Soaring energy prices could mean an even colder and darker winter across Europe, with governments racing to find new ways to protect households facing huge utility bills.
Wholesale gas prices are hovering around €200 per megawatt hour — eight times higher than the average level of recent years, wholesale electricity prices have risen sharply in response to generation difficulties in many countries, and the gloom is mounting.
In the UK, where households bills are expected to rise to £4,400 a year in early 2023, around four times the level of the period between 2018 and 2021, the consumer rights campaigner Martin Lewis has described the situation as “a national crisis on the scale that we saw in the pandemic”.
The UK is hard hit because it relies heavily on gas for both home heating and electricity generation, and because it, unlike many European countries, allows wholesale prices to flow straight to consumers — albeit with a delay.
While Rishi Sunak and Liz Truss battle publicly over energy prices in the race to succeed Boris Johnson as the UK’s next prime minister, governments of all stripes are facing the same challenges across the continent.
Germany’s chancellor Olaf Scholz said on Wednesday that his government would “do everything to ensure that the citizens get through this difficult time” of high inflation.
European countries differ in their spending on gas, electricity, coal and road fuels, but almost all have used the power of the state to protect customers from part of the increase in bills.
The IMF estimated in July that the median high income European country had already spent an additional 1 per cent of annual national income on energy price support — a figure it says is almost certainly an underestimate and that is likely to rise. Poorer European countries, where energy is a larger proportion of budget share, had spent 1.7 per cent of their national income already.
Most worrying was that much of the money spent so far has gone on stopping energy companies passing on higher prices to customers — a tactic which the fund said did not “incentivise energy savings”.
In France, the government will this year spend around €22bn to shield its citizens from surging energy costs, with a freeze on gas prices for consumers as well as its four per cent cap on electricity price increases — both of which were introduced in February this year.
Norway’s government pays 90 per cent of households’ electricity bills when wholesale prices exceed prescribed thresholds. But even with its big hydropower capacity, Oslo has faced growing political and public pressure over its inability to curb high prices.
Germany has agreed a €15bn bailout of Uniper, a large gas purchaser, although the higher costs of gas will eventually be passed on to customers.
Most European countries have lowered taxes on petrol and diesel, ranging from a 5p cut per litre in the UK to a temporary lowering of 29.55 cents per litre in France and Germany.
The price of gas canisters, a common way of heating Spanish homes, has been fixed by the government in Madrid until next year.
While these measures have been popular with the public, economists and governments have recognised they also need to offer support that encourages households and businesses to use less energy.
High industrial power prices in the Netherlands led to a 30 per cent reduction in use in the first five months of this year compared to last year. Looking at these results, one government official in The Hague said: “The energy market works.”
Lump sum payments have proliferated in other parts of Europe. All households in the UK will receive a subsidy of £400 towards energy bills this winter. In central and eastern Europe, households spend more on fossil fuels as a proportion of their household budgets because the goods are necessities and incomes are lower. This has led to significantly higher support being offered, mostly in the form of measures that have protected consumers from higher prices.
For the first time since the end of communism, each household in Poland can apply for a one-time subsidy of up to 3000 zlotys (€640) to purchase coal, which still heats many of the country’s households.
Germany has offered lump sum reductions in income tax and raised allowances, while Italy has put in place a €200 “cost of living bonus” for the majority of salaried workers, self-employed workers and pensioners.
As the costs mount, countries are increasingly targeting support for poorer households — a policy which the IMF thinks is a better way to cut overall energy usage.
Italy’s poorest — defined as those earning less than €12,000 a year — have had their household energy bills frozen under the outgoing government of Mario Draghi, who sought to walk a tightrope between providing relief to families and keeping to its declared public deficit target of 5.6 per cent of GDP.
Lower income consumers in the Netherlands will receive an energy allowance of around €1,300, while in the UK, households receiving means-tested support from the government will receive £650.
In Spain, the government has been less generous to poorer working age households, with one-off payments of just €200 to people earning less than €14,000 a year. More generous support has gone to those receiving the lowest state pensions, where payments have been increased by 15 per cent, equivalent to about €60 more a month.
Some governments have also taken to innovation and distraction in a bid to keep households happy amid the energy crisis. The most visible policy, billed as a means to reduce road use, was Germany’s €9 a month public transport pass for June, July and August. The policy has seen huge uptake, with politicians under pressure to extend the scheme, probably with less government subsidy, in some form into the future.
For Oya Celasun, assistant director of the IMF’s European department, governments should focus their efforts on helping lower-income households, which suffer the most from higher energy bills. “Policy should shift from broad-based support to targeted relief,” she said.
Reporting by Chris Giles in London, Guy Chazan in Berlin, Akila Quinio in Paris, Amy Kazmin in Rome, Alice Hancock in Brussels, Richard Milne in Oslo, Peter Wise in Lisbon and Raphael Minder in Warsaw