Goldman Warns EU Energy Price Freeze Could Backfire

Goldman Warns EU Energy Price Freeze Could Backfire

UK and European governments freezing energy prices risks blanketing the Continent in power blackouts, a Wall Street investment bank has warned today.

Keeping energy bills artificially low will likely stimulate energy demand, possibly causing supplies to run dry, Goldman Sachs said in a note to clients.

“With interventionist policies announced so far prioritising capping energy costs over curtailing demand, the concern is always that such measures end up incentivising higher energy consumption, thereby making the gas deficit worse,” the bank said.

“The more reductions [in energy consumption] we see, especially in summer… the less likely Europe is to face blackouts or lack of heating in the winter,” Goldman added.

Last week, UK prime minister Liz Truss announced energy bills will be pegged at £2,500 for two years from October at a cost of around £150bn.

“The lower cap to energy bills to be implemented in the UK this winter (and for the next two years) might also keep energy consumption at higher levels than what we would have seen under a higher cap,” Goldman said.

Europe’s largest economies have launched similar market interventions to prevent households suffering a historic hit to their living standards.

Although the measures will offset the energy price shock, they are likely to water down incentives to reduce energy spending.

The UK and European energy market has been grappling with a shortage of gas after Russia squeezed flows in response to western sanctions in retaliation to the illegal invasion of Ukraine.

The Kremlin turned off all flows through the Nord Stream I pipeline – the main thoroughfare transporting Russian gas to Europe – for maintenance. 

Moscow has since said flows will not resume until western sanctions are lifted.

Weaker than usual supply has propelled gas prices to record highs, triggering cost of living crises in Britain and across the Continent, prompting governments to step in.

Related: How The Situation In Ukraine Could Get A Lot More Dangerous

Businesses will need to respond to swelling energy costs by curbing economic activity to ensure the UK and European government do not impose energy rationing measures, Goldman said.

UK gas future contracts for December dropped around six per cent today, as did Dutch gas futures, the European benchmark.

UK gas future prices have cooled from record highs

Price of UK gas supplies in December (Source: ICE)

By CityAM

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