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EU Energy inconsistencies and lies

by Jerome a Paris Thu Sep 20th, 2007 at 03:36:39 AM EST

The new EU package on energy market liberalisation has come out and is repeating the mantra of liberalisation and competition. There's tons of things in there, but I'd like to comment on a few items in their pre-directed "Q&A" document. Most of all, I'd like to start with the biggest whopper of all:


The benefits from earlier legislation will not materialize if these new measures are not taken.

In effect: liberalisation does NOT work so let's liberalise more in the hope that it will.
I cannot find a simpler description of the ideological, non-reality-based nature of the liberalisation drive.


More tidbits:


A competitive market with correct price signals will increase investments in new infrastructures. This will improve security of supply and reduce risks of blackouts or gas supply interruptions. And last but not least, a competitive market will help to fight climate change. Energy efficiency will improve in all parts of the supply - consumption chain. Finally, the Emissions Trading Scheme, an important measure for cutting emissions, will only function in a competitive market environment.

All unsubstantiated assertions.

  • In particular, markets with long lead times for insvestments are known for their boom-and-bust cycles as investors do react to price signals but their decisions take years to feed into the supply.

  • Also, markets provide weak incentives to provide for spare capacity - the one thing that can prevent blackouts.

  • Finally, as I have said many times, competitive markets favor investments in gas-fired plants, which are easier to finance, and thus go agaisnt both security of supply and the fight against climate change.


The Commission cannot guarantee that energy prices will go down. However, studies indicate that in liberalised energy markets the difference between production- and end-consumer prices is smaller than in non-liberalised markets.[1] This demonstrates that consumers pay less for energy in liberalised markets than what they would pay in markets where there is no competition.

The last sentence is, quite simply, a lie, and it certainly does not follow for the one before it. It is quite correct that competitive markets reduce the difference between production and end user prices. But that margin is not the only component of the price.

In fact, competition ensures that prices are set at the marginal cost of production (i.e. the most expensive producer necessary to fulfill a given level of demand). Competition also ensures that that marginal price is going to be set by gas-fired plants, and thus will tend to follow, in Europe, oil prices (on which most gas supply contract prices are indexed).

Conversely, a monopoly producer can sell power at average prices, and take advantage of the fact that baseload capacity like nuclear is a lot cheaper if financed by the State than if financed by the private sector, as imposed by liberalisation.

I would note that the [1] note provided by the Commission states this: "CapGemini Study ordered by the Netherlands. Reference can be provided if needed. See also Impact Assessment quotes of studies." They are going out of their way to make that information available, aren't they? What is it hiding? I'll try to find out.


Governments have the right, even the obligation, to ensure that all citizens have access to affordable energy. The current legislation provides the possibility to impose energy prices to protect vulnerable customers or to ensure public service obligations, provided they respect certain conditions, to ensure that they are clearly defined, transparent, non discriminatory, etc. However, such regulated prices should be the exception and not the rule in a competitive environment. Regulated tariff prices for all customers would prevent the benefits of competition from being reaped.

Where's the freedom of choice? Why can't consumers have the freedom of choosing regulated prices, if that's their choice? Aren't they responsible enough to make that decision? If such prices are higher, the decision should be easy, right? Or is it that the decision is all too easy to make and would not be favorable to the energy traders and banks whos interests seem to be the only one the Commission has in mind?


What will happen to a "vulnerable" consumer (an unemployed, handicapped or retired person) who does not have enough income to pay market prices?

Vulnerable customers already have a high degree of protection in the current legislation to ensure that they have access to the energy they need to lead a decent life. This is for example guaranteed through the possibility of governments to have a supplier of last resort, or measures to avoid disconnection. To clarify the framework, the Commission proposes to define binding guidelines to be attached to the current law.

How is the Commission going to make sure that citizens who live in areas that are not interesting to the market also enjoy their right to energy at affordable prices?

The rules in the current Directive that apply to consumers with lower incomes or other difficulties, also apply to customers in remote areas. In addition to this, if countries want to build infrastructure to serve isolated areas, the possibility to be temporarily exempted from many of the requirements of liberalisation already exists.

Hmmm... so where exactly is the line between the acknowledged market failures (that require government intervention) and the other market failures?


The EU's use of renewable energy should be 20% of its energy mix by 2020. This target cannot be met without a properly functioning energy market.

Grrrr... What a fucking STUPID thing to say.

How hard is it to vote a law that says "all electricity-generating companies must produce 20% of their electricity from renewable sources by 2020 or face fines of  [_] for non-compliance" ???


the proposals give access to smaller companies - for instance those that invest in renewable energy - to the networks and thus to the energy market.

