How can the government respond to high energy prices?

At the Eurogroup meeting, ministers discussed policy measures in response to the crisis in the Middle East and its impact on the EU economy, including energy markets. The discussion took place in the presence of Dr. Fatih Birol, Executive Director of the International Energy Agency. The Directorate-General for Economic and Financial Affairs prepared a Note to the attention of the Eurogroup (Energy measures to attenuate the impact of the current spike in energy prices ) which emphasizes that the current situation necessitates an urgent transition by the EU to an electrified economy. This is crucial for ensuring security of supply. Electrification represents a structural solution that would permanently shield the European economy from fluctuations in fossil fuel prices. Consequently, the energy transition is essential for achieving both security of supply and long-term energy sovereignty. However, as the transition is underway and requires a significant increase in investment, the impact of the transition on prices will take time to materialize and will be gradual. The deployment of a number of key transition technologies, such as heat pumps and electric vehicles, can be accelerated, as they are already available on the market. However, some technologies that are crucial for energy-intensive industrial sectors, such as hydrogen technologies or carbon dioxide capture and storage, require further development and scaling up.

Accordingly, targeted and temporary support could be provided to immediately alleviate the burden on vulnerable businesses and consumers, but it must be carefully planned. According to the document, based on the lessons learned from the 2022–2023 period, a balanced strategy should be implemented: promoting the structural transition to low-carbon electricity and electrification, particularly in heating (both in households and industry) and transport, with the aim of reducing these sectors’ dependence on fossil fuels, while ensuring that short-term relief measures are targeted and that overall efforts are fiscally sustainable.

In this context, according to DG ECFIN, any government measures to address high energy prices should be governed by the following principles:

Any measure taken should be coherent with the decarbonisation of the energy system: Policy measures should preserve incentives to save energy and invest in low-carbon energy as well as promote electrification. Short-term support must not lock in carbon-intensive behaviours or prolong obsolete fossil-fuel-based business models.
Any measure taken should not unduly increase aggregate demand for oil and gas: Measures must be carefully designed to prevent unintended consequences that could worsen the supply-demand balance in the energy markets. In particular, measures that substantially reduce the marginal price of oil and gas will spur demand and contribute to higher aggregate prices and generate spillovers among Member States. Preference should be given to measures that lead to reduction in the consumption of fossil fuels.
Any measure taken should consider the fiscal costs: Any public support provided by Member States to mitigate the impact of higher energy prices must be compatible with their fiscal situation and the commitments under the EU’s fiscal surveillance framework. To limit the fiscal costs, Member States should target measures on the most vulnerable consumers,
including energy-intensive industries.

Against this background, the following list of measures outlines potential options to address the current crisis, evaluating their respective pros and cons. Priority should be given to the least distortive measures that provide relief while preserving market functionality. EU-level coordination is essential to prevent market fragmentation and leverage economies of scale, thereby reducing the overall need for intervention.

Measures to encourage consumers to save energy such as information campaigns and targeted incentives. These should promote the use of public transport, accelerate the renovation of buildings, and continue to enhance energy efficiency in industry. These are a no-regret option.
Income measures. This is a preferred option. It protects the most vulnerable households’ purchasing power without distorting market price signals, though it requires precise targeting to avoid ineffective support and excessive fiscal burden.
Adapt the structure of electricity taxes and levies so as to combat high electricity prices while supporting electrification. This would be in line with Action 1 of the Affordable Energy Action Plan (published in February 2025) to make electricity bills more affordable and Action 1 of the Citizens’ Energy Package to lower taxes and levies on electricity for households to the EU minimum (published 10 March 2026). While it will help accelerating the electrification of the economy, it risks creating revenue shortfalls in national budgets and should hence be used carefully.
Targeted price interventions for vulnerable consumers and firms in the form of two-tier pricing for electricity or natural gas. Such interventions would provide price relief for vulnerable consumers and firms while keeping an incentive to save energy. However, they distort energy prices, resulting in economic inefficiencies. Under the electricity and gas market Directives, Member States can, if they wish so, intervene in the price setting for the supply of electricity to the energy poor or vulnerable households8. This support can be extended to SMEs and all households if the Council declares a regional or EU-wide energy crisis. However, the conditions for such a crisis to be declared are not currently met9. Furthermore, State aid rules allow Member States to provide temporary electricity price relief for energy-intensive firms and to compensate sectors at genuine risk of carbon leakage for part of the high electricity prices arising from the effect of carbon prices on electricity generation costs.

Under the EU fiscal framework any fiscal measures introduced should remain consistent with the net expenditure growth paths recommended by the Council. Member States can adopt fiscal measures they consider necessary provided that their net expenditure growth remains within the limits of the Council recommended net expenditure growth path. Deviations from the net expenditure path will be treated in the same manner irrespective of whether they originate from energy support measures or any other fiscal measure. This approach reinforces the credibility and transparency of the fiscal framework and avoids setting a precedent which may undermine the fiscal rules going forward. To the extent that measures are temporary in nature, their impact on the cumulative deviation will be limited over a medium-term horizon.

Energy support measures generally do not qualify as one-offs. The classification of a measure as one‑off requires that it is inherently temporary (i.e. the measure cannot become permanent). The assessment also takes into consideration the degree of control the government, and the risk of creating inappropriate incentives for policymakers, especially regarding sustainability of public finances. As recent experience has shown, even if energy support measures are introduced on a temporary basis, they are prone to remain in place for an extended period of time or even become permanent. As there is nothing that prevents such measures from becoming permanent, they do not qualify as one-off. Moreover, unlike the response to a natural disaster, governments have a substantial degree of control over the magnitude and design of these measures. As such, the treatment of energy support measures as a once-off would constitute a departure from the well-established practice and risks undermining the concept of a one-off measure. For these reasons also the energy support measures introduced in response to the increase in energy prices in 2021 were not classified as one-offs. The same logic was also applied in the case for measures introduced in response to COVID-19.

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