Europe’s energy trilemma returns: security of supply, carbon markets and competitiveness in an era of geopolitical risk

Europe’s energy debate has evolved since the 2022 energy crisis, with the emphasis now on balancing decarbonisation, energy security, affordability and industrial competitiveness. Increasing geopolitical risks and high energy costs are driving renewed interest in policy interventions that affect gas infrastructure, storage mandates, joint purchasing and strategic reserves. Meanwhile, uncertainty around the EU’s Emissions Trading System (EU ETS) is affecting investment in industry, hydrogen, and carbon capture, usage and storage (CCUS). The next phase of the transition is likely to combine carbon pricing with industrial policy and strategic resilience measures rather than solely market liberalisation.

The energy transition: ‘take two’

European energy policy has entered a new phase.

The crisis conditions of 2022 may have eased, but policymakers are confronting a deeper structural tension between decarbonisation, security of supply, affordability and industrial competitiveness;¹ these were discussed in our previous article. Recent events in the Middle East demonstrate that geopolitical risks remain.²

Discussions across European energy markets indicate that the EU may be entering a more interventionist era of energy policy. Gas infrastructure is increasingly being reconsidered as a component of the security of electricity supply.³ Questions are re-emerging about storage mandates, joint purchasing of gas and other commodities, strategic reserves, and the long-term role of market intervention.

At the same time, the trajectory of the EU ETS is becoming a major source of uncertainty for industrial investment, hydrogen and CCUS projects. As the carbon emissions cap tightens, policymakers continue to face difficult trade-offs between maintaining carbon pricing credibility and industrial competitiveness.

Based on recent and current debate, the next phase of the transition is therefore likely to focus on frameworks for market reform and liberalisation that combine considerations of carbon pricing, industrial policy and strategic resilience planning.

The result is a growing tension between the ‘trilemma’ of energy policy objectives, specifically:

• maintaining secure and resilient energy systems;
• preserving affordability via internationally competitive energy prices for European industry (and consumers);
• delivering rapid decarbonisation through increasingly stringent climate policy.

This tension is increasingly visible in several areas, including the following three that are discussed in this article.

• First, the EU appears to be reconsidering its approach to energy security and infrastructure resilience, particularly regarding the relationship between electricity and gas systems.
• Second, the future design of the ETS is emerging as a major source of uncertainty for industrial investment and low-carbon infrastructure development.
• Third, a range of overlapping regulatory interventions—including methane regulation, hydrogen market design, and the carbon border adjustment mechanism—are creating new forms of commercial and policy risk for energy market participants.

Security of supply is becoming a cross-sectoral issue

In the aftermath of the Russian invasion of Ukraine, European policy focused on reducing dependence on Russian gas through diversification, demand reduction, accelerated renewable energy deployment and mandatory storage filling obligations. While these measures succeeded in avoiding outright supply shortages, they exposed weaknesses in the EU’s broader security of supply framework (see the box below).⁴

The current architecture remains siloed: electricity adequacy assessments are largely undertaken separately from gas security assessments, despite the interdependence between the two systems. At the same time, significant differences remain across member states regarding gas emergency planning, protected customer definitions, and resilience standards.⁵

This sectoral and geographic fragmentation increasingly appears inconsistent with the needs of a power system characterised by growing renewables penetration, weather dependency, and electrification where greater integration is required. A notable development is the recognition within European policy discussions that gas infrastructure may need to be treated as part of electricity security-of-supply policy rather than as a separate transitional asset class. This represents a material shift from the narrative of recent years.

Under high-renewables scenarios, gas-fired generation functions less as a conventional baseload technology and more as a provider of flexibility and balancing to ensure system adequacy. In this context, gas storage, liquified natural gas (LNG) import capacity, and flexible gas infrastructure are economically relevant because of their role in maintaining electricity system reliability during periods of low renewable output and high demand.

The implications are potentially significant for integrated adequacy assessments, since these can lead to changes in:

• infrastructure planning methodologies;
• gas storage policy;
• capacity remuneration mechanisms;
• cross-border solidarity arrangements;⁶
• resilience standards;
• the regulatory treatment of gas infrastructure assets.

