A European Energy Market Designed For Supply Disruption Profiteering And General Chaos

A couple of days ago I watched Yanis Varoufakis, who was the Greek finance minister during the Greek debt crisis, explain the fake electricity market (video below, 2.08 mins to 26 mins and 52 mins to 56 mins) that has been put in place by the European Union; designed to reap major profits for the energy companies during supply shortages while the state protects the energy companies during periods of excess supply. This says so much about the utterly plutocratic and anti-democratic nature of the EU I wanted to provide the details to my readers, with some additional context.

As Mr. Varoufakis states, there is only one set of electricity wires that enter a given property – electricity generation and supply is what used to be known as a “natural monopoly” that was seen as best being situated in the public sector to remove the obvious risks of private owners using their monopoly power to gain “excess” profits at the consumer’s expense. With the neoliberal wave that washed over the world from the 1970s onwards such considerations were thrown aside and the natural monopolies, such as water, gas and electricity distribution were privatized.

The structure of the EU electricity market was put in place first of all in the UK by Margaret Thatcher’s government, and then later copied by the EU. It constructs a “market” where none really exists – a neoliberal fantasy market that serves to enrich corporate executives and shareholders during periods of supply shortage and facilitates more general profiteering. The electricity system was split into three parts:

-       Electricity Generating Companies, dominated by the “Big Six”: Centrica, EDF Energy, E.ON, nPower, OVO and Scottish Power who supply more than ¾ of UK electricity.

-       The National Grid that manages the electricity distribution system

-       Electricity Supply companies that buy electricity in the wholesale “markets” from the electricity generating companies and sell it to retail customer, transported over the National Grid.

This arrangement reminds me of comparisons of the incredibly expensive US healthcare “market” with other countries’ socialized healthcare systems, where the sheer complexity and lack of adequate state oversight of the US system (the US state actually banned itself from negotiating wholesale drug prices with pharmaceutical companies!) produces a myriad of avenues for profiteering manipulation together with a huge administrative overhead. The result being much higher costs, and in many cases worse outcomes (for example in infant mortality). As Mr. Varoufakis notes, the margin between the cost of electricity production and prices has trebled rather than fallen since privatization, reflecting exactly the same dynamic within the US healthcare system; over-complexity breeds profiteering opportunities. The energy generating companies and energy supply companies are in many cases owned by the same holding companies, underlining the utter fakeness of this “market”. The much simpler nationalized system run by state managers was much more efficient.

With respect to Mr. Varoufakis’ statement that the UK is self-sufficient in electricity, it is actually not self-sufficient in natural gas – approximately half the UK’s gas comes from the North Sea, a third from Norway and the remainder from global LNG sources. UK electricity generation is one third natural gas, one quarter wind, one sixth nuclear, one eighth bioenergy (imported fuel pellets), one twentieth solar, with the rest being a mixture of coal, oil, and hydro. If half of the gas is imported, then one sixth of electricity generation should be exposed to global gas prices. But then why are UK electricity prices rising as fast as in a Greece that imports the vast majority of its energy needs, as Mr. Varoufakis asks?

The electricity supply companies buy electricity in wholesale markets from the electricity generating companies (the UK has its own markets, the EU has markets such as the TTF), for same day supply on a spot market (where the marginal clearing price is given to all suppliers) and for longer-term arrangements via brokers. In the EU, the unelected European Commission forced individual states to deregulate and denationalize their electricity markets and then tightly coupled national markets together into a single pan-European market. The energy companies responded with a wave of mergers to successfully negate much of the competitive threat to their profits, and to gain dominant position across Europe in both production and distribution. For example, in the UK “EdF, RWE and E.ON became the three largest generators and three of the largest retailers” and generally “EdF, RWE, E.ON,  Iberdola, ENEL, and Vattenfall expanded substantially outside their home markets in both generation and retail”¹. This wave of mergers was not stopped by the EU competition authorities, even though it made a mockery of the supposed increased competition produced by the fake electricity market.

Such a market with a highly concentrated group of suppliers is a profit paradise for energy suppliers during periods of supply disruption, as they can switch to the spot markets and short-term contracts where the market clearing price reflects the most expensive source of supply – irrespective of the cost of generation. There is also the possibility of gaming the system by manipulating markets and withholding supply to boost prices (a strategy used to great profit by the criminal Enron in California at the turn of this century). Supply is generally highly inelastic in the short term, as it takes time to build electricity generating units. Demand is also highly inelastic as much of its use is for the most basic needs of retail and commercial customers. The availability of excess capacity, and storage facilities for natural gas would ameliorate the supply problem somewhat but that would not be in the interests of profit maximizing supply companies; no new gas storage facilities have been built in the UK since the privatization of the nationalized gas company.

