Powering Deterrence: Energy Costs, Industrial Capacity, and NATO’s Hidden Rearmament Risk

Europe’s defence industrial base operates in an energy cost environment roughly twice as expensive as that of the United States. As governments scale spending toward NATO’s 5% GDP target, that differential reduces the real output each euro of rearmament can generate. This article examines the EU-US industrial electricity price gap, traces its implications for defence production, and proposes three policy interventions ahead of the NATO Ankara Summit in July 2026.

On 10 June 2026, NATO Deputy Secretary General Radmila Shekerinska addressed the FuelsEurope Conference in Brussels, underlining that secure energy and fuel supply chains are a prerequisite for Alliance deterrence (NATO, 2026a). She also flagged the erosion of domestic European refining capacity as a strategic vulnerability: dependence on fuel processed outside allied territory creates logistical exposure that worsens precisely when military demand is highest. The concern is well-founded, and it extends beyond fuel logistics to the broader industrial cost environment in which European rearmament is taking place.

The Rearmament Surge and Its Industrial Assumption

EU defence spending rose from €218 billion in 2019 to an estimated €381 billion in 2025, a 75% increase in six years. NATO’s 5% GDP framework implies aggregate European outlays of €700 to €800 billion annually by 2035 (NATO, 2026b; European Parliament Think Tank, 2026). In 2025, all allies exceeded the 2% benchmark for the first time, with European members and Canada increasing spending by 20% year on year (NATO, 2026c). The assumption embedded in these figures is that European industry can scale up production at the required pace. That assumption has an energy cost attached that policy frameworks have not addressed.

The Cost Gap

Defence manufacturing is energy-intensive. Steel for armour, nitrocellulose for propellants, aluminium for airframes, and rare-earth processing for guidance systems all require large continuous energy inputs (Eurochambres, 2025). When industrial electricity prices rise, production costs rise disproportionately in these sectors.

Graph 1:

EU non-household industrial electricity prices averaged €117 per MWh in 2019. They peaked at €287 per MWh in 2022 following Russia’s deliberate restriction of gas supply to European markets, then fell to €163 per MWh in 2024 before rising again to €184 per MWh in 2025. The European Commission’s Sixth Report on Energy Prices and Costs concludes that a return to pre-2021 levels is unlikely given structural factors: higher network costs, decarbonisation levies, and the permanent loss of Russian pipeline gas (European Commission, 2025a). The 2025 level remains 57% above the 2019 baseline. U.S. industrial electricity prices averaged €57 to €75 per MWh over the same period (U.S. Energy Information Administration, 2025). Figure 1 shows the divergence.

Graph 2:

Figure 2 places electricity prices alongside the defence spending trajectory. Both rose since 2021, meaning that a growing share of each additional euro in defence spending is absorbed by higher production costs rather than converted into additional output. EU energy-intensive industries have already called for the suspension of further ETS benchmark reductions, warning that additional carbon costs will reduce free allowance allocations by up to 34% compared to 2021 to 2025 levels (Euromines, 2026; CEPI, 2026).

Energy as a Wartime Vulnerability

Beyond input costs, energy dependence introduces a direct operational risk. Dependence on fuel refined outside allied territory creates supply chain exposure that compounds under wartime conditions, when demand surges and adversaries have incentives to target logistics infrastructure. Interference with refinery infrastructure, cyberattacks on grid management systems, and coordinated disruption of maritime shipping routes are documented patterns in European grey-zone experience since 2021. EU Transport Commissioner Apostolos Tzitzikostas flagged this vulnerability in spring 2026, when the Strait of Hormuz disruptions forced the EU to source additional jet fuel from the United States, exposing the fact that Europe produces only around 70 to 75% of the jet fuel it consumes domestically (Cyprus Mail, 2026).

Policy Incoherence and Three Recommendations

NATO’s 1.5% broader-security envelope explicitly covers critical infrastructure and the defence industrial base (NATO, 2026b), making it the appropriate vehicle for energy resilience investment. The problem is that the EU’s Clean Industrial Deal and the ongoing ETS phase-out of free allowances are simultaneously raising carbon costs for the heavy industrial sectors that defence production depends on (European Commission, 2025b). The March 2026 Industrial Accelerator Act introduces “Made in EU” procurement preferences, but those preferences cannot deliver results if EU manufacturers face structurally higher energy costs than their U.S. counterparts.