At the same time, policymakers are concerned about the economic consequences of relying excessively on scarcity pricing to manage security risks.⁷ The gas storage filling obligations introduced during the crisis by the European Commission, which applied to member states with significant gas storage capacity, illustrate this tension.

While these mandatory filling targets strengthened physical resilience, they also affected procurement incentives during summer 2022. The resulting synchronised purchasing behaviour is likely to have exacerbated market volatility and amplified seasonal spreads.⁸

This experience triggered growing debate about whether security-of-supply frameworks should move away from rigid top-down obligations and towards more flexible risk-based approaches. For example, gas storage filling targets have recently been made more flexible (e.g. by widening the compliance window and introducing derogations), thereby reducing the risks of unintended market distortions.⁹

A risk-based approach could also incorporate:¹⁰

• differentiated resilience standards;
• probabilistic stress testing;
• strategic reserve mechanisms;
• optionality-based procurement frameworks;
• integrated gas–electricity adequacy modelling.

However, these reforms also raise difficult economic questions. For instance, if certain industrial sectors or customer groups are prioritised during emergencies, who bears the cost of enhanced protection?

Protected customer frameworks can create significant distributional consequences. If some consumers receive preferential access to energy supplies during crises, other consumers bear greater curtailment risk.

In turn, this could affect:

• network tariff structures;
• supplier hedging costs;
• long-term contracting incentives;
• industrial location decisions.

In practice, the distinction between protected and non-protected demand may increasingly become an industrial policy instrument. Historically, ‘protected customers’ were quite narrowly defined and primarily comprised households, hospitals and other essential services. However, recent discussions raise the possibility that certain industries warrant preferential treatment because of their economic importance, strategic value, or role in critical supply chains.

The return of strategic intervention in gas markets

A second major debate concerns strategic intervention in wholesale gas markets.

The EU response to the 2022 energy crisis involved a range of extraordinary market interventions, including the storage mandates discussed above, demand reduction targets, joint purchasing mechanisms, and the Market Correction Mechanism (MCM), which introduced the possibility of temporary price caps on wholesale gas transactions.¹¹ The MCM is described in the box below.

At the time, these measures were often explicitly temporary.¹² However, growing geopolitical uncertainty and concerns about future supply disruptions could prompt a new round of emergency measures that may become permanent.

For example, joint purchasing mechanisms are particularly controversial. Supporters argue that coordinated procurement by companies and, in theory, member states could strengthen Europe’s bargaining position in global LNG markets, reduce competition among member states during crises, and improve resilience.

Critics argue that such mechanisms risk undermining:

• long-term contracting incentives;
• hub liquidity;
• price discovery;
• risk management.

These concerns are not trivial.

European gas markets have historically relied heavily on liquid wholesale hubs—particularly the Title Transfer Facility (TTF)—to support hedging, investment and cross-border trade.

If policy interventions weaken confidence in hub pricing or reduce market liquidity, the resulting increase in gas market risk premia could itself raise long-term consumer costs.

There is also a broader concern regarding moral hazard. If market participants increasingly expect governments or EU institutions to intervene during periods of stress, incentives for private investment in resilience may weaken. For example:

• utilities may face reduced incentives to secure long-term LNG contracts;
• traders may rely more heavily on spot markets;
• infrastructure investment decisions may become increasingly politicised;
• market participants’ incentives to enter into long-term contracts and other risk management measures could weaken as expectations of public intervention increase.

Ironically, this could increase volatility over time even if interventions temporarily suppress prices during crises.

This creates a notable risk of internal inconsistency in the development of energy policy. Specifically, in electricity markets, the European Commission has simultaneously been encouraging longer-term contracting structures—such as power purchase agreements (PPAs) and contracts for difference (CfDs)—to reduce exposure to short-term price volatility.

However, more interventionist gas security frameworks could unintentionally increase volatility in the underlying fuel markets that continue to have a strong influence on electricity prices across much of Europe.

The ETS is approaching a structural credibility test

Alongside security-of-supply concerns, the trajectory of the EU ETS (described in the box below) is becoming a major source of uncertainty for industrial strategy and low-carbon investment.

