Rising energy prices mean that many people will be cutting back on their gas consumption this winter. In this blog, Jake Shepherd estimates the financial savings households and the Government could make by reducing demand, using energy saving efforts in Germany as a benchmark.
When the colder months draw in, people usually go to put the heating on. This year higher energy prices mean many will be looking to reduce their usage in whatever way they can. In Germany, data suggests that households have successfully brought down their gas consumption. What impact would similar reductions have this in country, and how much money would be saved?
What’s been happening in Germany?
Cascading supply-side problems are stacking pressure on the European economy. Under particular strain is Germany, a nation that relies heavily on Russian gas. To avoid soaring prices and shortages, Germany has announced its commitment to voluntarily cut gas consumption by 15% by March 2023.
In order to encourage savings among consumers, businesses, and public entities, the German government has approved several new energy-saving measures. Germany’s economy minister has said the rules could save around €10.8bn (£9.1bn) over the next two years.
In the public and private sectors, the package includes a lights-out policy, with monuments, public buildings, and advertising boards turning off their lights at night. It also requires that temperatures in public buildings are limited to a maximum of 19° C, with heating turned off completely in halls and corridors.
For domestic consumers, Germany is running an energy-saving campaign to tell people how they can cut down on their own consumption, “offering practical tips, suggestions, and examples to make saving energy as easy as possible”.
German officials have thus far refrained from imposing policies that force households to further reduce consumption. But in the face of rising prices, alongside encouragement and support, consumers are adjusting their behaviour of their own accord.
How is it getting on?
Germans have saved on gas consumption compared with previous years. Analysis published by Zeit Online shows that, from the beginning of September, gas consumption by households and businesses has been around 20% below what is expected given weather conditions and temperature. In the second week of September, household gas consumption was 37% lower.
This analysis is based on the assumption that without energy saving efforts, consumption in Germany would have been much higher given the unusually low temperatures of recent months. The German Institute for Economic Research has arrived at similar results. Figure 1 below describes the weekly savings made by households from the beginning to September through to mid-October (more recent data is not currently available).
Figure 1: Weekly household gas saved compared with average 2018-2021 consumption at comparable temperatures
Source: Zeit Online (last updated 14th October 2022)
This is good news. A long winter lies ahead, but households appear to have brought down their gas consumption by around a third. This raises a question: if the UK were to match Germany’s (temporary?) success, what would the impact be? How much gas would British consumers save, and at what cost? What, given the nature of the UK’s energy price guarantee, would the financial consequences be for the Treasury?
As well as having important financial implications, the conversation around energy saving measures also carries some political weight. In October this year, the then-business secretary Jacob Rees-Mogg called for an information campaign to help the public conserve energy. Concerned about the ‘nanny state’, then-prime minister Liz Truss rejected the proposals. Could Rees-Mogg yet be vindicated in his wish to enable the public to make better decisions on their energy usage?
If the UK followed in Germany’s footsteps, the financial gains would be significant
Provisional temperature adjusted data suggests that British households have already been cutting back on their gas consumption. According to the Department for Business, Energy and Industrial Strategy, in Q2 of this year demand fell by 7.3% when compared with the same period last year.
This suggests households are already taking steps to reduce their consumption, although perhaps not quite to the extent we might hope for given the national concern around energy prices. In the context of Germany’s recent energy saving efforts, there is plenty of room for improvement.
We do not yet have more reliable estimates of more recent gas consumption here in the UK. But we can apply the same basic assumptions, taking temperature adjusted data from previous years to estimate what the impact of a Germany-style reduction would be.
Table 1 shows the temperature-corrected average gas consumption for households in Great Britain in 2019. It also shows the impact of both 20% and 30% demand reductions, as observed in Germany, on household and government finances. Though 2020 data is also available, it is not as directly comparable, given that COVID-19 restrictions meant that more people stayed at home more often, creating an unusually high demand for domestic energy consumption.
Table 1: Gas costs under reduced demand, 2022 prices
Source: SMF analysis of BEIS energy consumption data
In 2019, when controlling for weather fluctuations household average gas consumption cost £1,307 a year in today’s prices. If consumption were to be reduced by 20% from 2019 levels, bills would fall to £1,045, a £261 reduction. If demand decreased by 30%, households would pay £915 – just under £400 in annual savings.
Given its commitment to subsidise the reductions suppliers are making to households’ energy bills through the Energy Price Guarantee, the Government currently pays roughly the same amount as customers for gas. It would therefore see similar savings returns. As such, a 20% demand reduction would save the Treasury an average of around £250 per household a year. A 30% reduction would save just over £375 a year.
There were 24.5 million gas customers in Great Britain in 2019. Gas consumption reductions of 20% and 30% would therefore see total savings of £6.42 billion to £9.63 billion a year off household energy bills. The Treasury would save a similar amount, £6.18 billion to £9.26 billion a year.
Table 2: Financial impact of reduced gas demand, 2022 prices
Source: SMF analysis of BEIS energy consumption data
It is important to note that these are only rough estimates. However, as estimates they do provide an indication of the kinds of savings that could be made in this country. Crucially, they also point to whether further policy intervention is needed.
Since gas consumption depends on other factors, not just the weather, and seeing as though data is only available to a limited extent, they are relatively uncertain. Meanwhile, energy prices, including wholesale gas prices, are subject to fluctuation, affecting any potential savings estimates.
It is also worth mentioning that the above calculations are based on annual data, unlike Zeit’s analysis which is presented more granularly, on a week-by-week basis. Though it is not implausible, it seems unlikely that the German people would reduce their gas consumption by 30% consistently across the year, especially in the colder months to come. The above savings figures may therefore be overestimates.
But given the tough economic climate we currently find ourselves in, even the lower estimates that are presented are a considerable amount of money for households, and is a sum most would be grateful for.
Equally, in the context of an energy bills support package for households that will cost the government £31 billion in 2022-23, not to mention the “tough and difficult economic decisions” soon to come, reductions in gas demand would represent significant relief for the public purse. Encouraging Britain to turn off the lights and turn down the heating would do a lot to help.
 Costs are calculated by multiplying average gas consumption by current prices: the price of gas on standard variable tariffs (10.3 pence per kWh; as of 12th October) and the amount the Government compensates suppliers to discount the price of wholesale gas (9.9 pence per kWh; 22nd August).