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Liberal markets create an addiction to gas - my article in the FT

by Jerome a Paris Thu Feb 1st, 2007 at 02:56:37 AM EST

I am pleased to inform you that the Financial Times is publishing, in its edition dated 1 February, an article by the Editor of the European Tribune and Contributing Editor to the Oil Drum (i.e your truly) which covers a number of topics that we've discussed here before. Its conclusion:

Taking into account pollution, carbon emissions and the expected depletion of resources, moving away from burning hydrocarbons should be an overriding long-term goal. A sane energy policy should focus, as a priority, on reducing our electricity demand via conservation and energy efficiency and on switching to capital-intensive, locally built, renewable energy sources. That will require thinking again about how we finance the sector.

Energy market deregulation is incompatible with the fight against global warming – markets like to finance gas plants – and with security of supply when exporters will not play by our rules. There is no reason to expect them to do so at a time of increasing tightness in energy markets. We have solutions available, if we act on demand reduction and promotion of renewable energy. Sadly, we seem to be doing the exact opposite.


With their kind permission, I am copying the article in full herebelow.

Liberal markets create an addiction to gas
By Jerome Guillet

Energy has become a hot political topic in Europe. Oil price volatility, cross-border mergers and concern about global warming and the security of future oil supplies have conspired to keep the issue in the headlines. Added to this have been fears that the Kremlin will use our increasing dependence on Russian gas as a geopolitical weapon, and the European Commission’s plan to tackle climate change while pushing on with energy market liberalisation.

In all this some basic realities of energy markets seem to be have been forgotten, in particular the growing connection between electricity and gas markets. Electricity market liberalisation has meant that wholesale prices are no longer set by regulated utilities on the basis of production costs, but by supply and demand.

Electricity demand is inflexible – users, except for some industrial consumers, turn on the switch whenever they need electricity. They do not do so on the basis of price. In a market situation, this inflexibility leads to the price’s being set by the production cost of the most expensive power plant needed at a given moment. This is the marginal price, and it is usually higher than the average production cost of available capacity.

Gas-fired power plants provide technical flexibility, thanks to the speed at which they can vary their output. They are also cleaner and emit less carbon than coal-fired plants. This has helped make gas the fuel of choice for electricity generation during the past 15 years. With their ubiquity and rapid response to demand peaks, gas-fired plants are almost always the market’s marginal cost plants, and thus set the electricity price – creating a direct link between gas prices and electricity prices.

Low gas prices during the 1990s created the illusion that marginal prices were almost as low as the price of base load electricity (production from coal-fired, nuclear or hydro power plants, which is needed all the time and is usually cheaper). That is no longer the case. Gas prices – which, in Europe, still largely follow oil prices – have increased sharply and drawn wholesale electricity prices up with them. Retail prices have followed.

Politicians who pushed for deregulation never described marginal pricing to consumers and now have to explain why liberalisation is not bringing prices down as promised. Rather than face the music, they blame price rises on insufficient liberalisation or “uppity” suppliers such as Russia.

But the fundamental reason gas-fired plants have been favoured in today’s liberalised environment is their lower financing costs. Some technologies have lower investment costs and higher fuel costs (gas); some have higher investment costs and lower operating and fuel costs (nuclear and wind). Deregulation and competition rules put the burden of funding investment on financial markets instead of the public purse. This makes financing costs higher than for public utilities that could rely on state guarantees and thus borrow at lower rates.

The increase in financing costs favours technologies with lower initial investment costs – that is, gas and, to a lesser extent, coal-fired plants. Thus liberalisation increases the European Union’s demand for gas and its dependence on imported gas at a time when domestic supplies are declining.

Worrying about Russia controlling our supplies while de facto encouraging investment in gas-fired power plants appears silly. If we are so concerned about our dependence on energy imports, why do we not focus our policies on what we actually control – our demand – instead of concentrating only on the supply side?

Taking into account pollution, carbon emissions and the expected depletion of resources, moving away from burning hydrocarbons should be an overriding long-term goal. A sane energy policy should focus, as a priority, on reducing our electricity demand via conservation and energy efficiency and on switching to capital-intensive, locally built, renewable energy sources. That will require thinking again about how we finance the sector.

