In July, the European Commission published a massive legislative package, Fit for 55, to shape up the climate and energy legislation. The objective of the legislative package is to put the EU’s climate targets into practice.

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Besides climate work, Europe has experienced higher energy prices than normally. From the point of view of supporters of ambitious climate targets, this gives rise for concern with respect to the acceptability of the climate policy and to energy poverty.

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The pressure to influence prices in one way or another will increase. Political decision-makers would like to lay out measures that have a rapid impact. There have been demands for governments to levy a tax on profits from increased electricity prices. The member states are sending messages on excessively high prices of emission allowances to Brussels and on unnecessarily expensive gas to the Kremlin. Unfortunately, the proposed solutions will not be the answer to longer-term challenges.

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Many different factors have an impact on the price of European electricity, there is no single reason. We must hope that politicians will show prudence and refrain from using the climate policy or the Fit for 55 package as a scapegoat for the situation.

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The price of natural gas has risen on the market to record levels, which, of course, reflects directly on the heating bills of European gas users and households. The majority of households in Central Europe are heated by gas.

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Gas is also a significant fuel in electricity generation in Central Europe. Increased gas prices also push up the price of electricity. The price of emission allowances has also risen to record levels. This is seen in the cost of electricity produced from gas and coal and, further, in consumer prices.

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The weather also has an impact on prices. For example, in Southern Europe, warm weather increases the need for cooling and that way the demand for electricity. High precipitation has an impact on the amount of electricity produced by hydropower available on the market, and that is also reflected in the prices.

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In the longer term, the availability and diversity of electricity production forms will be key components in the price of electricity. Excluding some carbon-free technologies, such as nuclear power, from the range of instruments will raise production costs. Bottlenecks in the transmission capacity will also result in regional price spikes.

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In Nordic countries, the price of electricity has risen less than in Central Europe as production and consumption are more balanced. Transmission connections are quite good between the Nordic countries. On the other hand, insufficient connections from Northern Europe to Central Europe keep our prices lower than in the rest of Europe.

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Currently, the price of electricity is at an unhealthy high level. On the other hand, higher market prices of electricity are not only a bad thing because they encourage investment. We have moved on from the investment recession of the past to a situation where investment in carbon-free production is constantly growing. For example, investments in wind power are at high level on market basis in Finland and that is very welcome development.

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As a result of the higher price of emission allowances and the technological development, renewable and carbon-free forms of electricity production are the most favourably priced in terms of their production costs. If emissions trading is maintained as the most central instrument, this will also be the case in the future. Therefore, it is important for the EU and the member states to ensure the functioning of the emissions trading system. There is a risk that the climate policy and the development of the EU emissions trading system are held back. This would be wrong because the climate will not wait. Other means would not achieve the emissions targets at a lower cost, faster or more efficiently than emissions trading. The European Commission has a good proposal on the development of emissions trading, and it should be defended.

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In the North, our diverse and near carbon-free electricity system keeps the price of electricity lower than in Central Europe. We do not rely on just one production form, which means that a calm summer week or dry autumn will not result in as high prices as would be the case with a more one-sided production structure. Electricity generation should rely less and less on fossil fuels.

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Therefore, it would be important for the EU to end the beauty contest between different electricity production forms and energy sources and let the market invest in the carbon-free technologies that are needed in the system and the market. In Finland, for example, nuclear power and CHP produced with bioenergy are a key part of the energy system, but the Fit for 55 package casts a shadow over them.

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The EU and the member states must enable investment in all clean energy forms. For example, areas must be reserved for different forms of electricity production, and the permitting of new investments such as wind and solar must be even more fluent than before. The smoother the process of investment in electricity production, the better.

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There is a perception among academics that we will continue to see high prices, or at least a high variation in prices. The highest prices can be avoided if the energy system acquires storage facilities and growing demand responses. Easily adjustable and flexible energy production, such as hydropower, also plays a significant role here. The Nordics have strong capabilities for all of that.

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The Nordic countries have for long invested in cross-border electricity transmission connections. For this reason, our system has more flexibility, and the resources are more efficiently available to the entire market. There are countries in the EU that have poor transmission connections to the neighbouring countries. The reasons are often nationalistic. When the building of transmission connections has been neglected, it has not been understood that a bigger market also helps to protect against price fluctuations. The EU must make a greater effort to encourage cooperation between member states. Hopefully the member states will also come up with this idea themselves.

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It is true that high energy prices are burdensome for consumers and especially for poorer people, and people’s concerns and distress must be resolved. The Nordics have a social security system for this purpose, and it is to be hoped that problems are tackled with the same kinds of mechanisms also elsewhere in Europe. In the longer term, it is not a sustainable solution to give people money so that they can pay more for natural gas or for electricity produced with fossil energy sources. Instead, it is better to support the energy renovations and energy-efficiency investments of those who are living in energy poverty. If people consume considerably less energy than before, the unit cost of energy may be quite a lot higher without the total energy cost even rising. That will achieve permanent changes and, in the longer term, energy can even account for a smaller proportion of living costs than during the era of fossil fuels.

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This provides a lot of food for thought also in the processing of the Fit for 55 package. At the same time, I wish the politicians wisdom. They are facing an exercise that calls for enormous capability of managing complexities, for which the market has better preconditions than any preparatory work by ministry officials or political machinery.

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Antti Kohopää, Head of Brussels Office, Finnish Energy