Forum Introduction DOI: 10.

2478/ie-2023-0002

Tackling the European Energy Crisis

Having had little time to absorb the economic and social shock of the COVID-19 pandemic,
the EU is confronted with yet another crisis – rising energy prices due to Russia’s war in
Ukraine coupled with inflation reaching historic levels. Household burdens vary greatly
across and within EU member states, requiring different policy responses. In most European
countries, high energy prices impose a heavier burden on low-income households. Putting
compensatory measures in place to support the most vulnerable is therefore a priority. In
this Forum, contributors consider specific responses from individual EU member states and
the EU as a whole to determine best practices and gauge how they may be more effectively
applied.

Exiting the Energy Crisis: Lessons Learned from the Energy Price Cap Policy in France
Andreas Rüdinger, Institute for Sustainable Development and International Relations (IDDRI), Paris, France.

The Tale of the German Gas Price Brake: Why We Need Economic Disaster Preparedness in
Times of Overlapping Emergencies
Isabella M. Weber, University of Massachusetts, Amherst, USA.
Thore Beckmann, German Network for Pluralist Economics, Berlin, Germany.
Jan-Erik Thie, Macroeconomic Policy Institute (IMK), Dusseldorf, Germany.

Understanding Inflation: The Italian Case

Giuseppe Simone, University of Bologna, Italy.
Mario Pianta, Scuola Normale Superiore, Firenze, Italy.

The UK Energy Price Guarantee

Catherine Waddams, University of East Anglia, Norwich, UK.

An EU Price Cap for Natural Gas: A Bad Idea Made Redundant by Market Forces
Daniel Gros, Centre for European Policy Studies, Brussels, Belgium.

Intereconomics 2023 |1
4
DOI: 10.2478/ie-2023-0003
Andreas Rüdinger
Exiting the Energy Crisis: Lessons Learned from the Energy Price
Cap Policy in France
Starting in September 2021 and greatly reinforced by the
war in Ukraine, the energy price crisis has strongly affect-
ed all European member states. In France, the conjunc-
tion of crises has been even stronger, with a national elec-
tricity supply crisis piling up on top of the international
energy price crisis, due to large parts of the nuclear fleet
being unavailable.
In order to respond to this crisis, France has been one of
the first EU member states to implement a stringent “en-
ergy tariff shield”. Starting in October 2021, France has
blocked regulated tariffs for electricity and gas, flanked
by a myriad of successive measures aimed at reducing
the impact of energy price surges on consumers.
After over one year, the French “tariff shield” has proven
to be rather successful from an economic standpoint,
considering the comparatively lower inflation rate and re-
sulting macroeconomic costs. However, it has been much
less efficient in addressing the other two key dimensions
of the policy trilemma: social justice and environmental
sustainability.
This article aims at providing a first assessment of the
French response to the energy crisis, by measuring its ef-
fectiveness from an economic, social and environmental
perspective. To put the French experience into perspec-
tive, the article then outlines some recommendations re-
garding the challenge of simultaneously addressing all
three dimensions of the well-known policy “trilemma” of
economic, social and environmental goals in the context
of the energy crisis.
© The Author(s) 2023. Open Access: This article is distributed under the
terms of the Creative Commons Attribution 4.0 International License
(https://creativecommons.org/licenses/by/4.0/).
Open Access funding provided by ZBW – Leibniz Information Centre
for Economics.
Andreas Rüdinger, Institute for Sustainable Devel-
opment and International Relations (IDDRI), Paris,
France.
ZBW – Leibniz Information Centre for Economics
Forum
Intereconomics, 2023, 58(1), 5-9
JEL: Q43, Q50
The French response to the crisis: A whatever-it-
takes approach to limit price impacts?
In 2020, while facing the worst public health crisis in a
century, French President Macron insisted on the need to
overcome this crisis by “whatever it takes”, a slogan that
had been famously coined by Mario Draghi and widely
used to describe the massive effort to keep the economy
on track in times of crises (Conesa, 2021).
Many have argued that the French response to the en-
ergy price crisis has indeed become a continuation of this
approach, citing a comparison of public expenditures:
€150 billion to face the COVID-19 crisis compared to an
estimated €100 billion to cover the impact of the energy
price crisis between the end of 2021 and 2023 (La Trib-
une, 2022).
A brief summary of the main measures can help to un-
derstand the scope of the French response to the energy
crisis:
• In October 2021, a tariff shield on electricity and gas
was announced, effectively blocking the levels of regu-
lated tariffs (and for those indexed on the regulated tar-
iffs for gas).
• This was achieved through a succession of initia-
tives: a reduction of the main tax on electricity (TICFE,
passing from €22.5 per MWh to €0.5-€1 per MWh);
an increase in the volume of the “regulated access to
historic nuclear electricity”1 from 100 to 120 TWh to
help alternative suppliers access cheaper generation;
a subsidy scheme for gas and electricity providers
to compensate the difference between gross market
prices and retail tariffs; and a legal obligation for the
incumbent suppliers of the regulated tariffs (Engie for
natural gas, EDF for electricity) to block the tariffs at
their current levels.
1 The so-called ARENH scheme (accès régulé à l’électricité nucléaire
historique) was created in 2010 to foster market liberalisation by ena-
bling alternative suppliers to propose competitive retail offers. With-
out such access to the largely amortised and low-cost nuclear gen-
eration, no actor could possibly compete with the market power of the
state-owned company EDF.
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• These direct price measures have also been flanked
by two direct subsidies to households: firstly, an ad-
ditional “energy cheque” of €100 for the 600,000 low-
income households that already benefitted from the
energy cheque scheme; secondly, a €100 “inflation
premium” paid to 38 million citizens (those under the
median income level).
• The measures targeted at energy consumption in
buildings have been complemented by a state-subsi-
dised reduction of road fuel prices of 10 to 30 cents per
litre between April and December 2022. Additionally,
the largest French oil company Total Energies reduced
prices by 10 cents per litre at all company-owned gas
stations.
• In early 2022, a subsidy scheme was deployed to help
the private sector and local authorities pay their signifi-
cantly higher energy bills. Initially based on very com-
plex criteria, this scheme later applied to all companies
experiencing an energy bill increase of at least 50%,
with energy costs representing at least 3% of gross
revenues, and aims at covering approximately 25%-
35% of the total bill increase.
• For the year 2023, an additional price shock absorber
has been introduced for small and medium enterpris-
es by local authorities aimed at limiting the recent in-
crease of tariff levels by approximately 25%.2
A policy approach focused on households to the
detriment of companies and local authorities
The first conclusion that can be drawn from this overview
is that the French policy response to the crisis has been
concentrated particularly on households (and very small
companies), for which the energy tariff shield has effec-
tively absorbed the whole increase in prices since Octo-
ber 2021.3 On the contrary, aid schemes for the private
sector and local authorities have not only taken longer to
emerge, but also shown less ambition.
2 This shock absorber aims at bringing down the cost per MWh by up
to €320 to a reference level of €180 per MWh, but only applies to 50%
of the total consumption for each month, with an additional threshold
to limit the total aid (maximum €160 per MWh of subsidy on the total
consumption). This means that for a company consuming 15 MWh at
an initial tariff of €600 per MWh, the initial bill reaches €9,000, while
the reduction amounts to €2,400 (26%).
3 It must, however, be noted that the regulated tariff for natural gas is
updated on a monthly basis, and thus had already increased by 40%
compared to the levels of 2019, and 70% compared to the beginning
of 2021. For electricity, the increase of regulated tariffs has been lim-
ited to only 4% compared to the level of early 2021.
6
Figure 1
Distribution of gross revenue losses linked to the
energy import bill increase in France, 2022 vs 2019
in billion euros
Before transfers 3 50 32
After transfers 44 36 5
State Companies Households
Source: Clavères (2022).
The redistributive effects of this approach have been
quantified in December 2022 by the French Treasury it-
self, indicating in a study that the loss of revenues due
to surging energy import bills represented a total cost of
€85 billion – 3% of GDP (Clavères, 2022). Without any aid
or transfer measures, this burden would primarily have
struck the private sector (59%) and households (38%),
with very limited impact on the state (3%). However, tak-
ing into account the massive policy response to the crisis,
the French state effectively assumed most of the costs,
and almost all costs for households, as illustrated in Fig-
ure 1. Considering that this study only takes into account
the cost of imports of fossil fuels, the total distributive ef-
fect of the policy response (including measures on elec-
tricity) to the benefit of households might be even higher.
The energy tariff shield: An effective measure to
counter the inflationary spiral
Even though this has not been claimed as a political ob-
jective initially, it is probably on the macroeconomic level
that the French response to the energy price crisis has
been the most effective. This effect has notably been
quantified by the French National Institute for Statistics
and Economic Studies (INSEE) in September 2022. Ac-
cording to their calculations, the impact of the energy
price surge on the total inflation rate has been divided
by two, thanks to the energy tariff shield. Energy prices
have contributed 3.1 percentage points of the total infla-
tion rate of 5.3% between the second trimesters of 2021
and 2022. Without the energy tariff shield, the inflation-
ary effect linked to energy prices would have doubled,
leading to a total inflation rate of 8.4% (Bourgeois and
Lafrogne-Joussier, 2022).
This result needs to be nuanced, however: in its calcula-
tions, INSEE has applied the effect of the tariff shield to
all economic agents (not only households), which theo-
retically leads to a significant overestimation of the total
Intereconomics 2023 | 1

