Europe's huge energy aid budget likely not enough to offset surging prices

BRUSSELS • Europe's politicians have already earmarked about €280 billion (S$388.9 billion) to ease the pain of surging energy prices for businesses and consumers, but the aid risks being dwarfed by the scale of the crisis.

With Russia squeezing gas deliveries and power plant outages further sapping supply, wholesale energy prices have soared to more than 10 times their seasonal average over the past five years.

Tensions have soared as Moscow prepares to shut the key Nord Stream pipeline next Wednesday for maintenance, reviving concerns about a long-term halt that would threaten efforts to secure sufficient reserves for the winter.

Governments across the continent have focused efforts mainly on lowering energy bills - an approach that may not only be overwhelmed by the price surge but risks making the crisis worse.

Programmes like a tax cut on gas in Germany and a heating subsidy in Poland without restrictions for income levels or energy efficiency are more likely to prop up demand, rather than rein it in.

"This is putting out fire with gasoline," said Dr Joanna Mackowiak-Pandera, president of the Warsaw-based Forum Energii think-tank. "We haven't reached the bottom of the crisis yet."

European Union energy ministers may hold an emergency meeting to discuss the spike in power markets as leaders strike a more urgent tone. The Czech Republic, which holds the bloc's rotating presidency, is considering calling a gathering to debate the idea of capping electricity prices, the CTK news wire reported, citing Industry Minister Jozef Sikela.

The policy response so far risks burning through the region's financial resources and intensifying a surge in inflation as economies stumble.

That could put pressure on taxpayers to foot the bill for more support down the line, with prices expected to remain high at least through next year.

In Britain alone, covering extra energy costs would cost the government around £110 billion (S$180.7 billion) through next year, according to a study by the Institute for Government.

While policies like Greece's plan to cover 94 per cent of the increase in power bills next month are easy to sell to voters, reducing consumption requires unpopular choices. But there may be little alternative.

"Our freedom, the system of freedom we've become used to living in has a cost," French President Emmanuel Macron said at the beginning of a Cabinet meeting on Wednesday. "Sometimes when we need to defend it, it can entail making sacrifices."

The response to the energy crisis is indicative of the region's unstable political landscape, with many leaders lacking the backing for tough decisions.

Mr Macron has lost his majority in the National Assembly, Chancellor Olaf Scholz's party has slipped to third in German voter polls, Italy is awaiting a snap election after allies dumped Prime Minister Mario Draghi and Britain's Conservatives are picking Mr Boris Johnson's successor.

With the region already heading towards recession, failure to contain the energy crisis threatens to spur social unrest and political upheaval if the supply crunch sparks blackouts this winter.

It could also sap public support for moves to punish the Kremlin for its war in Ukraine.

Russia - historically the EU's biggest gas supplier, covering about 40 per cent of demand - is nearly impossible for the region to replace in the short term.

Liquefied natural gas cargoes have helped fill reserves, but competition is set to intensify.

Any disruption to natural gas shipments risks exacerbating a supply crunch and setting off bidding wars between European and Asian countries.

BLOOMBERG