EU has spent €1tn subsidising energy bills so far

That means no respite from high prices.

While governments were able to help companies and consumers absorb much of the blow with more than €700bn in aid, according to the Brussels-based think tank Bruegel, a state of emergency could last for years. With interest rates rising and economies likely already in recession, the support that cushioned the blow for millions of households and businesses is looking increasingly unaffordable.

Fiscal capacity stretched

“Once you add everything up — bailouts, subsidies — it is a ridiculously large amount of money,” said Martin Devenish, a director at consultancy S-RM. “It’s going to be a lot harder for governments to manage this crisis next year.”

Government fiscal capacity is already stretched. About half of EU states have debt exceeding the bloc’s limit of 60% of GDP.

The roughly €1tn calculated by Bloomberg from market data is a broad tally of more expensive energy for consumers and companies — some but not all of which was offset with aid packages.

Bruegel has a similar estimate looking at demand and an increase in prices, which was published in a report this month by the IMF.

A rush to fill storage last summer, despite near-record prices, has eased the supply squeeze for now, but freezing weather is giving Europe’s energy system its first real test this winter. 

Last week, Germany’s network regulator warned that not enough gas is being saved and two of five indicators, including consumption levels, have become critical.

With supply tight, businesses and consumers have been asked to reduce usage. The EU managed to curb gas demand by 50bn cubic metres this year, but the region still faces a potential gap of 27bn cubic metres in 2023, according to the International Energy Agency. That assumes Russian supplies drop to zero and Chinese LNG imports return to 2021 levels.

“Getting gas is an absolute necessity and we will likely see widespread European hoarding,” said Bjarne Schieldrop, chief commodities analyst at Swedish bank SEB AB, predicting a “seller’s market” for at least the next 12 months.

“The race is on to fill EU natural gas inventories” before next winter.

The main source of pipeline gas from Russia to Western Europe was Nord Stream, which was damaged in an act of sabotage in September. Europe is still receiving a small amount of Russian supplies through Ukraine, but heavy shelling of energy infrastructure by the Kremlin puts the route at risk. Without this gas line, refilling storage will be challenging.

Inventory targets

To head off a shortage, the European Commission has set minimum targets for inventories. By February, reservoirs should be at least 45% full to avoid depletion by the end of the heating season. If the winter is mild, the goal is to leave storage levels at 55% by then.

LNG imports into Europe are at record levels and new floating terminals are opening in Germany to receive the fuel. Government-backed buying has helped Europe attract cargoes away from China, but colder weather in Asia and a potentially strong economic recovery after Beijing eased Covid restrictions could make that more difficult. Chinese gas imports are likely to be 7% higher in 2023 than this year.

European gas futures have averaged about €135 a megawatt-hour this year after peaking at €345 in July.

“The nature of the support will change from an urgent, all-encompassing approach to more targeted measures,” said Piet Christiansen, chief strategist at Danske Bank.

“The numbers will be smaller — but it will still be there through this transition,” he said.

For the likes of Germany, which rely on affordable energy to make products from cars to chemicals, high costs mean losing competitiveness to the US and China. That puts pressure on German chancellor Olaf Scholz’s administration to maintain support for the economy.

• Bloomberg