Now the above structure can also be a nightmare for generating companies during periods of excess production (e.g. when the winds are very strong and the sun shines), but the UK government would not allow these private companies to be too discomfited in such circumstances – so the state directly interferes in the market to make sure that the supply companies maintain viability during such periods (just like EU governments do). So why cannot the state taketh in times of reduced supply just as it giveth during times of excess supply?

Let’s remember that only one sixth of UK electricity generation is imported, and that one sixth could have easily been supplied through long-term fixed price contracts. When the UK and the EU asked Norway to “share the pain” by accepting lower prices the Norwegian response was that it was the EU that chose variable market prices when fixed price long term contracts had always been an option (just as the Russians prefer for their pipeline gas and LNG suppliers will also provide). When UK and EU leaders trawled the world for LNG supplies they found that the vast majority was tied up in just such long term contracts with nations such as China. They were left price fighting for the limited supply of LNG not tied up in such contracts (a significant amount of which were from the US that is making US$200 million per LNG tanker to Europe, and Russia!). In addition, adequate gas storage would have allowed the UK to have a “rainy day” supply filled up at much lower prices (Germany has this for example but had to refill it at excruciatingly high gas prices in 2022, after the energy companies hadn’t filled it up to the usual levels in 2021).

So, the EU and the UK took many steps to make the electricity market as volatile as possible, by making the price of electricity dependent upon the price of natural gas generated electricity; a price made dependent upon spot prices of natural gas as long term supply contracts were rejected and removed (e.g. for pipeline Russian gas). As Vladimir Putin put it:

We made attempts to persuade the Europeans to focus on long-term contracts rather than solely on the market. Why? I said it before and will repeat it once again: Gazprom needs to invest billions in development but it must be confident that it will sell gas before making investments. This is what long-term contracts are about.

Mutual obligations are incurred by the sellers and the buyers. They said, “No, let the market regulate itself.“ We kept telling them, “Don't do it or it will lead to drastic consequences.” But in fact, they forced us to include a significant share of the spot price in the contract price. They forced us to do this, and Gazprom had to include both the oil and oil product basket but also the spot price in the gas price. The spot price began to grow, causing the increase in the price envisaged even in long-term contracts. But what does it have to do with us? This is the first thing.²

With the privatized energy companies deciding not to fill up European gas storage as much as usual, the cold winter of 2021/2022 then produced extremely high gas and electricity prices that directly benefitted the companies that had decided not to fill up the gas storage (or not build any gas storage with respect to the UK). Windfall revenues, produced by a flawed market structure and the shortage of filled storage, then produced a windfall profit bonanza for the European energy supply companies.

Then the EU decided to declare an economic war upon Russia, which included the refusal to open up the completed Nordstream 2 gas pipeline, the “freezing” of Russian state foreign exchange reserves, the entanglement of the maintenance of Nordstream 1 in ill though out sanctions, and the refusal by some states to pay for gas in Rubles; the latter producing a cut off in supply to those nations. Exacerbated by Ukraine’s shutdown of one third of its gas transit infrastructure and a summer drought that reduced hydro-electricity generation, produced cooling issues for some generation units and even reduced the movement of coal barges on the Rhine. Exacerbated again by the utterly idiotic German government decision not to keep its remaining nuclear power stations open (by an energy minister who is a member of the Green Party!) and Russia’s removal of a nuclear power plant from the Ukrainian electricity network which is connected to the European electricity network (turning Ukraine into an electricity importer from an exporter). It seems that the EU may step away from delusional thoughts that they can impose price caps on Russia fossil fuel exports, thankfully so as any such actions would result in a cut off of the remaining Russian fossil fuel exports (e.g. LNG and oil) to Europe – producing another leap in prices.

It would be natural in such circumstances to suspend the electricity and gas markets and impose price caps on the domestic energy production companies (including North Sea and other domestic EU coal and gas producers) to reflect actual costs of production plus a reasonable profit margin. This would then lead to a limited increase in electricity prices driven by the percentage of electricity generation utilizing gas from non-domestic sources (Norway, LNG etc.). Instead a price cap was placed on the electricity supply companies, which were paying the nosebleed wholesale market prices and therefore were in immediate danger of becoming insolvent. It was the supply companies that then started to be bailed out/nationalized, placing the cost of the production companies’ windfall profits onto the taxpayer (as was the bailout of the banks during and after the 2008 GFC).

Just imagine if the national grid companies were state-owned corporations that supplied electricity to all consumers, and owned the fossil fuel, large hydro and nuclear plants while maintaining gas storage facilities and managed long-term contracts for fossil fuel and uranium supplies? They would then engage in contracts with new renewable suppliers, with a focus on small and medium scale suppliers – including local governments – to facilitate a general distribution, localization and democratization of the electricity system. A stable provider of electricity, with limited administrative overhead and managers paid state salaries with a focus on the societal good, long-term planning, energy security and the need to move away from fossil fuels rather than private profit – and accountable to national parliaments. The removal of Russian gas supplies would still be a problem, but nowhere near the scale of the current crisis and would be the subject of national-level discussions.

