Long live deregulation

By Benedict De Meulemeester

By Benedict De Meulemeester on 28/05/2009

With energy prices tripling in the past three years, many industrial buyers of energy have come to doubt whether deregulating energy markets was such a good idea after all. With exploding energy budgets, it is hard to be enthusiastic about it. It is true that in countries with diversified power production parks, power prices would have probably been lower if the market had remained regulated. In countries such as Germany or Belgium, the power producers used marginal cost pricing to explain why their power prices rise along with gas prices. Everybody understands that this is boosting the profitability of their nuclear or to a lesser extent coal-fired power plants. In a regulated market, it would have been much more difficult to push through such price rises. The regulator would have argued that the cost of nuclear power plants was not running up so high. This has been proved in the French electricity market where prices are still regulated. On the other hand I still see some firm arguments in favor of deregulation.

In some areas of Europe, such as remote parts of Germany or Eastern Europe, you still find yourself confronted with de facto monopolies in the gas market. Dealing with such suppliers learns you why deregulation is a good thing. I was "negoatiating"with one today. We asked him perfectly reasonable conditions regarding volume flexibility and price fixing services. The only answer that he had in store was 'we do not offer that'. The gas market in the past years would have been a disaster without deregulation. As suppliers have the prices at which they buy from the producers pegged to the oil prices, they would have risen just as much as they have done now. But without competition and without transparency about the oil-indexed formula, customers wouldn't have had access to services to hedge these exploding prices. Fixing prices for natural gas has only become available when markets were deregulated. And as I have learned today, without pressure from competition, gas suppliers are not likely to introduce services for gas price fixing. So at least in this perspective: long live deregulation!

Keep up to date with E&C