Europe faces another energy crisis

Europe, which prior to the outbreak of the armed conflict in Iran was facing this year with relative optimism, is now confronting the impact of a new surge in energy prices. The invasion of Ukraine in 2022 already triggered a major supply crisis, driving up crude oil prices and, above all, natural gas prices, which necessitated fiscal measures to limit its impact on economic activity. The conflict in the Middle East presents a new energy shock, and although the situation and risks are different,1 it has once again put Europe’s energy model under the spotlight.

Despite the efforts made in recent years to reduce energy intensity in Europe and boost the role of renewables as alternative energy sources, the region remains sensitive to shifts in international energy prices. In fact, more than 70% of all the energy consumed by the EU-27 is generated from non-renewable sources.2 One of the main energy consumers is transport, accounting for nearly one-third of the EU’s total energy consumption and relying almost entirely on petroleum derivatives, such as petrol and diesel, which have already recorded a significant price increase (of nearly 20% and 36%, respectively, in the year to date) and have raised costs in the sector. On the other hand, households3 and the industrial sector each account for around 25% of total energy consumption, mainly through natural gas and electricity.

Electricity is not a primary energy source, but its price will depend on the cost of the inputs used in its generation. In Europe, electricity prices are set through a marginal system, which means that the final price is determined by the most expensive source of energy that is needed to meet demand, and this is often generated with gas, despite not being the main source of generation.4 In the EU as a whole, over 47% of electricity is generated from renewables, compared to less than 16% from gas, 10% from coal, and 23% from nuclear energy. However, the aggregate picture conceals significant divergences between countries, which is crucial when assessing the impact of a rise in fossil fuel prices, especially in economies with a significant share of energy-intensive industry.5

Generally speaking, the economies of Eastern Europe are in a less favourable position, both because they lie at the bottom of the energy efficiency ranking and due to their energy mix and production structure. Specifically, Poland, where industry accounts for almost a fifth of the country’s economy and consumes nearly 40% of the country’s electricity, generates about 54% of this electricity from coal6 and has virtually no nuclear generation. Furthermore, its energy-intensive industry accounts for around 7.0% of the total GVA.

Germany is also noteworthy: its industrial sector, one of the largest in the euro area (almost 21% of GDP), directly consumes more than 37% of all the gas used in the country and nearly 47% of all the electricity. Moreover, 18% of this electricity is generated with gas and 21% with coal. France, on the other hand, shows less sensitivity thanks to its nuclear power plants that cover most of its electricity demand (around 67%) and an economy that is less dependent on the industrial sector (which accounts for only 12% of GDP). Spain and Italy, where industry accounts for 14% and 18% of GDP, respectively, show different starting positions. Industry in Spain accounts for around 60% of the nation’s natural gas consumption and nearly 30% of its electricity consumption, although it has reduced coal-fired electricity generation to less than 1% and combines 56% renewables with 19% nuclear, providing it with a certain buffer. Italy, however, is more vulnerable as its industry accounts for over 30% of the national consumption of natural gas and electricity, but 44% of the country’s electricity is generated with gas and the share of renewables in its production is the lowest among the four major euro area economies.