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Pay consumers not to consume electricity!

Negative electricity rates and incentives such as subsidies for energy efficient machinery could help Europe store gas for the winter.

Negative oil prices were one of the craziest moments in the fuel market. At one point in April 2020, a seller paid a buyer ওয়ে 40 for a barrel of West Texas Intermediate. If Europe wants to go through the winter, we need another crazy moment. How about it: Pay customers not to use electricity.

One year after the energy crisis, policymakers have tried to simply supply the system in their efforts to solve the problem. Their own words highlight the approach: “Supply” and “Production” 28 were mentioned to the community at last week’s Group of Seven summit; “Demand” and “use” are only five.

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This is going to change: the best energy is what we do not accept. In Europe, officials are now working on a plan to combat the crisis, which will probably be published in a few weeks, focusing on the consumption system. I hope to see a greater emphasis on the so-called “demand response”.

It involves consumers, mostly large companies, reducing or shifting their energy use at the maximum time in response to time-based rates or other financial incentives. The most common demand response measure is cheap energy prices during low-demand periods – say, at night or on weekends. But what I hear from Brussels is an extreme form: paying some companies to significantly reduce or even shut down their plants, so that they don’t use electricity, and so help light up for everyone else.

Saving electricity is equivalent to saving natural gas because a large portion of Europe’s electricity is generated by burning gas imported from Russia, led by Vladimir Putin.

The UK is also exploring this idea. National Grid PLC is asking companies how many megawatts of electricity they will be able to reduce demand for next winter – and how big they will demand payments. This has created a price range for potential payments, ranging from £ 100 ($ 122) to £ 6,000 per megawatt hour. The current day-to-day electricity price in the UK is around £ 200 per megawatt hour. Germany is considering a similar arrangement based on an auction: the government may allow companies to bid negative prices for megawatt-hours.

Paying companies for not using electricity is easier said than done with families. First, industrial plants have sophisticated metering systems that allow for time-based tariffs. Second, companies could completely stop using it more easily. Households can benefit from demand response policies through smart digital meters, which allow for the introduction of time-based tariffs.

European policymakers can still implement the negative cost of electricity for households through a different route: a kind of cash-for-clinker program for machinery, modeled on the 2009 American version for cars. The U.S. program scrapped 677,000 older cars, shifting consumer demand to more fuel-efficient cars. After heating, most household energy needs are centered around appliances: washing machines, ovens, dry tumblers, refrigerators and freezers. Improving their efficiency can save many megawatt hours of energy. European governments should use tax breaks – reduced VAT – or even direct subsidies to encourage families to scrap their energy-intensive appliances for the less energy-hungry.

In southern Europe, the scheme should involve air-conditioning units, which are now a huge source of electricity demand in Spain, Portugal, France and Italy. The Greek government is already subsidizing between 30% and 50% of the cost of some new, energy-saving equipment. Others should follow.

Ironically, Europe could copy-paste some policy from the unlikely champions of energy efficiency: Saudi Arabia. The state has run a program for several years to replace old, inefficient air conditioning units with new, energy-efficient units, providing subsidies to families.

A cash-for-clinker program for air conditioning and other household appliances will not only reduce energy demand, but will also support the retail industry and some European manufacturers. It won’t be cheap. But black is not out. And it achieves many policy objectives at a time when many families are tightening their belts and the economy is slowing down.

With most of the focus on oil and natural gas, people are ignoring the fact that the European electricity market is already blowing up – and pointing to the dangers ahead for this winter. The price of French electricity for December rose by about 1,000 euros ($ 1,046) per megawatt-hour, up from 50 euros two years ago. Benchmark German one-year forward up to 300 euros per megawatt hour – except for two days in December 2021, when prices rose to return. This is a record high.

Demand response systems such as incentives for negative prices and industrial recessions can help now. Reducing electricity consumption is the key to reducing gas costs – and dependence on Russia. On Friday morning, the UK was generating about 65% of its electricity at gas-powered power stations. It is a better stored gas for the winter, when we will need it to heat our house.

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