Europe has started fighting the energy crisis, but real test lies ahead

The last six months in the EU have been characterized by emergency decisions to try to rein in the energy crisis, but this year will be where the rubber meets the road on these brand-new rules’ effectiveness in shielding Europe’s businesses and households.

While 2022 was the year of record-high energy prices spurred on by the war in Ukraine, top international and European energy officials have said that 2023 may prove an even more challenging year for energy markets.

There could be even fewer Russian gas deliveries this year. Europe will need to secure liquefied natural gas supplies and replenish its gas storage levels before winter without paying too much and avoiding a price war between member states keen to purchase reserves.

The bloc has approved six energy crisis-tackling laws in the last seven months, including first-of-a-kind rules on joint gas purchasing, and limiting excessive gas market derivative prices via a dynamic capping tool.

It remains to be seen whether these laws will work as planned or what their consequences will be, including being enough to avoid price spikes, energy curtailments and social unrest.

While it is too early to say how this will turn out, the EU managed to roll out a large-scale plan quickly despite the complexity of the bloc's decision-making processes, divided national governments, and a European Commission rather hesitant on taking decisive action against the issue of high gas prices.

Stroke of luck

A combination of higher-than-normal temperatures, a drop in gas demand and an EU-wide storage policy have provided a soft landing for EU officials.

As of today, Europe still has plenty of gas in its reserves. Statistics office Eurostat said the bloc’s gas consumption between August and November 2022 was 20 percent lower than the average over the previous five years.

Yet, the bloc's luck may still run out in 2023. The International Energy Agency said in November that the EU could face a shortfall of 30 billion cubic meters during next summer’s key storage refilling period, in the event that Russian pipeline gas supplies stop completely and China's post-Covid economic recovery brings LNG imports to 2021 levels.

In December, the IEA confirmed that these conditions might lead to a gap of 27 bcm, and said the EU would need to spend 100 billion euros ($106 billion) on energy efficiency, rolling out renewables, electrification of heat, behavioral change and an increased gas supply to close it.

New rules, same problems

Recently adopted emergency rules to immediately accelerate the rollout and revamping of some renewable energy projects appear to go in this direction.

A new law will also finally allow EU companies to aggregate their demand and buy gas together, although there could be some wrinkles in the plan. While the perks of joint purchases are apparent, the policy's optional design could cause some issues.

Only 15 percent of a country’s storage needs must be included in the demand aggregation process by law. Higher levels remain voluntary, and companies aren't obliged to use the common platform for their purchasing agreements, making it hard to predict how companies will eventually use the mechanism.

The emergency gas demand reduction rules also only include a non-binding 15 percent target between August 2022 and March 2023, and the commission basically can only intervene with national governments' approval.

EU countries took over the driving seat of a measure that would have allowed the EU executive to declare an emergency and made the target binding. They also added various forms of flexibility, exemptions and derogations, so it's still unclear how effective the binding target may actually be once activated.

Gas price cap drama

Negotiations between countries for and against a cap on wholesale gas prices shaped the energy policy debate in the second half of 2022. EU ministers finally approved a “market correction mechanism” — a tool to keep prices in line with global LNG prices when “excessive” hikes happen in Europe.

It applies to gas market derivatives contracts under certain conditions in a bid to keep prices bearable.

But the question remains: will it ever be triggered? If so, will it be able to keep prices in check, as its supporters hope, or will it create the potential security of supply and financial market problems that some countries fear?

Europe should have learned by now that its member states and companies must refrain from outbidding each other on global markets and work as a coordinated team instead, especially when there is less gas available or physical constraints put available infrastructure under stress.

One of the areas worth keeping an eye on is central Europe. It will rely on new LNG infrastructure in Germany to have access to global energy markets to bolster its gas supplies, according to German climate minister Robert Habeck.

“The world market is actually big enough, but it's like driving on a motorway, and then suddenly, it's narrowed, and then you have a traffic jam, and then ... to deliver the goods is ... quite impossible,” he told journalists on Dec. 19.

"So what really will help — and this is what we're doing — is broadening the infrastructure. This is why we are pushing so hard for a new LNG infrastructure in Germany. And if this is done, then central Europe is connected to the world market again, and we will get world market prices."

Only time will tell whether Europe's new year's resolution — to fight the energy crisis united — will turn out to be a success in 2023.