The ETS remains the most prominent economic instrument underpinning EU decarbonisation policy, and some policies relating to the ETS were mentioned in our previous article on the energy trilemma. The EU’s recent adoption of a strengthened 2040 climate target supports this.¹³ The ETS linear reduction factor (LRF) implies a progressively tightening supply of allowances over time. Under current trajectories, the volume of newly issued EU Allowances (EUAs) could decline sharply by the late 2030s and early 2040s. This creates a fundamental uncertainty regarding the long-term equilibrium of the system.

If industrial decarbonisation technologies fail to scale sufficiently quickly, the EU could face difficult choices:

• allowing carbon prices to rise dramatically;
• intervening to relax the cap by accessing the Market Stability Reserve or reintroducing free EUA allocations;
• expanding state aid support for exposed industries; or
• introducing fundamental ETS reforms such as recognising persistent residual emissions post 2050 while requiring permanent removals.

None of these outcomes are economically or politically straightforward. Very high carbon prices could accelerate industrial relocation risks, particularly in energy-intensive sectors exposed to global competition. Conversely, repeated political interventions to stabilise prices or relax the cap could undermine the credibility of the ETS as a long-term investment signal.

This tension is particularly important for emerging low-carbon infrastructure sectors such as hydrogen and CCUS. Many of these projects depend on assumptions regarding future carbon prices to support commercial viability.

For example, carbon contracts for difference (CCfDs) increasingly rely on expected ETS trajectories to bridge the gap between low-carbon production costs and prevailing market prices. CCfDs are offered by governments to those seeking to develop technologies for greater emissions reduction. However, if investors believe that future ETS scarcity will trigger political intervention, the credibility of long-term carbon price expectations may weaken, turning CCfDs into future government liabilities.

This creates a paradox. The stronger the ETS becomes as a decarbonisation instrument, the greater the political pressure could increase to intervene to protect industrial competitiveness. In effect, the ETS increasingly resembles a large-scale political commitment mechanism.

The central question is no longer whether the ETS can produce high carbon prices. Rather, it is whether European policymakers can credibly commit not to intervene if those prices become economically or politically uncomfortable.

The Carbon Border Adjustment Mechanism may reduce leakage—but not necessarily competitiveness pressures

Meanwhile, the Carbon Border Adjustment Mechanism (CBAM, described in the box below) is intended to address one of the central weaknesses of carbon pricing systems: carbon leakage. By applying carbon costs to imported products, the CBAM seeks to preserve a level playing field between EU producers and foreign competitors.

However, the CBAM alone does not eliminate the broader competitiveness concerns that remain even after the EU ETS has been taken into account.

• First, implementation remains administratively complex.
• Second, many downstream sectors may still face higher input costs even if direct leakage risks are partially mitigated.
• Third, the geopolitical implications remain uncertain.

Current trading partners may increasingly view the CBAM as a trade policy instrument rather than purely an environmental measure. This could impede international trade and increase fragmentation of global markets, or it may come to be seen as a necessary policy intervention depending on wider geopolitical developments.

More fundamentally, the CBAM does not fully resolve the macroeconomic challenge associated with structurally higher European energy costs. This concern is visible in discussions around industrial policy and strategic autonomy. Policymakers are increasingly asking whether Europe can simultaneously:

• decarbonise rapidly;
• maintain long-term price signals to support energy transition investments;
• preserve industrial production and support economic growth;
• compete with jurisdictions offering lower energy costs and/or more flexible state support.

Methane regulation highlights the growing complexity of energy trade policy

The EU Methane Regulation (see the box below) illustrates another important feature of the evolving European energy framework: the growing overlap between environmental regulation, trade policy and security-of-supply considerations.

The Regulation introduces new monitoring, reporting and verification (MRV) obligations alongside methane intensity limits that will affect imported gas supplies.

In principle, the policy is intended to reduce lifecycle emissions associated with fossil fuel consumption. In practice, implementation raises difficult commercial and geopolitical questions. For example, the January 2027 equivalency requirements for importers are creating significant uncertainty across LNG supply chains.¹⁴

Many non-EU producers remain reluctant to provide the underlying operational data necessary to satisfy EU monitoring requirements. At the same time, certification methodologies remain only partially defined. This creates a substantial contractual and compliance risk for importers.

