The EU must pull out all stops to save energy
EU members, in particular Germany, have been following increasingly restrictive energy policies with an enormous dependence upon Russian supplies and now need to find immediate relief in this hour of crisis.
This entails reducing dependencies upon Russia, which has certain limitations due to strong logistical links with Europe and reducing energy demand to take the pressure off the over-heated energy markets.
There is only one short-term instrument available – drastic and immediate energy saving.
Energy prices have risen to sky-high levels, which have never been seen before except for oil.
At time of writing, both power and gas prices were an eye-watering factor of ten higher than they had been before a tight gas supply situation began to bite last Autumn.
The prices for futures contracts are showing a degree of relief so that for the year 2024, they will be “only” 150% higher than previously.
The important question now is to what extent an energy reduction should be left to the price mechanism alone and to what extent governments should intervene.
The current high wholesale prices are not yet percolating to all customers. However, they are an enormous threat to retailers and industrial companies who are forced to buy gas or power at the margin.
The best parallel we have is the 1970 oil crisis when crude oil prices rose initially by a factor of five and eventually by a factor of twenty but dampened in real terms by rampant inflation.
This crisis led to the first major energy reset since the second world war.
But the situation was different: there was a great deal of lowing hanging energy-efficiency fruit which could be quickly harvested and driven partly by the price mechanism.
North Sea oil and gas production was just coming into its own, and major gas exports, including from Russia, despite the cold war, were just beginning.
Today Europe does not have the same immediate options open, and experience shows that left to themselves, household customers and motorists do not react as strongly as required.
While the exorbitant motor fuel prices are clearly seen at the service stations, it takes time for householders to see their gas and power prices climbing.
There is a crucial double-dividend to be obtained by cutting energy demand to the limits: it reduces pressure on supply and therefore price, and less energy needs importing – a powerful multiplicative effect.
What should governments do?
First, they should undertake a powerful publicity campaign, appealing to their citizens on every TV screen and every newspaper to:
- Avoid car journeys as far as possible and use public transport instead
- Limit speeds to 120 kph, but ideally lower: fuel consumption increases much more than proportionally at above 80 kph
- Turn down thermostats and only heat rooms as required, even though the end of the heating season nears
- Save electricity in every possible corner – run appliances in the economy setting and only when full
Second, they should consider administrative means to limit energy consumption, especially those who usually would be willing to pay whatever price.
The two possible instruments are rationing and progressive pricing, so that the unit price increases rapidly the more a consumer uses.
Rationing takes us back, unfortunately, to war-time territory, which is precisely where we again are.
Progressive pricing was practised for electricity in California following acute power shortages for which the normal pricing mechanism was inadequate to stem.
In the case of industry, the current prices will quickly kick out the least energy-efficient plants.
Industrial production and civil engineering construction depend upon a multiplicity of components, and if only one is missing, the conveyor belt stops or the building cannot be completed.
Unless the government prioritises certain products or construction projects, it must be left to the price mechanism alone to ration energy use across the sector.
The European Union played out their ambitious Green Deal with great panache, which must now be subordinated to affordable and adequate energy supplies.
They now need to show how they can rise to the hour of the moment and pull out all stops to reduce energy demand.
This article is also published by Euractiv. Energy Voices is a democratic space presenting the thoughts and opinions of leading Energy & Sustainability writers, their opinions do not necessarily represent those of illuminem.
About the authors
Graham Weale is a leading expert on Energy Transitions. He is Professor of Energy Economics at the Ruhr University, Bochum. Previously he was Chief Economist at RWE AG, Germany’s largest power generator. He began his career with ExxonMobil and has a science degree from Oxford University.