BAKU, Azerbaijan, Dec.6. Ironically a wholesale gas price cap may harm those most impacted by the current high prices, Trend reports Dec.6 with reference to the Oxford Institute for Energy Studies (OIES).
“A price cap applied on a €/MWh basis benefits those who consume more gas, such as rich individuals in large houses with swimming pools, or inefficient factories. As such a price cap is socially regressive by effectively subsidising richer households more than poorer ones in cash terms. Price caps will put pressure on government budgets if governments need to pay external suppliers more than the wholesale price cap to attract more LNG to prevent physical shortages. This, in turn, could put pressure on government social spending which often forms a larger part of poorer households’ incomes,” reads the OIES report.
The analysts believe that if the result is a reduction in social spending, poorer households may find themselves worse off, even if they benefit from lower energy prices.
“In the business sector those companies which have invested in energy efficiency or have switched to renewable energy will benefit less from their investment than they otherwise would compared to their less efficient competitors. The latter are shielded from the normal market price but have also benefitted from not spending on energy efficiency measures. Efficient companies are hence put at a competitive disadvantage compared to their less efficient competitors. A price cap cannot distinguish between those companies which can reduce their gas demand at lower cost, (see the examples quoted above) and those for whom there is little alternative other than reducing output or closing factories.
As the current crisis is caused by a supply shock, and it will take time for more LNG supply to come on stream, the burden will be on demand reduction in the next two years to balance supply and demand. Imagine a scenario where two companies have different costs for reducing gas demand. For Company A the cost of reducing its gas demand is equivalent to €150/MWh; for the Company B the cost is €200/MWh. If the price cap is set at €149/MWh neither company will reduce demand. At a price cap of €160/MWh, Company A will be incentivized to reduce demand – if enough companies are in this position this could help reduce the wholesale market price below the price cap, benefitting both Company A and Company B but still at a level where Company A is incentivized to reduce demand (i.e. above €150/MWh.) The challenge facing those setting the price cap is that they cannot know all the economic variables of the many different companies and cannot therefore deliver energy efficiency savings as effectively as a well-functioning market.”
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