Bird on a Fire wrote: ↑
Tue Mar 22, 2022 9:17 pm
IvanV wrote: ↑
Tue Mar 22, 2022 8:27 pm
Bird on a Fire wrote: ↑
Tue Mar 22, 2022 3:12 pm
The PIGS are coordinating their demands in advance of EU Council meeting later this week
Specifically, they're proposing an energy price cap:
Let's just tell those foreigners, we'll only buy their gas if they carry on selling it at the old price. We'll make them.
It's considerably more complicated than that
The EU uses wholesale gas prices to determine electricity prices. Here's Reuters from late last year:
https://www.reuters.com/markets/commodi ... 021-12-13/
Spain and France are among the EU countries seeking to change regulation to de-link the price of electricity from gas prices and tie it to the average cost of production in each EU state.
They say the current system, whereby gas plants typically set the price of electricity, means consumers do not benefit from the increasing share of cheaper renewable energy in countries' energy mixes.
OK, I see what they are getting at.
The EU does not use have a rule saying that the wholesale gas price sets the price of electricity. Rather it has an electricity market. But there are reasons why the market outcome means that the price of electricity is often closely related to the wholesale gas price. Not because anyone says it should do, but because that's how markets work.
Markets are not mechanisms whereby you consider the production cost of all the items being sold into the market and average them. Rather they are mechanisms by which the price is bid down (or up if you prefer, it hardly matters), until supply matches demand. So everyone buys at the price of the producer who has the highest production cost still left in the market, for the quantity of electricity people will buy at that price. That will mostly be a gas station. Only relatively rarely will there be so much wind, sun, nuclear, etc, in the market that the only remaining gas left on is only to deal with swing. That can happen on a windy night at a warmer time of year in Britain. It can also happen on a very sunny day in Germany. But mostly there is some gas burning away because we need that much electricity.
So, you might think, that means most of the time most producers actually producing are selling for more than their production cost. And you would be right. And they need that money to pay for the construction cost of their plant. Because the price they are bidding in is only the running cost, not some average cost including their capital costs. Because that's what markets make you do. And being a gas plant has been really terrible in recent years, because you don't get to run so often, and you don't get enough money to cover your capital costs. This is called the Problem of the Missing Money. And is a feature of how we pay for renewables. As a result of the Problem of the Missing Money, governments have had to introduce Capacity Payments, or risk having no gas plants there when they need them.
I am afraid that linking the electricity price in the market to the average production cost, rather than the marginal production cost, is just utterly illiterate, and just can't work in the way we have built our electricity institutions. Maybe this is a bid by the French to destroy the single European energy market. Because the French have never really liked it. Because EdF have never really liked it. Because it benefits customers over EdF. And there are enough French politicians who feel sufficiently connected to EdF rather than French consumer interest that they will support EdF. And in general most electricity producers don't like the competition it creates.
You can tell producers to reduce the price of electricity, if you somehow don't bankrupt them. But many electricity producers are not profiting from this. They have put up the price of electricity because they have to pay more for gas. Ok, hydro producers and nuclear producers and the like will make more money, but that's usually on some kind of a state money-go-round. The solar and wind people won't benefit because they are on CfD's so the government takes any extra money they earn from higher prices. So I'm not entirely sure where they think all this profit is that can reduce the price of electricity to the "average cost" without shafting the producers, because they do actually need more than the average cost. Even though EdF, the biggest nuclear producer, will in principle get more money from selling its nuclear electricity, overall it is actually being crucified by what is happening. The French govt has told it to not increase the price of electricity very much to consumers, and it has problems with some of its stations. I read something the other day that this is costing it currently about €500m per week. Maybe that's before considering the extra money that's coming in, I don't know.
It's not very nice what is going on in the energy market. The best that can be said is that we were much poorer back in the 70s when developments in the energy markets then produced large increases in the price of oil and gas. It's part of why the 70s were not very nice at all. We are better able to cope with it today. We are less used to such bad times as back then.