Since the European energy crisis started last year, when Russia first reduced the flow of gas to the continent, the market has done the job of rationing demand via increasingly eye-watering prices. Energy-intensive industries have curbed output and, in some cases, closed plants for good. Households, facing sky-high utility bills, have also cut their consumption.
Painful as it has been – and continues to be – free markets have worked as they are supposed to: by curtailing energy use to balance scarce supply.
Now European leaders are moving to end market-driven energy economics, capping the price households and some businesses pay for their electricity and gas in an effort to stem spiraling costs. They’ll have to set about the dirty job of rationing demand – and that’s a messy business.
In the UK, incoming Prime Minister Liz Truss is drafting a plan to freeze utility bills, rather than allow the 80% increase proposed by the energy regulator. Other European countries are mulling a similar approach, or offering energy rebates and subsidies that will have much the same impact.
In replacing the market as leveler of supply and demand, policy makers will have to roll up their sleeves and decide who gets what energy, and when. If they don’t, they’ll resolve the price problem but exacerbate the supply crunch, dooming their plans to failure.
The European Union has acknowledged as much, albeit camouflaged in diplomatically correct terms. In a policy note ahead of an emergency meeting of energy ministers set for Friday, the European Commission said its plan to reduce retail electricity prices had an element of “mandatory demand reduction,” which “helps to mitigate the price pressure.” In simpler words: to cap energy prices, one must first curb consumption.
European leaders better prepare themselves for the job: multiple industry lobbies will surely come knocking to insist that others shoulder the burden of rationing. From steelmakers to fertilizer producers, all will consider their business essential. And governments will have to disappoint many.
Source: Bloomberg.com