impact, considering that companies are only benefitting
to a very limited extent.
In line with this, another macroeconomic study has con-
cluded that despite its significant cost of €110 billion (ac-
cording to the authors), the policy response to the energy
price crisis has generated a positive effect in 2022 by lim-
iting the inflationary spiral, resulting in an additional 1.8
percentage points of economic growth, but with a limited
reduction of only 1.1 to 1.8 percentage points on the total
inflation rate (Langot et al., 2022).
The macroeconomic impact of the French tariff shield on
the inflation rate is all the more visible when comparing
France to other EU member states. The year-on-year in-
flation rate until December 2022 reached “only” 6.7% in
France, compared to an EU average of 9.2%, and a rate of
9.6% in Germany (Eurostat, 2023).
All for one and one for all? Equality, equity and the
just transition
The French government has insisted on providing the
same level of protection for all French citizens. Indeed, the
tariff shield guarantees the same price level for all, regard-
less of their actual levels of income or energy consump-
tion, thus de facto setting aside the issue of social justice.
As Xavier Ragot, president of the French economic think
tank OFCE recently put it: “The advantage of a tariff shield
is its simplicity of implementation, but it is far from solving
the question of the effects of the energy crisis on inequali-
ties between households” (Ragot, 2022).
Indeed, considering that the richest households consume
up to twice as much energy as the poorest ones, they re-
ceive more than double the subsidy in absolute terms. Or,
as stated clearly by the French statistical institute INSEE
in a recent analysis, “the benefits of the tariff shield and
the rebate for road fuels reach 420 euros for the richest
10%, against 180 euros for the poorest 10%” (Cornuet,
2022).
The absence of any indexation on income raises a serious
question in terms of equity and efficiency, in particular
when considering the massive levels (€30 billion in 2022,
€45 billion in 2023) of public expenditure (Conesa and
Tonnelier, 2022). It is one thing to justify that all house-
holds should get access to the same subsidy, regardless
of their actual needs. But it becomes another when this
effectively means that twice as much public aid is granted
to the richest compared to the poorest.
Furthermore, beyond the lack of any income or wealth-
related criteria, the inequality of this approach is further
ZBW – Leibniz Information Centre for Economics
Forum
exacerbated by the absence of a cap in terms of energy
consumption levels: the tariff shield (and fuel rebate at gas
stations) applies from the first to the last kWh of electricity
or gas consumption, regardless of the actual consump-
tion level. This is surprising, insofar as other EU mem-
ber states have managed to implement similar subsidies
while maintaining a marginal incentive to save energy. In
Germany for example, the subsidy on gas and electricity
only applies to 80% of the consumption (compared to the
previous year) for households, and 70% for companies
(Kurmayer, 2022).
And the energy transition in all that?
The current energy crisis painfully illustrates our long-
lasting addiction to cheap and imported fossil fuels.
Many have thus argued that it will be a major catalyst to
accelerate the transition to low-carbon energy sources.
However, as can be illustrated by the French example,
this is not necessarily the case. Indeed, doing so re-
quires a strong balance between measures targeting the
social and economic urgency of the crisis on one side,
and measures aimed at massively accelerating the low-
carbon transition on the other.
Concentrating all its efforts on relieving the short-term
impacts of the crisis (and thus depressing the price sig-
nal for energy), the French state has clearly missed the
opportunity to stimulate investments that would effec-
tively improve the low-carbon transition and resilience to
future crises.
The public support for energy retrofits in buildings re-
mained constant between 2022 and 2023, despite house-
holds and companies being much more aware and willing
to make energy efficiency improvements. In absolute fig-
ures, the main public support scheme for energy retrofits
“MaPrimeRénov” will receive €2.5 billion in 2023, which
equals only 5% of the total expenditure for the tariff shield
of the same year.4
Despite corresponding discussions at the EU level, France
has remained silent concerning a possible reinforcement
of its renewable energy target for 2030, and no additional
public funding has been earmarked for renewable ener-
gies in 2022 or 2023, even though renewable energies will
reverse €31 billion to the public budget between 2022 and
2023 because of the massive surge in wholesale market
prices (CRE, 2022).
4 In comparison, Germany announced a stark increase of public sup-
port for energy efficiency in buildings in July 2022, from €8 to €14 bil-
lion, with total commitments already reaching €9.6 billion between
January and July 2022.
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In a way, France is now paying the price for not having
achieved its 2020 target for renewable energies (reach-
ing a share of 23% of gross final energy consumption).
The gap for 2020 amounts to 4% or 65 TWh, mainly in the
sector of renewable heat (and to a lesser extent, electric-
ity). This represents a cost of €5 to €9 billion per year, as-
suming that this lacking renewable production has been
substituted with imported natural gas.5
Unlike other countries such as Germany or Austria,
France has limited its support in the transport sector to
a rebate on road fuels, without incentivising low-carbon
solutions such as trains, public transports and electric
vehicles.
Finding a way out of the crisis: Food for thought
The French approach to the energy price crisis is sympto-
matic of several patterns that can also be observed else-
where and need to be addressed to develop a coherent
and effective policy response.
First and foremost is the tendency of policymakers to fol-
low the lure of short-term, “quick and dirty” measures in
the face of urgency, losing track of any long-term objec-
tives and associated investment needs, even though they
represent the most credible solutions to the crisis itself.
The second pattern regards the great comeback of the
energy policy trilemma in this crisis. Responding to the
economic urgency while keeping in mind the imperatives
of social justice and of the low-carbon transition requires
careful thinking and calibration, which is incompatible
with the political pressure for quick, simple and strong
measures.
Last but not least, such crises tend to exacerbate the ten-
dencies of policy fragmentation between member states,
even if a common European response is more often than
not the most effective option to resolve the crisis.
Striking the right balance between crisis relief and
acceleration of the low-carbon transition
Tackling these challenges seems all the more important
when considering that the current crisis might be here to
stay for at least another few years. In this regard, assum-
ing that France might just continue the current approach,
i.e. spending another €40 billion each year to keep prices
down, seems neither credible nor sustainable in any way.
5 This depends on the assumption for the gas price (in this example:
€75 to €140 per MWh).
8
Thus, a few priorities and recommendations can be put
forward.
Regarding the first two points, France clearly needs to
find a balance between short-term crisis relief and invest-
ments aimed at reducing its vulnerability to future crises.
This can be summarised under a very simple proposition:
“€1 = €1”. For each euro of public support aimed at reduc-
ing prices or bills, an additional euro should be earmarked
to accelerate the low-carbon transition.
Considering constraints on public spending and debt,
this implies that the funding for the tariff shield must be
reduced to liberate funds for low-carbon investments.
This could be achieved through a more effective targeting
of existing measures, for example by concentrating direct
subsidies on the first five income deciles, or by limiting
it to a certain level of energy consumption, and ideally a
mixture of both.
Conversely, public support should be massively increased
to incentivise those households and companies that could
actually invest to reduce their exposure to the energy crisis
(through e.g. energy retrofits, heat pumps, electric vehi-
cles, photovoltaic panels and self-consumption). For the
sake of illustration: taking half of the current budget of the
tariff shield for 2023 (€45 billion), the support for energy
retrofits could be multiplied by five (for a cost of €10 billion)
and the public support for electric vehicles could be mul-
tiplied by five (€5 billion), which would still leave another
€5-€7 billion for other measures in the fields of renewable
energies, public transportation and the like.
Provide a strong European response to avoid policy
fragmentation
The risk of increasing policy fragmentation among member
states remains of crucial importance. Fearing that the Un-
ion might be unable or too slow to react collectively, mem-
ber states tend to revert to national approaches to face the
energy crisis. In some cases, the European Union itself
has become the scapegoat, as highlighted by the growing
criticism targeting the alleged weaknesses of the European
electricity market, sometimes referred to as the main culprit
of the surge in electricity prices.
This tendency has become particularly vivid in France re-
cently, with various members of the government and MPs
asking for a massive overhaul of the EU electricity market
to “decouple” gas and electricity prices, sometimes even
referring to a “Frexit” of the integrated energy market.
This overly simplistic approach neglects that France has
long been one of the main beneficiaries of the integrated
Intereconomics 2023 | 1
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electricity market, considering that it has been the great- crisis places us at a critical juncture: we can either remain
est net exporter of electricity for years (with up to 60 TWh stuck in the old world at the risk of suffering ever more
some years), while also heavily relying on imports during violent crises, or find the courage to embrace opportunity
cold winters, because of its high share of electric heating. to finally embark on the path to a more resilient society.

The political focus on potential short-term fixes of the

electricity market design might miss the point: the cur-
rent crisis is and remains a crisis of (imported) fossil fu-
els, and the best way to address it is by limiting the price
impacts through collective action and massively acceler-
ating the transition towards low-carbon energy to reduce
this dependency.
The former illustrates the crucial need for a new political
narrative that insists on the fact that European integration
and collective action is a solution to and not a reason for
this crisis, and that all member states will greatly benefit
from a common approach to resolving this crisis.
This could effectively be achieved through an EU-wide
gas price cap, combined with binding gas saving targets
to avoid an increase in consumption (as observed in Spain
after the implementation of a price cap on gas in the elec-
tricity market),6 which might be the most effective way to
avoid costly national tariff shields and national subsidies
altogether (see Fabra et al., 2022). This would also help to
eliminate the risk of a “race to the bottom” and resulting
political tensions between member states with different
funding capacities, each trying to improve its economic
competitiveness against its direct neighbours.
The latter point indicates that a massive upscaling of cli-
mate policy targets and investments is required, as indi-
cated by the REPowerEU Plan,7 with two essential con-
ditions. Firstly, accepting that, beyond any short-term
fixes, the existing energy market design needs to evolve
in accordance with the current policy challenges of mak-
ing low-carbon and particularly renewables the dominant
source of energy across Europe.8 And secondly, under-
standing that social justice is a key priority to make this
transition happen in the coming decade.
References
Bourgeois, A. and R. Lafrogne-Joussier (2022), La flambée des prix de
l’énergie : un effet sur l’inflation réduit de moitié par le « bouclier tari-
faire », INSEE Analyses, 75.
Clavères, G. (2022), Répartition des pertes dues à la dégradation des
termes de l’échange énergétiques, Trésor-Eco, 318.
Conesa, E. (2021, 31 March), Covid-19: l’impossible pari du « quoi qu’il en
coûte » dans une crise qui se prolonge, Le Monde.
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l’exécutif débloque 45 milliards d’euros pour prolonger le bouclier
tarifaire, Le Monde.
Cornuet, F. (2022), Entre janvier 2021 et juin 2022, la hausse des prix de
l’énergie a entraîné une perte de pouvoir d’achat, malgré la mise en
œuvre des mesures exceptionnelle, INSEE Analyses, 78.
CRE (2022, 8 November), La CRE réévalue les charges de service public
de l’énergie à compenser en 2023 à – 32,7 Md€.
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tion down to 9.2%, euroindicators, 2/2023.
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economists for an EU-level gas price cap and gas saving targets,
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lion energy support scheme, Euractiv.
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milliards d’euros en trois ans, indique Bruno Le Maire.
Langot, F., S. Malmberg, F. Tripier and J.-O. Hairault (2022), Loi de finance
2023: quel impact a eu le bouclier tarifaire sur la croissance, l’inflation,
la dette publique et les inégalités?, CEPREMAP, Note de l’Observatoire
Marcro, 2022-5.
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évolution artistique, OFCE le blog.
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By revealing the economic, social and environmental con-

sequences of our dependency on fossil fuels, the energy

6 According to data from the Spanish transmission grid operator, Red

eléctrica, the electricity generated by combined-cycle gas turbines
has increased by 42% between the second half of 2021 and the sec-
ond half of 2022 (after implementation of the gas price cap), even
though renewable output has been slightly higher.
7 The REPowerEU plan indicated a figure of €210 billion of additional
investments needed to phase out Russian fossil fuel imports by 2027.
8 In its 2022 report on the state of the Energy Union, the EU Com-
mission states that the share of renewable electricity should reach
around 70% by 2030, which would imply a share of low-carbon gen-
eration (including nuclear) above 80%.

ZBW – Leibniz Information Centre for Economics

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Isabella M. Weber, Thore Beckmann and Jan-Erik Thie
The Tale of the German Gas Price Brake: Why We Need Economic
Disaster Preparedness in Times of Overlapping Emergencies
The gas price shock has been a major contributor to in-
flation in Germany. In this context, Dullien and Weber
(2022a, b, c) proposed a two-tier pricing scheme for
natural gas in the spring of 2022 that lowers the price
for a base quota through a subsidy while maintaining
high market prices on the margin. In response to the war
in Ukraine, the German government acted swiftly to try
to access new sources of gas supply. However, it was
not until September that the government decided to
dampen the effects of the gas price shock and initiated
the so-called “gas price brake” that implements such a
two-tier system.
In this article, we argue that the gas price brake makes
a critical contribution towards providing relief for house-
holds, and alleviates cost pressure on firms while retain-
ing incentives for consumers and businesses to save
gas. It is also an important measure for macroeconomic
stabilisation and marks a breakthrough in the policy ap-
proach to price shocks in systemically significant sec-
tors. The gas price brake establishes that targeted price
stabilisation can be an important tool for governments in
times of emergencies. Yet, the delay in responding to the
price shock meant that the speed of policy implemen-
tation had to take priority over everything else and that
help came at a time when the shock had already perco-
lated through the whole economy. Our times of overlap-
ping emergencies require disaster preparedness in eco-
© The Author(s) 2023. Open Access: This article is distributed under the
terms of the Creative Commons Attribution 4.0 International License
(https://creativecommons.org/licenses/by/4.0/).
Open Access funding provided by ZBW – Leibniz Information Centre
for Economics.
Isabella M. Weber, University of Massachusetts,
Amherst, USA.
Thore Beckmann, German Network for Pluralist
Economics, Berlin, Germany.
Jan-Erik Thie, Macroeconomic Policy Institute (IMK),
Dusseldorf, Germany.
10
DOI: 10.2478/ie-2023-0004
Intereconomics, 2023, 58(1), 10-16
JEL: D47, E31, O13
nomic policymaking for governments to be able to react
to sectoral shocks without delay (Weber et al., 2022).
The threat of gas shortages and the price shock:
Germany’s heavy reliance on gas
Russia’s war against Ukraine has derailed the European
energy system, with Germany hit particularly hard. While
Germany was importing large amounts of oil and coal
from Russia,1 Europe and Germany were most depend-
ent on Russian natural gas imports. Germany is respon-
sible for around a quarter of all gas consumption in the
EU (Ritchie et al. 2022). According to Destatis (2022),
95% of the roughly 905 TWh natural gas that was con-
sumed in Germany per year is imported, of which 55%
came from Russia in 2021. The German state could have
used the opportunity of low or even negative borrow-
ing rates in the years before the pandemic to create a
green energy infrastructure and pioneer a green transi-
tion. Instead of leading the way to tackle climate change,
the Merkel government prioritised a balanced budget.
Locked into fossil fuels, the high dependency on Rus-
sian gas became a serious cost burden to key German
industries and about half of German households who
use natural gas for heating. With the onset of the crisis,
the impetus in Germany was put on reducing gas con-
sumption while finding substitutes for Russian gas on
the world market and building a new liquefied natural
gas infrastructure.
The gas crisis has put a dual pressure on the German
economy: the looming threat of physical gas shortages
as well as an enormous cost pressure following from
price shocks induced by the turmoil on the energy mar-
kets. In parallel to natural gas, oil and electricity also
experienced significant price increases. This had ma-
jor implications for overall inflation and macroeconomic
stability. Of the 10.4% headline inflation in October 2022,
4.6 percentage points reflect the cost increase for ener-
gy and fuel consumption (Endres and Tober, 2022). The
contribution of energy and fuels is even larger if we also
account for indirect effects that result from the cost-
1 According to Destatis, 45.2% of German oil imports came from Rus-
sia in 2021 (27,741 tonnes). In 2020, according to the BDEW (2022b),
45% of German imports of black coal came from Russia.
Intereconomics 2023 | 1

