European Tribune - Community, Politics & Progress.

Deregulation at work

by Jerome a Paris
Wed May 31st, 2006 at 05:39:39 AM EST

A recent study on electricity prices in Europe, which can be downloaded from here (in French), has been widely publicised in France because it shows that France has seen electricity prices in the deregulated market (i.e. price for industrial users) increase fastest over the past year, by a whopping 48%, to become some of the most expensive in Europe (not as expensive as in fully deregulated UK, though).

above: industrial prices, as of 1 April 2006
below: evolution of these prices over the preceding 5 years.
click on either for larger version.

It is being used by industrial and commercial users to complain about EDF's unfair practises and about the silliness of France having cheap nuclear power and its industry mot benefitting.

What it hilarious, and sad, is that you did not hear these customers complain about market prices a few years ago, when these prices were lower than the regulated EDF prices, and they moved away from EDF's guaranteed prices to the more efficient (and thus supposedly always lower) market prices. EDF's regulated prices, as the second graph above shows, have barely increased, and are the lowest in Europe. The thing is, once you've switched to market prices, you cannot go back to regulated prices (Duh! would seem appropriate here).

Newsflash 1: market prices can go up too!
Newsflash 2: electricity prices on the market are determined not by the cheapest producer, but the the most expensive needed at any given time to fulfill all demand. And in most places, that would be gas-fired electricity.
Newsflash 3: EDF has been privatised and sells its electricity at market prices, except if you chose to stay under the umbrella of the State-regulated prices.

What? Reality is not complying with ideology?

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Deregulation at work | 11 comments (11 topical, 0 editorial, 0 hidden)

Re: Deregulation at work (none / 0)

Neo-lib economics pundit Jean-Marc Sylvestre, heard yesterday morning on France Inter (French public radio):

I'll explain it to you, it's very simple... The private suppliers (Suez etc) had to raise their prices because the price of oil and gas rose. EDF is based on nuclear. So we're in a situation where EDF can ignore the reality of the market thanks to subsidies from the taxpayer.
(my paraphrase from memory, emphasis mine)

When locusts move on, they leave nothing behind

by afew (afew(a in a circle)eurotrib_dot_com) on Wed May 31st, 2006 at 06:01:09 AM EST

Re: Deregulation at work (none / 1)

The big headline of Les Echos yesterday was "Electricité : les prix flambent malgré l'ouverture du marché" (Power: prices jump despite the opening of the markets)

It made me want to scream.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (jeromeguillet@yahoo.fr) on Wed May 31st, 2006 at 06:12:24 AM EST
[ Parent ]

A few days ago (4.00 / 3)

I got to talk with a pretty senior analyst on energy in Europe (someone regularly published in big papers and the like). He said that the situation in the energy markets is really worrisome; the markets are tight, they don't function properly, and Europe is in dire need of some good regulation and a new model.

So I told him: what's wrong with the EDF model? Every singlt attempt at deregulation/market based regulation has failed over the past 20 years. There are lessons from a number of countries, and each regulatory framework has had its problems. Isn't it time to say the the problem is actually the markets, and the electricity should follow the EDF model - fully integrated, State-owned and run - and State funded.

To which he said that this had led us to having an overcapacity - too many nuclear plants - for our needs.

The very overcapacity which is the only thing preventing several of the other European markets from collapsing from insufficient supply - and which is creating a tidy profit for EDF and its shareholders...

EDF = State-owned (and French) thus BAD, BAD, EVIL. They cannot get this out of their heads.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (jeromeguillet@yahoo.fr) on Wed May 31st, 2006 at 06:17:53 AM EST

A data point (none / 0)

In 2005, EDF's operating profit was higher than that of Total. It is making more money than one of the biggest oil companies around - on half the turnover.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (jeromeguillet@yahoo.fr) on Wed May 31st, 2006 at 06:19:19 AM EST
[ Parent ]

Re: A few days ago (4.00 / 2)

You can keep stating the obvious tilll you're blue in the face, but they who will not listen cannot hear.

They've had neocon poison about the effectiveness of markets dripped in their ear for so long that, even in the presence of absolute proof, they would rather disbelieve their own senses.

keep to the Fen Causeway

by Helen (lareinagal at yahoo dot co dot uk) on Wed May 31st, 2006 at 06:39:16 AM EST
[ Parent ]

Re: A few days ago (none / 1)

From power to neocons to Shakespeare! (I notice Denmark is at the top of the graph above.)

Have a 4!

-----
sapere aude

by Number 6 on Wed May 31st, 2006 at 07:01:15 AM EST
[ Parent ]

Re: Deregulation at work (4.00 / 2)

Its the same thing in America, where the rich have convinced the poor and middle class people to think that a good, regulating (and socially-oriented) government is bad...when everything the Rich right wing does is AGAINST their best interests. Brain-washing. If they say something enough, it must be real...<what a bunch of bullshit>

Half the population is under the age of 18. Tanzania's future is NOW...join the 50% campaign!

by whataboutbob on Wed May 31st, 2006 at 06:48:51 AM EST

profit? (none / 0)

One of the consequences of "deregulation" of power in the states (which generally means privatization of public utilities and scaling back of oversight on those private companies) is that public utility commissions -- local and state bodies generally -- have allowed private energy brokers to greatly increase profits while private energy providers to retail and business customers (in many cases owned by same holding company as the broker) claim poverty due, of course, to rising gas/oil prices and/or too much regulation -- and thus are allowed by utilities commissions to raise prices drastically.

