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The European energy plan is not ambitious enough


By all indications, Russian President Vladimir Putin is weaponizing energy exports to divide Europe and undermine his support for Ukraine. The European Union’s response this week should not change its calculations. Time is running out to find a better solution.

Russia’s state-owned Gazprom PJSC has cut gas flows to Europe through the Nord Stream 1 gas pipeline to 20% of normal capacity, blaming maintenance issues. As the war drags on, a complete gas cut remains a real possibility. This would represent a serious risk for the European economy and could potentially deprive millions of people of heating in winter. Even if the EU manages to store 90% of its gas capacity in advance, according to the International Energy Agency, it could still face severe disruption.

Despite its commitment to ‘solidarity’, Europe has struggled to respond to this threat. A first plan from the European Commission, which called on member states to reduce their gas consumption by 15%, was dead on arrival. Germany, heavily dependent on Russian gas, naturally supported the measure. But many other nations expected it to cause disproportionate pain for little collective benefit. As Portugal’s energy secretary has pointed out, imposing across-the-board cuts makes little sense when European distribution is not interconnected anyway.

On Tuesday, the EU announced a revised proposal. Unfortunately, it was little more than a watered down version of the original, with various exemptions and waivers and bureaucratic elisions thrown in to broaden support. A more ambitious and coherent approach is desperately needed.

To begin with, the EU should convene a summit of heads of state to negotiate a new short-term strategy. A large-scale public information campaign will be needed to explain the threats to European security and to prepare citizens for the responses that may be needed. To have legitimacy, any such effort – requiring mutual compromise and sacrifice – must be led by the nations’ politicians, not the unelected bureaucrats of the commission.

What that plan should look like is of course up for debate. But three main elements should form the core of their strategy.

First, plans need to be in place to help vulnerable households weather a cold winter. Although several countries are considering price caps and tax breaks (the UK’s new cap will be announced in August) to help people pay for heating, such devices are not ideal as they will only encourage consumption. Ultimately, it would be better to provide income-based subsidies to those who need them most while providing incentives for households to reduce their energy consumption during peak hours.

Next, governments should think creatively about how best to manage demand. Skyrocketing prices are already pushing businesses to cut back (or close up shop). But better planning should help anticipate supply shortages and avoid more serious disruptions. Under the German emergency plan, for example, companies can receive government compensation if they reduce or suspend their gas consumption and make the resulting surpluses available to the market at large through a auction system.

Depending on the severity of the situation, suspensions or mandatory industrial shutdowns may well become necessary. These will be controversial, to say the least, which makes it all the more important that leaders start planning now and communicate clearly with companies. Again, unity will be key: an EU-wide plan to spread the tax burden and coordinate energy sharing efforts – including finding new supplies abroad – should be the priority.

Finally, the EU must intensify its efforts to permanently free itself from Russian energy; its 2030 goal is too far. Germany should rethink its historically mistaken abandonment of nuclear power. Other countries should follow Britain’s lead in planning a drastic expansion of their own nuclear supplies. Overall, the EU should boost investment in solar, wind, green hydrogen and other alternative sources. If there’s a silver lining to this crisis, it’s that the right response could accelerate the transition to a low-carbon future.

In all likelihood, next winter will test European resolve. The answer must be more than a supportive fig leaf. Only adequate preparation can prevent the worst.

The editors are members of the Bloomberg Opinion Editorial Board.

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