push impact of systemically significant prices through-
out the industrial production network. 2
In Germany, the average price of gas for households in-
creased more than threefold from 6.11 cents per kWh
in the first quarter of 2021 to an average of 20.04 cents
per kWh in the fourth quarter of 2022, even though
the government eliminated the value added tax of 7%
(BDEW, 2022a). Wholesale gas prices have increased
even more dramatically. EU Dutch TTF rose from €4.77/
MWh on 31 March 2021 to well above €150/MWh from
July to October 2022, indicating additional price pres-
sure.
Energy-induced inflation hits people with less savings
and financial flexibility the hardest. Households in the
lower income deciles are particularly affected as they
spend a larger share of their income on essentials like
energy, food and transportation (Endres and Tober,
2022). But the gas price shock also overburdens middle-
class households.3 Prices have been too high in relation
to household income way into the middle of the income
distribution while demand of energy is relatively inelas-
tic. Endres and Tober (2022) point out that the energy-
driven inflation that Germany has experienced has sig-
nificant distributional consequences. While a family with
two children in the lower income deciles experienced
inflation of 11.8%, singles in the higher income deciles
faced an inflation of only 8.4%.
In a time when many people were pushed to the limit by
the price explosion in essentials like gas, fear of social
unrest emerged in German policy discussions. Demon-
strations for immediate relief packages (Tagesspiegel,
2022), a run on consumer centres (Zeit, 2022a) and an
increasing fear of being overburdened by regular bills
(WSI, 2022) are just some of the signs that large shares
of the population have felt threatened by energy inse-
curity. High gas prices have also figured prominently
in demonstrations organised by right wing groups in
many cities in autumn 2022 (Tagesschau, 2022).
Energy-intensive companies provide basic inputs at the
beginning of value chains. Price increases of 300% to
400% compared to pre-crisis levels have been a real-
ity for many industrial firms and can potentially under-
2 See Weber et al. (2022) for an analysis of the contribution of systemi-
cally significant prices such as those of gas and oil to inflation in the US
and Weber and Wasner’s forthcoming analysis of the propagation of
cost shocks along the value chain.
3 For example, a typical one-family household with a gas consumption
of 22,000 kWh paid €1,430 in 2021 (assuming a price of 6.5 cents per
kWh). Without the gas price brake, the gas bill would have increased
to €7,040 in 2022 (32 cents per kWh).
ZBW – Leibniz Information Centre for Economics
Forum
mine the competitiveness of energy-intensive industries
(PWC, 2022; Heymann, 2022). The Deutsche Bundes-
bank (2022a) went as far as to warn that the gas price
crisis could mark the beginning of an accelerated dein-
dustrialisation in Germany as key industries could move
to countries that provide a cheaper and more secure
energy supply. If such German companies decided to
move production elsewhere in response to the energy
crisis, it could imply the destruction of thousands of for-
merly secure and well-paid jobs in the German industrial
sector (Hüther, 2022; Die Zeit, 2022b). It could also mean
a setback for green reindustrialisation as a lot of indus-
trial capacity and know-how is on the line.
The policy debate: What to do about the gas price
shock?
In February 2022, Dullien and Weber (2022a) first called
for a policy broadly resembling what came to be known
as the “gas price brake”. They proposed to cap the price
of households’ basic consumption by fiscal means while
leaving market prices to govern marginal consumption.
This follows the principle that prices are stabilised where
consumption fulfills basic needs, while preserving price
incentives for more digressionary consumption. Based
on this basic need principle, they recommended a per
capita quota of price-capped gas. The initial response
from economists was overwhelmingly critical. Unions
were the first to officially endorse the policy proposal.
With the onset of Russia’s war on Ukraine, more and
more interest groups started to support the idea of a
gas price brake as a key instrument to tackle the crisis.
Broad social support built up over the course of 2022.
Groups and parties that represent opposed interests
for the most part issued endorsements for a two-tier
gas price policy: organisations of landlords and tenants
(GDW, 2022; ZDF, 2022); consumer protection organi-
sation and retail and wholesale associations (Energate,
2022); the Left and the Christian Democrats (CDU/CSU,
2022; Linke, 2022). Some economists came up with their
own versions of non-linear gas price policies (e.g. Bayaz
and Grimm, 2022). Many economists remained sceptical
of any interference with the price mechanism discount-
ing that the market price at the margin would preserve
incentives to save gas (Hildebrand and Olk, 2022; Haus-
er, 2022).
Initially, the burden on households using gas was not ad-
dressed in a targeted fashion. In the fight against infla-
tion, the main focus has been on the ECB. Meanwhile,
purchasing power has been propped up by a sequence
of relief packages providing cash transfers of €300 to
employees through their paychecks. Many could not be
11
 Forum
reached in the first round due to a lack of payment infra-
structure for direct cash transfers. Pensioners received
direct financial support only as late as December 2022.
As of today, students are still waiting for their direct pay-
ments. The specific burden on households dependent
on gas was not addressed. Some received money they
did not need; many gas customers got transfers that
were welcome but not enough to cover the cost burden.
Some households dependent on gas were not reached
at all. Meanwhile, inflation kept climbing higher. The
cost-push of rising energy prices trickled through value
chains during the summer. This resulted in significant
price increases, for example in the gas-intensive, sys-
temically important chemical industry, where in the third
quarter of 2022 prices rose by 23.7% compared to 2021
(VCI, 2022).
Before shifting to a price stabilisation strategy, the Ger-
man government initially wanted to implement exactly
the opposite: as late as September 2022, the govern-
ment was on the verge of passing a law that would
have imposed a surcharge on gas consumption – the
so-called Gasumlage – to finance the bailout of Uniper.
Every household and industrial customer was meant to
pay an additional 2.4 cents per kWh for gas starting in
October 2022. The Gasumlage stirred a lot of opposition.
In late September 2022, the German government made
a policy U-turn and announced the so-called Doppel-
Wumms – a massive €200 billion financial programme
with a gas price brake as the core measure. To design
such a price stabilisation policy, an expert commission
was appointed by the German government. One of the
authors of this article was fortunate to serve on this com-
mission. Members of the commission included CEOs
of utility companies, industry representatives, unions,
charity and environmental organisations and academic
economists. The task was to design a policy that would
achieve the balancing act of lowering prices while at the
same time providing sufficient incentives to continue the
reduction in gas consumption. The scope was not just
households but all firms in Germany.
The gas price brake policy
The gas price brake follows the basic logic we introduced
in relation to Dullien and Weber’s (2022a, b, c) proposal.
It defines a price-capped quota for every household and
firm. Unlike in the initial proposal for households, this is
not defined in per-capita terms but as a share of past
usage. All consumption above that quota is at market
prices. This also renders the national gas price brake
complementary to the EU-level gas price cap that was
passed shortly after. Under the gas price brake, prices
are capped at a level that corresponds to a “new nor-
12
Figure 1
Exemplary gas bill at different levels of gas savings
Balance of household's gas bill, in euros
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
0
0 -10 -20 -30 -40 -50
Consumption reduction compared to 2021, in percent
Note: One-family house, gas consumption of 22,000 kWh.
Source: Authors’ calculation.
mal”, i.e. the price level projected to prevail when the cri-
sis eases. Thus, the gas price brake does not fix prices
at pre-crisis levels but aims to smooth the transition to a
world of structurally higher gas prices by dampening the
effect of the current gas price shock.
The gas price brake policy distinguishes two groups of
users: non-industrial gas users, including households
and firms, and large-scale industrial users. All users with
an annual gas consumption of less than 1.5 million kWh
belong to the first group and all others to the second
group. For every gas user, the gas price brake is imple-
mented as a discount calculated according to the follow-
ing formula:
Discount = ^contractual gas price - gas price gap h
x price-capped quota
The first part of the equation is the difference between
the current (high) gas price and the price cap of 12 cents
per kWh. The quota in the second part of the equations
is 80% of a consumer’s expected gas consumption
based on past use. Consumption above the 80% thresh-
old must be paid at full market prices.
This pre-defined discount is fixed and independent of
actual gas consumption. Therefore, households can sig-
nificantly reduce their annual gas bill if they save more
than 20% of the projected gas consumption (which for
most customers is based on the past year’s consump-
tion). The gas bill can even drop to zero. For instance, if a
household currently has to pay 32 cents per kWh, saving
50% on projected gas consumption (for simplicity here
illustrated as the same as in 2021) would result in a gas
bill of 0 euros (see Figure 1).
Intereconomics 2023 | 1

However, according to the gas price brake legislation,
energy bills cannot turn negative. This means the gas
price break remains a two-tier pricing scheme but
with saving incentives that go beyond a price cap for
base consumption. Rich households are likely to have
more capacity to save and are likely to benefit more
from the lump sum element that is part of the gas price
brake than poorer households. But if they have a sec-
ond home, rich households are not paid by the state
for vacant and thus unheated homes because the gas
bill cannot turn negative. Businesses benefit if they in-
crease their energy efficiency or reduce their operating
rate and thus lower their gas consumption below 80%
of projected usage, but they are not paid for shutting
down their operation entirely. The gas price brake for
non-industrial customers will be effective from March
2023. For January and February 2023, the gas price
brake will apply retroactively. To provide immediate
support to households, the government also covered
a months’ worth of gas costs in December, which has
already lowered measured inflation.
The gas price brake largely followed the recommenda-
tion of the expert commission. The commission acted
under enormous time pressure. It was called into ses-
sion in late September and had to deliver the decisive
interim report by 10 October 2022. Given the time
frame, feasibility constraints as assessed primarily by
utility companies were key in setting the terms for the
policy design. This has resulted in a gas price brake
that is less socially balanced than the initial proposal
by Dullien and Weber (2022a, b, c) for a fixed per capita
quota. Since on average gas consumption rises with in-
come, this would have resulted in poorer households
having a larger average share of their gas consumption
subsidised compared to richer households. It would
also have avoided penalising households that already
made great efforts to save gas before the 2022 crisis,
be it because of financial pressures given elevated gas
prices in 2021 or due to environmental concerns. Such
a per capita approach was, however, not feasible given
the short timeline due to limited data availability and
bureaucratic capacity. With the gas price brake that
is now being implemented, all households will benefit
equally in relative terms. In absolute terms, however,
rich households will on average benefit more than poor
households (Bauermann et al., 2022; Kellner et al.,
2022). A floor and a ceiling for the price-capped quota
were intensely discussed in the parliamentary process
to make the distributional effects of the gas price brake
more balanced (Weber, 2022a, b). They were not imple-
mented at this stage mainly due to feasibility concerns
on the part of utility companies in charge of the imple-
mentation of the gas price brake.
ZBW – Leibniz Information Centre for Economics
Forum
The gas price brake for industrial users works in a simi-
lar way to that for non-industrial customers. The price-
capped quota is defined as 70% of the previous year’s
gas consumption with a price cap of 7 cents per kWh.
This alleviates the massive cost pressure to which com-
panies are exposed. Usage above this quota is at mar-
ket prices. Therefore, analogous to the price brake for
non-industrial users, the industry instrument contains
significant saving incentives and is complementary to
the EU gas price cap. The total subsidy is determined in
advance and paid out to companies on a monthly basis.
The industrial gas price brake became effective in Janu-
ary 2023. Further, the total amount of subsidies any one
company can receive as part of the gas price brake is
capped to bring the policy in line with EU regulations.
For energy-intensive companies, the maximum subsidy
is €150 million. For all other companies, it is €4 million.
Companies receiving a subsidy of more than €2 million
must secure the production location and are obliged to
maintain 90% of the jobs for a full year – unless they have
collective bargaining and company agreements in place.
The gas price brake policy does contain some condition-
alities but the thresholds are very high and the link with
the urgently needed energy transition remains limited.
Companies that received subsidies in excess of €25 mil-
lion are not allowed to increase bonuses and dividends.
If the subsidy passes the threshold of €50 million, bo-
nuses and dividends are prohibited altogether. Further-
more, subsidies above €50 million oblige companies to
present a plan to the government outlining the meas-
ures to improve environment protection with a specific
focus on, among other things, electrification measures
to expand the use of renewable energy sources, energy-
efficiency measures and other initiatives to improve the
company’s carbon footprint.
More ambitious conditionalities that could have con-
tributed to lowering inflation and encouraging green in-
vestments fell between the cracks in the rushed policy
process. If, for example, companies had been obliged
as part of the gas price brake programme to pay back
the subsidy in case they generated windfall profits, that
would have created a powerful mechanism to ensure
that lowered gas input prices are translated into lower
output prices. In addition, green investments could have
been made deductible, so that firms that reaped profits
above a certain threshold could avoid paying back the
subsidy by contributing to the urgently needed energy
transition (Weber, 2022a, b).
One of the points of contestation among German econ-
omists was whether companies should receive a so-
called “hibernation premium” either by being allowed
13
 Forum
to resell their subsidised gas at current market prices or
through a lump sum payment of the subsidy, independ-
ent of whether firms shut down their production. Advo-
cates for this approach argue that this will ensure an
efficient allocation of the scarce resource gas at a time
when such efficiency is needed most (Bayer and Jung,
2022). In this way, the government would subsidise pro-
duction shutdowns and the market would decide who
does and who does not produce (Bayer et al., 2022).
Opponents of this idea argue that a hibernation premium
can trigger dangerous cascading effects: Shutdowns are
most likely at the energy-intensive beginning of value
chains, which are points of great vulnerability for the sta-
bility of the industrial system. Shutdowns in sectors that
produce key inputs can exacerbate supply chain issues
and shortages, which can have ripple effects beyond
the domestic economy given Germany’s position as an
important exporter of goods like chemicals and machin-
ery (Dullien et al., 2022; Krebs, 2022a, b). Furthermore,
given the enormous volatility of gas prices in an environ-
ment of extreme uncertainty due to the war, it is not clear
whether market prices present correct scarcity signals
(Krebs, 2022b). Instead of shielding industry from the full
force of price fluctuations while maintaining price incen-
tives to save, a hibernation premium carries the risk of
accelerating deindustrialisation, increasing an inflation-
ary cost-push dynamic and exacerbating macroeco-
nomic downward pressures. The German government
has decided not to implement a hibernation premium: for
industrial customers like for all other gas users, the total
gas bill is not allowed to become negative. In order to re-
ceive the subsidy, a company must therefore continue to
use gas as part of its business operation and not simply
have a gas account from past use.4
Overall, the gas price brake represents a targeted meas-
ure and constitutes a shift in policy thinking toward
smart and strategic price stabilisation as part of emer-
4 Consider the following example to illustrate this point. An energy-
intensive company used 100 million kWh of gas in 2021. Accordingly,
the company’s price capped quota is 70 million kWh. Multiplied by the
difference of an assumed current gas price of 18 cents and the price
cap of 7 cents, the maximum subsidy for that company is €7.7 million
(70 million kWh times 11 cents). The company is entitled to receive
and to retain this maximum subsidy as long as its actual gas procure-
ment costs for its own use are equal to or exceed €7.7 million. In this
example, the company’s overall gas bill (procurement costs minus
subsidy) would be exactly zero. This corresponds to a usage of 42.8
million kWh of gas. If, however, the same company decides to use
only say 20 million kWh during the time of the gas price brake, then it
only receives a subsidy of €3.6 million, because the overall gas bill is
not allowed to be negative. Below a certain threshold, in this exam-
ple 42.8m kWh of gas usage, the subsidy is shrinking with decreas-
ing procurement costs. Of course, the company can decide to close
down the production site and not use any gas at all. However, then it
will not receive any subsidy.
14
gency economics. The Deutsche Bundesbank (2022b)
estimates that the household part of the gas price brake
alone will lower inflation by one percentage point in 2023
and this does not take into account any effects from
lower costs. Nevertheless, the policy could have been
more socially balanced. Due to the delay in the policy re-
sponse, help comes very, if not too late for many house-
holds and firms – especially the vulnerable ones. The gas
price brake is designed to dampen the price shock. But
it becomes effective at a time when the first major gas
price explosion that peaked in August is easing. Yet, this
does not make the gas price brake redundant: it offers a
price guarantee for the larger part of gas use, which pro-
vides households and businesses with greater certainty
on their financial outlook and thus enables them to plan
ahead and invest. The gas price brake also preserves
households’ purchasing power, which together with
enabling investments, helps mitigate a consumption-
driven recession. Analysts have in fact already adjusted
previous predictions for a recession since the gas price
legislation has been passed. Additionally, the cost of the
subsidy necessary to bring down the gas price to the
price cap depends on the level of the market price, so
the lower the market price the less costly the gas price
brake, which is important as a shield against ongoing
price pressures and possible future price explosions. It
would have been even better if it had been put in place
sooner.
The future is now: New mindsets and institutions for
overlapping emergencies
The energy crisis in Europe was a shock induced by a
war and geopolitical confrontations. We are living in a
time of overlapping emergencies that renders future
price shocks likely (Weber et al., 2022). From the cli-
mate crisis to the COVID-19 pandemic and ongoing ge-
opolitical confrontations, sectoral shocks are prone to
become more systemic. If they hit systemically signifi-
cant sectors like energy, shocks can have far-ranging
implications for monetary stability. At the same time,
inflation affects households differently. While richer
households can buffer price shocks to essentials more
easily, such shocks can be an existential threat for
poorer households.
What is required in this time of overlapping emergencies
is a new mindset from a reactive management of shocks
to a form of economic policy disaster preparedness.
Monetary stabilisation policies must go beyond mon-
etary policies. The crisis year of 2022 has demonstrated
that the ECB is not equipped to absorb an energy price
shock where it hits. This requires new institutions that
monitor price movements in systemically significant sec-
Intereconomics 2023 | 1

