Europe’s costly energy support | FinancialTimes

More than half a trillion euros have been pledged since September 2021 by European countries to protect households and businesses from exorbitant energy costs. As the pandemic and then Vladimir Putin’s invasion of Ukraine led to a spike in natural gas prices, governments quickly implemented measures such as subsidies, price caps and travel allowances. The longer the crisis lasts, the more these interventions will have to be fine-tuned to limit expenditure and curb energy demand. Britain decided this week to reduce and revise its two-year energy price guarantee, while Germany assesses how to allocate a new €200 billion package.

Energy prices will remain high beyond this winter. Estimates suggest annual bills for UK households could rise to more than £4,000 in April – compared to the £2,500 guarantee on average – when support ends in its current form. Although natural gas prices in Europe have fallen recently, they are expected to remain well above pre-war levels for some time. Gas reservoirs will be harder to fill next year with little supply from Russia, and global competition for liquefied natural gas will be fierce.

National policies will have to evolve and find a difficult balance. This includes targeting those most in need, while limiting spending; at a time when the public debt burden is growing and inflation is approaching 40-year highs. Above all, if policies are to protect households and businesses, they will need to ensure that price incentives to reduce energy consumption are also adequately maintained, otherwise demand will continue to weigh on supply. limits.

Countries have so far taken a variety of approaches. In June, Spain and Portugal implemented a cap on the wholesale price of gas, essentially offering a payment to power generators to fund part of their fuel cost (EU leaders on Friday approved the plans of a block-scale ceiling). France is experiencing limited increases in the retail price of gas and electricity. Meanwhile, Germany recently introduced a plan to offer lump sum payments to gas consumers based on a proportion of their historical usage.

Each has its advantages and disadvantages. Price caps are easy to understand, but they reduce incentives to save energy. A recent study of Spain’s cap showed that it initially led to an increase of more than 40% in gas-fired generation. They are also expensive and poorly targeted, helping those who don’t need them as much. The IMF advocates letting retail prices rise while protecting the most vulnerable through income relief. This is an ideal approach: it can be easier on the public purse and encourage less energy consumption. Yet mechanisms to calibrate and disburse cash payments based on need are not always in place.

Providing needs-based payments across the income scale could be difficult and costly, particularly if energy prices remain high. Since energy consumption tends to increase with income, one approach could be to set tiered tariffs on bills, where the price per unit of energy used increases with usage. Above a certain amount, users would be faced with the market price. Subsidies could then be given to the most vulnerable households that have above-average energy needs, which can be identified through benefit schemes. This would be cheaper than a universal price cap and retain incentives to save energy.

While energy supplies this winter may now seem less precarious, next winter is worrying. Securing new supplies and improving efficiency will remain crucial. When it comes to cushioning the cost of living, policymakers have to make tough trade-offs. But what began as emergency measures to dull the pain will have to adapt if countries are to meet the broader financial and energy rationing demands of the crisis.

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