by Jerome a Paris
Wed Apr 29th, 2009 at 04:14:47 AM EST
Change is slowly coming to Germany's dysfunctional electricity market
The competition regulator is trying to work out why energy prices in Europe's biggest economy are so stubbornly high, and in some cases still rising, even though oil and gas prices have fallen sharply. It suspects that generators may have been keeping prices artificially high by, for instance, shutting power stations in concert to limit supplies. Finding evidence of that sort of skulduggery may be difficult, and proving it even more so. But regulators need not look too hard to see that Germany's electricity market is broken and that a flawed liberalisation of the market over the past decade seems only to have entrenched many of its problems.
The first sign that the market is not working is in Germany's electricity prices, which are among the highest in Europe, even though it has access to abundant cheap coal.
Setting aside for now the issue as to whether coal is "cheap" (it is under current regulations which do not make coal pay for its externalities), I had to choke here. Market prices are not set by the cheapest source, but by the most expensive: it's called "marginal cost", and it's supposed to be one of the first things you learn in economics class. So coal is almost never the price setting generation source.
That a journalist from the Economist would so blatantly contradict a basic rule of economics had me stunned (yeah, I should know better)
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Moreover, Germany's electricity prices have remained persistently high even at times when they would have been expected to fall. Analysts at Credit Suisse, an investment bank, reckon the slowing economy will reduce electricity demand by about 5%. Coal prices have dropped by half from last year. Yet there is little sign that either falling demand or lower input costs are leading to cheaper electricity.
There, ignorance is vaguely more excusable - after all, Credit Suisse is quoted, so they have to be right, no? But electricity prices are driven by marginal producers, which are gas-fired plants, and thus electricity prices tend to track gas prices. And gas prices, well - they track oil prices, but with a lag of about 6-12 months. So, given that the high for oil prices was July 2008, it is not very surprising that electricity prices should still be high today.
Basic knowledge of the market suggests that this journalist is plain incompetent.
But of course, that does not prvent him/her from making, tadam, the following point:
The main reason Germany's electricity market is not working as it should is the lack of competition.
But of course! This is also surely why France has the cheapest electricity around...
A second problem is that Germany's biggest electricity generators also own the networks that distribute electricity. Critics argue that this gives them a huge advantage over independent producers, which may struggle to gain access to the networks fairly or, if they do, gain as much information on supply and demand across the grid. The European Commission has long criticised this "vertical integration" but it has had little success in getting its members to agree to force firms to "unbundle" generation and transmission.
Ah, unbundling. The tarte à la crème of energy ideologues for the past 10 years. The separation of the delicate, integrated, highly regulated network from the producers and consumers, which somehow will make things better run (as evey experiment over the world has proven it's not).
And over the longer run, ambitious plans to increase the share of electricity from renewable sources may erode the dominance of the country's four biggest electricity generators. Germany hopes to get as much as 30% of its electricity from renewable sources by 2020, and although few in the industry think the target will be met, there is nevertheless likely to be a huge investment in new generating capacity over the coming decades. Judicious action by antitrust authorities now could ensure that it adds to competition in the electricity market rather than simply entrenching the incumbents' positions. But because of the high cost of renewable energy, even with more competition in the market, Germany's power prices are likely to keep on rising.
Renewables are, for the most part, zero marginal cost producers, ie they reduce market prices when they are available by pushing out the most expensive sources of power and replacing them by (in the short term) very cheap ones. You'd think that an Economist journalist would know that. But no, in addition to the lie that renewables are "high cost" (hydro is the cheapest form of power around, and wind is basically competitive with coal and nuclear today), they pile on with an ignorant misunderstanding of how market work.
And this is the kind of drivel that drives our energy policy.
