Did affordability measures help tame energy price spikes for consumers in major economies?

Russia’s invasion of Ukraine drove already rising wholesale energy prices even higher, leading governments around the world to spend billions of dollars to keep energy affordable. These government interventions helped limit the cost pass-through to retail energy prices, though household budgets were still squeezed. The latest comprehensive data shows that in 12 countries representing nearly 60% of the global population, average households saw their share of income going to home energy rise in 2022 in spite of these substantial government interventions, as energy prices still outpaced nominal wage increases. Impacts were larger for poorer households, as they typically spend a higher share of income on energy. There were some major economies where the share of home energy expenditure in incomes remained flat or even declined, thanks to substantial government support. However, household budgets in these countries were still affected by record transport fuel costs as in other major economies.

Gas, coal and electricity wholesale prices were already exceptionally high in the second half of 2021 as a strong post Covid-19 recovery drove energy demand. Then in early 2022, Russia cut natural gas deliveries to Europe and by the third quarter wholesale gas prices in the region had risen ten fold compared with the beginning of the previous year. Wholesale gas prices also soared in Asia, as European countries competed for alternative supplies elsewhere.

These increases had knock-on effects across the board. Record prices for natural gas and coal used in power generation caused wholesale electricity prices in Europe and Australia to skyrocket by as much as seven times over the same period. Meanwhile, gasoline wholesale price hikes accelerated further in the months after Russia’s invasion of Ukraine and doubled compared with early 2021.

Households also faced record energy costs, though the price spikes were less extreme than those on wholesale markets. Long-term contracts, financial hedging and utilities' ability to amortise costs already prevented price spikes in global fuel markets from fully cascading to consumers, especially in the power sector where generation represents less than half of total electricity cost. Still, affordability measures played a sizeable role in 2022. Governments mobilised nearly USD 900 billion to shield consumers from high prices. At least ten major economies directly stepped-in to control energy prices, by compensating utilities directly for losses or by temporarily cutting taxes and charges on energy.

Nonetheless, retail natural gas prices increased by at least 30% in major European economies and in the United States in 2022. In the United Kingdom, where government measures focused on bill rebates rather than reduced taxes and charges, households had to pay 90% more per unit of gas.

Retail electricity prices also rose by 25% in Japan and Spain and by over 45% in the United Kingdom and Italy, and there were substantial price hikes in South Africa and Korea. However, tax cuts, other price stabilisation measures and lower dependence on imported fossil fuels tamed the price increase in many other major economies. Replenished hydropower dams even brought down electricity prices in Brazil.

In Türkiye, where overall inflation was already extremely high, nominal prices for natural gas more than doubled, while in Argentina residential energy prices rose by around 50%. Although part of these increases were due to generally high overall inflation, they still created substantial challenges for low-income households in particular as wages often did not catch up quickly enough. In all other major economies where energy prices for consumers increased, the trends were still considerable even when adjusted for broader inflation, for which rising energy prices are a key driver.

Early numbers for 2023 show that wholesale energy prices may have passed their peaks and have largely returned to 2021 levels. However, retail prices are unlikely to fall that quickly, as many suppliers hedged electricity and natural gas when wholesale prices were much higher. Residential electricity and gas prices in the European Union have already started to fall on average, though they still remain above 2021 levels. In the United States, prices for residential electricity and gas are also likely to decline. In other regions, consumers might continue to face high energy prices in 2023. For example, the Japanese government recently allowed major power companies to raise tariffs by 10 to 40%.

As a consequence of the soaring prices, households spent a higher share of their income on energy bills in a range of major economies in 2022. These increases were most pronounced in Italy, Spain and Japan, being around one percentage point higher than in 2021. On average, households in major economies spend between 3 to7% of their incomes to heat and cool their homes, to power appliances and to cook, though shares are higher for low-income households.

Affordability measures absorbed some of these increasing financial pressures. Three quarters of the money spent on global government support measures was provided directly to consumers via subsidies, vouchers and grants. In some cases, these measures were directly applied to energy bills, while some governments opted for general support for households coping with higher costs of living through one-off payments. For example, in the United Kingdom, where average residential energy expenditure increased by over a third compared with 2021, all households received a GBP 400 discount1 on their energy bills during the 2022-23 winter. In the four countries with the highest relative increases in expenditure, low-income households received further payments or vouchers to partially offset energy cost increases.