Sigh... giving access to the network for renewable energy creates a distorsion in the markets by giving them special rights. That's needed precisely because market mechanisms don't work so well for intermittent power sources like wind. So it's not liberalisation that works there, it's exceptions to liberalisation...

There's more, but I'll stop here.

Display:
I forgot to mention the "Gazprom" clause. Non-EU groups cannot buy into networks - even if they are subject to the same rules as local "champions" on the split between network operations and supply - unless there is a bilateral agreement between the EU and the country allowing it;

Beyond yet another acknowledgement that market rules don't seem to work, this is interesting as a gambit by the EU to grab a formal role in negotiations with Russia, by requiring a formal agreement to be negotiated - and who knows what that may cover...

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

by Jerome a Paris (etg@eurotrib.com) on Wed Sep 19th, 2007 at 09:40:22 AM EST
<head exploding>
by Colman (colman at eurotrib.com) on Wed Sep 19th, 2007 at 09:43:09 AM EST
[ Parent ]
Or only over the Gazprom clause?

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Wed Sep 19th, 2007 at 10:18:32 AM EST
[ Parent ]
I lost track. We're well into firework display territory though.
by Colman (colman at eurotrib.com) on Wed Sep 19th, 2007 at 10:21:04 AM EST
[ Parent ]


In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Wed Sep 19th, 2007 at 10:25:41 AM EST
[ Parent ]
This topics somehow slips off my attention but I think Brussels EUcrats forget to mention that EU has no oil or gas fields while EU companies from Germany, France and Italy operate in Russia so there is no reciprocity on part of EU. EU should be ready that these companies will be shown the door if Gazprom will be thrown out.

But not all that gloomy - after much whining and chest beating I believe EU will come to terms with Russia. This is usual tactics and who but Russians know hypocrisy of EUcrats.

by FarEasterner on Thu Sep 20th, 2007 at 04:34:24 AM EST
[ Parent ]
The EUcrats are ideologically committed to neoliberalism and their policy proposals are not exactly reality-based.

Oye, vatos, dees English sink todos mi ships, chinga sus madres, so escuche: el fleet es ahora refloated, OK? — The War Nerd
by Migeru (migeru at eurotrib dot com) on Thu Sep 20th, 2007 at 12:05:17 PM EST
[ Parent ]
Seems like there is a major caveat in place here.

A competitive market with correct price signals will increase investments in new infrastructures.

Key word:  "correct".  By definition, if there is not an end result that is appropriate / desired, it is somehow that the regulatory environment inhibiting the market from receiving the "correct" price signals, thus what we require is ever more liberalization.

This is, as you are aware so closely (can't recall who originated/fought for), this was a key element for the gasoline fee in EA2020.  Put in one cent/month, every month, for at least a decade.  This would, therefore, send the clear price signal that, all things being equal, there would be a guaranteed cost growth for petroleum based liquid fuels which would help provide decision makers (at all levels) a "correct" price signal for making investment decisions.

To me, this is something that should be pursued with carbon fees as well ... putting in an inexorable growth that will help fund more energy efficiency, renewable energy, pollution reduction, and global warming mitigation while providing a "correct" price signal that tomorrow CO2 emissions will be more expensive than today, thus providing the price signal to fight to reduce them.  

Blogging regularly at Get Energy Smart. NOW!!!

by a siegel (siegeadATgmailIGNORETHISdotPLEASEcom) on Wed Sep 19th, 2007 at 10:30:50 AM EST
Either the market gives correct price signals by definition, or the whole marketista house of cards collapses.

Oye, vatos, dees English sink todos mi ships, chinga sus madres, so escuche: el fleet es ahora refloated, OK? — The War Nerd
by Migeru (migeru at eurotrib dot com) on Wed Sep 19th, 2007 at 11:38:35 AM EST
[ Parent ]
That depends who benefits from the definition of 'correct.'
by ThatBritGuy (thatbritguy (at) googlemail.com) on Wed Sep 19th, 2007 at 06:27:27 PM EST
[ Parent ]
Jerome,

Are you preparing a more substantive examination for formal publication in "traditional" media?  A journal or such?

Blogging regularly at Get Energy Smart. NOW!!!

by a siegel (siegeadATgmailIGNORETHISdotPLEASEcom) on Wed Sep 19th, 2007 at 10:32:14 AM EST
It's a good idea... but I already have too many commitments on my plate. Maybe I can draft something tomorrow during work hours.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Wed Sep 19th, 2007 at 10:47:13 AM EST
[ Parent ]
What you need are some research assistants.
by Colman (colman at eurotrib.com) on Wed Sep 19th, 2007 at 10:48:02 AM EST
[ Parent ]
What's the hourly rate?