Energy market deregulation is incompatible with the fight against global warming – markets like to finance gas plants – and with security of supply when exporters will not play by our rules. There is no reason to expect them to do so at a time of increasing tightness in energy markets. We have solutions available, if we act on demand reduction and promotion of renewable energy. Sadly, we seem to be doing the exact opposite.

The writer, an investment banker for the energy sector, is the editor of European Tribune and a contributing editor to The Oil Drum

I am often critical of the Financial Times, but I will be the first to acknowledge that their opinion pages are amongst the most diverse and interesting of all business/'quality' papers, and I'm quite proud to be featured there. Hopefully the ideas discussed in this piece will be heard by some and will help influence our energy policies, which badly need it.

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Great work, Jérôme! This is a milestone.
by afew (afew(a in a circle)eurotrib_dot_com) on Wed Jan 31st, 2007 at 04:42:51 PM EST
Thanks, afew. You've beaten me to the first comment, as I was crossposting the story to the Oil Drum and to DailyKos, but I'll post this here anyway.

Recommends and comments most welcome.

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

by Jerome a Paris (etg@eurotrib.com) on Wed Jan 31st, 2007 at 04:51:52 PM EST
[ Parent ]
Today was the last day of the radiotherapy of my son, started in mid-January. It has gone really well, with no obvious short term secondary effects, and no difficulty in getting him to climb into the machine every morning (thus no need for anasthesia, which was a huge relief). The doctors are optimistic, but of course we'll know for sure if it has worked in several months' time only.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Wed Jan 31st, 2007 at 05:32:28 PM EST
[ Parent ]
Best wishes for him! He sounds like a brave young kid...
by Trond Ove on Wed Jan 31st, 2007 at 06:29:50 PM EST
[ Parent ]
several of you that helped me edit this text before sending it to the FT. You know who you are, but I'd like to note afew's extensive contribution.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Wed Jan 31st, 2007 at 07:35:10 PM EST
[ Parent ]
Congratulations, Jerome!
by das monde on Wed Jan 31st, 2007 at 08:38:23 PM EST
[ Parent ]
Well done Jerome. Of course, you're arguing against the anglo-american economic cultural concensus, so nobody will understand it.

keep to the Fen Causeway
by Helen (lareinagal at yahoo dot co dot uk) on Wed Jan 31st, 2007 at 05:07:43 PM EST
Excellent article, clair et pédagogique...


"Dieu se rit des hommes qui se plaignent des conséquences alors qu'ils en chérissent les causes" Jacques-Bénigne Bossuet
by Melanchthon on Wed Jan 31st, 2007 at 05:15:31 PM EST
Well done, Jerome.  I've long thought you were well past the LTE stage and ought to be writing op-eds, so I'm glad to see that the FT agrees.

Excellent article, too.  You're talking sense, man.

Will the FT let you know what kind of feedback they receive?  I'm interested to hear how (if) people respond.  Especially given their readership.

by the stormy present (stormypresent aaaaaaat gmail etc) on Wed Jan 31st, 2007 at 05:16:55 PM EST

(Moving fifth line...)



Don't fight forces, use them R. Buckminster Fuller.

by rg (leopold dot lepster at google mail dot com) on Wed Jan 31st, 2007 at 05:21:13 PM EST
I know you've been asking recently about this, but I did not want to give a hint until I was sure it would actually be published. I hope it's a pleasant surprise for you!

PS - I'm not sure I understand your little squares above...

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

by Jerome a Paris (etg@eurotrib.com) on Wed Jan 31st, 2007 at 05:27:12 PM EST
[ Parent ]
They're I Ching hexagrams.  Peace and waiting, if I read them right.
by the stormy present (stormypresent aaaaaaat gmail etc) on Wed Jan 31st, 2007 at 05:33:53 PM EST
[ Parent ]
I am very impressed, as always.  I'm wishing you all the best as you progress Jerome.  ET is, indeed, a progressive site at its heart...

(For the little squares...you have to click on them...;)

And now...some tuvan throat singing!




Don't fight forces, use them R. Buckminster Fuller.

by rg (leopold dot lepster at google mail dot com) on Wed Jan 31st, 2007 at 05:37:10 PM EST
[ Parent ]
Thus the ruler divides and completes the course of heaven and earth;
He furthers and regulates the gifts of heaven and earth, and so aids the people.