The British prime minister has already refused to tax away the energy producing companies’ windfall profits using some utterly spurious bullshit logic about “price signals” and the sanctity of the “market” – the very one that is a pure creation of the state and was totally undermined by the state’s actions. I am sure that her previous employment in an energy company, or the massive donations of energy companies to her political party had no impact upon her decision! The EU leaders lack the sheer chutzpah of the UK leader, so they had to come up with a “keep track of the profits” cup game that was complex enough to hide the fact that the state is subsidizing the energy producers’ windfall profits; I will leave it up to Mr. Varoufakis to explain this in his usual entertaining fashion!

This is the reality of the neoliberalism forcibly implemented by an EU Commission and EU Central Bank controlled by the oligarchs against the people of Europe, hidden behind complex structures and rules that hide the looting and insulates the decision makers from democratic oversight. In the Greek debt crisis, the ECB printed money that it lent to the Greek government that then used that money to pay off its government bond holders (mostly large European banks and the ECB itself) – in effect indebting the Greeks to bail out the European banks via the ECB (prohibited from doing such things directly). The same actions were forced upon, or happily accepted by, other European governments (e.g. Spain, Ireland, UK). Then the now socialized losses were paid for by government austerity, cutting services to the general European populations, as well as the fire-sale of state assets to the very financial institutions that had been bailed out. A “heads I win, tails you lose” corrupted version of capitalism. The Icelandic people revolted against their politicians and said, “no thank you” and forced the costs back onto the financiers and other governments.

The massive windfall profits for the energy production companies (including the Russian gas companies that are making more money by selling much less gas, US natural gas and LNG companies, and the people of Norway through their nationalised oil and gas sector) will be paid for by electricity and heating gas consumers and European citizens in general through government austerity and higher taxes (for the little people). This purely extractive capitalism will not only enrich the few (excepting the nationalised oil and gas companies of Norway and Russia) at the cost of the many, but will also lead to a significant deindustrialization of Europe and the UK (well, what industry is left in the UK) due to uncompetitive energy costs. The somewhat pyrrhic victory of the extractive financial capitalism covered by Michael Hudson; consuming the very societies upon which it relies for legitimacy and security.

The EU is a deeply undemocratic structure forced upon the vast majority of European citizens without a referendum, or if there were a referendum and the people voted the “wrong” way the referendum was held again or undemocratically reversed. Its core role is to remove decision making behind opaque and highly complex institutions and structures and closed doors that are open to the oligarchs but not the general citizenry; facilitating oligarchy at the supranational level.

Note: The cost of the UK subsidies to the electricity production companies is estimated at US$200 billion over 18 months, and could be higher. This package fixes retail electricity prices at four times what they previously were, still causing severe issues for much of the populations and commercial businesses. The response of the UK population is a “don’t pay” mass movement that may cause some problems for the Conservative government subsidizing of windfall profits at the general population’s expense. Prime Minister Truss’s love of energy corporations was underlined by her use of the Queen’s funeral as cover for the lifting of the prohibition on fracking in the UK.

Note: Spain and Portugal have managed to somewhat escape the EU single electricity market noose due to the lack of electricity interconnectors between the Iberian Peninsula and the rest of Europe. They have been allowed to subsidize the price of gas-based electricity generation specifically (they import their gas through a pipeline from Algeria and LNG), which removes the connection between natural gas prices and marginal electricity prices; greatly reducing the wholesale price paid to all electricity suppliers.

Note: Hungary has signed a long-term gas agreement with Russia, and got its pipeline oil supplies exempted from EU measures. For this it has been defined as “not a full democracy” by an EU laughable in its hypocrisy and threatened with the cessation of Euro billions in aid. The government of Bulgaria may soon change to one that will also negotiate a long term gas agreement with Russia. Both nations would be supplied via pipelines that go through Turkey rather than Ukraine. There is also the possibility of an election in Slovakia which would return the previous non-russophobia government. Serbia seems happy to not have joined the EU, and Turkey may now be thankful that it dodged that energy bullet.

UK Wholesale Same Day Electricity Price Graph

https://tradingeconomics.com/united-kingdom/electricity-price

EU Wholesale Electricity Price Graph (TTF)

https://tradingeconomics.com/commodity/eu-natural-gas

Manipulation of Californian Energy Markets:

https://web.archive.org/web/20100527135313/http://www.ferc.gov/industries/electric/indus-act/wec/enron/summary-findings.pdf

1. https://link.springer.com/article/10.1007/s11151-019-09682-w

2. https://www.moonofalabama.org/2022/09/putins-press-conference-on-ukraine-terrorism-fertilizer-europes-energy-crisis.html#more