Oye, vatos, dees English sink todos mi ships, chinga sus madres, so escuche: el fleet es ahora refloated, OK? — The War Nerd
by Migeru (migeru at eurotrib dot com) on Wed Sep 19th, 2007 at 11:38:46 AM EST
[ Parent ]
How much do you need? ;-)

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Wed Sep 19th, 2007 at 11:40:47 AM EST
[ Parent ]
That's an interesting question.

Oye, vatos, dees English sink todos mi ships, chinga sus madres, so escuche: el fleet es ahora refloated, OK? — The War Nerd
by Migeru (migeru at eurotrib dot com) on Wed Sep 19th, 2007 at 11:47:40 AM EST
[ Parent ]
Are we talking need?  Or desire? Is this a market? What is the "correct" price signal?  Seems like we give each other a lot of assistance for free.

Blogging regularly at Get Energy Smart. NOW!!!
by a siegel (siegeadATgmailIGNORETHISdotPLEASEcom) on Wed Sep 19th, 2007 at 02:57:21 PM EST
[ Parent ]
Exactly, "need" is not quite right in this context. Expecially because, depending on the time horizon, the answer might well be €0.

Oye, vatos, dees English sink todos mi ships, chinga sus madres, so escuche: el fleet es ahora refloated, OK? — The War Nerd
by Migeru (migeru at eurotrib dot com) on Wed Sep 19th, 2007 at 03:00:55 PM EST
[ Parent ]
Are we talking need?  Or desire? Is this a market? What is the "correct" price signal?  Seems like we give each other a lot of assistance for free.

You Europeans can't even get your communism right!  It doesn't work without both the "From each according to his ability," part, AND the, "To each according to his needs," part. /snark

by Zwackus on Wed Sep 19th, 2007 at 06:49:59 PM EST
[ Parent ]
Who said anything about communism?

Actually, I should have pointed out that this was a conversation about markets and price signals.

In that realm, Jerome's question was irrelevant -- "how much do you need?" Does the market care about that? The question is "how much will you charge me?" The buyer doesn't, in theory, have to have any concern about what the level of profit is (if there is even a profit). The purchase price is, well, the purchase price.

Blogging regularly at Get Energy Smart. NOW!!!

by a siegel (siegeadATgmailIGNORETHISdotPLEASEcom) on Thu Sep 20th, 2007 at 01:05:25 AM EST
[ Parent ]
It's a gift economy.

Oye, vatos, dees English sink todos mi ships, chinga sus madres, so escuche: el fleet es ahora refloated, OK? — The War Nerd
by Migeru (migeru at eurotrib dot com) on Thu Sep 20th, 2007 at 03:54:34 AM EST
[ Parent ]
'How hard is it to vote a law that says "all electricity-generating companies must produce 20% of their electricity from renewable sources by 2020 or face fines of  [_] for non-compliance" ???'.  One of the better outcomes of the current regime in the U.S. is that states and local governments have had to take more initiative in the real needs of the public.  In Washington state, where I live, we approved a referendum last November that requires Jerome's suggestion.

I think that Oregon has a similar law now that came from their last legislature's session.  I'm not quite sure of the details, but it's similar to the WA law. Interestingly, power companies in both states are not waiting until the last moment to implement.  Pacific Gas & Electric, for instance, is already starting to pull together a large wind turbine project in Oregon.

paul spencer

by paul spencer (spencerinthegorge AT yahoo DOT com) on Thu Sep 20th, 2007 at 12:55:50 AM EST
The benefits from earlier legislation will not materialize if these new measures are not taken.

In effect: liberalisation does NOT work so let's liberalise more in the hope that it will.
I cannot find a simpler description of the ideological, non-reality-based nature of the liberalisation drive.

I think "inconsistencies and lies" falls short as a characterisation. This is classic quackery where a remedy is prescribed on the basis of faulty theories and when the remedy doesn't work it is blamed either on insufficient dosage or on mistakes by the patient. And when the patient gets better on their own, as often is the case, the charlatan takes the credit.

So "free market quackery on Energy from the European Commission's charlatans" might be a better title.