"Dieu se rit des hommes qui se plaignent des conséquences alors qu'ils en chérissent les causes" Jacques-Bénigne Bossuet
by Melanchthon on Wed Jan 31st, 2007 at 05:48:43 PM EST
[ Parent ]
The I Ching has been one of my life oracles...love this!! We should do an article on the Ching sometime!! (I always enjoy your contributions too...thanks!)

"Once in awhile we get shown the light, in the strangest of places, if we look at it right" - Hunter/Garcia
by whataboutbob on Thu Feb 1st, 2007 at 03:05:54 AM EST
[ Parent ]
Bob, click here.

Don't fight forces, use them R. Buckminster Fuller.
by rg (leopold dot lepster at google mail dot com) on Thu Feb 1st, 2007 at 04:05:57 AM EST
[ Parent ]
Wow, rg, I missed that! Damn...that was when I was in Africa. Well, good on you...now I'll go read it!!

"Once in awhile we get shown the light, in the strangest of places, if we look at it right" - Hunter/Garcia
by whataboutbob on Thu Feb 1st, 2007 at 04:29:23 AM EST
[ Parent ]
Hope you enjoy it!

Don't fight forces, use them R. Buckminster Fuller.
by rg (leopold dot lepster at google mail dot com) on Thu Feb 1st, 2007 at 04:33:38 AM EST
[ Parent ]
'Nuff said.
by ThatBritGuy (thatbritguy (at) googlemail.com) on Wed Jan 31st, 2007 at 07:05:07 PM EST
is recommendations on how to reduce demand by energy-efficiency and also lifestyle changes.

I believe that most (at least) semi-rational people are beginning to wonder what these melting glaciers and strange weather patterns really mean. And so they will eventually ask 'Can I do something about it?' and 'If I do, will it make any difference?'

These are the questions to which there must be palatable answers. When the majority really demands change, it will happen. The power of the people  - if harnessed - is unstoppable.

But how do we harness that power?

I think it is just great to address, through the FT for instance, the esoteric arguments of investment and policy. But, in the end, the argument has to be personal and individual. The threats that we all face, in this case, cannnot be socially addressed. They must be individually addressed.

You can't be me, I'm taken

by Sven Triloqvist on Wed Jan 31st, 2007 at 07:37:24 PM EST
Yesterday I posted a diary at Daily Kos with a transportation proposal that may help to reduce CO2 emissions from cars. Tha proposal was first formulated in a comment on this blog.

Free markets is a powerful thing, but it is a big mistake to let it range uncontrolled, or let it control public policies. Instead, the society itself should be a master of free markets. In a discussion by my new dKos diary, I even used a term market engineering.  

Speaking of (suspected) global warming harzards, they are becoming very unpretty.

by das monde on Wed Jan 31st, 2007 at 11:21:58 PM EST
On the subject of the FT and the possibility of its takeover by the WSJ, see this item put up by Fran in today's Salon.
by afew (afew(a in a circle)eurotrib_dot_com) on Thu Feb 1st, 2007 at 01:45:23 AM EST
Fantastic Jerome...a well deserved congratulations! NYT next!! And sending along best wishes for Bartholome too!

"Once in awhile we get shown the light, in the strangest of places, if we look at it right" - Hunter/Garcia
by whataboutbob on Thu Feb 1st, 2007 at 03:04:21 AM EST
Hey, I've looked through the print edition of the FT twice and can't find your article... Online, it's subscription only.

"It's the statue, man, The Statue."
by Migeru (migeru at eurotrib dot com) on Thu Feb 1st, 2007 at 04:05:16 AM EST
if it was published in the UK edition, but it obviously was not, then. It's not featured on the front page on the ft.com website either.

But hey, if it can be read by a few people in Brussels and Paris...

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

by Jerome a Paris (etg@eurotrib.com) on Thu Feb 1st, 2007 at 04:09:00 AM EST
[ Parent ]
Who in the UK could possibly be interested in a French Banker's opinion on Gas prices?

"It's the statue, man, The Statue."
by Migeru (migeru at eurotrib dot com) on Thu Feb 1st, 2007 at 04:13:32 AM EST
[ Parent ]
The point isn't one article (I don't think)...it's getting leverage...your foot in the door, the next article, the murmur round the tables, in the cubicles, the waves...you throw the stone in the pond...ripples...throw another...keep throwing 'em.  (I think your french ET--which I won't be able to follow--will....you know...it's all good.)

