The authoritative source for independent research on UK-EU relations

21 Sep 2022

A Changing EU

Economy

In the past fortnight both the EU and UK have unveiled plans for dealing with soaring energy prices. Given the common crisis they face, the contrast in approach is remarkable.

Put simply, the UK’s priority is subsidising energy costs for consumers, while the EU has focused on encouraging consumers to reduce their demand.

The UK government will freeze the price of energy for two years – keeping typical household bills around £1,000 lower than they would otherwise have been this autumn – and compensate energy companies directly for the shortfall in revenue. This is estimated to keep the poverty rate 20% lower than it otherwise would be, and to keep inflation down (at least in the short-term).

The EU, by contrast, is not subsidising bills but, rather, setting a target for member states to cut their overall electricity usage by 10% until March 2023, and by 5% at peak times. This comes on top of a separate initiative to reduce gas demand by 15%. Spain has already mandated that public and commercial central heating cannot be warmer than 19 degrees and air conditioning cooler than 27 degrees, while lights on shop-fronts must be switched off by 10pm.

Energy costs are not, however, being ignored in the EU – rather intervention is coming at member state level (France has capped energy price increases at 15% for 2023), while the EU manages the wider strategy on demand. The lack of comparable UK action on demand is concerning.

The most immediate risk is supply shortages at times of peak demand this winter, potentially leading to blackouts. The UK is especially reliant on gas for heating its homes and buildings, which are also some of the least energy-efficient in Europe, meaning a demand reduction of 10-15% could have been a valuable insurance policy.

Reduced demand would also bring an immediate financial benefit to consumers. The price cap does not limit the overall cost of bills, but rather caps the price paid per unit of energy used. So lower usage means lower bills.

Moreover, the two-year freezing of energy prices gives consumers little incentive to take action to use less energy longer-term, which would save them money and reduce demand pressures. Had the government permitted periodic, controlled increases in energy prices (supplemented by targeted support for the most vulnerable) there would have been a clearer incentive for households to reduce their energy usage and/or invest in long-term cost-saving measures such as insulation.

Given that the war Ukraine – the chief cause of the crisis – could drag on for years, there is a clear need to build this kind of society-wide resilience. Subsidising bills for two years and hoping the problem goes away is insufficient (albeit convenient, given it takes us up to the next election).

This is not to say the EU’s measures are perfect: plans for implementing its demand-reduction strategy remain ill-defined, while a range of carve-outs on gas consumption could blunt its impact further. Meanwhile the absence of price caps on liquid natural gas and Russian pipeline gas imports in last week’s package led to a jump in natural gas prices.

But it is at least beginning to face up to the scale of the crisis, discussing long-term, multifaceted responses. By comparison, there are several other gaps in the UK approach which need addressing urgently.

Financial support for businesses only lasts for six months, leaving companies in the lurch. Nor is there a funding plan for the price cap, which is expected to cost somewhere between £100150bn (roughly equivalent to the 2008 bank bailout), while Friday’s ‘mini-budget’ seems likely to prioritise further tax cuts. A windfall tax on energy companies’ excess profits has also been ruled out (though the EU is introducing one, worth an estimated €140bn).

Meanwhile, the critical question of modernising UK energy management has been hampered by the pausing of the energy security bill. The UK’s main long-term supply solution is a revival of fracking. Yet, by the new Chancellor’s own admission, it would take up to a decade to extract significant volumes of gas. Even then, fracking would have virtually no impact on UK gas reserves or consumer costs, as the gas would be sold on global markets, unless the government nationalised the industry or taxed revenues highly.

This betrays the siloed thinking of the UK approach, focused solely on British market factors, even though the crisis is international – driven by a gas shortage on European markets. Effective UK policy requires a much clearer consideration of how it interacts with forces beyond its borders.

Which brings us to the vexed question of EU cooperation. Despite their divergent regulations, energy policy is an area where the UK and EU are inextricably bound – in a quite literal sense – by the interconnectors that run under the Channel from France, Belgium and the Netherlands.

That means coordinated action – such as alignment on demand reduction targets – would send a stronger market signal which should in theory lead to bigger falls in energy prices – especially if combined with shared attempts to procure energy from non-Russian sources. In the present climate, such cooperation seems unlikely, but in time both sides might come to see the importance of cooperation, much as the EU and Norway do.

Otherwise, there is a risk of further shocks to come. One imminent question is how to decouple electricity prices from gas, given gas prices are driving the surge in energy bills, despite electricity from renewables and other sources remaining relatively cheap.

As the BBC’s Katya Adler has pointed out, if either the UK or EU were – via decoupling – to start obtaining much cheaper electricity, it might prompt concerns about that cheap energy leaking out – potentially entailing some curtailment of supply.

This could leave either energy market more isolated and create a major row over the status of Northern Ireland and Ireland – who share a common electricity market. Significant divergence in UK and EU electricity regulations could raise difficult questions about whose new regulations should apply on the island of Ireland.

Without a much more wide-reaching policy package – that aligns with international partners in attempts to reduce demand and boost supply – the UK may find that its energy crisis is only just beginning.

By Joël Reland, Research Associate at UK in a Changing Europe.

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