So far the European Commission’s response has not been ambitious enough. Its latest idea is a cap on the price of gas used to generate electricity, which will be discussed at a summit of ministers on September 9th. The commission may also seek to overhaul the power market, so that spot prices are no longer set by the costs of the marginal producer, which is often gas-fired.
Capping prices sounds neat but could be counterproductive. That is because the ceilings will not curb demand for scarce energy. According to one study, a cap implemented in Spain has led to a 42% increase in gas-fuelled generation since June. An eu-wide policy would only increase the demand for gas further still, raising the chances of rationing in the winter. It is true that the current set-up allows some renewable-energy firms, which produce at close to zero marginal cost, to rake in profits. If gas prices were to stay high for years such windfalls could be described as unjustified rents. But that same price signal ensures that gas-fired plants generate power when the wind doesn’t blow, and incentivises more investment in renewables.
Rather than tinkering, governments should focus on two bigger tasks. The first is to allow the market mechanism to curb demand, while supporting the most vulnerable people. Large handouts will be needed, but targeted assistance can limit the bill: according to the imf, policies that offer rebates and cash transfers to the poorest 40% of people would be cheaper than the policy mix today, which largely includes tax cuts on fuel, or retail-price caps.
The second priority is to increase supply, something that is not solely in Vladimir Putin’s gift. Other sources of natural gas can be cultivated: this is one reason why France’s president, Emmanuel Macron, has just visited Algeria. Within Europe, countries can help ease bottlenecks, such as inadequate cross-border gas interconnections. Today insufficient investment and differences in standards impede the flow from Spain and France to Germany and eastern Europe. The eu needs to ensure that in the event of rationing, there is a continent-wide agreement about which users are cut off first: without this the danger is that countries will hoard supplies.
