Michael Eriksson's Blog

A Swede in Germany

EU and energy insanities

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A guardian article from yesterday ([1]) again shows how current politicians cause problems that they, themselves, then try to “solve”, usually making things even worse. This in particular through a gross ignorance of basic principles of business and economics. It also demonstrates how misguided EU policies increasingly make the EU a negative, instead of the positive that it could have been, as well as how problematic Ursula von der Leyen is.* Someone this stupid, ignorant, and/or dishonest** has no place as the leader of anything, let alone the EU.

*Like Merkel, she is the German equivalent of a RINO. (At best: I have occasionally wondered whether they are not something worse.)

**E.g. in that she might actually know better, but pretends that she does not for purposes of political propaganda (e.g. in the “evil Capitalists” or “evil Russians” genres).

To look at a few quotes (formatting might have been lost):

Low-carbon energy companies, renewable and nuclear suppliers that have reaped “enormous revenues … they never dreamed of” from generating electricity will face a cap on their revenues, Von der Leyen said, with proceeds earmarked to help domestic consumers and companies pay “astronomical” bills.

Under EU energy rules, the price of electricity is determined by the cost of the most expensive fuel, usually gas,* rather than cheaper renewables and nuclear power. As a result of all-time-high gas prices, low-carbon electricity generators have been rewarded with a big increase in income.

*Here and elsewhere, the word refers to natural gas, not gasoline.

Here we have a systematic underlying problem caused by the politicians: to fix prices is bad; to do so by the most expensive source is harebrained, a recipe both for poor incentives for the industry and high prices for the customers, as well as a disabling of market forces. A good system would have utility companies sell and buy electricity to its customers resp. from the energy producers* by reasonable negotiations based on supply and demand—and we would have none of these problems. In particular, we would see a natural shift to gas as an “only when we can find nothing else” source, gas suppliers would experience a corresponding downward pressure on prices, the extreme overall price hikes and any windfalls** would have been smaller or non-existent, etc.

*Here I to some degree oversimplify. The principle demonstrated holds, however.

**In as far as they do exist right now. The extreme amount of Leftist and/or anti-Capitalist propaganda in today’s world makes it hard to say what is true and what is just propaganda. Note the common strategy of politicians to screw things up, often by destroying the markets, and then to blame the markets.

No, this would not magically solve the current gas shortage, but it would make even the current effects smaller, and it would, in the past, have given incentives to shift from gas to more sensible forms of energy. (To the degree that other government interventions allowed it, of course. Note, in particular, the common issue of governments forcing an utterly idiotic, utterly indefensible abolishment of nuclear power.)

Now those companies who have done the right thing within the rules of the game are to be punished… Also note that this type of confiscation of revenue gives incentives to not invest in better production facilities or other means of improving, increasing, and/or making cheaper the production.

“These revenues do not reflect their production costs,” Von der Leyen said. “So it is now time for the consumers to benefit from the low costs of low-carbon sources.” The commission, she said, proposed “to re-channel these unexpected profits” to allow member states to support vulnerable households and companies.

Firstly, revenues are uninteresting—profits matter. Secondly, profits should not be governed by production costs, for reasons of both fairness and incentives. If X is able to produce something at 1 Euro per unit and Y is willing to buy at 10 Euro per unit, then they should do so. If margins are great, in a market not destroyed by politicians, others will move in to drive prices down, while X will ramp up production with the same effect.

Then, since when are low-carbon sources low cost? Many, in particular those favored by the politicians, e.g. solar power, tend to be quite expensive—or how does von der Leyen propose to explain the costs of the German “Energiewende”? They might or might not by now be lower than e.g. for gas, but that does not make them low. Certainly, any reason why the consumers have hitherto not seen a “benefit” is rooted in the regulations.

(An interesting side-question is what would happen if gas prices had remained at the pre-Ukraine level and other producers had seen a drop in production costs through e.g. improved technology: Would she want to confiscate these winnings too? To force the producers to lower prices to allow “consumers to benefit”?)

Then again, support of vulnerable companies usually implies that companies that are a net-drag on the economy are artificially kept alive, which, in the long run, does more harm than good. It also often implies that companies that pretend to be vulnerable receive free handouts. (The question of vulnerable households is more complex, but is also an area often filled with high costs, abuse, and/or unfairness.)

Oil and gas companies that have made “massive profits” would also be subject to a windfall tax, which Von der Leyen called a “solidarity contribution”.

Abuse of the word solidarity for “the government takes from the one and gives to the other” is inexcusable. This alone condemns and illegitimizes von der Leyen. Solidarity is voluntary or it is not solidarity. Besides: considering the delivery issues, shortages, and price hikes on inputs, how are gas companies supposed to make “massive profits” on outputs? The explanation, if true, is government regulation that destroys markets.

While she did not mention specific numbers, a leaked document seen by the Guardian shows the commission wants a €200 (£173) per megawatt hour limit to the price of electricity generated by low-carbon technologies. The paper states this “mimics the market outcomes that could be expected were global supply chains functioning normally and not subject to the weaponisation of energy through gas supply disruptions”.

Apart from politicians already having ruined markets, the idea is now to have regulations mimic the market instead of just letting the market do its thing. The “weaponisation” of this and that has been done by the EU and the US, not (as presumably implied) Putin/Russia. Attempts to force outcomes as if no external disturbances were present will make things worse, not better, as they severely reduce the possibility to adapt to the new circumstances.

Finally, Von der Leyen proposed a cap on the price of Russian gas, saying it was necessary to cut revenues that “Putin uses to finance his atrocious war in Ukraine”.

And how the F-ing HELL does she propose to convince Russia to accept a price set by the EU?!?!?! Is she going to march in with tanks and force Russia to sell?!?!? In reality, the result would be that only as much gas is sold as makes sense to Russia at the new price, which will be less than today, maybe nothing, making matters even worse.

(And, of course, if Russia were willing to sell current quantities at lower prices, market mechanisms could, with reservations for levels of desperation and negotiation skills of the parties, have brought about those lower prices without reducing quantities and without causing conflict. And, of course, with this motivation, what von der Leyen suggests is exactly a “weaponisation”.)

Speaking in Vladivostok, Vladimir Putin dismissed attempts to cap the prices of oil and gas as “completely stupid” and “sheer nonsense”, while claiming that Russia had enough customers in Asia to ride out the damage. “Will they make political decisions contradicting contracts?” he said. “In that case, we won’t supply anything if it goes against our economic interests. We don’t supply anything: no gas, no oil, no coal, no heating oil, nothing.”

My point exactly.


Written by michaeleriksson

September 8, 2022 at 8:40 am

Posted in Uncategorized

Tagged with , , , ,

2 Responses

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  1. […] **See a recent text on von der Leyen and energy politics ([1]). […]

  2. […] **See a recent text on von der Leyen and energy politics ([1]). […]

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