tors and policy preparedness that enables a swift and
targeted response to sectoral shocks. Shocks need to
be absorbed with suitable policies where they hit instead
of letting them ripple through the whole economic sys-
tem (Weber et al., 2022).
The experience of other European countries shows that
a less reactive approach is possible. In France, for ex-
ample, gas and electricity prices were capped already
in late 2021. Unlike in Germany with over 1,000 gas sup-
pliers, utilities in France are few in number and mainly in
the hands of the state. That is one reason why price caps
could be implemented without much delay. The French
price cap unlike the German gas price brake lacks in-
centives to save gas. But the swiftness with which state-
owned entities were able to react to a crisis affecting a
basic good like gas for heating is instructive.
The energy crisis has highlighted once more that struc-
tural changes are needed to overcome dependence on
fossil fuels. The best way to achieve this is to acceler-
ate the transition to a climate-neutral economy. The gas
price brake can only buy time for that urgently needed
transformation of the German economy towards a
greener industrial state. The expert commission on gas
presented a range of recommendations on short-term
investment initiatives, e.g. to improve the energy effi-
ciency of low-income housing, that the government has
not yet acted upon. The lasting success of the gas price
brake will ultimately depend on whether the bought time
is used to leverage Germany’s current industrial strength
to initiate ambitious investments into greening the econ-
omy. This demands massive public investments in the
expansion of renewable energies, in railway networks
and housing. In this decade alone, an additional €160
billion would need to be invested in green infrastruc-
ture in Germany (Murau and Thie, 2022). First steps are
being taken (Finke, 2022), but much more is needed. A
paradigm shift from the reactive crisis management of
the past years towards emergency preparedness and a
mission-oriented, market-shaping state is necessary to
turn the crisis into an opportunity (Weber et al., 2022;
Mazzucato, 2021).
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Intereconomics 2023 | 1
16
DOI: 10.2478/ie-2023-0005
Giuseppe Simone and Mario Pianta*
Understanding Inflation: The Italian Case
In 2022, the return of inflation drastically changed the
economic landscape in Italy as well as the rest of Europe.
The average annual growth of the Harmonised Index of
Consumers Prices (HICP) in Italy reached 8.7% (com-
pared to 1.9% in 2021), and the monthly change over the
previous year reached 12.3% in November 2022. Starting
in late 2021 with a major rise in imported energy prices,
inflation then spread to producer prices and set in motion
a process of readjustment in the economy as a whole.
We have to understand the inflationary shock as a trans-
fer of real income from the domestic economy to energy-
supplier countries, and – internally – from the economic
actors operating with unchanged prices and incomes to
the industries, firms and individuals in a position to in-
crease them. This process of redistribution is shaped by
power asymmetries among economic actors and by pub-
lic policies regulating energy prices, the operation of mar-
kets and the redistribution of incomes.
Without public control of energy markets, the industry
has obtained large excess profits; firms in oligopolistic
markets and with some degree of market power have
increased their prices to compensate for more costly
inputs; firms unable to raise prices have experienced a
squeeze in profit margins. In the longer term, firms may
respond to the inflationary shock with investment in new
technologies and organisations that reduce the monetary
cost of energy and other expensive imported inputs, or
that expand the value of exports relative to imports, lead-
ing to a recovery in efficiency and competitiveness.
Individuals are exposed in different ways to the effects of
inflation. Poorer households devote a greater share of their
© The Author(s) 2023. Open Access: This article is distributed under the
terms of the Creative Commons Attribution 4.0 International License
(https://creativecommons.org/licenses/by/4.0/).
Open Access funding provided by ZBW – Leibniz Information Centre
for Economics.
* The authors are indebted to Claudio Gnesutta and Matteo Lucchese
for in-depth discussions on the issue, and thank Matteo Lucchese for
his crucial help on data analysis.
Giuseppe Simone, University of Bologna, Italy.
Mario Pianta, Scuola Normale Superiore, Florence,
Italy.
ZBW – Leibniz Information Centre for Economics
Forum
Intereconomics, 2023, 58(1), 17-21
JEL: E31, E60, E64
incomes to energy and food, and are hit hardest by price
increases. Moreover, individuals have little ability to re-
spond to inflation. Self-employed workers may have some
opportunity to increase the price of the services they
provide, depending on their market power. Conversely,
employees’ real wages are seriously eroded by price in-
creases; automatic adjustments of wages to prices have
a modest relevance and a recovery of real wages can only
come from demands in collective wage contracts; these,
however, face a strong resistance by firms. Moreover, an
increasing number of workers – including many in tempo-
rary and part-time employment – are not covered by col-
lective contracts and have few prospects to recover their
losses in real wages. Labour conflicts over the protection
of real wages may result from these tensions.
Moving from income flows to the stock of assets, price
increases mean that the holders of financial wealth face
the erosion of the nominal value of stocks and bonds. In-
flation undermines the foundation of financial expansion
and is addressed by monetary authorities with restrictive
measures on money supply and interest rates.
In economies with national currencies, a higher inflation
tends to be reflected in exchange rate adjustments and
currency devaluations that may have further wide-ranging
effects on a country’s competitiveness and income dis-
tribution. Monetary and exchange rate policies are cen-
tralised in the hands of the European Central Bank for
countries with differing rates of price increases, leading to
additional problems of potential policy mismatch.
In these ways, inflation brings about a wide-ranging re-
distribution of incomes, hitting mostly the weaker parts of
the economy and society. Inflation becomes an issue of
political contention and a challenge for governments, and
public policy plays a key role in addressing the dynamics
and effects of inflation and in managing the conflicts over
income distribution that may emerge. These adjustments
end when the external shock disappears and the result-
ing new set-up in terms of production, income distribu-
tion and policy actions becomes socially and politically
acceptable under the new domestic and international
conditions.
Following this analytical framework, we investigate the
case of Italy, the dynamics of inflation, the trends in prices
and wages, considering the compensatory policies that
have been adopted and the broader actions that have ad-
17
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Figure 1
Inflation in Italy and the euro area
Annual rate of change, monthly data, January 2019-December 2022
14
12 84
10 70
8 56
6 42
4 28
2 14
0 0
-2 -14
2019 2020 2021 2022
Italy (Energy; right axis)
Italy (HICP - all items)
Italy (Overall index excluding energy, food, alcohol and tobacco)
Euro area (HICP - all items )
Euro area (Overall index excluding energy, food, alcohol and tobacco)
Source: Eurostat.
dressed inflation through fiscal, monetary, industrial and
price control policies.
Trends in prices
Figure 1 shows the evolution of consumer prices in Ita-
ly and the euro area in 2021 and 2022. Both the overall
measure and the index (excluding energy goods) shows
that Italy experienced a lower price increase than the
rest of the euro area, until the very end of 2022. A large
part of the inflation rate is due to energy, confirming the
origin of the shock in imported energy prices, rather than
in domestic demand factors (Pasimeni, 2022).
The rise in international energy prices started in late 2021, in
parallel with rising tensions between Russia and Ukraine. In
December 2021, the increase of the HICP of energy goods
was 30% in Italy and 26% in the euro area compared to the
same month of the previous year. In February 2022, Rus-
sia’s invasion of Ukraine led to economic sanctions and the
restrictions on the import of Russian gas. The ensuing dra-
matic increase in energy prices peaked in Italy in Decem-
ber 2022 with a 70% increase over the previous year due
to Italy’s strong dependence on imported energy as well as
to the volatility of speculation-driven international energy
markets.
Inflation caused by energy goods then spread across
the Italian economy; in December 2022, food prices in-
creased by 11.6% over the previous year, and a variety
of goods and services recorded substantial price hikes,
pushing up core inflation.
18
Figure 2
Inflation in Italy for income classes
HICP, annual rate of change, monthly data, January 2019-September 2022
14
12
10
8
6
4
2
0
-2
2019 2020 2021 2022
Rrichest quintile of households
Poorest quintile of households
Second quintile of households
Third quintile of households
Fourth quintile of households
Overall HICP
Source: Istat (2022a).
Inflationary pressures driven by energy and food affect
households unevenly, as poorer households consume a
larger share of their disposable income for such goods.
A study by Istat (2022a) has divided Italian households in
five income groups according to their purchasing power,
calculating a HICP measure for each of them on the basis
of their consumption patterns. Figure 2 shows that in the
third quarter of 2022, prices grew by 11.6% (year-on-year)
for the poorest 20% of the population, while they grew by
7.6% for the richest quintile. The three poorer quintiles of
Italian households experienced price increases higher
than the 8.9% national average.
The effects on wages
In 2021, the nominal wages of private sector employees
covered by the national collective agreement increased
by 0.8%, and in 2022 (January to November) the increase
was 1%. The stability of contractual wages is in sharp
contrast with the rise in inflation, as shown by Figure 3;
according to Istat (2022c), in the first nine months of 2022,
the gap between the growth of the general price level and
of real wages reached 6.6 percentage points; in Novem-
ber 2022, the gap was around 11%.
A 2009 agreement between employers and unions regu-
lates the renewal of collective wage agreements. Italian
nominal wages follow a price adjustment based on the
three-year forecast of an inflation index estimated by Istat
excluding imported energy goods (HICP-NEI). The 2022
estimate of the HICP-NEI is equal to 4.7%, a value below
the 8.7% of the average annual inflation of 2022, but also
below the 6.5% price increase of the index net of energy.
Intereconomics 2023 | 1
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Figure 3 Figure 4
Changes in prices and wages Government compensatory measures on the effects
Annual rate of change, monthly data, January 2019-November 2022 of inflation
Estimates of government selected measures to counter inflation in 2021-
13 2023, in billion euros

