Europe is preparing for a harsh winter. The European energy system is strained by Russia’s cutback of natural gas exports and droughts impeding the production capacity of nuclear energy and hydropower, setting record high energy prices.

Measures now on the table include shutting down energy-intensive industries to prevent households from freezing in the dark in the middle of the winter. In a worst-case scenario, officials are considering temporary power cuts for households. Dealing with the energy crisis further puts Europe at risk of backsliding on its efforts to phase out fossil fuels.

Major economic crises create policy windows for accelerating the clean energy transition. The energy crisis in particular provides fertile ground for such a transition amid growing demand for greater energy security. This opportunity should not, however, be taken for granted. While surging energy prices and energy poverty are urgent issues, it is important not to get completely lost in the hive of short-term concerns and remain steadfastly focused on making the long-term structural changes necessary for the clean energy transition.

Balancing both urgency and opportunity, we assembled six lessons from past crises on how green stimulus actions have worked in the past – focusing on their implementation, effects on the economy, and blind-spot challenges that emerged – to inform a successful green recovery.

In the wake of Russia slashing liquefied natural gas (LNG) exports to the EU, several Member States have announced plans to open new LNG delivery infrastructure. Graphic: Jindan Gong / SEI.

At present: European energy ministers are juggling competing priorities of energy decarbonization and easing a cost-of-living crisis. The living costs for European households grew by an average of about 7% in 2022 due to surging energy prices, disproportionately hitting low-income households.

So far, the immediate response has focused on compensating for increased prices rather than reducing demand, arguably to secure political support. Several EU countries have sought to diversify their Russian liquefied natural gas (LNG) supply through increased imports from other countries, paired with LNG infrastructure reinforcements to support that. Several countries also announced plans to prolong the operation of coal-fired power plants, allowing them to remain on standby to re-start operation when needed.

Ministers of the EU have also agreed on emergency interventions, such as a mandatory reduction of electricity consumption by 5% at peak hours, a cap on the revenues of power producers with low operating costs (such as those using renewables, nuclear power and lignite), a market correction mechanism to protect citizens and the economy against excessively high gas prices, and a temporary windfall tax on the profits of EU-based fossil fuel companies. The surplus from the levies will be redistributed to support end-users. To further shield consumers from high energy prices, Member States enacted measures such as tax cuts on electricity, petrol and diesel.

The EU has taken some action to safeguard the long-term goals of the energy transition. The REPowerEU plan, developed to wean Europe from its dependence on Russian fossil fuels, proposes amendments to the EU Fit for 55 package to speed up the green transition. These include:

• increasing the binding Energy Efficiency Target to reduce energy consumption from 9% to 13%
• increasing the headline 2030 target for renewables’ share of total energy use from 40% to 45%

Recent EU country policies also slashed planned fossil-powered electricity generation in 2030 by about one-third compared to national goals set in 2019. Moreover, the International Energy Agency has for the first time projected a peak in fossil fuel demand by 2030 in their Stated Policies Scenario in the 2022 World Energy Outlook, a turning point triggered by the energy crisis.

As the EU works toward energy security, several countries have announced plans to prolong the operation of to when needed. Graphic: Jindan Gong / SEI.

What have we learned from previous crises?

While the energy crisis could accelerate the clean energy transition, its impacts demonstrate the urgency to transition now – to address energy security issues and make the energy market less prone to shocks. This can, in turn, lead to a more inclusive and equitable energy sector for consumers. The recoveries from the 2008–09 Global Financial Crisis and the Covid-19 pandemic show that green stimulus helps economies rebound, creates jobs and builds toward a greener future. Apart from the need for strengthened international collaboration and active participation from citizens, here are six factors that make green stimulus programmes more effective:

1. Establish transparency in where the money goes to foster government accountability and allow taxpayers to monitor whether the funds are fully disbursed.
2. Pair green stimulus with policy and regulatory changes to cut emissions, such as phasing out fossil fuel subsidies, introducing carbon pricing, setting emission targets, or accelerating financial incentives for demand-side grid balancing.
3. Focus the green stimulus on energy efficiency policies and support other demand-side measures, such as adopting efficient appliances and smart metering.
4. Expand existing green policies, as implementing new policy programmes takes longer and might be less effective.
5. Prioritize proven and scalable technologies that are ready for expansion rather than complex projects that may not materialize.
6. Consider wider effects of green policy, such as social benefits, as well as impacts on social equality and energy security.

Dwindling energy access and growing demand in the EU have driven surging prices of fossil energy. These problems are avoidable – they could have been less severe if we made more progress expanding energy efficiency and renewable power in the past.

While we need short-term relief for the energy crisis, politicians need to make the case for, and place determined focus on, the structural changes necessary for the energy transition. Drawing on the lessons from past crises and acting on them can build resilience against future crises while limiting risks of further entrenchment in the fossil fuel industry.