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Electricity Deregulation: Another Outrageous Spin

by DoDo Wed Oct 12th, 2005 at 05:53:16 AM EST

Last month, I analysed electricity price developments in Germany after market liberalisation1, which showed that deregulation won't make electricity cheaper on the medium to longer term - and that major grid operators will spin the statistics in all possible ways to shroud the truth2.

Now, as prices climbed further, they did something I thought would be the next logical step - but I didn't believe they'll dare to be this dishonest...

To recap, one of the price indices I analysed was the electricity bill of a standard home3. This is calculated every year by the German Association of the Electricity Industry (VDEW), which represents the traditional producers and grid-owners. Here is again its development through deregulation (since March 1998, with a Q1 estimate for 2005):

In its press releases, VDEW always emphasized the increase of the state part: taxes, feed-in tariff for regenerative energy. (This already contained a trick: for the consumer, only the part of feed-in tariffs exceeding market prices are extra costs, not all of it. I.e., the "netto" price is in truth the share of the large grid owner, not what it would be without state-mandated 'surcharges'.)

Now, in October, VDEW normally releases its second estimate for the running year - a text invariably pointing the blame for brutto price increase at the state-mandated parts, followed by a table with the netto and brutto electricity bill and various components, which at least the alert spin-resistant reader could analyse on her own. Not this time.

Instead, they released data only on the state-mandated part - without giving the brutto or netto bill! And if you think that's dishonest, wait for the second trick! The brutto price could be calculated from the VAT. But to prevent that, and to make the increase of the state-mandated part even more dramatic, they just dropped the VAT part! (In fact, they didn't even presented the figures for an average home, just the sum totals - but I'm not sure how that skews things.)

Thus they got an increase (from 1998) of 433%, instead of - I can only estimate - around 60%...4

Finally, one more little spin in the text is comparing with 1998 prices. The core price is about the same, the state part grew, voilą, blame it all on the State! However, the increase consumers feel is not the slow climb of the state part, but the faster rise in the core part since 2001 (when the large producers, having eliminated the upstarts in price wars, started the climb back).

  1. I was supplementing a diary by Jérôme with general arguments against electricity deregulation.

  2. In a related issue, I also wrote about the shameless spinning of statistics behind the claim of Germany's supposed dependence on French nuclear energy imports.

  3. A standard suitable in West Europe: usage patterns of 3 persons, total yearly consumption of 3500 kWh; actual numbers released are for one month, averaged over the full year.

  4. While state-mandated surcharges moved up from around 24% to c. 38% of the brutto price, note that just a few years prior to 1998, it was above 30% too: one tax type was eliminated 1996.

Added last paragraph.

*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Wed Oct 12th, 2005 at 03:08:22 PM EST
Re-edited with Jérôme's objections in mind. Is it clear enough now?

*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Wed Oct 12th, 2005 at 05:41:28 PM EST
[ Parent ]
I think I understand your point, but it not obvious. Is there a chance you could make more explicit the components of electricity prices for users, and explain how they varied, and what were the claims (or announcements of the VDEW) with respect to each component's growth or otherwise?

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Wed Oct 12th, 2005 at 03:50:17 PM EST

VDEW's claim was general, that electricity prices increase due to state surcharges (the title of the linked press release translates to: "State makes electricity bill more expensive"). That they grew is not a question, how different parts grew matters only inasmuch as VDEW was 'creative' in its interpretation of statistics; what matters is that they again chose to emphasize the state part, while most of the increase this year was from them - and did so simply by not publishing the complete statistics.