Oye, vatos, dees English sink todos mi ships, chinga sus madres, so escuche: el fleet es ahora refloated, OK? — The War Nerd

by Migeru (migeru at eurotrib dot com) on Thu Sep 20th, 2007 at 04:01:55 AM EST
but you don't get published in the FT with such titles... lol (not that mine would pass muster either, though. Hmmm; maybe we can do the switch)

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Thu Sep 20th, 2007 at 04:12:35 AM EST
[ Parent ]
For a primer on "competition" in electricity markets in the US, try this article:

http://www.pulp.tc/html/_competition_has_not_lowered_u.html or its .pdf, available via http://wpweb2.tepper.cmu.edu/ceic/papers/ceic-05-01.asp

For a vision of the future with a twist, check out the New York example. We have been "blessed" with a competitive electricity market for some time, via a state assembled entity called the New York Independent System Operator, or NYISO, which regulates and polices this "competitive" market. And when natural gas and oil was  cheap (both pre-NYISO and post-NYISO), lots of oil/gas burners got built, even though NY has effectively zip for oil and gas resources. Then oil got expensive, so gas became the leading determinant of electricity prices. Then gas got expensive, and in areas where gas is the main source of electricity, electricity is now among the most expensive in the country. However, it turns out that in areas where electricity tends to be the most expensive, well, that's where economic growth is occurring.

Meanwhile, the least expensive electricity in the U.S. is made by....NY State!. That's right, a part of the state, in the form of the New York Power Authority (which helped spawn this NYISO system), or "the people's electrical energy" producer, makes electricity from a pair of hydro plants at a cost of less than 0.5 cents/kw-hr...fully depreciated, and about 12% of the state's electricity supply. A lot of this super-cheap energy (< 10% of "market rate") was sold roughly at cost to electricity hungry industries, to create jobs, but these are either highly automated (and thus have very high electricity use per job ratios, such as 500 kw/job) and now are often gone the way of the dinosaurs...or in pursuit of lands where pollution is not a hindrence to doing business, and the labor is cheaper than dirt, but less respected. And most of the cheap power is sold to municipal electric utilities in and out of state in small towns/rural regions, who keep prices low for these small towns, are the least efficient with this bonanza, and whose economic well being is still slipping away to those high priced areas near or in NYC. So, cheap electricity is not all that it is cracked up to be. And new renewables, especially wind, are never going to be that cheap, but are somehow expected to get that way...or else these areas will put some some cheap coal burners....except that those are not so cheap anymore, either. In some cases, NYPA is supposed to give Power Purchase agreements to these proposed coal units, to keep things cheap, but never to wind....

The high prices for electricity in much of the state have spawned a bit of a gold rush in the wind business, where rural areas export their wind energy to the NYC area, the only region that can afford the wind derived electricity. But, due to bizarre laws and economics, these rural areas are lucky to keep 1% of this income from wind, and the only players in this wind market tend to be large companies who can ride out the dips in electricity prices in our "competitive" NYISO system. Right now, after canceling ~ 5000 MW in natural gas plants (and replaced by about the same quantity of wind plants, at least in capital costs), the price of gas has temporarily dipped - and it may be that way for a couple of years. But the bet is that natural gas prices in NY will eventually equilibrate with oil prices, which will double the present NYISO electricity prices. Then the "wind gamble" will pay off like 3 oranges turning up on the one-armed bandit at the casino slot machine emporium. And when oil doubles in price again, blowing past the $100/bbl...well, so does the electricity price, again.

The moral of the story is that the "competitive" model can only work in theory, when "competition" exists, and where this competition is not limited by things such as finite quantities of oil and natural gas, or by Global Warming induced Greenland ice sheet meltdowns initiated by burning all that oil, natural gas and coal. That world does not exist anymore, at least on this part of the globe.

So, the urge to recreate NY State in Europe is a strange one, a sort of Truthiness gone bonkers. It's not really that flattering, but it is a bit reassuring that we in the U.S. don't have the exclusive copyright on stupid, despite the best efforts of Bu$h to prove otherwise. How is the "new Europe" energy system going to reconcile things like Renewable Feed-In Laws in many countries, such as Germany and Denmark? And given that Europe's natural gas supplies are fading fast, with more reliance on Russia and North Africa/LNG imports, it seems like the NY experience with natural gas is also going to be replicated, but slightly farther ahead in the future.

Anyway, the NY experience may not be of much use when those making the decisions on the electricity market only want to decide on what they believe to be best (for themselves and some well connected friends?), and not on the historical evidence of those who have tread the "competitive" path already. But it should be a warming to those who can still read and think coherently.

nb41

by nb41 on Thu Sep 20th, 2007 at 10:40:11 AM EST


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