Attribution: Goran_tek-en
In February 2022, Russia invaded Ukraine. By May of that year, oil prices had spiked sharply to well over $100 per barrel.
This pushed-up global energy prices and caused particular hardship in the UK.
Figure 1: Oil Prices over time (nominal)
As oil prices are now rising again, this prompts the question was our approach last time flawed and can we do better this time?
Our conclusion is that last time, our response was badly flawed:
- The impact was worse in the UK than in most other leading countries;
- Our policy response was weaker in the UK than in most other European countries;
- To improve we must rethink our management of inflation and rewire our key institutions.
The impact was worse in the UK
In comparison with other European countries, the UK protected consumers less effectively from the impact of rising oil prices.
Figure 2: Electricity prices in Europe 2021-2023
| Cost of electricity €/kWh | France | Spain | Germany | Italy | United Kingdom |
| 2021 | 0.13 | 0.19 | 0.16 | 0.18 | 0.20 |
| 2022 | 0.17 | 0.29 | 0.23 | 0.32 | 0.31 |
| 2023 | 0.22 | 0.21 | 0.29 | 0.25 | 0.33 |
Source: Breugel, Eurostat, ONS
Our policy response was weaker in the UK
The policy response in the other European countries was in general both swifter and more wide-ranging.
Figure 3: European policy responses to oil price shock
France quickly adopted a tariff shield to protect electricity consumers, and in July 2022 imposed a windfall tax on EDF and other big energy companies to fund the protection of consumers. It also introduced an ‘energy sobriety plan’ which cut energy consumption by around 10 per cent. An inflation premium was paid to households below median income.
Spain (and Portugal) took advantage of the Iberian Exception[2] when, in June 2022, the European Commission allowed them to decouple the price of gas from that of electricity for 12 months. Though there were some unintended consequences, this policy is estimated to have reduced prices by around 24% between June 15 and August 31, translating to potential savings of nearly €700 million for 10 million households, and by 17% over the first six months.
Germany was slower to respond, but for 2023, Germany capped prices on the first 80 per cent of energy usage and introduced a windfall tax. It also offered relief packages for the most vulnerable households.
Italy was quick to respond to rising energy prices with a combination of tariff and income-based fiscal policy measures. Italy was also effective in demand reduction both through rationing and a switch to renewable sources of energy.
The UK response was both slower and overall less effective. The energy price cap was actually raised by 54 per cent in April 2022 to protect suppliers; and the regulator Ofgem planned to increase it by a further 80 per cent on 1 October 2022. (To be fair to Ofgem, given the combination of a limited remit and a genuine threat to the solvency of some generators, they felt they had little choice). The government realised that this would be an impossible burden for households and introduced an Energy Price Guarantee. Nevertheless, typical household energy bills increased by 54 per cent in April 2022 and 27 per cent in October 2022. Lower wholesale prices since then have led to some fall in prices, but in 2025, bills were still 43 per cent above their winter 2021/22 levels. In May 2022, the government introduced a windfall tax on oil and gas companies which raised £6.2 billion in its first two years. There was also limited help for the poorest households, and limited support for demand reduction through insulation.
Figure 4: UK energy prices over time
To improve we must rethink and rewire
The relatively poor UK response was conditioned by two institutional weaknesses:
- The regulator of electricity supply (as with many other regulators) has been captured to the extent that its decisions serve the interests of the shareholders in those it is meant to be regulating, not the customers or the wider economy;
- Our approach to management of inflation assumes that the Bank of England is best placed to tackle inflation and that it should do so by raising interest rates.
These factors produced two extraordinary effects. The first of which has already been mentioned: the regulator approved a 54 per cent increase in prices and would have approved a further 80 per cent increase: neither household nor business consumers would have been able to weather such a storm.
The second is that when Putin invaded Ukraine and caused a spike in global energy prices, the resulting inflation was clearly not caused by UK consumers having too much money – as the Governor of the Bank of England recognised. He told MPs,
“It’s a very, very difficult place to be. To forecast 10 per cent inflation and to say there isn’t a lot we can do about it is an extremely difficult place to be.”
He knew that raising interest rates would harm both household finances and the economy, and do little to reduce inflation, but his remit meant that he felt that he had to raise them anyway. That is no way to run a country.
Our previous Working Paper, Rewiring for Success sets out a proposed rewiring of our institutions to address these (and other) issues which harm households and the UK economy.
In particular, we called for the removal of the Bank of England’s inflation remit and the creation of a new independent body, the Inflation Control Office which would have a full range of inflation control tools: not only interest rates (which place the burden of inflation reduction on those least able to bear it) but also taxes, price controls and, in extremis, consumption caps. It would also recognise that while inflation is undesirable, often the cure can be worse than the disease. As Paul Krugman pointed out, the risks in relation to inflation are asymmetric – we need an institution with a remit which recognises the asymmetry and does not harm the economy (and households) needlessly.
Without such rewiring, both Ofgem and the Bank of England will stick to their remits and we run the risk that our reaction to today’s oil price surge will be as damaging to households and to the economy as it was to the last one.
If you think this is important for policymakers to understand, please send a link to your MP, and take a look at the 99% organisation and join us.
