Energy liberalisation leads to higher prices (...) what is liberalisation expected to achieve? A more competitive and transparent market and thereby lower prices is the stock reply. A possible relationship between liberalised markets and security of supply has been a more recent emphasis. Such aspirations could be dismissed on the grounds that the gas and electricity industries are inherently unsuitable industries for competition. Here, though, I would like to challenge them by drawing attention to the impact of liberalisation on the three main cost components that make up the prices paid by households (...) the wholesale cost of gas and electricity, the cost of transmission and distribution and the cost of supply (billing and marketing). (...) First, as should be anticipated, liberalisation increases aggregate supply costs for domestic customers (increased marketing costs, duplicated billing infrastructure, switching costs etc). Second, the level of these costs can be unrelated to the actual cost of supply as energy companies defend or increase their downstream profit margins. Third, while supply costs for gas and electricity should not be too different (the billing process is the same), in 2006 they were only £16 for gas, but jumped to £88 for electricity - providing a clear indication that a squeeze on gas supply margins brought about by the rising wholesale cost of UK gas was compensated for at the expense of electricity customers. Full liberalisation in electricity and gas has either not got off the ground or has died a death elsewhere in the world. Through its impact on wholesale pricing and on supply costs and margins it is likely to result in both higher and more arbitrary prices, as well as making a lottery of investment incentives. But the European Commission presses on regardless at the expense of addressing more urgent energy problems. Somewhat ironically, its efforts are mainly sustained by the UK.
(...) what is liberalisation expected to achieve? A more competitive and transparent market and thereby lower prices is the stock reply. A possible relationship between liberalised markets and security of supply has been a more recent emphasis.
Such aspirations could be dismissed on the grounds that the gas and electricity industries are inherently unsuitable industries for competition. Here, though, I would like to challenge them by drawing attention to the impact of liberalisation on the three main cost components that make up the prices paid by households (...) the wholesale cost of gas and electricity, the cost of transmission and distribution and the cost of supply (billing and marketing).
(...)
First, as should be anticipated, liberalisation increases aggregate supply costs for domestic customers (increased marketing costs, duplicated billing infrastructure, switching costs etc). Second, the level of these costs can be unrelated to the actual cost of supply as energy companies defend or increase their downstream profit margins. Third, while supply costs for gas and electricity should not be too different (the billing process is the same), in 2006 they were only £16 for gas, but jumped to £88 for electricity - providing a clear indication that a squeeze on gas supply margins brought about by the rising wholesale cost of UK gas was compensated for at the expense of electricity customers.
Full liberalisation in electricity and gas has either not got off the ground or has died a death elsewhere in the world. Through its impact on wholesale pricing and on supply costs and margins it is likely to result in both higher and more arbitrary prices, as well as making a lottery of investment incentives. But the European Commission presses on regardless at the expense of addressing more urgent energy problems. Somewhat ironically, its efforts are mainly sustained by the UK.
The impact of liberalisation on wholesale costs is problematic in that short-term markets increasingly price electricity or gas delivered under long-term contracts. Such indexation to short-term markets (for example to month-ahead or day-ahead prices) is wrongly seen as a virtuous indicator of liberalisation, when in fact these markets establish a volatile flexibility premium as buyers and sellers seek to balance their positions when delivery day approaches and options increasingly diminish. To counterpose them with "old-fashioned" long-term contracts and allow them to set a price for baseload supplies contracted for perhaps years in advance of a delivery day is therefore misplaced - such long-term supplies are more appropriately indexed to a wider basket of commodities, including alternative fuels, in order to reflect the different risk profile they offer. This is not a trivial matter: gas indexation has ruined otherwise viable businesses in the UK and made long-term investment decisions hazardous.
To counterpose them with "old-fashioned" long-term contracts and allow them to set a price for baseload supplies contracted for perhaps years in advance of a delivery day is therefore misplaced - such long-term supplies are more appropriately indexed to a wider basket of commodities, including alternative fuels, in order to reflect the different risk profile they offer. This is not a trivial matter: gas indexation has ruined otherwise viable businesses in the UK and made long-term investment decisions hazardous.
(Note - investment banks and traders love volatility - it's a great source of profits for them. In essence, deregulation has forced utilities to outsource volatility management - with the added twist that they pay more for it than before...) In the long run, we're all dead. John Maynard Keynes
Note - investment banks and traders love volatility - it's a great source of profits for them.