Anyway, here is the structure of the German private electricity bill, from the point of view of traditional producers/grid owners:

  1. Production price
  2. Grid charge
  3. (Profit)
  4. Coupled power generation/heating surcharge (granted by a newer law to promote energy efficiency, but this too goes into the traditional producers' pockets)
  5. Regenerative energy feed-in tariffs (grid owners pay the windmill etc. owners, then spread the costs among consumers; for consumers, the extra cost is the amount by which tariffs exceed market prices, but of course all of it is money lost for traditional producers)
  6. Concession charge (paid to cities and communities)
  7. Environment tax (at a rate fixed to consumption in kWh)
  8. VAT (a fixed percentage, now 16%, of the sum of the previous)

I will re-edit my post for clarity once I understand what you found confusing :-)

*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Wed Oct 12th, 2005 at 04:41:18 PM EST
[ Parent ]
Damn, writing the previous, I noticed they have been even more trickier (see added line in italics): the actual average home calculation is reverred to in a single sentence, but the figures presented are the sum totals in billions of Euros for all users.

Anyway, just to give you an idea, here are the average-home figures for 1998 and 2004, with the above notation:

1+2+3 (="netto"): €37.60

  1. €0.00
  2. €0.23
  3. €5.22
  4. €0.00
  5. €6.90

1+2+3: €31.52
  1. €0.85
  2. €1.58
  3. €5.22
  4. €5.97
  5. €7.24

Since then, 1+2+3 must have grown to around 1998 levels or more, 4 and 5 grew a few cents (but, I emphasize, only maybe half of it being extra costs for consumers), and VAT of course grew to scale.

*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Wed Oct 12th, 2005 at 05:00:21 PM EST
[ Parent ]
In footnote 4, I mentioned that there was another tax removed in 1996. This was the "Kohlepfennig", a long-running tax to subsidize locally mined coal instead of imported coal, which was added before the VAT and was around 8.5% towards the end.

*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Wed Oct 12th, 2005 at 05:26:33 PM EST
[ Parent ]
That's exactly the kind of detail i was looking for, thanks. From your numbers, the VDEW claims seem true between 1997 & 2004? what you're saying is that the most recent price increases come from the "netto" price and not from the rest, and that they are trying to hide that in fudged numbers?

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Wed Oct 12th, 2005 at 05:50:30 PM EST
[ Parent ]
Yes, as I said, the VDEW claims of increase are real (even if one component is misinterpreted), and no, they don't hide the "netto" price in fudged numbers: they just hide it altogether. They didn't release it.

They just state in a sentence that they did the calculation, and give a rough brutto/netto ratio.

Maybe the sensationalist "Lie" in the title was what misled you, I shall change it to "Spin".

(I guess they'll release the final numbers in early 2006 all fine, with full details, and a much milder spin - this press release must have had chanchellor-to-be Merkel and her future economy minister as their target, just when they decide on policy.)

*Lunatic*, n.
One whose delusions are out of fashion.

by DoDo on Wed Oct 12th, 2005 at 06:09:45 PM EST
[ Parent ]

These are UK wholesale prices (i.e. the price electricity is sold by producers for delivery on the high voltage grid), which are expected to jump massively this winter in the steps of gas prices.

As you implied, retail prices are the addition of wholesale prices, distribution costs and taxes. In a number of countries they are still regulated closely by the State or public authorities (for instance by public bodies in each individual State in the US).

When wholesale prices increase like this, producers request to pass this on to consumers, and it eventually happens, so Britons should expect significant increases in coming months.

The reason why gas prices determine power prices even though gas power plants only make 30% or so of the production capacity in the UK is simple: they are the marginal plants. By this, I mean that when power demand goes up or down, it is gas fired plants that are turned on or off, because (i) it's the most expensive power source and (ii) it's the easiest to turn on and off. Coal and nuclear are cheaper (and nuclear is hard to stop anyway). Wind is way cheaper when it produces. so these are pretty much always on, thus leaving the adjustment to the gas side. The production cost of the plant turned on or off becomes the price for the whole market. If gas prices go up, so will the clearing price for power.

This is happening on a violent scale in the USD today.

