Governments should subsidize energy savings, not gas, electricity prices – analysis

Price caps on gas and electricity or direct subsidies won’t lower the overall energy costs for European citizens, but they are making things worse, according to an analysis produced by European think tank CEPS.

Instead, Daniel Gros, author of the study Why Gas Price Cap and Consumer Subsidies Are Both Extremely Costly and Ultimately Futile, proposes to the European Union to encourage member states to give consumers the proper incentive to reduce their gas consumption.

The key policy aim should not be subsidizing gas or power prices but, instead, to subsidize energy savings, he said.

The document says extreme gas prices are reducing households’ purchasing power and increasing costs for industry. It puts EU governments under political pressure, and the outcome is various support schemes.

Of note, price caps were introduced, for example, by Croatia and Romania, while Bulgaria and Greece pay subsidies. There is also an initiative to cap wholesale gas prices in Europe.

High gas prices constitute a tax on Europe given that 90% has to be imported and the tax has to be borne by somebody

“But the reality is that high gas prices constitute a tax on Europe given that 90% has to be imported and this tax has to be borne by somebody. If it is not the consumer, it must be the taxpayer (often the same person). Only a very few leaders have been brave enough to acknowledge this reality,” the report reads.

The thing that no EU government has the courage to say is that subsidizing gas consumption would only make the problem worse.

“Every measure which reduces the incentives for domestic savings means a higher need for imports, which then puts more pressure on the price Europe faces on the global market, and, in a vicious circle, increasing the demand for additional protective measures. This constitutes a clear externality which justifies common efforts to reduce gas demand,” the report reads.

Price caps on electricity have a similar effect since gas still constitutes in many cases the marginal fuel when flexibility is required during peak hours.

Gros: encourage energy savings

According to Daniel Gros from CEPS, instead of subsidizing consumption through a price cap, governments should subsidize gas savings, for example by paying households for consuming less in the upcoming winter than last winter.

“This would also involve fiscal expenditure, but my model predicts that such subsidies would mostly pay for themselves through lower import prices – but only if implemented at EU level,” he explained.

His other proposal is to encourage energy savings by offering households a price cap only for a limited basic amount per capita and charge the full market price for any quantities consumed above this level.

“The broad conclusion is that gas or electricity price subsidies do not make sense. The European Commission should strenuously oppose them and it should recommend to member states that they should swing behind savings subsidies instead,” Gros advised.