Remember that, while prices have soared, electricity generation has not become more expensive. The "electricity crisis" is a crisis for European consumers but a massive windfall for producers. This is a market failure - not an electricity failure.
The current problem is that in europe a lot of the electricity is made by gas plants and those plants are seeing their costs rise. They therefore increase the price at which they are willing to inject capacity, and that means the market price moves up because that power is needed to satisfy demand. Gas plant operators are not making a lot of profit.
Because every party injecting power at market rates (some of it is actually locked up in long term contracts) is paid the market rate, those not using gas to produce power are actually the ones making record profits. Wind is literally making windfall profits. There are talks of having an excess profit tax because right now governments are going into debt to finance energy subsidies that line the pockets of wind and nuclear operators (and of vladimir putin).
A lot of generation in Europe is using gas, so it very much has. It's more or less a normal market experiencing a jump in price on inputs.
If you can produce cheaper than the market price then you make lots of money. That's normal.
The market is telling buyers to use less electricity and sellers to produce more. It's how markets work.
Price is a function of supply and demand. Supply was massively reduced by sanctions and war, so price goes up, simple as that.
>This is price gouging.
If electricity producers had enough pricing power to set the price to whatever they wanted without competition they'd already have done so years ago. Again, price is a function of supply and demand, cost of production is only one component.
Saying "the highest cost available at any moment sets the price for everyone" is misleading, it's also the lowest marginal price required to satisfy the total load required to supply the market.
The margin price in that market is the marginal cost of a GW hour by for the last GW that satisfies the load required (demand).
In a monopoly situation, yes. Luckily there is competition, and at this level their competition has a great incentive to ramp up capacity. Which, frankly, is going to make them ramp up production so they can capture a bigger piece of the market when the situation isn't quite as ridiculous as it is today anymore.
It instead makes sense for me to buy a new second panel for $100 after 10 days and then I can make $20 a day, then 5 days later buy a 3rd.
30 days into this I'll have made $45, and be making $30 a day instead of $10.
But this is not true. Price is a function of whatever price the seller sets. Look at the actual circumstances rather than on mathematical models with no bearing on reality.
Only if customers are willing to buy at that price. Which is only true now because there are no cheaper competitors to turn to, which in turn is because the entire system is operating at capacity.
Over time the high prices incentivizes bringing more power generation and transport online, which is exactly what we are seeing - new/reopened nuclear, coal, and nat gas plants are all planned or coming online across Europe and imports have spiked from places like the US. No one likes high prices but it does incentivize building more capacity that might lose money when prices are low, but make up for that when prices are high. This process doesn't happen over night but sanctions + war (roughly) did. Europe was lulled into complacency by consistent and cheap Russian gas for years.
Also, don't overlook those transport costs. Networks across all energy types are severely constrained and underinvested in. Doesn't matter how cheap you can produce energy if you can't get it to your customers cheaply.
In other words, the price is the marginal price: at the very edge. What is the highest price consumers want to pay for X amount of electricity. You should split it up: say price of electricity is 5$. That means:
Electricity produced at 1$: sells for 5$
Electricity produced at 2$: sells for 5$
Electricity produced at 3$: sells for 5$
Electricity produced at 4$: sells for 5$
Electricity produced at 5$: sells for 5$
Electricity produced at 6$: does not sell, plants get paused
Buyers are willing to pay $5 to secure 100GW of power. Sellers are: 80GW Solar at $3 and 20GW Coal at $5.
At 100GW the price is $5 because it's the price that will secure 100GW. If buyers only needed 80GW the price would be $3.
There is only one market price and it's the price that gets the required quantity of power (as you say).
Sometimes that means: Electricity produced at x$: sells for -5$ (I pay you to use it)
It was the European Commission that designed the integrated electricity market because it was believed that a free market would guarantee low electricity prices for everyone. It seems very naive to believe that this system will function better in the future. For the energy giants it is more profitable to limit supply and jack up prices than to build more capacity.
Back in the real world, we can look at hard data. Margins for energy producers and retailers have increased massively in the latest quarter. Also, we know that markets don't react directly (and exclusively) to fundamentals. They react to panics, they react to extremely complex interactions of manual and automatic trading algorithms. Reality is far from the simple "supply and demand" that economics 101 textbooks portray.
2. That does not apply here since we are talking cost/profit and not share price
> The efficient market hypothesis (EMH), alternatively known as the efficient market theory, is a hypothesis that states that share prices reflect all information and consistent alpha generation is impossible.
Nothing you say is about EMH. Nor does EMH predict that markets react only to "fundamentals", only in that shares reflect the whole set of information.
And natural gas, which usually covers the more elastic power demands is dramatically more expensive.
Germany should be a super exporter of energy to the EU/Eurozone (they are a big electricity exporter, they should and could be considerably more so). They land border nine other nations (and are of course very close to Italy). They have the technical and financial ability to do it.
Production cannot be scaled up and down infinitely and immediately.
The price is a market signal.
The fact that production cannot be immediately scaled to serve the customer demand and bring prices (and therefore profits) back down to a "normal" level is not a market failure either; it's simply a physical reality.
1. The Western governments have spent a decade demonizing fossil and nuclear energy. For that whole time, big funds have divested, and investors punished. No major fund is going to touch this sector, especially not if the intent is a capital project. Nuclear is just seeing a turnaround as some governments regain their rationality (e.g. Japan), but others seem to be utterly hopeless (Canada, Germany).
