Since September 2021, countries across Europe have pledged more than half a trillion euros to protect households and businesses from exorbitant energy costs. As the pandemic and then Vladimir Putin’s invasion of Ukraine led to a surge in natural gas prices, governments have been quick to take measures, including subsidies, price caps and commuter allowances. The longer the crisis lasts, the more those interventions need to be refined to reduce costs and reduce energy demand. Britain this week decided to lower and revise its two-year energy price guarantee, while Germany looks at how to allocate a new €200 billion package.

Energy prices will remain high after this winter. Estimates suggest annual household bills in the UK could rise to more than £4,000 – from the guarantee of £2,500 on average – in April when support ends in its current form. Although European natural gas prices have fallen recently, they are expected to remain well above pre-war levels for some time to come. Gas supplies will be harder to fill next year with little supplies from Russia, and global competition for liquefied natural gas will be fierce.

National policies will have to evolve and find a difficult balance. This includes targeting those most in need of support while keeping expenses low; at a time when government debt is rising and inflation is hitting its 40-year high. While the policy must protect households and businesses, it must above all ensure that price incentives to reduce energy consumption are also sufficiently maintained, otherwise demand will continue to weigh on limited supply.

Countries have so far taken different approaches. In June, Spain and Portugal introduced a cap on the wholesale price of gas, essentially a payment to electricity producers to finance some of their fuel costs (EU leaders approved plans for a block-wide cap on Friday). France is experiencing limited increases in the retail price of gas and electricity. Meanwhile, Germany recently outlined a plan to offer flat-rate payments to gas consumers based on some of their historical usage.

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Each has its pros and cons. Price caps are easy to understand, but they reduce incentives to save energy. A recent research The Spanish cap showed that this initially led to a more than 40 percent increase in gas-fired generation. They are also expensive and poorly targeted, helping those who don’t need it as much. The IMF advocates increasing retail prices while protecting the most vulnerable through income relief. This is an ideal approach: it can make the state treasury more efficient and encourage less energy consumption. However, there are not always mechanisms to calibrate and pay out cash payments in proportion to need.

Providing needs-based payments across the income scale can be challenging and expensive, especially if energy prices remain high. Since energy use tends to increase with income, one approach could be to establish tiered rates on bills, where the price per unit of energy consumed increases with use. Above a certain amount, users would be confronted with the market price. Subsidies can then be provided to the most vulnerable households with above-average energy needs, which can be identified through benefit systems. This would be cheaper than a universal price cap, and retain incentives to save energy.

While the energy supply this winter may seem less precarious now, the coming winter is a concern. Securing new stocks and increasing efficiency remain crucial. When it comes to cushioning the blow to the cost of living, there are tough trade-offs for policymakers. But what started as emergency measures to ease the pain will have to adapt if countries are to meet the broader financial and energy rationing demands of the crisis.