So back to Dodo's point: competition makes producers more efficient, maybe, but it makes prices more volatile. It has also encouraged investment quasi excusively in gas fired plants at the exclusion of everything else because they are the only plants for which you can get a return on less than 10 years (coal and nuclear are cheap also in part because they can be amortised over 40 years or even more) and are thus the only kind to attract private investment.

This has brought the boom and bust typical of many sectors, except that with a product that cannot be stored, it brings about much more brutal price spikes when supply is unsufficient. and it has had unexpected consequences on the gas market which, to put it simply, has not been able to cope with that sudden surge in demand. Thus higher prices, a "normal" market phenomenon which pro-liberalisation politicians seem somewhat embarrassed to acknowledge...

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

by Jerome a Paris (etg@eurotrib.com) on Wed Oct 12th, 2005 at 04:05:14 PM EST
Excellent additions - to which two of my additions :-)

  1. Another point on why prices first went down, to recap: the pre-deregulation regional monopolists (grid+production) have slowly raised prices prior to deregulation (at least for six months, but maybe three years), and then used this extra profit in price wars that eliminated almost all new upstarts. The newcomers were mostly dead by 2001, just when prices started to move up...

  2. I still think the connection to gas prices should be less strong in Germany, because (a) gas there doesn't come from the depleting North Sea, (b) it's still just under 10% of total production. (Gas prices rise there too, but that may be hitch-hiking; one producer was sued successfully by a consumer group to release its price calculations, which they refused even after the court order.) I don't know where to look for German gas price (or any other) data to check correlation, tough. Maybe someone can help out?

*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Wed Oct 12th, 2005 at 05:19:28 PM EST
[ Parent ]
  1. I don't know the details in Germany, but it sounds logical enough
  2. Gas prices in all of Europe except the UK are set as moving averages of oil prices (they follow it with a 6 month lag, basically, and much less short term variation). Natural gas prices set the marginal price in the general European market, it doesn't matter if Germany has less gas-powered capacity, the price is still set by gas (unless you have unusual stuff like very high or very low hydro production in Scandinavia, or less nuclear available than usual in France, like during the heatwave two years ago)

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Wed Oct 12th, 2005 at 05:48:56 PM EST
[ Parent ]
Jérôme, I have only recently (in the last couple of days, really) noticed you mentioning the fact that energy prices are set by gas prices because the latter are marginal. While this is elementary once one is introduced to the concept, most people have never heard of it. Given that this was one of the few points that Adam Smith made repeatedly in his Wealth of Nations, public misunderstanding of how marginal sources set the price of commodities must rank up there with people not knowing about Newton's laws of motion (a topic more dear to me personally). I would write a diary about it were it not that you are probably better equipped that I am to write it (including access to hard data), unless you think there is value in having a non-economist write about it and reserving your sharp wit for smoothing out my corners.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Carrie (migeru at eurotrib dot com) on Thu Oct 13th, 2005 at 11:07:23 AM EST
[ Parent ]
with my new found fame on dkos, I am taking on so many projects that I fear I will default on all... (not to mention that I do have to work once in a while)

This is indeed an important topic, on which I have already done a number of comments (which I have stupidly not saved in an easily retrievable place), but which certainly deserves a full diary. If you have the time and courage to go for it, I'd be happy to give you my input if you want before posting it. My email is below.

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

by Jerome a Paris (etg@eurotrib.com) on Thu Oct 13th, 2005 at 05:47:17 PM EST
[ Parent ]
Learn from California USA:  You don't want to do this.  

For that matter, learn from the 19th century.  

Deregulation of natural monopolies is a scam.  

Replacement of regulated monopolies by unregulated oligopolies is also a scam.  

The US has been looting its own economic and social infrastructure for 25 years now.  It is now far to late to avoid a complete crash.  What about Europe?  Are you stuck on the same road or do you have a window of escape?  

The Fates are kind.

by Gaianne on Fri Oct 14th, 2005 at 01:41:45 AM EST
We're working on it :-)

*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Fri Oct 14th, 2005 at 07:27:37 AM EST
[ Parent ]

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