Brussels pitches state subsidy bonanza to combat Iran war energy shock

The European Commission is considering providing sweeping government subsidies to European businesses, as Brussels races to shield the EU’s economy from the surge in energy prices sparked by the Iran war.

According to a draft Commission proposal seen by Euractiv, the EU executive will allow member states to significantly increase subsidies for heavy industry by allowing the state to cover 70% of wholesale power bills until December 31 2026, up from 50% today. Like under the current rules, the measures would set a floor of €50 per megawatt-hour and are capped at half of consumption.

The initiative, which was announced by Commission President Ursula von der Leyen on Monday and has been circulated to member states, also proposes allowing firms to combine multiple sources of state aid to gain a boost of up to 50% in their subsidy rate.

“This goes much further than the current state aid rules,” said Philipp Jäger, a senior fellow at the Jacques Delors Centre.

Jäger added that the proposal marks a major victory for Germany, the bloc’s largest economy, where both politicians and industrialists have long demanded that they be able to combine multiple forms of state support to help cover companies’ power bills.

But Brussels’ push is likely to be fiercely criticised by smaller member states, which lack the financial firepower to protect their domestic firms.

Berlin currently offers companies the option to benefit from either €1.6 billion per year to compensate them for increased electricity prices owing to the EU’s carbon price scheme (ETS) or from a special €1.5 billion industry power tariff.

“Letting energy-intensive industry match indirect ETS compensation with electricity state aid has long been a German government and industry demand,” Jäger said. “This will be a lot of money, probably.”

The draft proposals, which Brussels is hoping to implement by the end of April and which could still change, also envisage allowing governments to temporarily cover 100% of the fuel costs for all companies active in the agricultural, fisheries, inland shipping, and road transport sectors by way of loans and guarantees.

Grants could also cover 50% of firms’ added fuel cost, the document notes. National governments could provide up to €50,000 to any company using fuel or fertiliser based on estimated consumption, bypassing red tape to speed up the disbursement of funds, it adds.

The sweeping measures appear to contradict EU officials’ repeated claims that any government subsidies offered in response to the Iran war will be “targeted”.

Member states’ response to the 2022 energy crisis sparked by Russia’s full-scale invasion of Ukraine “was much less temporary and much less targeted,” EU economy Commissioner Valdis Dombrovskis said on Tuesday. “So this is something which we want to avoid this time.”

(ow)