Electrification as best plan to exit the crisis

The European Union (EU) is facing another major energy crisis linked to its high dependence on oil and gas imports, this time due to the war in the Middle East. Geopolitical instability and infrastructure damage continue to drive high volatility for oil and gas prices. The EU remains highly vulnerable as one of the world's most energy-dependent economies. Disruptions to oil and gas supplies quickly lead to a cost-of-living and competitiveness crisis, with possible inflationary impacts on food products and materials. 

The succession of energy crises calls for a fundamental shift in the EU’s energy system, not only short-term emergency measures. This week’s informal European Council and upcoming Commission proposals (AccelerateEU, Energy Security Framework and  Electrification Action Plan) can design an energy independence pathway for Europe that will shield citizens and businesses from future crises.

Mitigating the impact of the crisis without impairing the ability to invest 

It is crucial to address the short-term economic impact of the crisis,  particularly on low- and middle-income households and businesses, but not all responses contribute to the EU’s energy security. Capping wholesale gas prices or providing untargeted support for fuel consumption provides short-term relief without lowering structural exposure. These measures incur significant costs to public finances with limited benefits. In 2022, cutting fuel prices led to a net budgetary cost of 2.2% of the EU’s GDP over 2022-2024. 

A targeted financial relief package for companies and households most affected is far more effective. Similarly, attempts to suspend or reduce the price of CO2 under the EU Emissions Trading System (ETS1) would only deprive governments of a major source of revenue, estimated at €24 billion in 2024. Instead, the €6 billion in windfall profits that were generated by fossil fuel companies could be distributed more fairly, as Austria, Germany, Italy, Portugal and Spain suggest. As recommended by the International Energy Agency, energy-saving measures are also key to mitigating the effects of the crisis and easing pressure. In 2022, the voluntary gas reduction target proved an effective tool for reducing gas demand by 70 billion cubic meters.  

Crafting a crisis exit plan focused on electrification 

In a constrained fiscal space, public funds are best used on the rapid electrification of the economy. The French government’s electrification plan sets a good precedent by focusing first and foremost on the electrification of end-use of low-income households, workers and small businesses. Other Member States could follow the example, especially where new governments are formed in Denmark, Slovenia, Hungary and Bulgaria. Governments could better allocate ETS revenues, as well as frontloading from the Social Climate Fund, to more than double the deployment of electric vehicles (EVs) and surpass the 2022 record of 3 million heat pumps installed across the EU. The Commission’s recent proposal to weaken CO2 standards for cars no longer makes economic sense, and a withdrawal is thus overdue. Equipping workers and low-income households with an EV is crucial to alleviating the cost-of-living crisis. 

Governments can also rebalance fiscal policies to favour electricity over gas, so electrification becomes the no-regret choice for businesses. Today, electricity taxes and levies remain on average roughly twice as high as those applied to gas across Member States.

Setting the course for the EU’s energy independence  

President von der Leyen confirmed her intention to set an electrification target for the European economy and unlock quick actions. A minimum 50% electrification target by 2040 can be added in the Electrification Action Plan and Energy Security Framework. Reaching this level can cut gas needs by two-thirds and halve oil demand. Consequently, the EU would only need to rely on Norway and the UK for its gas imports. 

The Energy Security Framework could also ensure that zero-emission power production aligns with the electrification target by setting clear benchmarks for each technology. With around 80 GW of solar and wind installed last year, the renewables deployment rate can be maintained. Additionally, a binding non-fossil flexibility and storage target could be introduced as a security lever. Batteries already play a major role in some Member States’ electricity mix. In addition, the implementation of an ‘electrification first principle’ in all EU funding, including the ETS, can leverage additional actions at the national level.

This new energy crisis is a reminder that EU decision-makers cannot only focus on lowering prices now. High fossil fuel prices are the new normal. The main priority is to shield Europeans from future shocks by crafting an energy independence pathway based on electrification.