Excerpt from bruegel.org
Faced with spiralling energy prices, European governments are trying to shield vulnerable households and small businesses with tax cuts, price caps or rebates.
These temporary government interventions are designed to protect the most vulnerable households from the energy price spikes and ensure that the ongoing economic recovery is not derailed by the shock.
However, should the supply crisis continue to worsen or winter temperatures dip lower than usual, then the problem will not be one of consumers paying high prices but inadequacy of energy supply. If, as a consequence of a worsening imbalance, wholesale prices increase further, energy subsidies in some countries will become unsustainable for public finances.
The only way out of this dilemma is by relaxing the energy supply-demand balance. But, on the supply side, there is not much Europe can do. Possible short-term solutions such as giving in to (alleged) Russian demands to open the taps on natural gas or allowing German nuclear power plants to continue running past their 2021 phasing out, will undermine confidence in the stability of energy policy commitments – increasing cost of the massive future investments that Europe needs for its energy transition.