Plus, you don't get to see all those people (however many) reading your article, scratching their chins...but they'll read it the way you read articles....somehow "real" because....there they are.

(And also, newspapers can sometimes bump an article to another day for whatever reason(s), so it may be worth contacting your...contact...to see what the situation is...)

(Not that I am in any way connected to these processes, so...whatever you think is best.)

Don't fight forces, use them R. Buckminster Fuller.

by rg (leopold dot lepster at google mail dot com) on Thu Feb 1st, 2007 at 04:32:24 AM EST
[ Parent ]
And hats off to everyone who helped on that piece.

I encourage you to go shopping more. -- George W. Bush
by marco on Thu Feb 1st, 2007 at 05:03:51 AM EST
This is quite an acheivement!

Congratulations, man.

by redstar on Thu Feb 1st, 2007 at 07:20:23 AM EST
I have a question about marginal pricing. In my youth power companies used to brag about the long-term supply contracts they had with resource supplies. I think at the time these were mostly coal mines.

In addition as regulated utilities they knew how much they were going to be able to charge for electricity. Any changes were always multi-year efforts to get past the state regulatory bodies.

I know that much electricity is now priced by auction on a hourly basis so that such stability is no longer the norm.

However it seems to me that electricity generators would still be interested in long-term supply contracts. Those with lower fixed supply costs could underbid during the auctions and still make a profit thus forcing the more expensive plants out of the auction except at times of the most extreme demands. So why would electricity be priced at the marginal rate under these conditions?

Are there no longer any long-term contracts?

Policies not Politics
---- Daily Landscape

by rdf (robert.feinman@gmail.com) on Thu Feb 1st, 2007 at 11:48:28 AM EST
Electricity is always priced at margianl cost. The question is how often marginal cost is really far off from average or base load cost.

Marginal cost will be close to baseload/long term supply contract prices the majority of the time in any case - as you say, it's only during demand peaks that that price increases.

One problem today is that enough of the baseload capacity is coming from gas-fired plants that they determine marginal price even for period of lowish demand, and even then prices will be high because the gas supply-demand balance imposes it, not the electricity supply-demand balance.

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

by Jerome a Paris (etg@eurotrib.com) on Thu Feb 1st, 2007 at 05:33:44 PM EST
[ Parent ]
I know it doesn't actually work this way, but wouldn't it mean nuclear operators are making a fortune? And they are accumulating the financial resources to build more nuclear capacity?
by richardk (richard kulisz gmail) on Thu Feb 1st, 2007 at 09:08:19 PM EST
[ Parent ]
EDF has actually been making a higher operating profit than Total (on roughly half the sales) for the past 2 years.

So yes thye will be able to finance nuclear plants - but it will cost them more than if they borrowed at the same rate as the French State.

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

by Jerome a Paris (etg@eurotrib.com) on Fri Feb 2nd, 2007 at 09:02:50 AM EST
[ Parent ]
That sounds vaguely impressive but I don't know about French industry outside of EdF and Alstom. I only know American oil companies had return on investment (or maybe even profit margins) around 45% on Saudi oil sales back in the 70s or 80s. European oil companies must be taxed at a much higher level though since European governments aren't patently insane.

Absent raiding by the Assemble Nationale, EdF's profits are theirs, yes? So the only thing they're missing out on is the opportunity to lend their money to the private sector as they borrow from the public purse. I suppose from a financial perspective, it's all the same thing.

I take it there's no chance whatsoever of France breaking EU rules to give guarantees?

How will they be financed anyways? 20 years or 40? Any news on the transition would be appreciated.

by richardk (richard kulisz gmail) on Fri Feb 2nd, 2007 at 05:36:19 PM EST
[ Parent ]
Your article was translated and put on www.inosmi.ru.
I hope that site, which specializes in translations of foreign press is doing it with all necessary licenses (in this case from FT). But anyway congratulations.

It seems you just reminded marketistas in FT readership that there are basic contradictions between what they want to do in their own countries and what they preach to third world countries.

by FarEasterner on Thu Feb 1st, 2007 at 01:39:33 PM EST


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