2. The above means that schools stopped offering the programs necessary to train the workers for the industry. There is an entire generational gap now in oil and gas trades, from the roughneck to the engineers.
3. The government's incompetence has caused rampant inflation which, affects these industries too. Suddenly you have to deal with the labour shortage, there being no raw inputs (the year supply of anything from pipe to mud was sold out in most markets by Q1 of '22), and you have no idea what great ideas government will pass by next quarter so you have to price high to build a buffer. All of this leads to huge uncertainty.
The worst part in my eyes, is that we're only really seeing the beginning of this. Governments are still on their ESG-above-reality stance. Approval from their UN SDG and WEF cronies is still more important than their constituents well-being.
I honestly feel for the Europeans that saw this coming and voted accordingly - but more for the Africans and Asians who will be bid out by Europe and be faced with starvation of freezing. They had no say in this and they will pay the steepest price for Europe's ESG hubris.
I don't think anyone is meaningfully wasting electricity in Europe currently. Demand can't go to zero. Supply dropped significantly.
We don't currently do a good job of responding to price signals. We have some plans to expand this, which are being rushed into service after being neglected for a long time.
https://www.bbc.co.uk/news/business-61949246
And even that has to lie about "it not being about rationing" because price signals are so foreign to the consumer energy market.
Everybody blames the war, but AFAIK UK imports 1% of its gas from Russia, and its electricity is generated locally, so why are prices increasing? I would expect grain and wheat to increase 500%, not power.
Just like oil. The US has cheap oil but it's a global market, so everyone pays the (more or less) the same price regardless of how close they are to the oil.
Because demand side has no upper price limit the whole market price can raise to very high.
Ofc, this ignores cases of own production, futures and so on.
It is very efficient at creating a transparent market and finding the "natural" market price. The same price that a free and transparent market would converge to.
The alternative are price caps. Which could be considered. But it's a choice between free and non-free markets.
Blaming merit-order is shooting the messenger.
That's wrong. The price is determined by demand and supply, which in turn is determined by what prices producers are willing to sell at and consumers are willing to buy at, plus other traders in the market.
Because that's how the auction works, but it's misleading, it's the cheapest supplier that can deliver the final GW hour required to satisfy the projected load. Other multiparty auctions with a volume requirement work the same way.
Saying that price is "determined by the most expensive producer" without further context is still wrong.
Is a 'completely free market' if not a spherical cow in a vacuum on a frictionless surface i.e. a purely theoretical concept that can never exist in real life?
Presumably a 'completely free market' allows cartells, bribes are not illegal, and there is no authority to throw me in jail if I lie about my product? So either it would collapse into a cesspool of fraud, or you have to introduce rules and then it's not free any more?
You're stating that without evidence, but the kind of auctions that the electricity market requires are similar to opening auctions for stocks. Would you claim they're very dysfunctional?
This is why we originally stopped mining coal - because Russian gas was so cheap at the time that it was a no-brainer.
What could possibly go wrong?
Europe is now at a critical point where choosing not to burn coal is going to have a high economic cost that many people are not going to be able or willing to pay.
If you think miners should not be fairly compensated for their work you're free to go work as one for one of those foreign producers that less "dysfunctional" and more "reliable"
Maybe we were also importing cheaper coal from elsewhere?
> The United Kingdom has the second-largest LNG regasification capacity in Europe (4.7 Bcf/d), and it can export up to 2.5 Bcf/d of natural gas to the European Union via the Interconnector pipeline into Belgium and the BBL pipeline into the Netherlands. Regasified LNG volumes in the United Kingdom averaged 2.9 Bcf/d from January through May 2022, and regasification facilities ran at a 63% utilization rate, up from 30% last year. Exports from the United Kingdom via interconnecting pipelines to the European Union have run at close to maximum rates since March 2022.
I would assume because of this.
Same thing for gas, uk is competing with their neighbors for a resource that just got a whole lot more scarce (locally), causing prices to rise
See https://doomberg.substack.com/p/have-fun-staying-cold
From last November
You still haven’t addressed WHY the fundamental price setting mechanism of nat gas would be any different from any other commodity.
Well. I don't know where you live, but I'm not paying more than last year.
I read about soaring prices being an issue in the UK. Prices, here, in France are fixed twice a year by the energy commission. Right now, residential electricity increased by 4% last February and remained unchanged at the start of August. So it means that whatever is happening in the market, is not affecting us. Actually, I will probably have 2-3 months of cash back at the end of the year.
Not really a crisis, to be honest.
However I would be very interested to know what is the situation like for my fellow European citizens !
You very seriously need to check out news or Twitter from any other Western European country
If what was happening in UK happened in France, Paris would have been burnt to the ground months ago
You may not be aware, but there's a war going on that is sort of impacting things on top of existing inflation.
I realize picking a scape goat feels easy but it's poor form and leads to not fixing the actual problem.
This gives them a lot of leeway to control prices without actually costing them anything.
Fundamentally you can have high prices, shortages or you can disconnect France from the rest of the European grid but you cannot just have cheaper prices in France.
And nothing you've said seems to have relevance to shortages
As ClumsyPiloy said electricity is not something you can easily trade under the radar of the regulator. Technical limitations and regulation do change everything.