MARKET COMMENTARY

The fossil fuel crisis is affecting the energy sector across three time horizons. First, there are immediate consequences for market developments in April. At the same time, the EU is adopting energy policy measures to cushion energy costs for industry. In the long-term outlook, however, a drastic change of course across the entire economic structure will still be necessary.

A brief look back: The ceasefire in the Iran conflict, together with diplomatic initiatives in April, brought energy prices down from their peak. Prices did not return to pre-conflict levels, but a clear easing was visible. TTF gas prices for the front year are moving just below EUR 40/MWh, while the German power front year is hovering around EUR 90/MWh. Overall, the market reaction is currently subdued: Asia is importing significantly less LNG or substituting it with other fuels through fuel switching. Global price competition therefore remains muted for the time being. Nevertheless, the Strait of Hormuz is de facto closed, which brings the risk of major price volatility.

The following can be expected for May: As there is no indication of a lasting solution to the Iran conflict, rising prices are more than possible. The upward trend in gas prices could also pull electricity prices higher. On the spot markets, prices are already expected to rise in the first week of May due to low renewable generation. However, if diplomatic efforts prove promising, prices could also quickly fall to a lower level.

In addition to managing the short-term consequences, the EU is pushing ahead with energy policy relief measures. In April, the Commission approved state aid schemes in Germany, Bulgaria and Slovenia intended to enable lower electricity prices for energy-intensive companies. The basis for this is the Clean Industrial Deal State Aid Framework (CISAF), which the Commission had only adopted in the summer of 2025. The rapid use of this framework shows the political pressure to protect industry from high energy costs.

The CISAF sets clear guardrails: support may cover no more than half of annual electricity consumption; the reduced price may not fall below EUR 50/MWh; and at least 50% of the aid must be reinvested in decarbonisation measures. Only companies from sectors with an increased risk of carbon leakage are eligible to apply, meaning sectors where production may be relocated to countries with lower environmental standards. These include the chemical, metal, paper, glass and semiconductor industries, for example. Many parts of the manufacturing sector therefore remain excluded.

Only limited details are known about the national designs. Germany has provided by far the largest budget, at EUR 3.8 billion; the aid will be paid out annually in arrears through the Federal Office for Economic Affairs and Export Control (BAFA) and calculated on the basis of the average EEX futures market price of the previous year. This is also likely to influence companies’ procurement strategies. Bulgaria has budgeted EUR 334 million, was the first EU country to activate the support, and pays out the relief monthly through electricity suppliers. Slovenia has chosen a middle path, with EUR 90 million and semi-annual payments. All three schemes have one thing in common: they are limited to three years and do not permanently solve the structural challenge of high energy costs. The reinvestment obligation is positive because it does not merely use public funds to cover ongoing costs, but channels them into technologies that relieve the electricity system in the long term without promoting fossil fuels.

The interaction with existing support mechanisms is important, especially with electricity price compensation. The two instruments can be combined, but not for the same electricity volumes. For consumption volumes for which electricity price compensation is applied for in the respective accounting year, the industrial electricity price is excluded. Companies must therefore weigh up which instrument is more economically advantageous; for many electricity-intensive businesses, electricity price compensation may be more attractive.

In Austria, the opening of the portal for the “Industriestrombonus” was announced at the same time. Although the term is similar to “Industriestrompreis”, or industrial electricity price, it refers to a different measure: electricity price compensation, legally anchored in the Standort-Absicherungs-Gesetz, which compensates energy-intensive businesses for indirect CO₂ costs that electricity producers pass on through emissions trading. The instrument is generally provided for under EU state aid law, but had been suspended in Austria in recent years. The fact that Austria is now starting without final EU approval carries regulatory risk, but is politically understandable: EUR 75 million is available retroactively for 2025, and around 60 companies from the paper and steel industries are waiting for relief. A separate industrial electricity price based on the German model remains under discussion, but has not yet been decided due to the strained budget situation.

Taken together, this creates a picture typical of European energy policy: different instruments, national designs, and a common framework that leaves considerable room for interpretation. Whether these measures will actually strengthen industrial competitiveness while also triggering investment in a decarbonised energy supply will only become clear in the coming years.

Looking at the longer-term development: Because of the acute crisis, the International Energy Agency (IEA) expects a drastic change of direction in the markets, similar to the period after the oil crises of the 1970s. “I believe there will be a massive response to this crisis on the energy side,” said IEA Executive Director Fatih Birol at the Petersberg Climate Dialogue in Berlin. A look back: In 1960, Iran, Iraq, Kuwait, Saudi Arabia and Venezuela founded OPEC, which had grown to 12 member states by 1973 and was intended to represent the interests of oil-producing countries. With clear parallels to today’s events, a military conflict destabilised the situation: on the occasion of the Yom Kippur War in autumn 1973, OPEC reduced its production volumes by 5%. Within one year, the oil price quadrupled from USD 3 per barrel to USD 12 per barrel.

High-consumption countries responded with efficiency, restraint and investment. Whereas cars had previously used 20 litres of fuel per 100 kilometres, consumption had fallen to half that level after the crisis, Birol emphasised. In Germany, the Energy Security Act was passed, on the basis of which a driving ban applied on car-free Sundays. In addition, there was a speed limit of 100 km/h on motorways. Comparable measures are being called for today by climate policy circles, but are meeting with considerable resistance. Austria, incidentally, also responded with one car-free day per week in January 1974 for a period of five weeks - and with the so-called energy holidays. To save heating oil, schoolchildren were given one week off in early February, now known as the semester break.

In addition to financing higher levels of efficiency, funds at the time were invested above all in alternative technologies. Renewables played hardly any role; the government of the day primarily created greater independence through nuclear power, which is currently gaining importance again. So-called Small Modular Reactors (SMRs) are to be subsidised by the EU, and Commission President Ursula von der Leyen has described the move away from nuclear power as a “strategic mistake”. Whether this form of energy should be reactivated is controversial - especially with regard to the long-term responsibility for final storage and safety. At the same time, investment in renewable energy continues to advance. This also fits with the conference currently taking place in Colombia, where 60 countries aim to define a roadmap for phasing out fossil fuels.

Fatih Birol believes that today we are better prepared for a change of direction than we were 50 years ago. The necessary technologies are available, including renewable energy and electric vehicles. The question is: do policymakers and society want this transformation? If markets, history - and reason - have their way, we will not be able to avoid it. Otherwise, we risk facing the economic consequences that Germany had to deal with one year after the oil price crisis. In 1974, an economic crisis brought short-time work, unemployment and company insolvencies.

The global energy sector stands at a crossroads. Markets are currently reacting cautiously, while political measures are being prepared and profound structural changes are emerging.

Matthias Kisslinger
for the Inercomp Team