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Save us from the perils of maximum prices for energy! (in English)

By Benedict De Meulemeester

By Benedict De Meulemeester on 19/01/2012

For the Dutch version, please click here.

The Belgian ministers Vandelanotte en Wathelet, responsible for economy and energy, want to investigate the high prices of energy in Belgium. Apparently, they consider the introduction of maximum prices. This obviously sounds logical to citizens. If the prices that those vilified energy suppliers charge for their gas and power are too high, than impose a maximum on them. Well, my dear ministers, can I please beg you to abandon this idea? And if you start ordering studies, you might analyze the consequences of curbing energy prices for final consumers in California and Spain.

In California, maximum prices contributed substantially to the energy crisis of 2000 – 2001. The curb by the Californian government of prices that suppliers could charge to end consumers induced an investment stop for power production capacity and a continuous growth of consumption. The consequence was a massive, disastrous shortage of power. In Spain, the government also decided many years ago to use the weapon of maximum prices, looking for electoral success. Today, the power producers that were affected claim the losses they suffered then. As a consequence, the already beleaguered Spanish budget minister is to search for an extra 20 billion euro for paying back power companies.

The ministers want to compare our energy prices with the surrounding countries. Of course, they will point out the much lower power price in France. However, the comparison doesn’t stand. The French power market, especially in the residential segment, still largely is a regulated market and not an open market such as ours. And indeed, in such a market, the authorities can simply decide to have the lower production costs of nuclear power reflected in lower costs for the end consumer. But that is a totally different story than a Belgian government that promotes an open market but intervenes in the pricing by imposing maximums.

Of course, the fact that prices in the regulated French market are lower than in our open market gives rise to the question whether deregulating the power market was a good idea after all. What do we get in the open market? Higher prices, more risk since the volatility is higher and about the service level I here a lot of complaints. In open markets, marginal cost pricing determines the price of the power, in regulated markets, the price is determined by average production costs. In countries with a lot of nuclear power like Belgium and France, the result is that with a gas price of 20 euro per MWh, the open market results in higher power prices than the regulated market. If the gas price would drop to 10 euro, the prices in the open market would be lower. Is that unthinkable? No, in the US prices have been below 10 euro per MWh for many months now. However, even if as an energy procurement consultant, liberalized energy markets are my ‘raison d’être’, intellectual honesty obliges me to admit that the deregulation of the power market hasn’t brought us much good. The question is whether a return is possible? Would that be intelligent if during the liberalization you have allowed all your national energy champions to be sold to foreign outfits?

Moreover, as far as the gas market is concerned, we can claim without a doubt: fortunately that that market was an open market and not regulated in the past years. Without liberalization we would have had a variable gas price that went up without limitations with the oil price. Thanks to deregulation, gas clients had the possibility to fix their oil-indexed prices and to switch their contracts to the cheaper Hub markets. Again the example of France is telling. The regulated gas prices in France are much higher than the prices you can close in the liberalized part of the market.

I am curious whether another (expensive) study of the price level in Belgium compared to the surrounding countries will result in the same conclusions. I can already save some costs of study for the ministers. A simple look at the price evolution on the power and gas exchanges (www.apxendex.com, www.eex.de) will teach them that wholesale prices for power and gas in Belgium are not higher than those in the surrounding countries, rather to the contrary. To our own surprise, we observe in the past months that the forward power price in Belgium is the lowest in the Belgian-Dutch-French-German market. Bad luck of course for populist politicians (a plague of which I wouldn’t want to accuse the gentlemen Vandelanotte and Wathelet). Drawing the evident conclusion, namely that Electrabel abuses its dominant position in the production market to push up prices, becomes impossible.

Due to my job, I have a good view on prices paid by industrial consumers of power in Belgium and the surrounding countries. Well, as far as the commodity part of the bill is concerned, that part for which suppliers are responsible, I can say: they are not higher in Belgium than in the Netherlands or Germany. Again: comparing with France is meaningless, as that market is regulated and if you want to compare with it, you have to run the debate on whether to liberalize or not. I’m not familiar with the power market for residential consumers, but I read in the papers that the prices are effectively higher than e.g. in the Netherlands. Of course, a study is to show whether this isn’t mostly due to higher grid costs and taxes, which is the non-deregulated part of the bill. However, if the commodity price for the residential consumer is higher, I see only one possible cause: a malfunctioning retail market. If the wholesale price (the one on apxendex and eex) is lower, and the price for the end consumer is higher, this means that there is a lack of competition in the retail market.

Precisely for this reason maximum prices are such an idiotic idea. The incumbent and still dominant player (Electrabel) would suffer least from this. He would be able to compensate the losses he suffers by the maximum price with the profits that he makes by selling his nuclear power in the wholesale market. For a newcomer without its own power production, it would mean a disaster. If the ministers put the price at the level of the French price, it would mean that a newcomer would have to supply an end consumer at a price that is cheaper than the price at which he can buy in the wholesale market. The introduction of a maximum price would simply destroy the small amount of competition that we currently have in the power market.

What we need to bring Belgian power prices in line with the surrounding countries is more liberalization and not less. Belgium is for example, the most limited market in Europe as far as available products on the wholesale exchange are concerned. Just compare market results for Belgium and The Netherlands on www.apxendex.com. In Belgium, a supplier has just ten products to hedge the power prices he is offering to a client. In the Netherlands, a supplier has 51 products. Especially the lack of peakload products for Belgium is a real shame. Due to this, alternative suppliers have to charge additional risk premiums, of which I could imagine that for residential consumers this results in higher prices in Belgium than in the surrounding countries.

And while I’m giving ideas of how to complete our liberalization. When will regulator Creg get a strong mandate to face grid operators when they are negotiating grid fees? For the residential consumer, this regulated part of the power bill is at least as big as the liberalized commodity part. Why does a new supplier have to go through three different authorization processes (Flanders, Brussels and the Walloon Region) to develop its business in this tiny country? Why do we use the nuclear rent to fill the holes in the government’s budget instead of using it to reduce the cost of greening the power production for the end consumer?

But OK, we will probably get another study that doesn’t reveal much. So, that it allows policymakers to take the measures that are politically right, not those that offer fundamental technical-economical solutions. But please, save us from the perils of maximum prices. Don’t destroy the small amount of competition that we currently have.

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