European inflation is reaching new heights. In December 2021, EU annual inflation was 5.3%, the highest since the creation of the euro. Energy price drove almost half the total inflation. Energy inflation was over 25%, 10 times that of Services, the second-largest driver. The United Kingdom experienced similar inflation. Sweden’s energy prices increased 35% year-on-year. Among the worse hit were Norway, the Netherlands and Belgium, with Norwegian energy inflation as high as 80%. Soaring gas prices following very low Russian gas supply were largely behind the surge.
Basic energy services like electricity and heating are getting harder to afford. In the UK, an expected upcoming energy bill cap increase could triple the number of households under fuel stress to over 6 million. Following almost a million Belgian households’ requests, the Belgian government will subsidize household electricity bills by €30, funded possibly by cutting federal subsidies for wind energy from €812 million to €635 million. Other countries like Germany, Italy and Ireland plan to fund support measures from carbon tax revenue.
The coronavirus pandemic saw increased renewable investment as part of recovery packages. High energy prices made renewables more profitable and encouraged investment. But too-high prices can lead governments to spend on energy subsidies at the expense of supporting renewables, such as in Belgium, making renewable investment crumble.
Will the high prices last? While Nordic electricity prices have returned to normal, they are starting to rise again. German electricity prices are already higher than their levels pre-December. We could be looking at a sustained phase of high inflation due not just to high power prices, but also price volatility. A stagnation in renewable investment may ironically be on the horizon, if governments need to move investment away from renewable production and towards grid infrastructure that can better handle volatility, while simultaneously facing pressure to subsidize keeping the lights on.
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