In some major economies, energy expenditure would have been even higher in 2022 had residential energy demand not decreased. In Europe, these declines ranged from -7% to -15%, mostly driven by reduced heating needs thanks to a milder winter. However, behaviour change, fuel switching and efficiency measures accounted for more than a third of the decline in European Union gas demand in buildings, while also explaining part of the decrease in electricity demand. While some consumers adjusted their thermostats voluntarily, many vulnerable households could not afford to heat their homes sufficiently in view of skyrocketing energy prices. This may have led to more deaths in Europe last winter than caused by Covid-19 during the same period.

Car-owning households faced additional pressures. Just after Russia’s invasion of Ukraine, prices rose faster at German petrol stations than the previous records set during the oil crises in the 1970s and the global financial crisis. These exceptional developments have prompted governments to introduce a range of measures to tame prices. Nonetheless, retail gasoline prices surged between 10% and 30% in a range of major economies. In most emerging markets, transport fuel cost hikes posed the main burden on household budgets, alongside rising food prices. Accordingly, 60% of the financial support in those countries targeted high transport fuel costs.

Since the start of 2023 alone, governments have announced a further USD 300 billion in short-term consumer affordability measures as households continue to face extremely high energy bills. However, nearly 75% of the support mobilised since the start of the global energy crisis was made available to all consumers despite calls that the measures be better targeted to low-income households. The vast majority of the spending continues to be concentrated in Europe and other advanced economies.

Reduced taxes on petrol and diesel in countries across all continents pushed fossil fuel consumption subsidies to an all-time high in 2022. While these measures were mostly temporary in advanced economies, a range of emerging and developing economies continued to provide long-standing subsidies for transport fuels and electricity. Many governments are committed to phasing out fossil fuel subsidies, while financial pressures have pushed some governments to promptly reduce support. Despite such steps, subsidies remain extremely high for example in Indonesia, where home energy and transport fuel expenditure combined would have been nearly three times higher in 2022 without such price-reducing measures.

The considerable volume of support measures is not only intensifying financial pressures on governments, but also for utilities that could not pass their higher costs through to consumers. In the medium term, some utilities might raise tariffs to recoup losses occurred during the energy crisis. However, some energy companies, in particular oil and gas producers, have made substantial windfall profits in 2022. As a consequence, some governments have implemented ad-hoc levies on these gains to finance their affordability measures.

In many cases, more stable residential prices were also indirectly financed through higher prices for industrial energy consumers, with price increases for natural gas and electricity surpassing those for residential customers in nearly all major economies in 2022. While absolute prices remain below those paid by households in most countries, industrial energy consumers received only a limited share of affordability measures.

Surging energy prices are contributing to consumers increasingly choosing to buy electric vehicles and install solar panels and heat pumps, reducing their home energy and transport fuel bills. For example, electric vehicles (EVs) now account for 14% of the global car market, up from less than 5% just two years ago.

The energy crisis has increased fuel cost savings from EVs in all major economies that did not subsidise petrol prices and even in many countries that did. However, fuel tax cuts and other measures to keep gasoline affordable narrowed the cost savings of EVs in Japan, Italy and the United Kingdom. Across major economies, annual savings ranged from USD 380 in Japan to USD 1 300 in Canada in 2022.2 The cost of driving an EV is now half of that to drive the same distance in a gasoline powered car in Germany, while it is even seven times cheaper to drive an EV in Argentina and India.

Global heat pump sales saw another year of double-digit growth. Ample financial incentives further reduced upfront costs in key markets, while skyrocketing natural gas prices improved the competitiveness of operating costs. Heat pumps are now cheaper to run than gas boilers in all major heating markets, with substantial increases in savings in Europe but also four times higher savings in the United States in 2022 compared with the previous year. Cost competitiveness can be improved even further by rebalancing energy taxation and introducing attractive electricity tariffs for heat pumps.

These developments are adding to a record momentum for key technologies, showing that clean energy transitions are accelerating with major implications for the global energy industry in this decade.