The result could be a growing need for:

• renegotiation of LNG contracts;
• allocation of MRV liability across supply chains;
• third-party certification mechanisms;
• dispute resolution frameworks.

More broadly, the Regulation illustrates a recurring challenge in European climate policy. As the EU seeks to shape global environmental outcomes through access to its internal market, this creates another important interaction between climate policy and security of supply. The stricter the environmental conditions imposed on imported gas, the greater the potential tension with short-term affordability and supply resilience.

Hydrogen policy is moving from ambition to realism

Hydrogen policy may also be entering a more pragmatic phase.

The early hydrogen narrative was characterised by ambitious targets and expectations of a rapid phase of scaling-up.¹⁵ However, deployment has progressed far more slowly than many policymakers hoped. High production costs, uncertain demand, nascent infrastructure and regulatory complexity have all constrained investment.

As a result, attention is increasingly shifting from headline targets towards the design of practical de-risking mechanisms. Most renewable hydrogen projects currently remain structurally uncompetitive without substantial policy support. As a result, long-term cost competitiveness depends heavily on several intertwined factors:

• technological progress and cost reduction;
• industrial demand;
• infrastructure cost socialisation.
• electricity market design;
• the evolution of carbon prices;
• state aid frameworks.

In this sense, hydrogen policy resembles a broader industrial strategy question rather than purely an energy transition issue.

Early policy frameworks assumed that supply would emerge if sufficient production targets and support mechanisms were established. Experience has demonstrated that the problem is considerably more complex. Policymakers must simultaneously coordinate investment across both sides of the market: producers are reluctant to invest without credible long-term demand, while industrial consumers are unwilling to commit without confidence in future supply and prices.

Infrastructure development presents a similar coordination problem, with uncertainty over the scale, timing and geography of hydrogen demand complicating decisions regarding pipelines, storage and import facilities.

Questions also remain regarding the appropriate balance between indigenous European production and imported hydrogen, ammonia and other hydrogen-derived feedstocks. While imports may reduce overall system costs, excessive reliance on imported molecules risks undermining domestic industrial development and replicating some of the strategic dependencies that recent energy policy has sought to reduce.

These challenges are compounded by the need for cross-border market integration and the reality that renewable hydrogen remains substantially more expensive than conventional alternatives in most applications. As a result, hydrogen policy is increasingly focused not on deployment targets alone, but on the design of institutions that are capable of coordinating investment, infrastructure, trade and demand creation across multiple jurisdictions and sectors simultaneously.

Challenges to come

European energy policy is entering a challenging phase. The relatively straightforward logic that dominated much of the immediate post-crisis period—accelerate renewables, reduce fossil fuel dependence, strengthen carbon pricing—has collided with a complex economic reality. Security-of-supply concerns are still present (albeit evolving as global supply chains may become more fragile, industrial competitiveness pressures are intensifying, and the long-term credibility of the ETS is uncertain).

The growing interaction between climate policy, industrial strategy, trade policy and energy market intervention is creating new forms of regulatory complexity. This does not imply that decarbonisation objectives are being abandoned, but suggests that the transition may become more politically contested.

Questions that were previously framed primarily as technical energy market design issues are increasingly becoming questions about:

• industrial policy;
• distributional outcomes;
• geopolitical resilience;
• strategic autonomy.

The next phase of European energy policy is therefore likely to involve less emphasis on pure market liberalisation and greater reliance on policy frameworks combining:

• carbon pricing;
• industrial subsidies;
• strategic infrastructure planning;
• security-of-supply intervention mechanisms;
• managed market coordination.

For policymakers, the central challenge will be how to preserve investment credibility while retaining sufficient flexibility to respond to political and economic shocks.

For market participants, the challenge will be navigating a policy environment in which commercial outcomes increasingly depend not only on market fundamentals but also on evolving political tolerance for scarcity, volatility and industrial disruption.

The question for Europe is no longer whether the energy transition will occur. It is whether Europe can deliver it while preserving the industrial and economic foundations on which the transition itself depends.