As this column finds itself doomed to repeat, the EU’s marginal pricing electricity market means that the most expensive type of energy used in a given hour sets the price for all sources, even ones that are close to free to run, such as wind and solar.
A group of officials within the European Commission was already convinced that this was a bad market design that prevented consumers getting the benefit of renewables, long before the gas price began its havoc, long before the Russian tanks amassed on Ukraine’s border.
In their view, the marginal pricing market was designed for fossil fuels, which are extracted — involving a production cost — and then sold at the price the market will pay for them.
Renewables were awkwardly shoe-horned into this market later, as a more recent invention. They have a nearly-free running cost, after an initial investment to build them, but were made to fit into the electricity market by complex financial retrofitting.
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To sum it up crudely, large companies or government entities pay for the initial construction of the solar or wind energy farm, with an agreement that its energy will be sold at a particular price in the years to come.
If the market price turns out to be different to that agreed price, the gap is bridged by “contracts for difference”. These offer the renewable producer a subsidy if it ends up selling electricity at a market price that is less than agreed, and equally binds them to handing over accidental excess revenues earned if the market price is higher.
For this reason, if governments go to renewable companies looking for supposed excess profits to siphon off, they may not find them there. They may well be selling at prices agreed years ago — the profits are with their contract counterparty. (Who is the counterparty, you ask? This delightful research lies ahead for those implementing the EU plan to siphon off such revenues).
Some German companies for a time enjoyed odd asymmetrical contracts under which they got compensated if market prices were low but got to keep any excess money made if they were high, the EU officials say — but that’s another story.
These rebel officials advocate splitting the energy market into two, separating renewables and fossil fuels — conveniently, the carbon fuels will in time phase themselves out of existence, being more expensive, they argue.
They have been driven into the open with their ideas by the twin impulses of hope and fear.
Hope that the evident disfunction of the energy market revealed by the wild gas prices means change can be contemplated, even for those deeply wedded to or invested in the marginal pricing system.
And fear — fear about how bad the situation may get.
One official has warned colleagues that the different ability of member states to implement the energy revenues plan would lead to the kind of economic divergence that threatened to tear apart the euro in the last major economic crisis.
“We will have the next sovereign debt crisis before the end of the year,” warned the Cassandra of the Commission.
“While this week it is still all about energy, by the time the winter has come it could be a perfect storm of energy bills, social unrest, sovereign defaults ... financial crisis.”
Let it be recorded that it was Wednesday September 7th when the big “R” word was dropped for the first time to journalists.
“Do we run a risk of recession? Yes, I think it’s rather obvious the risk is there,” an European Union official said in a morning briefing.
In the afternoon, the R word was used again — by none other than Paolo Gentiloni, the European Commission’s economy chief. “The risk of a recession is rising,” he told a Brussels conference, according to reports that quickly lit up the news wires.
Politicians have been seriously spooked by a crowd, estimated to number in the tens of thousands, that gathered in Prague this weekend. The fringe left and right came together to demand an end to sanctions against Russia, a stop to support of Ukraine, and a deal with Moscow to bring down energy bills.
They also called for the resignation of the Czech Prime Minister, Petr Fiala. As the Czechs currently hold the rotating EU presidency, it is his government that is co-ordinating the drafting of common EU positions on how to tackle the energy crisis.
Politicians are tempted to start bolstering their job security by writing cheques, and fast. The problem is, they have to balance the urge against the risk of worsening another economic disturbance: inflation.