Gazprom, the Russian state-owned energy giant, has said that the Nord Stream 1 pipeline is to be turned off for three days for repairs. This development is further accentuating the cost of living crisis this winter.
Despite the financial hardship a lot of people find themselves in, politicians in the UK are not discussing the most obvious policy tool to bring energy prices down to more affordable levels: an ambitious administrated program to reduce natural gas consumption in the months ahead, across industry, in public and business services and by wealthier household.
Reducing demand in this way lowers prices, directly protecting households otherwise having to choose between eating and heating and the myriad small businesses threatened by closure.
Why is this obvious response being ignored? The elephant in the room is that, despite Brexit, the UK is still part of a single European gas market. “Europe” is thought a dirty word in UK politics and therefore this key dimension of the crisis gets scant mention in our own domestic debates.
Household fuel bills and the charges for heating restaurants, pubs and hotels all depend on the European price of gas and this in turn depends on the quantity of gas consumed across all of Europe. For a program of lowering prices through reduced demand to be fully effective, it must be adopted across all the countries of wider Europe, both non-EU like the UK and EU members.
The European Commission, all too typically, is also barking up the wrong tree. While promoting reduced gas consumption amongst its members, it has failed to take a European-wide approach and is now spending most of its political capital on the long-term problem of improving pricing arrangements in the European market, at the expense of tackling the pressing problem of the current European energy supply deficit.
This is shooting the messenger, high gas and electricity prices, and ignoring the message, we must reduce our consumption of gas.
An ambitious European-wide program to bring down gas prices can work. Here is how…
Total gas consumption across Europe is around 500 billion cubic metres (bcm) per annum. The worst-case scenario is a complete cessation of Russian supplies, amounting to 120 bcm.
Increased LNG imports will be able to make up about 40 bcm of this shortfall and increased output from European gas fields in the UK, Norway and the Netherlands a further 10bcm, devoted in part to putting as much gas into storage as winter approaches.
This leaves a required 70 bcm reduction in consumption that must be found from demand reductions. If total consumption through administrative measures can be reduced by 15% across Europe i.e. by 60 bcm, then energy prices will fall back close to normal levels. Some financial support for the most vulnerable households will still be needed, but the costs to the exchequer will fall dramatically.
Germany – the largest consumer of gas – is leading the way showing such a 15% reduction is possible, through measures such as limiting heating in common public spaces, and switching from gas to coal in electricity generation (environmentally problematic, but this is only for the next two years), limiting the availability of natural gas to industry to essential uses, as well as encouraging voluntary reductions.
It is also planning, if it becomes really necessary as it could, to limit short-term rolling electricity blackouts to eliminate any remaining demand for using natural gas in electricity generation. All this needs to be part of our conversations here in the UK and across all the other countries of Europe.
Finally, it can be highlighted how big a political opportunity this is for the next Conservative leader and Prime Minister of the UK, thought most likely to be Liz Truss.
Whether it is Truss or Sunak, the new PM can play the card of European-wide solidarity to ensure the defeat of Russian aggression, a card that trumps all our local Brexit disagreements on issues such as illegal migration across the English Channel or trading arrangements for Northern Ireland.
Our new PM can join with Olav Schulz, Emmanuel Macron and the new Italian leader in a continent-wide crusade, bringing in all the other countries of Europe including Norway as the most important gas producer, to bring energy prices back down to normal levels, and ensure that Putin is unable to undermine the energy security of our households or destroy the prospects of our small businesses.
If the new Conservative leader has the imagination to see and seize this opportunity, they could even win the next election.
Professor Milne’s analysis, An economic narrative for better managing the European energy crisis, was published on SSRN on August 30, 2022.