The end of subsidised gas, and what replaced it

The single most consequential economic reform of the last decade here was raising the price of gas to households. It was deeply unpopular, it was correct, and the reasons are worth setting out because they are not obvious.

What below-cost pricing was doing

Costing the budget an enormous amount, because someone has to pay the difference and it was the state.

Destroying the domestic production business: a producer forced to sell below cost cannot invest in drilling, so domestic output fell and import dependence rose. The subsidy was directly funding the dependence it was supposed to insulate people from.

Creating an arbitrage: gas at a low household price and a high industrial price in the same market is an invitation to move volumes between the two, and that is precisely what happened. The price gap was one of the largest single rent sources in the economy.

And discouraging efficiency: nobody insulates a building to save on gas that is nearly free.

What the reform did

Unified the price, removing the arbitrage at a stroke. Introduced a targeted subsidy for households that genuinely could not pay. And allowed domestic producers to earn a return, which is the precondition for output growth.

What it cost politically

A great deal, and it should be acknowledged that households absorbed a real fall in living standards.

What it bought

A functioning gas market, a producing sector with investment capacity, and the removal of the largest rent in the economy. That trade was worth making and it is why the reform held.

Pricing below cost does not protect the consumer — it kills investment. I see this clearly in industry: nobody can sell efficiency equipment into a sector whose price is held artificially, because the payback does not compute. Raising the tariff to real cost was painful and it made energy efficiency investment possible for the first time.