Three interventions would begin to close this gap. First, defence industrial clusters producing propellants, armour materials, and other verified military outputs should receive a time-limited exemption from further ETS benchmark reductions for the duration of the rearmament surge; the legal architecture for a sector-specific carve-out already exists (Bruegel, 2026; CEPI, 2026). Second, a defined share of the 1.5% broader-security envelope should be allocated to domestic refining capacity and hardened energy infrastructure, including modular fuel storage and dedicated microgrids, at major European defence production sites (Eurelectric, 2025). Third, a NATO-EU Energy-Defence Coordination Mechanism should be established before Ankara, incorporating industrial energy cost exposure and domestic fuel production capacity as standard variables in defence readiness assessments alongside spending figures (OMFIF, 2026).

Defence budgets measure political commitment. Industrial output measures actual capability. The gap between the two is partly a function of the energy cost environment in which production takes place, and that environment has not returned to the conditions under which Europe’s rearmament targets were set.

References

Bruegel (2026) ‘Defence and Climate: Seven Points for a Common Agenda’, Analysis, 11 May. Available at: https://www.bruegel.org/analysis/defence-and-climate-seven-points-common-agenda (Accessed: 11 June 2026).

CEPI (2026) ‘Preventing Irreversible Deindustrialisation: Europe Must Act Now on Energy and Carbon Costs’, Joint Statement. Available at: https://www.cepi.org/energy-intensive-industries-joint-statement-preventing-irreversible-deindustrialisation-europe-must-act-now-on-energy-and-carbon-costs/ (Accessed: 11 June 2026).

Cyprus Mail (2026) ‘Energy talks focus on EU fuel security and supply resilience’, 29 April. Available at: https://cyprus-mail.com/2026/04/29/energy-talks-focus-on-eu-fuel-security-and-supply-resilience (Accessed: 11 June 2026).

Eurochambres (2025) Electricity Prices and Employment: A Comparative Analysis of EU Countries. Available at: https://www.eurochambres.eu/wp-content/uploads/2025/06/Electricity-Prices-and-Employment-A-Comparative-Analysis-of-EU-Countries-3.pdf (Accessed: 11 June 2026).

Eurelectric (2025) Powering Security: The NATO Spending and Energy Resilience Nexus. Brussels: Eurelectric. Available at: https://www.eurelectric.org/publications/powering-security-the-nato-spending-and-energy-resilience-nexus/ (Accessed: 11 June 2026).

Eurostat (2026) ‘Electricity price statistics’, Statistics Explained. Dataset nrg_pc_205. Available at: https://ec.europa.eu/eurostat/statistics-explained/index.php?title=Electricity_price_statistics (Accessed: 11 June 2026).

Euromines (2026) ‘Joint Statement: Energy and Carbon Costs’. Available at: https://euromines.org/joint-statement-eeis-energy-and-carbon-costs/ (Accessed: 11 June 2026).

European Commission (2025a) Report on Energy Prices and Costs in Europe, 6th Edition. Brussels: European Commission. Available at: https://energy.ec.europa.eu/data-and-analysis/energy-prices-and-costs-europe_en (Accessed: 11 June 2026).

European Commission (2025b) White Paper for European Defence: Readiness 2030. Brussels: European Commission. Available at: https://commission.europa.eu/document/download/e6d5db69-e0ab-4bec-9dc0-3867b4373019_en (Accessed: 11 June 2026).

European Parliament Think Tank (2026) ‘EU Member States’ Defence Budgets’, Briefing, March. Available at: https://epthinktank.eu/2026/03/09/eu-member-states-defence-budgets-2/ (Accessed: 11 June 2026).

NATO (2026a) ‘NATO Deputy Secretary General: Energy Security Has a Critical Role for Defence’, NATO News, 10 June. Available at: https://www.nato.int/en/news-and-events/articles/news/2026/06/10/nato-deputy-secretary-general-energy-security-has-a-critical-role-for-defence (Accessed: 11 June 2026).

NATO (2026b) ‘Defence Expenditures and NATO’s 5% Commitment’. Available at: https://www.nato.int/en/what-we-do/introduction-to-nato/defence-expenditures-and-natos-5-commitment (Accessed: 11 June 2026).

NATO (2026c) Secretary General’s Annual Report 2025. Brussels: NATO. Available at: https://www.nato.int/content/dam/nato/webready/documents/publications-and-reports/annual-reports/sgar25-en.pdf (Accessed: 11 June 2026).

OMFIF (2026) ‘Europe Needs to Treat Spending on Defence and Energy Differently’, May. Available at: https://www.omfif.org/2026/05/europe-needs-to-treat-spending-on-defence-and-energy-differently/ (Accessed: 11 June 2026).

U.S. Energy Information Administration (2025) Short-Term Energy Outlook. Washington, D.C.: EIA. Available at: https://www.eia.gov/outlooks/steo/report/electricity.php (Accessed: 11 June 2026).