Of course it is. And I got into trouble a few years ago for blowing the whistle on one particularly blatant mechanism they were using to profit from it.
Unfortunately I alleged the manipulation was "systematic" ie a few doing it most of the time, whereas what I should have said it is "systemic" - ie most doing it some of the time.
And I was buried as a result as the UK system closed ranks. I could not be seen to be right, as that "would have brought the market into disrepute".
I believe that artificially induced volatility has been a feature of the global energy markets for at least the past 10 years and moreover that two particular players - the most profitable in their sectors - have made fortunes by colluding in this.
And still do.
But then, it probably isn't even illegal..... "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
Though I'm sure that's just too cynical to be real.
I'm sure that's just too cynical to be real.
Nah, it's too real to be cynical. In the long run, we're all dead. John Maynard Keynes
Are there recent European examples yet of privatized companies gone bust that have been re-nationalised (because of their national strategic position) to scrape them out? I have the impression some economic areas are waste-deep in Stage 3 "suck up profits without investing".
Alstom - Wikipedia, the free encyclopedia
Between January and February 2001 Marconi plc (the renamed GEC) sold 76.4% of its 24% share. The remaining 5.67% share was sold in June. In 2001, Alcatel also sold its 24% stake. The share price fell steeply following the September 11, 2001 attacks when a number of cruise liner orders failed. At the same time, a number of problems became apparent in the new generation of gas turbines, G24 and G26, Alstom installed around the turn of the century. The financial liability for repairing these problems pushed Alstom into a financial crisis. On March 12, 2003, shares dipped 50 per cent in one day, and finished at 1.36 euros. At this point it was announced that the most profitable division of the company would be sold off: its power transmission interests. In January 2004 these were transferred to Areva. Only through a much needed financial infusion from the French government was Alstom rescued from going into bankruptcy. The 21% of the stake the French government took as the result of rescue was later sold to the French company Bouygues, one of the world's largest construction companies.
Between January and February 2001 Marconi plc (the renamed GEC) sold 76.4% of its 24% share. The remaining 5.67% share was sold in June. In 2001, Alcatel also sold its 24% stake. The share price fell steeply following the September 11, 2001 attacks when a number of cruise liner orders failed.
At the same time, a number of problems became apparent in the new generation of gas turbines, G24 and G26, Alstom installed around the turn of the century. The financial liability for repairing these problems pushed Alstom into a financial crisis. On March 12, 2003, shares dipped 50 per cent in one day, and finished at 1.36 euros. At this point it was announced that the most profitable division of the company would be sold off: its power transmission interests. In January 2004 these were transferred to Areva. Only through a much needed financial infusion from the French government was Alstom rescued from going into bankruptcy. The 21% of the stake the French government took as the result of rescue was later sold to the French company Bouygues, one of the world's largest construction companies.
Reads like a textbook model for Colman's postulate - except that it wasn't nationalised, just got a governmental cash injection and the game continued.
Is this also the company responsible for rolling out the new railway signaling system that has been a pain in the everywhere, resulting in (further) delays for the Dutch high speed train connection?
But it would never have been needed if Alstom had not been stripped out before. All the big engineering companies need to have large cash reserves to cover unexpected technical problems (especially teething problems on new technology), and Alstom's was taken out by Alcatel and Marconi.
Now you can argue that:
The competence stayed (even though most of the jobs were of course cut) and today the industry has grown into a high tech knowledge-intensive extremely specialised business, supplying lots of highpaying high value-added jobs, and huge export revenue.
The Swedish state did this by itself (IIRC) but other times it has been helped out by the local patriotic capitalist dynasty, the Wallenberg family, who are about as far as you can come from "faceless fund capitalism". Peak oil is not an energy crisis. It is a liquid fuel crisis.
privatise-> liberalise -> suck up profits without investing -> disaster -> nationalise and public investment -> privatise ->
<cough>Northern Rock</cough>
If "rentiers" are allowed to participate in markets, then the cost of that market to the consumer must rise by the amount of the rent extracted.
It is now possible, in fact NECESSARY, I believe, to evolve "stakeholder" markets without rentier profits, which have a place for banks as service providers, rather than as credit creators, and which will be "Not for Loss" rather than "For Profit". "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
