What if the EU pays consumers who save the most energy?

This week, a European Commission proposal for a cap on gas prices was widely ridiculed because it set the bar for the cap to kick in so high that it would probably never be used.

Just as a refresher, the EU has been struggling with high gas prices, reaching a peak in August with gas prices topping €300 per MWh.

To protect businesses and households, various support measures were explored, with the bloc agreeing on creating a proposal for a gas price cap –– a maximum price EU member states would pay for gas.

The details of this price cap were passed on to energy ministers to hash out, which brought us to the proposal that led to "spicy" debate this week.

Now the proposal is not totally silly, of course. Gas prices could well shoot up in the next year, activating the price cap.

Then again, the price cap could lead to some nasty unintended consequences, such as Russia shutting off gas supplies to Eastern Europe, LNG suppliers diverting their gas to countries willing to pay more than the EU cap and gas sellers circumventing the cap by selling directly to consumers.

But the biggest concern, in my opinion, is that a gas price cap does not do the most important thing: reduce demand of fossil gas. In fact, some critics think consumers would end up using more gas because of the price cap.

Not a pretty picture.

At EUobserver, we regularly publish op-eds, and this week we received one that was very technical, but did seem to have a pretty well thought out alternative to gas price caps. One that addresses the question of demand as a mechanism to drive down prices, rather than just manipulating price.

The idea sounds counterintuitive at first: What if the EU pays consumers who save the most energy?

The op-ed was written by the authors of a policy paper published by EPICO KlimaInnovation, a Berlin-based think tank trafficking in "constructive climate and energy policies with clear concepts and viable, balanced solutions", according to their website.

Unfortunately, the op-ed was not widely read, possibly because it was quite technical, but I think the idea is worth lingering on.

The authors propose a centralised EU auction, where consumers –– companies –– would compete on who can reduce their demand of energy the most, in return for payment for each unit of energy saved.

Note that it's about energy, not necessarily gas, as a significant portion of Europe's energy is derived from gas powered plants –– meaning a reduction in energy use also means a reduction in gas consumption.

Successful bidders would be paid a price that could be several times higher than the market price of gas, simply for reducing demand for a sustained amount of time.

That last bit is where it seems to enter the realm of the fantastical. How can a scheme work in which companies are paid for not doing something?

The answer is surprisingly simple. Less demand = cheaper price. By paying the biggest consumers of gas/energy to reduce use, the overall demand for gas comes down, which in 101 economics means the overall price should go down as well –– for everyone.

Just as an example, if a significant number of energy consuming companies would commit to being paid in return for shutting down, this would reduce demand, which would reduce the price utility companies pay for gas, which would in turn reduce the price you pay for your heating bill.

There's more. The auctions are mostly aimed at large industrial energy consumers (e.g. factories), that can predictably cut demand by cutting production and shutting down the factory for a few months. So what about the workers?

Well, because companies are being paid a multiple of a price that would otherwise be a cost, they can afford to keep paying workers while not actually producing anything.

As the authors put it, the auctions "would achieve an immediate reduction in the price of natural gas (as traders anticipate that less gas will be needed in the future) and reduce the risk of gas shortages, to the benefit of consumers across the EU."

Ok sounds great, but who would pay for all of this? The authors naturally have some thoughts there as well, which sound pretty reasonable.

"Member states would have to contribute to the funding of these auction payments in proportion to their own annual gas demand, regardless of where the consumers who reduce their demand are located. The reason is that all member states will benefit from the auction in the form of lower gas prices, and the benefit for each member state is in direct proportion to its own national gas demand."

Of course, a measure like this would be highly reliant on member state cooperation, which in the current state of things seems pretty far off. A non-cooperative approach might encourage free-riders to benefit from gas price reduction without contributing.

Also, what happens after the auctions stop? Will demand just go back to pre-war levels?

Here, the argument is that a measure like this would buy the bloc time to invest in alternative power production from renewable sources, hopefully making up for a significant chunk of energy that would otherwise have remained fossil fuel powered.

And what about other prices? If, say, a bunch of steel producing factories commit to stop production, would that not negatively affect prices of things like cars or construction?

I reached out to the authors, and they told me that if you try to balance it, the benefits of having lower gas prices will probably still be beneficial for the economy as a whole –?although they admitted they had not done detailed calculations on this (yet).

In any case, looking at collective solutions that impact demand rather than price seems like a more prudent way to go in the long term. And being paid to not do something? Sign me up.