Wage index 21.9

11 Total 60.1
HICP - all Items 5.6

Firms
HICP excluding energy 9.8
9 Tax credits 20.3

6.9
7 Households (total) 15.7
0.5

Households
5 4.0
Support to social security 2.6

3 0.3
Social bonus 9.9
0.0
1 Energy bonus 2.5
(eletricity and gas) 0.5 3.2
-1 5.2
2019 2020 2021 2022 Tax reduction (total) 24.1
5.1

Source: Istat (2022b).
Italy’s current mechanism of adjustment of nominal wages is
inadequate to protect real earnings, especially those of the
lower income employees, who are more exposed to losses in
real wages. Moreover, the renewal of collective contracts is
extremely lagging, and Italy’s CNEL (2022) documented that
591 out of a total of 955 contracts had expired in Decem-
ber 2022; out of 12.8 million employees in the private sector,
6.8 million had expired contracts, with negotiations – includ-
ing agreements on the recovery of real wages – being post-
poned by the resistance of employers.
Losses in real wages are particularly serious for employ-
ees not covered by collective agreements and for those
with low-wage temporary and part-time jobs. The post-
pandemic recovery has been associated in Italy with a
proliferation of precarious employment, with about two-
thirds of all new jobs created in 2022 that are temporary in
nature (Cirillo et al., 2022).
In order to reduce inequalities in the face of inflation, the
general instrument for protecting real wages has been the
indexation of wages to prices, a sensitive issue in Italy.
After decades of trade union struggles over the automatic
adjustment of wages to prices in the 1970s and 1980s, a
referendum in 1985 confirmed the government decision to
abolish the “sliding scale” mechanism which had ensured
indexation and protected workers’ real wages. What is left
now in wage agreements is completely inadequate to pre-
vent income losses, and there is a clear need for new na-
tional bargaining arrangements. However, the resistance
by employers’ organisations is combined with the refusal
by the right-wing government of Giorgia Meloni to open
tripartite negotiations on wage adjustments.
Tax reduction
Excise and VAT reductions -0.6
9.1
transportation (oil, fuel) -
0.8
VAT reductions (gas) 2.5
0.6
Energy system 5.0
12.4
charge reductions 4.5
0 5 10 15 20 25 30 35 40 45 50
2021 2022 2023
Source: Authors’ own elaboration on UPB (2022).
The fall in Italy’s real wages, however, did not start with
energy price inflation. The International Labour Organiza-
tion (2022) Global Wage Report 2022-23 documented that
among the G20 countries in the period 2008-22, Italy had
the worst dynamics of real wages, with a fall of 12%. In the
same period, real wages increased by 12% in Germany
and by 6% in France. This long-term decline in real wages
in Italy is at the root of increasing income inequalities, the
rise in poverty and widespread social distress.
Government compensatory measures
In Italy, government policies have mainly focused on com-
pensatory measures to support firms and households
facing sharp increases in energy and food prices. In early
2022, the government of Mario Draghi introduced a range
of policies reducing taxation on energy goods, and grant-
ing subsidies to firms and one-off payments (bonus) to
poorer households. The Parliamentary Accounting Office
(UPB, 2022) estimated that the governments of Draghi and
Meloni allocated more than €116 billion to compensatory
measures for the price hikes over the period 2021-2025;
expenditures amounted to about €70 billion for 2022 and
€32 billion for 2023. In 2022, the resources spent amount-
ed to 3% of GDP, while in 2023, they are expected to be
equal to 1.4% of GDP. Figure 4 shows the main measures
introduced for 2021, 2022 and, in some cases, 2023.

ZBW – Leibniz Information Centre for Economics

19
 Forum
Overall, more than one-fifth of the resources were allo-
cated to households, one-third to firms and one-third to
tax reductions, cutting excise duties and VAT on energy
goods. Figure 4 shows the breakdown of the main types
of measures. An additional €2.2 billion was directed to
support cost increases for local authorities, €13.9 billion
for Public Administration investments and only €3 billion
to help the National Health System cope with the rise in
energy costs (UPB, 2022). During 2022, the measures
introduced were mainly financed by the increase in tax
revenues, including those resulting from greater energy-
related VAT and excise revenues.
General tax reductions included lowering the VAT to 5%
on gas for civil and industrial use (at a cost of about €4
billion) and reducing general system charges for elec-
tricity and gas – costs for supporting renewable energy,
the elimination of nuclear power, etc. – in 2021, 2022 and
the first three months of 2023 (€21 billion in total). Cuts
in excise duties on petrol, diesel, and gas and a reduc-
tion in VAT on gas for transportation were introduced from
March to December 2022 (at a cost of €9 billion). The Mel-
oni government prolonged several measures introduced
by Draghi, but the cut in petrol excise duties was discon-
tinued in January 2023, which resulted in major increases
in consumer prices for car fuel, as well as social discon-
tent, political quarrels and a strike by fuel pumps in late
January 2023.
Government measures supporting firms included tax
credits to offset the increasing cost of production inputs
and specific policies for gas-intensive and electricity-
intensive industrial sectors, along with fishing, transport
and agriculture (Simone and Pianta, 2022). In order to
compensate vulnerable households, the government
introduced measures targeting the poorest population
groups. An energy “bonus” reducing household bills was
financed with €500 million in 2021, €3.2 billion in 2022,
and €2.5 billion in 2023 for families with a total annual
equivalent income below a certain threshold (€20,000 in
2022, reduced to €15,000 for 2023) and with at least four
members. The energy bonus was also provided to people
receiving basic income, social pensions and those with
precarious health conditions.
A one-off social “bonus” of €200 was granted in June
2022 to low- and middle-income workers with a monthly
wage of less than €2,700 or with an annual personal in-
come of less than €35,000, as well as to those receiving
unemployment benefits, minimum wages and social pen-
sions. In November 2022, an additional transfer of €150
was granted to employees with an annual income below
€20,000. In total the cost of social “bonuses” amounted
to €9.9 billion in 2022.
20
Further measures included the reduction of social secu-
rity contributions for low-wage employees and a 2% cost-
of-living adjustment for pensions anticipated in the last
quarter of 2022 at the cost of €1 billion. For 2023, the Mel-
oni government’s budgetary law extended the increase of
the lowest pensions for a total of €4 billion. In total, the
reduction of social security contributions and pension ad-
justments cost about €7 billion.
The transition from the Draghi to the Meloni government
maintained the overall approach to compensatory poli-
cies. Limited changes included the controversial elimi-
nation of tax reductions on fuel, and a more specific
targeting of measures favouring the social base of the
centre-right, including low-income pensioners. However,
the burden for public expenditure is increasing, and in
2023 the government envisages a higher budget deficit
of about €21 billion. This follows from the prospects of an
economic slowdown in 2023, from the higher interest pay-
ments on public debt – both resulting from the European
Central Bank shift to a more restrictive monetary policy –
and from the limited revenue of Draghi’s government tax
on the extra-profits of the energy sector (UPB, 2022).
The impact on inequalities
What has been the impact of inflation, and of the com-
pensatory policy measures, on income inequality in Italy?
This question has been addressed by a study of the Par-
liamentary Accounting Office (UPB, 2022), which exam-
ined the redistributive impact of government policies in-
troduced between June 2021 and December 2022 across
Italian households divided in ten groups based on their
level of expenditure. Without government policies, the av-
erage cost of living hike would have been 9%; the actual
average increase has been 5.4%. For the poorest decile of
the population, the change in expenditure due to inflation
would have been 15.1%; the actual impact was limited to
4.8%, suggesting that policies considerably reduced the
regressive effect of inflation. Social and energy “bonuses”
and the cost-of-living adjustment of pensions were found
to have the highest redistributive effects. Conversely, tax
reductions on energy goods offered greater benefits to
the richer groups in the population. However, the redis-
tributive effectiveness of policies has declined over time.
For the poorest decile of the population, initial price hikes
from June 2021 to May 2022 were fully compensated, but
in the period May-September 2022, a 1.3% increase in
their cost of living was found.
Similar results are presented by a study by the Bank of Italy
(2022), showing that social “bonuses” were the most effec-
tive measure to mitigate the regressive effect of inflation
and limit inequalities; the other measures tended instead
Intereconomics 2023 | 1

to allocate most resources to medium-high income house-
holds. According to this analysis, government actions were
able to offset about 70% of the increase in inequality of
purchasing power (measured by the Gini index) that was
produced by the effects of inflation (Bank of Italy, 2022).
This evidence shows that the current inflation is indeed
increasing income inequality and that the mitigation of-
fered by compensatory measures has been partial, and
with declining coverage.
Corporate excess profits, energy markets and
monetary policy
The policy mix adopted in Italy has focused on compen-
satory measures, while much less attention has gone to
the possibility of containing prices in the international and
domestic markets for energy goods.
In January 2022, Draghi’s government tried to tax firms
gaining from energy price increases with an additional
10% tax rate – later increased to 25%. The tax targeted
profit increases greater than 10% or above €5 million ob-
tained from October 2021 to March 2022; however, the
revenues obtained were much below initial expectations.
At the European level, Draghi’s government pursued the
introduction of an EU-wide cap on gas prices in order to
limit energy price speculation in the Amsterdam market.
Greater EU-wide control over the setting of gas and elec-
tricity prices is an essential instrument to bring inflation
under control. But the policies that have been introduced
so far have not changed the structure and functioning of
the energy and electricity markets in Europe.
In Italy, the energy market is the result of the privatisa-
tion policies of the 1990s, with some public companies
– ENI and ENEL being the major ones – operating along-
side private firms in a market regulated by a weak public
authority. Even companies in which the Italian state is the
controlling shareholder adopted a strategy of maximis-
ing speculative profits in the same way private firms did.
Discussion has not yet emerged on the introduction of a
price cap for consumers or companies in the Italian en-
ergy market, nor are stricter regulations being proposed
to limit the market power of dominant firms, or the inef-
ficiency and instability of market outcomes.
Even less attention has been paid so far to the long-term
challenges. In the Italian debate, there is no mention of
the need for an industrial policy for the energy sector and
there is no consideration of the need to move the Italian
and European economies towards a development model
that is environmentally sustainable, less energy-intensive,
ZBW – Leibniz Information Centre for Economics
Forum
more reliant on renewable energy sources – solar, wind,
hydroelectric – and less dependent on energy imports
from Russia and the Middle East.
Europe’s strongest policy response to inflation has come
from the European Central Bank and its turn to a restric-
tive monetary policy. Interest rates have been raised
several times; after the expansion of quantitative easing,
efforts to reabsorb liquidity are under way. The resulting
prospects include a slowdown in economic growth, lower
investments and aggregate demand, the risk of insolven-
cy for highly indebted firms and banks, and heavier costs
of servicing the high public debt. None of these develop-
ments is able to reduce the rate of inflation, nor can they
address its roots in energy price hikes; on the contrary,
they make the transition to an economy with lower energy
vulnerability more difficult and costly. In crisis after crisis,
Europe’s response shows a recurrent lack of understand-
ing of the nature of the challenge, and the adoption of pol-
icies that are highly inappropriate to address it.
The inflationary crisis that Europe is facing, and the pol-
icy responses that are implemented by governments,
may turn out to be a missed opportunity for address-
ing the structural problems of our economic model.
The monetary restrictions, the focus on compensatory
measures, the failure to prevent predatory pricing and
protect real wages are likely to lead to a regressive re-
distribution, where the burden of adjustment to higher
prices is mainly put on workers’ wages and low-income
groups, resulting in greater inequalities, widespread
poverty and social tensions.
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21
 Forum
Catherine Waddams*
The UK Energy Price Guarantee
When energy prices started rising in 2021, the retail en-
ergy market in Great Britain1 was already subject to a
regulatory price cap. This had been introduced in 2019
to benefit household consumers who were not shopping
around for the cheapest deal in the liberalised retail en-
ergy market, and who had been paying higher prices than
those who were more active in the market. It merged with
an earlier cap, introduced in 2017 for pre-payment me-
ter users, into the Default Tariff Cap from January 2021.
Household consumers who were on a “default” (usually
indefinite, rolling) tariff with their supplier were automati-
cally protected by the cap, which was set twice a year by
the regulator, Ofgem, on a “bottom up” basis of the costs
of retailers over the previous few months.
The cap was set to provide head room for active con-
sumers to get a cheaper tariff in the competitive market,
which was usually on a fixed basis for one or two years.
As wholesale gas prices fell after the first quarter of 2019,
there were indeed good fixed deals available below the
cap; contrary to many forecasts, switching to alterna-
tive suppliers increased initially after the price cap was
imposed, as newer entrants were able to obtain cheaper
supplies in spot wholesale markets, undercutting estab-
lished suppliers who had committed to long-term con-
tracts. However, as wholesale prices rose from the first
quarter of 2020, gradually at first, but much more steeply
from the second quarter of 2021, the situation reversed.
Long-term contracts represented lower costs than could
be obtained on spot markets, and the new entrants, who
often had few financial reserves, could neither compete
for new business nor profitably serve the customers they
were already committed to supplying.
1 Ofgem and the price cap do not operate directly in Northern Ireland,
which receives equivalent help with energy bills.
© The Author(s) 2023. Open Access: This article is distributed under the
terms of the Creative Commons Attribution 4.0 International License
(https://creativecommons.org/licenses/by/4.0/).
Open Access funding provided by ZBW – Leibniz Information Centre
for Economics.
* The author is grateful to Monica Giulietti and Andrew Burlinson for
their very helpful comments.
Catherine Waddams, University of East Anglia,
Norwich, UK.
22
DOI: 10.2478/ie-2023-0006
Intereconomics, 2023, 58(1), 22-26
JEL: L51, M48, Q48
The number of consumers who switched suppliers re-
sponded as might be expected, falling back slightly
but remaining active until September 2021. After this,
switching fell dramatically to lower levels than had been
recorded even in the early days of market opening 20
years earlier, reflecting the withdrawal of fixed price of-
fers from September 2021. As wholesale prices rose,
the price cap initially provided some price protection
for all residential consumers, including both those who
had been inactive in the market and those whose fixed
terms were ending and transferred to the “rolling” tariffs.
This was due to the fact that the cap was based on costs
in the previous six months. However, this posed severe
profitability issues for retailers, especially those who
were paying spot prices for their energy supplies; this
was reflected in the high number of company failures in
this period (see next section). The respite for consumers
was short-lived: wholesale prices rose towards the end
of 2021 and both price levels and volatility increased fol-
lowing the invasion of Ukraine. The price cap and retail
prices rose inexorably in the wake of increasing whole-
sale prices, and its historic and publicly calculated basis
meant that each six-month increase was widely antici-
pated and discussed.
In August 2022, Ofgem announced that the cap would
be reviewed quarterly, rather than twice a year, to ad-
dress the volatility of the wholesale market. Later that
month, it announced that it would increase the annual
bill of a consumer using an average amount of energy
by 80% from the previous tariff, to £3,549 (€4,008) from
1 October to 31 December. This would almost triple
the prices charged compared with the previous winter,
and the announcement caused widespread and under-
standable concern. At a time when other household
costs, especially those of food and housing, were also
rising, energy bills would pose a major concern for many
consumers, especially for low-income consumers, for
whom energy represents a greater share of expendi-
ture than average (Deller et al., 2021). A large proportion
of households would struggle to pay their energy bills
(Bradshaw, 2022).
Although the Conservative Party has remained in pow-
er (since 2010), the UK had three prime ministers (and
four Treasury ministers and three energy ministers), with
very different economic outlooks, in the last four months
of 2022, which meant that policy sometimes seemed
almost as erratic as the energy prices to which it was
Intereconomics 2023 | 1

