Pay consumers to not consume electricity!

Incentives such as negative electricity prices and subsidies for energy-efficient appliances could help Europe store gas for the winter.

Falling oil prices are one of the craziest times ever in the energy market. At one point in April 2020, a seller paid a buyer $40 for a barrel of West Texas Intermediate. We’ll need another moment of madness if Europe makes it through the winter. How about this: Pay consumers to not consume electricity.

A year after the energy crisis, policymakers are just trying out supply measures in an attempt to solve the problem. Their own words highlight the approach: “supply” and “manufacture” were mentioned by 28 in the Group of Seven summit communique last week; “Demand” and “consumption” have only five.

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This is about to change: The best energy is something we don’t consume. In Europe, officials are currently working on a plan to combat the crisis, likely to be published in a few weeks, which will focus on consumption measures. I expect to see a great emphasis on so-called “meeting the need”.

That involves consumers, mainly large companies, reducing or changing their energy use during peak times in response to time-based pricing or incentives. other finance. A typical demand response measure is cheaper energy during times of low demand – for example, at night or on weekends. But what I heard in Brussels was a form of extremes: Paying certain companies to slow down their factories significantly, or even shut them down so they don’t consume electricity and thus help. keep the lights on for others.

Saving electricity is equivalent to saving on natural gas because a large part of electricity in Europe is generated by burning gas imported from Russia by Vladimir Putin.

The UK is also exploring this idea. National Grid Plc is asking companies how many megawatts they can cut electricity demand next winter – and how big a payout they will ask for. It offers a price range for potential payments, from £100 ($122) to £6,000 a megawatt hour. Current electricity prices in the UK hover around £200 per mega-watt hour. Germany is mulling a similar system, based on an auction: The government could allow companies to set negative prices for megawatt-hours saved.

It is easier to pay companies not to consume electricity than to do so for families. First, industrial plants have complex measurement systems that allow time-based pricing to be applied. Second, it may be easier for companies to completely convert consumption. Households can benefit from demand-responsive policies through digital smart meters that allow timed tariff rates to be applied.

European policymakers can still implement negative electricity prices for homes through another route: a sort of cash-back scheme for home appliances, modeled after the original 2009 version of America for cars. The US program has seen 677,000 older cars scrapped, shifting consumer demand for more fuel-efficient vehicles. Besides heating, appliances are at the heart of energy needs in most households: washing machines, ovens, dryers, refrigerators and freezers. Improving their efficiency can save a lot of megawatt hours of electricity. European governments should use tax breaks – reduced VAT – or even direct subsidies to encourage families to ditch their energy-intensive appliances for low-consumption ones. consumes more electricity.

In Southern Europe, the plan should involve air conditioning units, a huge source of power demand today in Spain, Portugal, France and Italy. The Greek government has provided subsidies ranging from 30% to 50% of the cost of some new, energy-efficient equipment. Others should follow suit.

Ironically, Europe can copy and paste some policies from a country that is unlikely to be an energy efficiency champion: Saudi Arabia. The kingdom has been running a program for the past few years to replace old, inefficient air conditioning units with newer, energy-efficient ones, providing subsidies to families.

The cash out program for air conditioners and other home appliances will not only reduce energy demand but also support the retail industry and some European manufacturers. It won’t be cheap. But it’s not a power outage either. And it achieves many policy goals at a time when many families are tightening their belts and the economy is slowing.

With most of the attention focused on oil and natural gas, people overlook the fact that the European electricity market has been booming – and shows dangers ahead for this winter. France’s December electricity price rose to nearly 1,000 euros ($1,046) per megawatt-hour, up from 50 euros two years ago. The standard one-year German forward is up to 300 euros per megawatt-hour – excluding the two days in December 2021, when prices spiked only to fall back. That is a record high.

Demand response measures such as negative prices and incentives for an industry slowdown can be helpful right now. Reducing electricity consumption is key to cutting gas consumption – and dependence on Russia. On Friday morning, the UK generated almost 65% of its electricity from gas-fired power plants. It is better gas saved for winter, when we need it to heat our house.

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