European countries are trying their best to adopt a more targeted approach for finding acceptable solutions to reduce the impact of high-energy prices on their socio-economic platform. A more effective move forward according to energy analysts might be able to help them in overcoming the cost-of-living situation that is slowly unfolding throughout Europe.
Energy analysts Philipp Lausberg and T. Croon have in this context made an analytical review of the existing situation and what is being done or needs to be done to assist those most in need because of high inflation. One needs to follow carefully what is happening in Europe so that one can find possible alternative courses of action for countries within our region, including Bangladesh.
We have seen in the recent past soaring energy prices in Bangladesh and the general criticism that has followed this action. In this context one needs to remember that gas prices in Europe reached a peak of Euro 346 per MWh in August 2022, after already increasing since 2021. At present gas prices in Europe are still almost four times higher than the long term average this century. Many geo analysts now think that energy prices in Europe will remain high for the rest of this decade due to geopolitical instability and the transition to low-carbon sources in that region. Such a scenario is almost certain to have an impact on Bangladesh.
Lausberg and T. Croon have given interesting observations about the equation of energy price increase affecting the cost of living for all Europeans. They have also pointed out that this is not evenly distributed across the population. One needs to note here that this is true for almost all countries around the world. It has to be mentioned here that an International Monetary Fund study carried out recently has indicated that the cost of living increase from higher energy prices for the poorest 20% of Estonian households was 25%, while this was only 14% for the 20% richest. Such an anomaly appears to be taking place also in most of South Asia, Southeast Asia and most of Africa and Latin America. In most European countries, the average energy burden – the proportion of income spent on domestic energy services- is about twice as high for the poorest 20% than for the richest 20%, although the latter group is consuming considerably more4 energy. Such a scenario is true everywhere.
Such an evolving situation of disparity is being followed very carefully in Europe. Bangladesh is also trying to create the necessary format which can tackle such a scenario through a juxtaposition of different factors. The common approach should be to distribute burdens justly. This is being attempted because relief materials for households in need will be crucial for preserving social cohesion and also effectively moving towards the green transition. Efforts are also being taken to not only guarantee availability of energy for all but also provide incentives for energy conservation to alleviate pressures on energy prices and supply. Alternative sources of energy, particularly renewable energy, are also receiving careful attention. In the case of Bangladesh, Germany has come forward to assist us in diversifying such a possible exercise- both in terms of social power as well as wind driven energy production.
It is generally agreed that some EU governments have spent heavily to tone down the effects of rising energy costs. It appears that in this regard between September 2021 and November 2022, around Euro 600 billion was earmarked to protect consumers and small businesses. The German support packages were probably the highest with about Euro 264 billion. It juxtaposed targeted income support for vulnerable customers with untargeted price support measures. However while the German price breaks for gas and electricity at least maintained market tariffs for excessive usage market tariffs for excessive usage, tax cuts and reduced excise duties took away incentives for households to lower their consumption. These policies effectively subsidized the energy consumption of all households, including non-essential luxuries.
However, last December, relevant European authorities reported that over 70% of European measures were untargeted. Nevertheless, such untargeted tools, it may be mentioned, sometimes have drawbacks despite being politically popular and relatively simple to implement. They weaken incentives for all households to reduce energy use and subsidize high-income households that tend to consume more energy. That creates higher inflationary pressures than support extended for those who really need it. We noticed that some of this is also true in developing countries including Bangladesh- particularly in urban households.
It would also be appropriate to mention here about some of the other socially targeted measures that have been introduced in Europe. This is being done to speed up energy efficiency and includes- block pricing, social tariffs, rebates and income support. Bangladesh needs to understand the different denotations of this exercise and identify factors which may be of use for us.
Block pricing as a model is functioning well in Germany. Under the system consumption below a certain threshold is priced at below market rates and above the threshold at market rates. The required threshold is decided upon based on historic consumption of individual households or on average consumption. Germany, Austria, Estonia, Poland and the Netherlands are associated with such efforts. This is done with the understanding that high income households will have higher consumption and will be able to pay more if needed. However, a drawback has surfaced in this regard about the higher costs that are also borne by low-income families with infant children renting energy insufficient homes. Consequently, in many cases critics have opined that such a principle of block pricing is sub-optional. Nevertheless, it has been noticed that such an effort is being seen as an incentive by many households to keep consumption at a basic level.
Such tariffs have been introduced in many European countries- Belgium, Bulgaria, Cyprus, France, Greece, Italy, Portugal, Romania and Spain. In this context, after careful evaluation by economists and energy analysts limits are being decided upon with regard to limits of energy prices to be paid by low income groups and households- that will include, as in the case of Belgium, pensioners, single parents and lower middle income groups. It is being estimated that such a principle is covering nearly 20% of the households. Such a decision has led to rates for electricity and gas under the social tariff increasing between 7.8% and 9.3%for this year’s first quarter. There has however been greater enhancement of rates for households outside this paradigm.
Another interesting measure has been introduced in some European countries. That includes rebates and energy vouchers, or energy assistance programs, which includes direct income support to households struggling to pay energy bills. Such financial support mechanisms offer direct relief to most EU member States other than Hungary and Malta who similar but separate systems.
The UK, no longer a part of the EU has also been trying to implement a more data-driven approach which is now being termed as “Warm Home Discount”.
Those associated with this process and that undertaken in the EU are also discussing interest free loans from government institutions and also thinking of providing landlords with stronger incentives, whereby they could be obligated to participate in financing the energy support for their low income tenants, until they have made their properties more energy efficient.
These measures in Europe are being studied carefully in Canada and the USA. We, in Bangladesh, also need to think of measures for our near future. The relevant authorities should also try to design targeted support schemes based on data – driven approaches to address the social impact of the energy crisis and ensure a just transition to other low-carbon sources.
Muhammad Zamir, a former Ambassador, is an analyst specialized in foreign affairs, right to information and good governance