reacting. The change of leadership also contributed to
the slowness of governmental reaction. The package
of responses to the crisis in place at the beginning of
2023 owes something to each of these regimes: Boris
Johnson in power until 5 September (but having an-
nounced his resignation two months earlier); Liz Truss,
from 6 September to 25 October; and Rishi Sunak from
25 October. Since Sunak was the chief Treasury minis-
ter in Johnson’s government, it is not surprising to see
more continuity between the Johnson and Sunak gov-
ernments than with the short-lived Truss administration.
Exacerbating difficulties for the UK energy market
These pressures on the UK wholesale market have, of
course, mirrored those in Europe and the rest of the
world, initially because of economic recovery from
COVID-19 in the autumn of 2021, and intensified by sup-
ply shortages following Russia’s invasion of Ukraine. A
number of factors, however, have exacerbated the en-
ergy crisis in the UK.
On the supply side, British energy is heavily dependent on
gas, which heats most homes and generates about 40%
of electricity. Since trading is based on marginal cost, ty-
ing the electricity market to the gas market transfers vola-
tility in the gas market directly to electricity prices. Con-
sequently, non-gas generation of electricity yields very
variable profits, in line with the gas price. The govern-
ment announced an additional windfall profits tax on such
generators in April 2022, and the tax level was increased
again in October (discussed below).
A second factor that affects UK energy prices is the
background to the retail market described above, which
had resulted in the exit of 46 retail suppliers from the
market between 2018 and summer 2022, with 28 going
bankrupt in 2021-22, leaving the regulator to arrange new
suppliers for their customers. To foster confidence in the
market and active switching, the regulator had instituted
a guarantee that if their supplier exited the market, cus-
tomers would not lose any credit with the company. In-
stead, another supplier would be found to supply them
at their existing tariff for the time being, and the costs of
this arrangement would be socialised amongst all con-
sumers. Moreover, barriers to entry, including financial
guarantees, had previously been lowered to encourage
the entry of new retailers, many of whom had little ex-
perience with or foundation in energy markets. While, as
we have seen, exit of retailers at times of rising whole-
sale prices is expected, meeting the guarantees of so
many collapses added considerably to retail costs, esti-
mated at £9.2 billion, or £326 (€370) per customer (Gross
et al., 2022). A parliamentary committee has called for
ZBW – Leibniz Information Centre for Economics
Forum
these costs to be recovered through a more equitable
means than the uniform rate charged to each household,
which is independent of consumption. Following these
company collapses, Ofgem has taken a more robust ap-
proach to licensing suppliers, requiring more financial
resilience, which also adds upward pressure on prices.
Thus, current costs include both those already incurred
from past firm failures, and those designed to reduce
such failures in the future.
Electricity supplies are also affected by the loss of capac-
ity to import from continental Europe through an intercon-
necting cable, following a fire in September 2021 at a Na-
tional Grid site in Kent. The facility is not expected to be
fully operational until May 2023.
Britain’s exit from the European Union contributed to
additional uncertainty, as membership of the European
common energy policy lapsed at the end of 2020 and was
replaced by more ad hoc agreements. Continuing uncer-
tainty over the Northern Ireland protocol overshadows
ongoing relationships, but there are more positive indica-
tions of future energy trading stability, including the an-
nouncement (while Liz Truss was prime minister) of col-
laboration through UK technical membership of the North
Seas Energy Cooperation.
Although heavily dependent on gas, the UK has low levels
of gas storage. The partially depleted Rough gas field in
the North Sea was used for storage from 1985, but closed
in 2017 because of operating expenses. In 2022 it was
reopened to help with the energy supply issues, but is
operating at only 20% of its previous capacity for winter
2022-23 (Centrica, 2022).
One characteristic of the British residential energy mar-
ket is that about 17% of consumers, 4.5 million house-
holds, pay for gas or electricity or both on a pay-as-you-
go system, where energy flows are released only follow-
ing prepayment. This payment method has traditionally
been used to recover debt and to supply those without
a good credit record, so prepayment consumers have
lower than average income and higher than average fi-
nancial precarity. Current price pressures see increasing
“self disconnections” among these households when
they do not pay the necessary upfront fees (Citizens
Advice, 2023). Unlike disconnection by a supplier, such
rationing is often hidden and results in no energy avail-
able at all for heating space or water, for cooking or for
lighting. This binary choice, made by some of the most
vulnerable households, including elderly people, those
with young children and people who are susceptible
to potentially adverse health consequences, is a par-
ticular concern in the cost of living crisis facing British
23
 Forum

households. Some of the traditional benefits of control Figure 1

that prepayment meters have offered in the past (see, for Average annual direct debit dual fuel bill for typical
example, Cooke et al., 2001) are now available through levels of consumption, Great Britain
smart meters. Cash prices

Government support for energy costs and taxation of £

3,500 Original
upstream suppliers default
3,000 tariff cap
EPG
The nature of the Ofgem price cap, outlined above, both
2,500
anticipated and emphasised the large step changes in
EPG after
household energy costs. When the annual cost for aver- 2,000
£ 400 EBSS
age consumption rose by 60% to almost £2,000 a year 1,500 Average SVT
(large legacy suppliers)
in April 2022, the Johnson government announced sup-
1,000
port, including a £400 grant for each household delivered
through discounted bills over winter 2022-23, with further 500 Cheapest tariff
(all suppliers)
one-off payments for low-income consumers who were
0
receiving means-tested benefits and for all those over re-

12

13

14

15

16

17

18

19

20

21

22

23

24
20

20

20

20

20

20

20

20

20

20

20

20

tirement age.
However, the announcement in August 2022 of an 80% in-
crease in the price cap from October and predictions of a
further increase in January raised widespread concerns.
They would require more than three-quarters of house-
holders to spend more than one-tenth of their net income
on energy, and nearly half to spend more than one-fifth
(Bradshaw and Keung, 2022). The concerns raised by
these forecasts stimulated additional support measures
from the newly elected prime minister, Liz Truss, who
rushed to announce additional support and reassure an
extremely anxious public before the Queen’s death shut
down parliamentary and government business for eleven
days. Truss added to her predecessor’s support by an-
nouncing a universal additional constraint on energy
prices, known as the Energy Price Guarantee, restricting a
typical annual bill to £2,500 until April 2024. Together with
the £400 discount for winter 2022-23, this imposed an ef-
fective cap on prices which would deliver a typical annual
bill of £2,100, less than 7% above the Ofgem cap for sum-
mer 2022, but a 70% increase on the previous winter. The
government would reimburse the difference between this
and the Ofgem price cap, a substantial subsidy.
Soon after the hiatus caused by the Queen’s death,
Truss’s government announced a raft of additional ex-
penditure plans and tax cuts which led to her resigna-
tion. Most of her proposed reforms were repealed and
reversed by her second Treasury minister (Hunt) and
her successor Rishi Sunak, but the energy package was
largely untouched in the short run, though it was curtailed
for the year from April 2023, rising then by 20% to £3,000
per year for typical consumption levels.
Ofgem’s initial price cap shifted some of the risk imposed
by energy price increases from residential consumers to
20
Note: SVT stands for Standard Variable Tariff; EPG stands for Energy
Price Guarantee; and EBSS stands for Energy Bills Support Scheme.
Source: Ofgem; from Bolton and Stewart (2023).
suppliers, while the energy price guarantee transferred it
to the public sector during winter 2022-23; it will continue
to apply thereafter if prices remain high. The magnitude
of the price changes and guarantees is shown in Figure 1.
The government took on some similar risks for non-resi-
dential consumers from autumn 2022, capping the whole-
sale price that suppliers were allowed to charge (rather
than the final price as was the case for the residential mar-
ket) through the Energy Bill Relief Scheme. However, the
risk will shift back to business and third sector users start-
ing in April 2023, since the government will offer a discount
on the wholesale price when it is high, rather than capping
it. This discount will be greater for energy intensive us-
ers. Government has cited the high cost of support (£18.4
billion in the first six months) as a reason for the reforms;
they expect support for non-residential consumers to cost
around £5.5 billion for the 2023-24 financial year.
One controversial aspect of government policy has been
its slow provision of a public information campaign to help
households save energy. A publicity campaign was finally
launched in December 2022, after being blocked by Prime
Minister Truss for being too much like a “nanny state”
(Guardian, 2022). However, major suppliers had already
reported a significant drop of between 10% and 15% in
demand as households responded to higher prices in au-
tumn 2022, though it is too soon to tell if this reduction
will be maintained throughout the 2022-23 winter. As part
of an international reduction in demand, this may have

