In Brussels, people are just discovering what it means when prices are determined by supply and demand. Instead of complaining about “market failure” and “excess profits”, the President of the European Commission, von der Leyen, should ask her compatriots to leave the nuclear power plants connected to the grid.
EU Commission President Ursula von der Leyen wants to rein in the electricity market.
“The electricity markets no longer work, they don’t serve their purpose”: So has this week the EU Commission President Ursula von der Leyen commented on the volts on the electricity exchanges.
Certainly, the prices on the exchanges where electricity is traded in Europe have increased enormously since Russia’s attack on Ukraine. This affects energy-intensive companies in Europe, and the bill will also be heavy for some medium-sized companies.
«Market design» is voluntary
But is this already a case of “market failure”, as von der Leyen insinuated? The electricity market does not work according to any obscure rules, but like any other market. Let’s take the market for strawberries: There is the farmer who just has a turn to meet the demand. He will at least want to cover his costs, otherwise he would not sell. Any farmer who can offer it cheaper than he will also sell her strawberries – at the price that the farmer who is just about to deliver the last unit demanded is asking.
The farmer makes a nice profit and can invest in new fields and seeds, so that next year the strawberry harvest will be larger and the price will tend to fall.
This “market design” was not imposed on anyone, but is entirely voluntary. The electricity market is very similar. There the “expensive farmer” is the gas power plant. The last kilowatt hours that can still be sold on the market are currently often produced with gas-fired power plants. Since the price of gas has increased more than tenfold, their production costs have risen sharply.
In this example, the counterpart to the “efficient farmer” is nuclear power, hydropower, wind and sun – they all produce much more cheaply, but receive the same price per kilowatt hour as gas-fired power plants. After all, electricity is electricity.
High prices now signal two things: Electricity consumers will pull out all the stops to curb their consumption. This can go so far that certain companies temporarily stop the machines. These savings will help us get through the winter.
But there is a second effect: The high price of electricity, which the markets expect to continue for the next few years, also triggers investments: in renewables, which are quickly amortized, but also in hydropower and maybe – if if the technology hadn’t been locked out – even in nuclear power. In any case, the supply will increase over time, which will put pressure on the prices.
Threatening spiral of intervention
So far, so unspectacular, one might think. The market works. But politicians are now flirting with price caps for electricity: some for the entire electricity market, the EU Commission for those types of generation that are cheaper than gas-fired power plants. In the latter case, to stay with the example, the strawberry farmer who produces cheaply would be additionally taxed – it would be a kind of “excess profit tax”.
In their working paper, the EU officials speak of legal certainty for the countries and consumers. But such ad hoc interventions in functioning markets are poison for the investment climate. In any case, the danger of intervention spirals is great. Those who set up power plants tie up their capital for the long term and need legal certainty. The basic problem, that energy is extremely scarce throughout Europe this winter, can’t be solved by magic – not even Brussels.
The Commission President shoots the messenger with her philippic and conceals the causes of the misery. Incidentally, the nuclear phase-out of their home country Germany also contributed to this. One of the rare opportunities to increase the supply of electricity in the short term would be to keep the German nuclear power plants running until 2023. Von der Leyen should work towards this – instead of complaining about alleged market failure and excess profits.