One of the Liz Truss administration’s first acts will be the introduction of an energy plan. Announced on 8 September, it is expected to effectively freeze the household energy price cap at its current value, and hopefully prevent thousands of businesses from sinking under the weight of their energy bills. It is expected to cost close to £200bn, and will be paid for by extra borrowing rather than a windfall tax on the energy companies – despite the fact they are enjoying bumper profits.
It is a bold plan, whose expense is justified by the severity of the cost-of-living crisis. But it only addresses the effects of the crisis rather than the root cause, which is that there is not enough gas to go round this winter in Europe.
Vladimir Putin, the Russian president, has slashed gas exports to Europe. Russia announced on 2 September that its main gas supply pipeline to Europe, Nord Stream 1, would be turned off indefinitely. While the UK is not directly reliant on the gas brought by the pipeline, cutting the supply increases demand for other gas suppliers that the UK does rely on.
One way of addressing this risk would be to ration the overall supply of gas, which is used to heat 85 per cent of UK homes and provides around 40 per cent of UK electricity. Indeed, rationing is something that the “reasonable worst-case scenario” published by the government in August makes clear is a possibility.
However, Truss explicitly ruled out rationing during the Conservative leadership campaign. It is easy to see why: for older Brits, the idea recalls the “three-day week” of 1973-74, which was introduced by the then-prime minister Edward Heath to try to save energy during miners' strikes.
For others, the idea of rationed energy is equated with developing nations that experience regular blackouts, or with more authoritarian countries such as China, which recently ordered lights to be dimmed and air conditioning to be turned down to tackle its own power crisis, which was triggered by weeks-long drought. It is not the kind of thing that a new Prime Minister looking for a boost in the polls would be quick to champion.
But if energy demand really does exceed supply this winter, then some form of rationing is inevitable. Leaders across the EU are already planning hard for this eventuality, with member states agreeing in July to reduce gas demand by 15 per cent over the winter in order to address the supply squeeze.
“In the European Union, gas demand is going to have to be reduced,” said Ben McWilliams, from the think tank Bruegel. “It’s a matter of physics: we simply can’t get the gas molecules into the grid at the moment to meet the same demand as last year.”
While domestic gas supply from the North Sea and a lower reliance on Russia for imports means that the risk of running out of gas is less pronounced in the UK than in Europe, rationing could still be needed if the winter is especially cold. Having plans ready for this is a pragmatic way of addressing the risk. Lisa Fischer, from the environmental think tank E3G, explained that, “Rationing can be a way of buying us time, and protecting certain consumers or industries as we anticipate further supply constraints.”
There are two ways in which energy rationing could be done. The first is the more extreme introduction of rolling blackouts, which is likely to occur if energy supplies are suddenly caught short. The second is a softer approach, focusing on voluntary demand reductions.
Just because an approach is soft, does not mean it is ineffective. It is largely through voluntary demand reductions that governments across Europe are currently working to meet the EU’s 15 per cent gas reduction target.
Governments in countries such as Croatia and Greece have introduced temperature limits on air conditioning and central heating. Spain is forcing shops to turn off window lighting by 10pm, while France has told air-conditioned shops to keep doors closed or face a fine of €750. In Germany public monuments are no longer being spotlit at night and there are plans in place for authorities to pay industrial gas users for every terrawatt of gas they don’t use.
If gas supplies do run out and rationing measures are not introduced, then it would usually fall to the market to self-regulate the gas supply system. This would price the poorest in society out of the market.
The energy price freeze that the UK government is expected to announce will probably prevent this outcome this winter. But the British plan also increases the risk of more heavy-handed gas rationing and blackouts, because there is currently no plan in place to curb gas demand via softer demand control measures. If Truss wants to protect consumers from blackouts, and also prevent the bill for her energy plan from spiralling out of control, then it makes sense to introduce some demand control measures sooner rather than later.
“If you want to artificially limit energy prices, you have to also come forward with a sensible plan to reduce demand,” explained McWilliams. “Otherwise, with consumer demand no different to an ordinary year, you risk continuing to push wholesale market prices up and up, and you end up with a huge bill on the government's books.”
[See also: How the energy crisis is devastating businesses]