Publication

The energy crisis: what emergency measures did the European Union introduce in response?

Published on the 18th of October 2024
Authors : Juan Carluccio, Arthur Stalla-Bourdillon, Jean-Baptiste Gossé, Florian Le Gallo, Aymeric Schneider, Niamh Dunne, Guillaume Gaulier

Bulletin No. 253, article 6. This bulletin attempts to evaluate the effect of emergency measures introduced by European Union (EU) Member States in 2022 to counter the energy crisis, and their impact on inflation. It analyses their economic consequences with regard to their three objectives: (i) lowering energy bills for households and firms; (ii) minimising the cost to public finances; and (iii) reducing demand for energy and securing energy supplies. The EU attempted to introduce measures aimed at all three objectives. In parallel, national authorities adopted two types of response: directly acting on energy costs for consumers (notably France and Spain) or paying subsidies to households and enterprises (Germany and the Netherlands).

Image Support measures for households and firms between 2021 and 2023 (cumulative total) : Italy, France, Germany, Spain and Netherlands Thématique Housing market and household wealth Catégorie Banque de France Bulletin
Support measures for households and firms between 2021 and 2023 (cumulative total) : Italy, France, Germany, Spain and Netherlands

1 Three objectives that are difficult to reconcile

The 2022 gas crisis was largely the result of Russia’s invasion of Ukraine. It disrupted Russian gas supplies and caused wholesale natural gas prices to spike in EU markets, which in turn triggered sharp rises in wholesale electricity prices and then in retail prices (see Baget et al., 2024 on the design of the European electricity market). In September 2022 (the peak in wholesale prices), the “gas” and “electricity” components accounted for 2.6 percentage points of the year-on-year rise of 9.9% in the euro area consumer price index. However, the effects of the crisis subsequently faded sharply. In December 2023, energy prices contributed negatively to the consumer price index, implying that energy in fact slowed inflation over the winter of 2023-24.

In response to the difficulties caused by high gas and electricity prices in 2022, EU Member States introduced various measures to contain inflation. The International Monetary Fund (IMF) has calculated that euro area inflation would have been 1-2 percentage points higher in 2022 if governments had adopted a laissez-faire attitude (Dao et al., 2023).
 

Multiple objectives that are difficult to reconcile

To counter the energy crisis, EU Member States introduced two types of mechanism: direct government intervention to control prices for consumers, in the form of price caps or producer subsidies, which in certain cases directly lowered the Harmonised Index of Consumer Prices (HICP); and the payment of cash benefits.

These support measures were designed, to differing degrees, to meet one or more of the following three objectives:

1) mitigate the impact of higher prices on consumers, in some cases by directly lowering the HICP;

2) minimise the cost of support measures to public finances;

3) reduce demand for gas and electricity while at the same time securing energy supplies.
 

Price caps limit the “price signal”

A price cap is a government decision to modify the prices paid by end-users. It automatically meets the Objective 1: the price paid by households and firms falls compared to market conditions, reducing uncertainty for consumers. However, it fails to meet the Objective 3 of lowering demand, since limiting the price rise reduces the incentive to lower consumption; in other words, the cap muffles the price signal.

Updated on the 18th of October 2024