I don't believe that anyone in Europe has privatized delivery of energy to homes and businesses, have they?

by desmoulins (gsb6@lycos.com) on Wed May 31st, 2006 at 11:56:04 AM EST

Re: Deregulation at work (none / 1)

There is too little information in the graph to really say much about it. Is it price to the consumer? When and how? With or without taxes? There is a difference between deregulation and privatisation. Denmark, Sweden, Norway, and I believe Finland all have deregulated markets, but at least in Norway the players are dominantly local counties (owning the power plants), supplemented by the state and the private sector. I find the reported differences between Sweden and Denmark interesting as they participate in the same energy market.

I am sufficiently green to believe that energy subsidies are wrong in every way it could possibly be wrong. So in my view low energy prices are not a good thing unless these prices reflect the cost of energy production and transmission including environmental costs. On the other hand I am not so green as to believe that high energy prices is in itself desirable.

It is easier to achieve these goals in a deregulated than in a regulated market. Before deregulation some parties had abnormally low energy prices, prompting them to waste energy. Now they have an incentive to save energy and send the surplus energy to the market.

How deregulation is done matters. The system must allow for maintaining and improving the needed infrastructure, otherwise power outages may become the rule as the grid deteriorates. Much of the European grid is dangerously close to capacity. On the consumer side it must be easy to switch provider. Again using Norway as an example very few Norwegians do that, giving the companies greater opportunities for higher prices and profit.

Whether private or public ownership is better is a matter of political opinion. If the local/national government is a responible owner, and that the market is truly deregulated, I see no harm in them owning the resources. OECD on the other hand has critisised Norway for high public ownership.

by jax on Fri Jun 2nd, 2006 at 02:58:55 AM EST

Re: Deregulation at work (none / 0)

These are prices to industrial users in each country, and I imagine they include all taxes and ancillary costs.

I fully agree with your comment that prices should reflect full energy costs (including externalities) but not necessarily more.

I do disagree that deregulation is the best way to achieve this. Externalities, by defintion, can only be internalised through regulation. Safety margins in the network, spare capacity, spinning reserves, etc... need to be defined and regulated and enforced.

Private electricity producers also have a structural preference for power sources with lower investment costs, as they are the easiest to build profitably, as variable costs are easier to pass through in market prices, and interest costs are higher for the private sector. Thus coal and gas fired plants are encouraged by private ownership, unless stringently regulated for their carbon emissions.

There are so many side effects of each aspect of regulation that a public, unified system increasingly appears to me to be the wisest solution and, as France shows, the cheapest as well.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (jeromeguillet@yahoo.fr) on Fri Jun 2nd, 2006 at 10:33:48 AM EST
[ Parent ]

Re: Deregulation at work (none / 0)

The follow-up question would then be if the previous price was a subsidised one. Industrial prices have often been much cheaper than consumer prices, and there is no good reason why that should be the case (except for industries able to use energy when the energy demand and prices are lower). In some cases it would make more sense for the factory to cease production and start selling energy instead. That happened in large scale here in the Czech Republic when plants with negative profitability shut down in the early 1990s, and the air and the environment has greatly improved since (somewhat offset by more cars, but that's a different story).

Deregulation shouldn't mean just throw the energy grid to the wind and let the market sort it out. But it should give wasters of energy a way to save energy and sell it to more deserving users (if they own it), and it should allow consumers (industrial or domestic) to really choose provider to prevent price gouging.

Most externalities can be handled by taxes and other fees, pollution taxes, paying for loss of capital for non-renewable energy sources, or rent for renewable sources (hydroelectric plants takes away a waterfall, solar and wind plants occupy non-neglible parts of the landscape). A hefty carbon tax, which is likely, will prevent inefficient coal power plants (it isn't a given that coal power plants are polluting, the current ones are, but it is at least in theory possible to have clean coal power, it is just that until now there has been no reason to look for it).

Some parts are hard to handle well, maintaining a power grid that can handle the strain, but not being excessively intrusive or expensive, may be hard to do for any entity, public or private. The profitability of a solar plant is fairly easy to calculate, you have an initial investment, you pay rent for the land, and the variability is what the energy prices will be in its (relatively short) lifetime. A nuclear plant is harder to calculate, it has a very long life span from construction to decommission, there is the small but real risk of a disaster, the cost of fuel is unpredictable, and desposing on the used fuel is another unknown.

by jax on Sat Jun 3rd, 2006 at 04:18:04 AM EST
[ Parent ]

Deregulation at work | 11 comments (11 topical, 0 editorial, 0 hidden)

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