Intereconomics 2023 | 1
24

contributed to falling wholesale prices since the sum-
mer, though lower current prices will not be immediately
transmitted to the price cap because of its retrospective
calculation.
The spot market price of gas will have a profound effect
on the cost of the support to the government finances. In
January 2023, wholesale gas prices were below their level
a year earlier, and electricity wholesale prices only frac-
tionally above their level at that time. The government es-
timated that the Energy Price Guarantee would cost £25
billion in its first six months and the Energy Bills Support
Scheme would be £12 billion (HM Treasury, 2022). The
cost of the higher price level Energy Price Guarantee from
April 2023 (which represents a 43% increase in price com-
pared with the Energy Price Guarantee plus the £400 re-
bate in winter 2022-23) will depend on wholesale prices
in that period. As noted above, support to the non-resi-
dential sector is expected to add more than £18 billion to
the support bill for winter 2022-23 and £5.5 billion for the
following financial year.
Despite the government’s inaction on energy savings, the
National Grid Electricity Service Operator launched a test
demand flexibility service to encourage consumers whose
meters recorded demand at least half hourly (primarily
through rebates on bills) to shift electricity demand away
from certain pre-specified peak periods. Over a million
customers signed up to the five first events in the last two
months of 2022, delivering greater than expected savings
(National Grid ESO, 2022). In January 2023, the National
Grid activated the scheme during a cold, still period when
demand was high and wind generation low.
In May 2022, the Johnson government announced the in-
troduction of a windfall tax on oil and gas companies op-
erating in the North Sea. Sunak extended this both in level
and duration in November 2022, so that it currently stands
at 35%, similar to the level imposed by the EU, which will
last until 2028. The government expects this to raise £40
billion over six years. Such companies are routinely taxed
at a higher rate than other UK companies, but also have
generous tax allowances for investment. An electricity
generator levy of 45% on renewable energy generators
in receipt of high prices and above £10 million was also
introduced from 2023 to 2028, and is expected to raise a
total of £14 billion. This total estimate of £54 billion over six
years compares with similar total expected costs of sup-
port for the six months of winter 2022-23.
Assessment and implications for future policy
Government help for the residential sector has clearly been
substantial but bluntly targeted during winter 2022-23. The
ZBW – Leibniz Information Centre for Economics
Forum
support provided for households by the Truss government
surprised many by its extent and generosity. Benefits were
poorly targeted and delivered to households who did not
need them. Such universal support also dampened incen-
tives to save energy among those who could afford to do
so. Nevertheless their wide-ranging nature alleviated con-
siderable anxiety among a very large number of house-
holds, and blanket support may have been the best instru-
ment that was available, given the widespread challenge
of rising prices and the need for swift action. The reduc-
tion and withdrawal of this support seems appropriate if
adequate additional help is provided to households who
are unable to adapt to the higher energy prices. As the cri-
sis continues, there is increasing concern for those who
are left particularly vulnerable by the large price increases
already imposed and those that are forecast as universal
protection is reduced. Greater targeting, whether through
the welfare system or otherwise, will be needed if house-
holds are to be adequately protected at a cost considered
acceptable to wider society. The government is exploring
new methods of consumer protection, including social tar-
iffs, from 2024 (HM Treasury, 2022). If effective, these are
likely to have a profound impact on how the retail market
develops.
Reluctance among some households, especially pen-
sioners, to apply for means-tested benefits has led to
some universal fixed-sum payments to people of pen-
sionable age, which were increased for 2022-23 to £500
per household. These could be slightly better targeted by
making them liable to tax, rather than tax free as they are
at present.
The UK is unusual (within Europe) in the separation be-
tween general income support and the specific challeng-
es that some households may face, particularly with utility
costs. Any difficulty in paying such bills has been largely
left to the privatised suppliers, who have been subject to
some moral pressure, from governments and more wide-
ly, to help those who are struggling to pay. Energy pos-
es a particular challenge because it constitutes a much
higher proportion of expenditure among low-income
households; and because of payment methods, both the
prepayment meters discussed above, and the traditional
method of paying three months in arrears, which can re-
sult in serious debt issues.
There are restrictions on actions that suppliers can take to
recover money owed. For example, it is illegal to discon-
nect energy supplies from households that are vulner-
able because of disability or age or that include children
under six. However there is no automatic welfare sup-
port system referral scheme for customers in difficulty
with outstanding bills; much of the emergency support
25
 Forum
available in winter 2022-23 is provided through a pri-
vately organised and largely voluntary food bank-based
network with a variety of official and unofficial referral
mechanisms.
Private suppliers had developed a range of their own
social tariffs, but these were phased out between 2011
and 2015, partly to avoid distorting the competitive re-
tail market. They were replaced by the government’s
warm homes discount, which provides £150 towards
energy bills each winter for some consumers in receipt
of income-related benefits, and a supplement was an-
nounced in May for the 2022-23 winter. Local authorities
have received some funding from the central govern-
ment to provide additional help where needed.
There have been increasing calls for a more substantial and
uniform social tariff from charities who deal with issues of
fuel poverty, from some parliamentarians and from some of
the large suppliers (see, for example, Maule, 2022). At the
beginning of 2023, there are no signs that the government
will announce plans for a wider social tariff before 2024,
though the regulator has called for a ‘serious assessment’
(Ofgem, 2023). A comprehensive scheme is more likely in
the medium term if a Labour government is elected.
All of these challenges have important implications for
whether a competitive retail market can be re-established
in the wake of the current crisis. There had been increas-
ing dissatisfaction in many quarters over its operation,
especially after the widespread entry of retailers when
wholesale prices were falling, and their subsequent bank-
ruptcy in recent years; and concerns both about the na-
ture of consumer choice and how it was exercised (Gi-
ulietti et al., 2021) and the distributional consequences
(Waddams Price and Zhu, 2016). One model would be to
auction parts of the market, establishing competition for
rather than in the market (Deller et al., 2017), which could
incorporate subsidies for some households while retain-
ing some of the benefits of competitive supply. However,
identifying and reaching households most in need of sup-
port would continue to be challenging whatever the tar-
geting mechanism adopted, and it is difficult to see how
errors both of inclusion and exclusion can be avoided in
the current interaction (or lack of it) between the energy
market and the UK welfare system.
References
Bolton, P. and I. Stewart (2023), Domestic Energy Prices, House of Com-
mons Research Briefings, https://researchbriefings.files.parliament.
uk/documents/CBP-9491/CBP-9491.pdf (20 January 2023).
Bradshaw, J. and A. Keung (2022, 26 August), Estimates of Fuel Poverty
in January 2023, jonathan bradshaw blog, https://jonathanbradshaw.
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blogspot.com/2022/08/estimates-of-fuel-poverty-in-january.html (20
January 2023).
Centrica (2022), Centrica re-opens Rough storage facility, https://www.
centrica.com/media-centre/news/2022/centrica-re-opens-rough-
storage-facility/ (20 January 2023).
Citizens Advice (2023), Kept in the dark, https://www.citizensadvice.org.
uk/Global/CitizensAdvice/Energy/Kept%20in%20the%20dark%20
-%20the%20urgent%20need%20for%20action%20on%20prepay-
ment%20metersV2.pdf (20 January 2023).
Cooke, D., A. Ferrari, M. Giulietti, D. Sharratt and C. Waddams Price
(2001), Affording Gas and Electricity: Self disconnection and rationing
by prepayment and low income credit consumers and Company at-
titudes to social action, Electricity Association.
Deller, D., P. Bernal, M. Hviid and C. Waddams Price (2017), Collective
Switching and Possible Uses of a Disengaged Consumer Database,
CCP report for Ofgem.
Deller, D., G. Turner and C. Waddams (2021), Energy poverty indicators:
Inconsistencies, implications and where next?, Energy Economics,
103, 105551.
Deller, D., M. Giulietti, G. Loomes, A. Moniche, C. Waddams and J. Y.
Jeon (2021), Switching Energy Suppliers: It’s Not All About the Money,
The Energy Journal, 42, (3), 95-120.
Gross, R., J. Webb, M. Bradshaw, K. Bell, P. Taylor, A. Gailani, I. Rattle,
C. Brand, J. Anable, C. Kuzemko and A. Froggatt (2022), Review of
Energy Policy 2022, UK Energy Research Centre.
Guardian (2022, 7 October), Tory MPs urge Truss to launch campaign on
cutting energy use.
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ernment/publications/autumn-statement-2022-documents/autumn-
statement-2022-html (20 January 2023).
Maule, J. (2022), What are Social Tariffs and why might we need them?,
Cornwall Insight, https://www.cornwall-insight.com/what-are-social-
tariffs-and-why-might-we-need-them/ (20 January 2023).
National Grid ESO (2022), Demand Flexibility Service delivers MWs and
savings, https://www.nationalgrideso.com/news/demand-flexibility-
service-delivers-mws-and-savings (20 January 2023).
Ofgem (2023, 23 January), Tackling inappropriate energy supplier pre-
payment meter practices, Blog, https://www.ofgem.gov.uk/news-
and-views/blog/tackling-inappropriate-energy-supplier-prepay-
ment-meter-practices (26 January).
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response in regulated markets, Journal of Competition Law and Eco-
nomics, 12(1), 113-149.
Intereconomics 2023 | 1
DOI: 10.2478/ie-2023-0007
Daniel Gros
An EU Price Cap for Natural Gas: A Bad Idea Made Redundant by
Market Forces
When the price of natural gas on the major European ex-
change, the Title Transfer (TTF) in Amsterdam, spiked to
over €300/MWh in the summer of 2022, a number of EU
member states demanded a price cap on natural gas in-
side the EU. The argument was that the TTF price was
driven by speculation. It did not reflect the average price
actually paid by EU importers.
Under pressure from this group of 15 member states, the
Commission made a proposal for a dynamic price cap
under which a cap would be imposed if the TTF price ex-
ceeded a certain value for a number of days. After some
tight negotiations, the European Council agreed in De-
cember on a price cap of €180/MWh.
TTF prices have been falling since the summer peak of 2022,
and are now (January 2023) around €60-€70/MWh, very far
from the value at which the EU limit would become opera-
tive. The European price cap has thus become a paper tiger.
What is the EU price cap?
The European Commission (2022a) calls it a “Market Cor-
rection Mechanism to protect EU businesses and house-
holds from episodes of excessively high gas prices in the
EU” with a “safety ceiling on gas prices”. Officially it is
thus not a price cap, but a safety ceiling. Looking closer,
one sees that this safety ceiling will not concern the price
for natural gas charged to consumers and industry, but
only the quoted prices on the TTF. The European Com-
mission (2022a) specifies that when the ceiling, or rather
“price correction mechanism” enters into force: “orders
for front-month TTF derivatives exceeding the safety
price ceiling will not be accepted”.
In practice, this means that the TTF will cease to func-
tion at this point. The real question is then: what happens
© The Author(s) 2023. Open Access: This article is distributed under the
terms of the Creative Commons Attribution 4.0 International License
(https://creativecommons.org/licenses/by/4.0/).
Open Access funding provided by ZBW – Leibniz Information Centre
for Economics.
Daniel Gros, Centre for European Policy Studies,
Brussels, Belgium.
ZBW – Leibniz Information Centre for Economics
Forum
Intereconomics, 2023, 58(1), 27-31
JEL: Q34, Q42, O52
once TTF orders above €180/MWh have been forbidden?
What should an industrial consumer or a local utility do
when it needs gas at that point, but cannot get it below
€180/MWh? In practice, there would be rationing, or a
grey market will arise under which EU customers who
need gas will contact foreign suppliers directly and pay
whatever price these suppliers charge.
The role of spot exchanges like the TTF: Marginal
versus average price
A confusion of the role of the TTF is at the heart of the
debate. Most gas is supplied under long-term contracts
(running often over decades). A spot exchange like the
TTF is thus used only for the small additional quantities
that an industry or utility needs (or has in surplus) be-
cause there is always some difference between the ex-
pected gas needs and actual demand.
The TTF thus represents only the marginal price for small-
er quantities of varying amounts. This changed funda-
mentally when Gazprom cut most of its deliveries to Eu-
rope in early summer of 2022. This forced the customers
of Gazprom, who had relied on their long-term contracts
to go to the TTF to find the missing quanties. Moreover,
demand for gas increased beyond the seasonal pattern
because of new regulations on minimum storage levels
which meant that many were scrambling for the little gas
still available, i.e. the small quantities not committed un-
der long-term contracts. The increased demand originat-
ed mainly in Germany, which had been the main customer
of Gazprom until that point and which has the largest
storage sites in the EU. This is why demand outstirpped
the normally available supply by far.
But these gyrations of the TTF price were threatening to
spill over into the wider market. The average price paid
by importers is determined by the long-term contracts,
in which the price is usually indexed to some reference
value to keep it close to the real value of gas. In the past,
most long-term gas contracts were linked to the oil price
because crude oil constitutes a close substitute for natu-
ral gas in electricity generation. Over the past years, so-
called gas-to-gas indexation has become more impor-
tant, with the contract price indexed on some spot price,
which could be the TTF, but could also be other market
prices. This is where the TTF quotations become relevant.
27
 Forum

Figure 1 This changed already in mid-2021 when the TTF price be-
Natural gas unitary price gan to increase rapidly because of stronger than anticipated
Panel A
demand in Asia. After Russia’s invasion of Ukraine, the TTF
price increased even further, but the average prices paid by
€/MWh
240 importers increased less than proportionally. It was this dif-
220 ference between the average prices paid by importers and
200
the TTF price (at its peak close to €80-€100/MWh) that un-
180
160 derpinned the argument that the TTF price did not represent
140 actual prices because it was driven by speculators.
120
100 EU TTF
80 Panel B of Figure 1 shows the same prices on a logarith-
60 mic scale to allow a comparison in relative terms. A vertical
Japan
40
20
distance between two lines corresponds to a proportional,
Germany Italy not absolute difference. It is apparent that the average pric-
0
Jan.
Mar.
May
Jul.
Sep.
Nov.
Jan.
Mar.
May
Jul.
Sep.
Nov.
Jan.
Mar.
May
Jul.
Sep.
Nov.
Jan.
Mar.
May
Jul.
Sep.
Nov.
Jan.
Mar.
May
Jul.
Sep.
Nov.
es paid by the two major EU importers (Italy and Germany)
2018 2019 2020 2021 2022 remain very close and that the vertical difference between
the TTF and the average import prices paid in these two
Panel B countries was very similar (but with opposite sign) in the
Logarithmic scale summer of 2022 and early 2020. The difference TTF to av-
€/MWh erage prices was thus not exceptional in 2022.
EU TTF
100

Figure 1 also shows the average price paid by Japanese im-

Japan porters, which until mid-2021 was much higher than those
Italy paid by European importers, but then increased much less.
Germany
The key reason for this is that Japanese importers of natu-
10
ral gas still have mostly contracts indexed on crude oil, the
price of which has increased much less than that of natural
gas. The rationale for this choice of contracts is that in Ja-
pan some power generation still uses crude oil (Federation
of Electric Power Companies of Japan, n.d.).
1
Jan.
Mar.
May
Jul.
Sep.
Nov.
Jan.
Mar.
May
Jul.
Sep.
Nov.
Jan.
Mar.
May
Jul.
Sep.
Nov.
Jan.
Mar.
May
Jul.
Sep.
Nov.
Jan.
Mar.
May
Jul.
Sep.
Nov.

