Energy price inflation: how the UK and EU could fight

Governments across Europe have been funding relief measures to help people with energy and petrol bills. The UK announced a £15bn package in May, largely in the form of cash payments to households, while EU member states are estimated to have spent €280bn (£243bn) over the past year on everything from subsidies and price caps to one-off payments. But bills for households and businesses are reaching unsustainable levels, with further increases expected next year, sharpening the debate over whether ministers should be intervening directly in energy markets to help bring prices down.

As Russia threatens to further reduce gas supplies, politicians in Italy, Spain, Greece and the Czech Republic are among those pushing for coordinated action. The European Commission president, Ursula von der Leyen, said on Monday Brussels was considering measures to be adopted by the 27 member states. What are the options?

Why are energy prices so high?

A painful combination of factors have pushed prices higher, primarily Russia cutting supplies of gas to Europe. Other contributing factors include the bounceback in global demand for power post-Covid restrictions, and the cost of the failure of 31 energy suppliers.

Is there international action that can be taken now?

It appears increasingly likely that some forms of coordinated international action will be taken, mirroring responses to the global financial crisis, the eurozone debt crisis and the Covid pandemic.

The former Italian prime minister Mario Draghi floated the idea of “a cartel of buyers” at a meeting with the US president, Joe Biden, in May. This would involve large oil consumers working together to negotiate prices. Draghi also suggested a “preferred path” of persuading Opec and other big producers to increase output. This suggestion is a greater imperative for the US, while the EU is more focused on buying gas.

Draghi and Biden also discussed implementing a cap on wholesale gas prices. The European Commission has so far rejected this idea amid arguments that such a cap could reduce the impetus for companies and countries to move towards cheaper green energy.

What has the EU’s response been?

The Czech Republic, which holds the rotating presidency of the EU, has called an extraordinary meeting of energy ministers on 9 September. The EU has so far put most of the focus on countries reducing their gas consumption and filling up storage facilities. More gas has been imported from the Middle East and the US to help. However, even with these measures, demand will remain strong and prices high, and there is still a risk of blackouts for households and businesses.

The European Commission had previously defended its regulations, but Von der Leyen now says discussions are under way for reform of the bloc’s electricity market, admitting that “skyrocketing electricity prices are now exposing the limitations of our current market design”.

EU policymakers are under pressure to act together on energy to ensure the stability of the bloc. They will also be wary of creating a situation akin to the rush for Covid vaccines, where countries overpay by competing on price. Angela Wilkinson, the secretary general of the World Energy Council, said: “The EU is looking at mechanisms to keep countries working together because [Vladimir] Putin is trying to divide Europe.”

How can the market be reformed?

In the UK and Europe, the electricity market was designed around coal-powered generation – a system that looks increasingly obsolete as countries work to phase this out.

In July, the regulator for Great Britain, Ofgem, suggested splitting the wholesale market to delink power produced from renewable energy from fossil fuel production. The thinktank Ember has estimated that 80% of the increase in electricity prices has been due to soaring gas prices. Ember found that average electricity prices per megawatt hour had increased from £55 in July 2021 to £171 by June 2022, and the cost of fossil gas was responsible for £93 of this rise.

Shares in the power generators Drax, Centrica and SSE, all of which produce power from sources other than gas, such as coal and wind, were hit earlier this year when the idea of a windfall tax on electricity generators was floated. The Treasury reportedly estimated electricity generators had made £10bn in excess profits.

The govern,ment proposed a new independent “future system operator” at a national level, and a potentially similar model at a local level. It has also been suggested bills could be lowered for consumers in areas nearer to renewable energy projects, but this could prove politically divisive.

There is little time to implement complex measures before this winter.

The consultancy Cornwall Insight has suggested that, to help this winter, the government subsidises the cost of gas burned in power stations, which could reduce bills by tens of billions of pounds. It argues that providing gas to plants at a lower price would cut wholesale electricity costs and prevent old solar, wind and nuclear plants from making profits which are pushing bills up.

Would nationalising energy companies help?

The former prime minister Gordon Brown has said energy companies that cannot offer lower bills should be temporarily brought into public ownership as a last resort. A YouGov poll for the Times this week showed 47% of Tory voters are in favour of returning energy companies to public ownership.

In theory, this would allow the government to ensure a company invested its profits back into cutting bills. However, few retail suppliers are expected to make any profit this year. Moreover, a difficult precedent was set when Bulb collapsed last year and was placed in “special administration” by the government. The government’s decision not to hedge energy costs has been blamed for the spiralling cost to the taxpayer.

This article was amended on 2 September 2022 to correctly convert €280bn to £243bn, not “£243m” as an earlier version said due to an error introduced during editing.