Onwards to the articles you should have not missed this week:

Energy

The EU gas cap: will the bottle ever be 'uncorked'?

EU energy ministers entered a council meeting disgruntled on Thursday (24 November), where they were scheduled to discuss a widely derided EU Commission proposal to cap the gas price at €275 per megawatt-hour.

The plan had been criticised by experts and politicians alike, who pointed out the ceiling was put at such a high level it was unlikely ever to apply. Both the Spanish and the Polish energy ministers already described the cap as a "joke" in media ahead of the meeting.

"I expect the discussion will be rather spicy," Czech industry minister Jozef Síkela whose country currently holds the rotating EU presidency, said at arrival. "First, we had a problem because the commission could not put a proposal on the table. Now we have a problem because it did."

Read it.

How the gas lobby is fuelling the cost-of-living crisis

This winter, times are tough for millions of Europeans. Three-in-four of us are?cutting back on everyday items, including food. Protests are erupting as the energy and cost of living crises bite.

But there's one quarter where things are looking suspiciously prosperous: the balance sheets of fossil-fuel giants. As fossil prices have spiked, their margins have grown.

Shell, TotalEnergies, Eni, and Repsol alone have?recorded €77.9bn in profit?up to September this year. At a time when consumer energy bills have sky-rocketed by?double-digit percentages, it amounts to a major redistribution of wealth from citizens to corporations.

Read it.

Labour

Asbestos — two to three times more deadly than known

"Where once working men in heavy industry were diagnosed with cancers related to a more direct exposure to asbestos, now women in professions such as teaching, nursing and other occupations are being diagnosed, as well as young people. From a widely-held perception that asbestos poses a direct occupational risk in a handful of industries, revised global figures now suggest that a once direct risk has become a diffuse risk to almost all of us."

Read it.

Done 'asking nicely', EU adopts rules for more women on boards

On average, across the EU, just 30 percent of board members in companies are women. The figure varies between member states, ranging from 45 percent in France to eight percent in Cyprus.

"It is about time we left that argument where it belongs, in the previous century. We have tried asking nicely, we tried waiting for the old boys networks to die out, and to no avail," Dutch MEP Lara Wolters said.

"Where there is a lack of will, you need a law," she told fellow lawmakers.

Read it.

Rule of Law

EU Commission to keep Hungary's EU funds in limbo

The EU Commission will continue to propose to suspend some of the EU funds to Hungary as officials think prime minister Viktor Orbán's government has failed to implement all the previously agreed rule of law and anti-corruption measures, according to people familiar with the discussions.

The Orbán government has in turn threatened to veto some key EU priorities, including an €18bn joint aid package for Ukraine and a global deal on a minimum corporate tax rate.

On Thursday (24 November), the European Parliament adopted a resolution arguing that Hungary has not fulfilled the measures, and that the commission should propose to suspend the funds.

Read it.

Ukraine

MEPs formally declare Russia 'state sponsor of terrorism'

The European Parliament on Wednesday (23 November) designated Russia as a state sponsor of terrorism.

MEPs, with 494 voting 'yes', 58 'no' votes and 44 abstentions, argued that Moscow's military strikes on civilian targets such as energy infrastructure, hospitals, schools, and shelters violated international law.

The move is symbolic as the EU does not have the legal framework to make such a designation officially, it is up to member states.

Read it.

Migration

EU Commission suggests need for new charity rescue boat rules

The European Commission wants to promote talks on possible new international maritime rules on sea-rescues for charity boats.

On Monday (21 November), it told reporters discussions are needed with the International Maritime Organization (IMO), a UN agency that regulates shipping.

"We have no concrete proposal and it's not really the role of the commission to have that either," EU home affairs commissioner Ylva Johansson, told reporters.

Read it.

EU leadership rehash old ideas to save migrant lives at sea

EU leadership on Wednesday (23 November) rehashed decade-old statements on the importance of saving lives in the Mediterranean Sea.

"Saving life is always our first responsibility," EU home affairs commissioner, Ylva Johansson, told MEPs in Strasbourg.

Margaritis Schinas, the vice-president of the European Commission, and Mikulá? Ben, Czech minister for European Affairs, made similar assertions.

But those statements appear increasingly hollow.

Read it.

As always, thank you to all new subscribers to this newsletter, and also as always, my various inboxes are open for feedback, suggestions, tips, leaks, ideas and gossip –– now also?on Mastodon.

See you next week,

Alejandro