany and the Czech Republic, are likely to oppose the gas price cap proposal over fears of further retaliation by Moscow.
“The price cap would remove the only incentive for Gazprom to keep selling gas to Europe,” Matteo Villa, a senior data analyst at the Italian Institute for International Political Studies (ISPI), told TRT World. Despite closing Nord Stream 1, Russia still sells gas to Europe, mostly through a pipeline that goes through Ukraine and TurkStream, which crosses the Black Sea to supply southern Europe.
“Russia would be deprived of about 100bn euros per year right now at current prices and current volumes,” Villa said.
“But Europe could see prices skyrocket to 500 euros per megawatt hour, which is double what we are paying today, because there really isn’t that amount of gas in the actual market,” he added.
Gas prices in Europe are already more than 10 times higher than they were a year ago.
This unprecedented spike in energy prices, which started as economies reopened post-Covid-19 and worsened after the start of the war in Ukraine, will see families struggle to afford heating their homes this winter, while industries and small businesses are threatened with a total or partial shutdown of their activities over unaffordable energy bills.
In 2021, Russia accounted for about 45 percent of the European Union’s gas imports. European countries aim to eventually replace all of Russia’s gas with other energy sources and have so far replaced about 30 percent of that amount, mostly with Liquefied Natural Gas (LNG).
But for now, Europe remains dependent on Russian gas, and Russia is still reaping huge profits from selling gas to EU countries, due to the higher prices.
Earlier in September, Russia announced a complete shutoff of gas supply through the Nord Stream 1 pipeline to Germany, the EU’s largest economy and one of the European countries most reliant on Russian gas alongside countries in central Europe including Hungary and the Czech Republic. Russia has been blaming the partial and total shutdowns it has been implementing since the summer on sanctions, while EU officials say the Kremlin has turned energy into a war tool.
Taxing electricity producers and fossil fuel companies
Apart from introducing a price cap on Russian gas, the four other proposals outlined by European Commission president Ursula von der Leyen ahead of the meeting on Friday include a mix of energy-saving measures and price capping. Many European countries have already introduced measures to offset the cost of electricity and gas for consumers, including tax and VAT reductions, subsidies and price caps.
Europe’s energy prices are pegged to the market price of the most expensive fuel, usually gas - which ultimately has reflected on the price of energy for consumers. The EU is looking to address this market distortion by taxing electricity produced with other energy sources, including wind and solar.
“It is now time for the consumers to benefit from the low costs of low-carbon energy sources like, for example, renewables,” said Von der Leyen in a statement, adding the Commission would propose to “re-channel these unexpected profits” - made thanks to artificially inflated wholesale electricity prices - to vulnerable households and companies.
Europe’s producers of non-ferrous metals such as aluminium and zinc warned the industry is at risk of collapse should high energy costs remain unaddressed. At least 50 percent of Europe’s zinc and aluminium production is already offline, and many companies have announced closures.
Small businesses too have been facing high energy costs, with many across the continent reducing working hours, while increasingly, citizens are calling on governments to take action. In Britain, thousands of people have signed up for the Don’t Pay UK campaign, pledging to boycott their energy bills from October, and in Italy a similar initiative was launched this week. The Czech Republic, where 70,000 people took to the streets in early September to ask for an end to EU sanctions against Russia and their government’s resignation, serves as a warning of the political fallout that could result from the economic crisis.
“The retail market is following the wholesale market, and this is where the problem is,” explained Rafaila Grigoriou, data science lead at the energy consultancy VaasaETT.
“In many cases retailers are also in a difficult position,” she told TRT World, “in many markets across Europe a lot of suppliers have stopped operating. There are suppliers that have stopped accepting new customers because they think it is too risky.”
The Commission also wants to impose a “solidarity contribution” to fossil fuel companies, which have been making record profits since the crisis in Ukraine began.
The European Commission will also propose a mandatory target for member states to reduce electricity use at peak hours, which is when prices spike, and introduce measures to address the liquidity crisis of utility companies.