External effects from national price caps and similar

2018 2019 2020 2021 2022
measures
Note: TTF is Title Transfer.

Source: Author’s calculations based on national trade statistics.
A higher TTF spot price can influence the prices paid by
importers to the extent that long-term contracts contain
indexation clauses referring to the TTF. However, in reality
the feedback loop between the TTF (=marginal price) and
average prices is rather slow.
A difference between the marginal and the average price
could be observed during the COVID-19 recession, which
saw a temporary glut that led to very low spot prices. But
the actual prices paid by importers declined only slightly
so that the TTF price was lower than the average price paid
by importers. Figure 1 shows the unitary prices calculated
from national import statistics by dividing the value of gas
imports (in euro) by the volume (in cubic meters or MWh).
During periods of low demand (2019 and early 2020), the
TTF price was below the average price paid by importers.
The EU has no competence to regulate the prices at which
private agents exchange gas at the wholesale level, whether
inside the EU or when dealing with foreign suppliers. Given
the dependency of the EU on foreign suppliers, it is impos-
sible to lower the price for businesses and households by EU
fiat. National governments can of course interfere with the
prices charged to households and industry. But they can
only cover the difference between the lower price charged to
consumers and the price paid to importers with public funds.
The companion contributions in this Forum describe in detail
the measures taken in the larger EU countries to protect con-
sumers and industry.
A national price cap that subsidises the prices paid by con-
sumers diminishes the incentives to save on gas. This has an
important impact on the market.
The starting point for any analysis of the gas market is that
increasing the production of gas takes time. Contrary to oil,
there is little spare capacity in gas because it is technically

Intereconomics 2023 | 1
28

difficult to change (reduce or increase) production from an
existing field. However, for Europe, supply is not a given; it de-
pends on the global price that induces consumers elsewhere,
especially in Asia, to use less gas (Hama, 2022; Gros, 2022b).
This implies that while one can take the global supply of gas
as a given in the very short run (i.e. the last few months of
2022), Europe can increase its imports if it is willing to pay a
higher price.
The marginal benefit from any additional quantity not con-
sumed is the change in the gas import bill that arises because
of a reduction in the European demand. Any gas saved in the
EU has two effects on the overall import bill:
1. it reduces the import bill at the given price;
2. it reduces the price paid by all other EU importers because
demand for gas (liquefied natural gas, LNG) is lower.
A first immediate corollary is that the benefit of savings (or
the cost of additional imports) is higher than the price. How
much higher depends on the (inverse of the) elasticity of for-
eign supply.
This elasticity of gas available for import by the EU must be
assumed to be very low in the short run because it is based
on consumers elsewhere reducing their gas use, thus liberat-
ing some gas for Europe. One should thus assume that it is
of a similar order of magnitude as the elasticity of demand
within Europe, which is often estimated at only 0.1 (but with
the opposite sign).
This simple consideration shows that the benefit from im-
porting one cubic metre of gas less is much higher than the
price quoted on the spot market. With a rather inelastic sup-
ply (as one must assume since demand abroad is likely to
be as inelastic as demand in Europe) the benefit could be
several times higher. For example, an elasticity of foreign
supply (or the elasticity of household demand abroad, i.e.
the countries from which the additional LNG would have to
come from, like Japan or Korea) of only 0.1, would lead to the
conclusion that the marginal cost of gas is 11(=1+1/0.1) times
higher than the price (Gros, 2022a).
The intuition behind this result is straightforward: each unit
of gas not consumed in Europe diminishes demand on the
LNG market, which is (in the very short run) very inelastic. This
means that even a small amount of gas saved in Europe can
have a large impact on the price and thus on the cost of im-
porting all gas.
The key problem is that any individual gas consumer or in-
dividual government does not take this effect into account
ZBW – Leibniz Information Centre for Economics
Forum
because an individual consumer (or a single member
country) accounts only for a fraction of EU consumption.
This explains why individual governments have tailored their
domestic actions to protect consumers and industry exclu-
sively to national concerns, ignoring that their actions affect
the import price of the entire EU. There is thus an external
effect operating. Each individual government does not face
a strong incentive to encourage gas savings at home.
Neglect of this external effect has been particularly im-
portant for the subsidies enacted by some member states
for energy-intensive industries to allow them to continue
production and for Spain, which subsidises the cost of
gas for power generation. These policies impose enor-
mous economic costs on the entire EU.
A similar reasoning applies to subsidies in industry. In-
stead of promising cheap gas, government should of-
fer energy-intensive industries subsidies to close down
temporarily or at least diminish production. However, in-
dividual countries do not follow these types of policies
because they do not take into account the impact of their
actions on the import price for the entire EU. Individual
national governments only see that others subsidise their
industry and feel justified to do the same.
While there should be a strong interest at the EU level in
incentivising gas savings and encouraging member states
to follow this policy, there is little that can be done to force
countries to change their policies. The “Save Gas for a
Safe Winter” Plan of the European Commission (2022b)
contains only a voluntary gas demand reduction target of
15% from 1 August 2022 to 31 March 2023.
So far, so good: Substantial savings bring Europe
through the winter
Discussions about energy price caps have almost ceased
in early 2023 as natural gas prices have fallen back to the
level they had before the invasion (€60-€70/MWh). This is
due to a combination of warm weather and gas savings
by consumers and industry. The importance of the milder
weather for residential consumption is well known, but it
appears that households have reduced gas demand irre-
spective of the milder temperatures.
The reduction of gas use in industry is clearly due to shifts
in energy use because industrial production has not fallen
in 2022. This implies that while some energy-intensive in-
dustries might have curtailed production as natural gas
became too expensive, other industries have increased
output. This is a sign that the overall elasticity of demand
in industry has been higher than expected.
29
 Forum

Figure 2 ings came from just a handful of countries. The biggest con-
Sectoral demand reductions 2022 compared to tributions came from just three countries: Germany, Italy and
average 2019-21 the Netherlands. For France, a large reduction in household
Absolute 2022 and industry demand is offset partially by increased use of
Austria natural gas in electricity production. For Spain, the increased
Belgium
Bulgaria use of gas in power production almost completely offset the
Czechia savings of direct gas use by households and industry.
Germany
Denmark
Estonia
Spain The reason for this difference in gas savings can be seen in
Finland the large differences in gas and electricity prices. Figure 3
France
Greece shows the latest data from the Household Energy Priced In-
Croatia
Hungary dex (HEPI) portal, which reports the residential prices charged
Ireland under new contracts in EU member states (and the UK). The
Italy
Lithuania biggest differences are in electricity prices shown in the left-
Luxembourg
Latvia hand panel, which range from above 50 euro cents per kWh
Netherlands in Germany and Italy (dark green) to around 20-25 euro cents
Poland
Portugal per kWh in Spain and France. Residential electricity prices in
Romania
Sweden Germany and Italy (and the Netherlands) are more than 100%
Slovenia
Slovakia higher than in France and Spain. It is thus not surprising that
-120 -100 -80 -60 -40 -20 0 20 in these two countries, natural gas use for power production
TWh increased. France and Spain account for the bulk of the over-
Power Industry Industry/Household Household all increase in gas use for power. Natural gas prices, shown in
Source: Bruegel, https://www.bruegel.org/dataset/european-natural- the right-hand panel of Figure 3, differ somewhat less: based
gas-demand-tracker. on December 2022 data, it was slightly above 21 euro cents
per kWh in Italy and Germany against about 15-16 euro cents
A significant proportion of natural gas (about a third) is per kWh in France and Spain (a difference of 4%).
used to generate electrical power. The proportion varies
from country to country and during the day since natural Figure 3 shows the level of residential energy prices.
gas turbines are the most flexible way to increase power What matters for energy savings is the increase in prices,
output when needed. This is why consumption of electric- which is in this case closely related to the level in 2022.
ity also plays a role in gas demand. As described in Andreas Rüdinger’s (2023) contribution in
this Forum, in France, residential electricity prices barely
In evaluating overall gas consumption patterns, one increased, whereas they more than doubled in Italy and
needs to look at three sectors: power generation, industry increased considerably in Germany as well. Spain is one
and households. of the few countries where electricity prices fell in 2022.
These differences in energy price caps and subsidies also
Figure 2 shows the absolute amount of gas savings by explain the large differences in headline inflation (Gros
member state (defined as the reduction in gas consump- and Shamsfakhr, 2022), which is lower in France and
tion in 2022 relative to the 2019-21 average) for these three Spain than in Italy or Germany (and most other member
sectors. All member states (except Slovakia) recorded a fall states as well).
in gas use. However, a number of member states show an
increase in gas used for power generation, with the largest In the case of Germany, one has to keep in mind that the
increases recorded in France and Spain. For France, the price cap announced under the big €200 billion package
increase is due to the reduction of output of nuclear power (Doppel-Wumms) enters into force only in early 2023. This
stations. For Spain, the subsidy for the use of gas in power means that the 2022 data is not affected by any price sub-
generation must have been one key reason. sidies in Germany because, up to the end of 2022, the Ger-
man government paid only lump sums to vulnerable groups.
Overall gas use for power generation across the EU27 de- By contrast, in France and Spain, price caps on electricity
clined marginally in 2022 because the increases in France and gas have been in force for most of the year 2022.
and Spain were more than offset by falls in Belgium and
the Netherlands. Conclusions

With gas for power use nearly constant, savings were mostly With Russian gas no longer available to Europe, natural
in industry and the household sector. The bulk of total sav- gas became a very scarce and very expensive resource

Intereconomics 2023 | 1
30

Figure 3
Residential electricity and natural gas end-user prices
Electricity end-user prices (c€/kWh)
4.61 54.44
Source: HEPI by Energy Control Austria, © MEKH and VaasaETT 2023. Created with Datawrapper
in the summer of 2022. The peak prices reached on the
European spot exchange, the TTF, went up to over €300/
MWh, 20 times previous levels, prompting calls for a Eu-
ropean price cap. A European market correction mecha-
nism was agreed in December, but upon closer inspec-
tion, represents a paper tiger.
Market prices have rapidly fallen into early 2023 as it
has become apparent that the elasticity of demand in
those major EU gas markets where prices were allowed
to increase was much higher than anticipated. Helped
also by relatively mild weather, the EU is on course to
reach its target of lowering demand during the winter by
15%. Since prices still remain elevated, one can expect
these savings to become permanent. Moreover, supply
should slowly increase over time. These factors support
a much more benign outlook for gas prices.
The impact of energy subsidies in France and Spain
has thus been limited. Nevertheless, they generate
negative externalities for the remainder of the EU and
should thus be very carefully scrutinised by the Com-
mission. It should not just apply state aid rules for aid
to industry. The Commission should also scrutinise the
disincentives for gas savings that result from subsidies
to households.
The justification is that the EU does not have common targets
for the reduction of gas use. Reductions have been partly (for
now) achieved through higher prices in some member states.
The generalised price caps in France and the outright sub-
sidy in Spain should be strictly temporary.
ZBW – Leibniz Information Centre for Economics
Forum
Natural gas end-user prices (c€/kWh)
2.15 30.02
Moreover, the Commission should also pressure member
states to abandon generalised price caps, which implic-
itly subsidise consumption. Targeted lump sum payments
that do not change incentives constitute a much better
way to spread the burden of high energy prices. Govern-
ments with fiscal space could also consider subsidies for
gas savings, for example, by paying households for con-
suming less than in the past.
The broad conclusion is that gas or electricity price caps do
not make sense. Luckily, the EU price cap has become ir-
relevant. But member states have created many new subsi-
dies that the Commission should carefully monitor for their
disincentive effect, and it should recommend that member
states employ other social support measures instead.
References
European Commission (2022a, 22 November), Commission proposes a
new EU instrument to limit excessive gas price spikes, Press Release.
European Commission (2022b, 20 July), Questions and Answers on the
EU “Save Gas for a Safe Winter” Plan.
Federation of Electric Power Companies of Japan (n.d.), Profile of Japan’s
Major Power Generation Sources, https://www.fepc.or.jp/english/en-
ergy_electricity/electric_power_sources/index.html (23 January 2023).
Gros, D. (2022a), Why gas price caps and consumer subsidies are both
extremely costly and ultimately futile, CEPS Blog, 31 August.
Gros, D. (2022b), When the Taps Are Turned Off: How to Get Europe
Through the Next Winter Without Russian Gas, CEPS Policy Insights,
2022-07.
Gros, D. and F. Shamsfakhr (2022), Energy prices and inflation  : One
shock, many asymmetric effects, CEPS Explainer, 2022-09.
Hama, M. (2022, 30 August), China throws Europe an energy lifeline with
LNG resales, Financial Times.
Rüdinger, A. (2023), Exiting the Energy Crisis: Lessons Learned from the
Energy Price Cap Policy in France, Intereconomics, 58(1), 5-9.
31