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Is There A Fair Market Price For European Energy?

Commodities / Energy Resources Jun 20, 2012 - 12:43 PM GMT

By: Andrew_McKillop


Best Financial Markets Analysis ArticleThe coming of "energy market liberalization" in Europe was a slow and cumbersome, top down process which started in the 1980s, surfing on the Neoliberal wave launched by the Thatcher-Reagan duo, but EML was not a Commission buzzword until well into the 1990s. Today it is everywhere - now called EMR or energy market regulation, that is de-regulation - and not only private consumers, but industrial users are beginning to say no because they fear a chaotic, high priced energy future.

The first avatar of the liberal wave was called EML and started around 1995, but with world energy prices at historic lows, the regular but small increases of final user energy prices generated little or no public protest, and EML was then itself swept aside by the next new thing of Commission mandarins, which was the clean energy-and-climate quest, which gathered elite support from around 2005. Looking back at the 1990s decade, consumers have one simple no frills read out: liberalization always drove up energy prices. Checking energy commodity prices in the 1990s only reinforces that quick conclusion: during the decade, oil prices rarely went higher than $25 per barrel, and hit their lowest ever inflation-adjusted price (around $10 per barrel in 1998). Yet EML, in the same decade, almost constantly raised energy prices - telling us all we need to know about it.

The real goal of EML, similar to the Enron sequence in the US was to set up a cozy profitmaking space between near-monopoly energy producing and supplier companies, all-monopoly state regulators, and Big Government tax-levying authorities. Sliced into the energy pie, the brokers and traders had a royal run for their price gouging. EML was the ideal fairy story to tell the consumer masses, on a take it or leave it basis, because there is No Alternative. It stood to reason.

The second coming of European EML/EMR is now in full flood, aiming for a "pan European energy trading space", for gas and electricity, by about 2020. Public opinion in most countries is already growling at the almost certain results of this: higher prices, less secure supplies, more frauds and scandals among the exploding numbers of new energy suppliers, distributors, brokers and traders. In some cases, in one or two member state governments, there are highly specific reasons for pushing EML/EMR, for example the UK government, heroically engaged in "saving nuclear power", by guaranteeing new build nuclear plant operators final user prices for electricity as high as $200 - $250 per 1000 kWh (equivalent in energy terms to oil at $320 - $400 per barrel).

Other countries like Germany are struggling to maintain the breakneck pace of their clean energy transition plans, which make a mockery of EML, but their ruling elites do not see things that way and are trying to prepare public opinion for "what the markets want": higher and more volatile energy prices. Other EU27 governments, notably of the PIIGS, have life-threatening things to think about, rather than letting final user energy prices spiral and divvying up the spoils with finance industry parasites - but are surely tempted by racking up energy taxes, to inflict an extra dose of austerity to their imploding economies, to cheers from the IMF.


The fantasy free market ideal runs like this: liberalization makes energy users able to decide what kind of energy they will buy and from whom.

They can for example buy some coal from South Africa, Russia or Colombia to run their car, and light their homes with municipal landfill biogas piped close to their homes - such is the playtime fantasy of Liberalism for suckers, and the paytime thrust for corporate and state profit gougers. The claim that Commission mandarins and corporate elites were working towards the free market ideal has already had some 15 years to play out in Europe and consumers know the real result.

Making the process even more laughable, more certain to fail, all decisions come from on high and are decided "from the top" - consumers can assert themselves, of course, but the end product is EML/EMR because the spin doctors say so. Today however, the stakes are higher: under conditions of ever-more-flagrant energy price and supply volatility, insecurity, whacking price rises, and threats of coming, even probable brownouts and blackouts the supposedly mindless and witless Consumer Masses of Europe are hitting back.

The key example is Germany, Europe's biggest energy market, now plunged into a strange and massive energy transition, the biggest that any country ever suffered outside wartime. Every day in Germany, today, the battle rages on between suppliers of "green" and "grey" energy. The fight is for starters political, but is also corporate, and is fully waged by the supposedly "inert" consumer masses who are scoring political goals almost daily.

The flurry of special offers and buy-it-now special prices that EML was supposed to deliver - but delivered Enron, instead - now rages in Germany, always with political trimmings. It can include competely free electricity, and electricity at close to $200 per 1000 MWh and is decided by.....nobody at all. Soon, German consumers are told, their gas supplies will go the same way. Worse than old style casino and roulette wheel capitalism, the new EML/EMR in Europe features pure stochastic chance. Confusingly called "Monte Carlo modelling", named for the casino at Monte Carlo, this method of calculating probability was coined in the 1940s by John von Neumann, Stanislaw Ulam and Nicholas Metropolis, while they were working on the Manhattan nuclear weapons project at the US Los Alamos National Laboratory.

Underlining that this forecasting method, right from the start, was not sympathetic to pinwheel and prayer market capitalism of the Neoliberal type, Stanislas Ulam is said to have originated the term - - because his uncle was an addict of the Monte Carlo casino, where he always lost his money.


Shifting from previous system of relative probability, where the energy supply surely existed and its price was relatively predictable, to just about the opposite, the Monte Carlo method now rules the energy space in Europe. It applies with all its atomic bombmaking potential to what is coming for energy users. The Monte Carlo method, we can note, was developed because previously understood deterministic problems with an unambiguous result were no longer present or relevant - the bombmaking scientists had entered the quantum era, the Era of Uncertainy.

A completely new method of forecasting probability was needed. Flirting with uncertainty on supplies, but with an almost totally certainty that prices will rise, every year, UK power consumers are lauded by European Commission mandarins as being the most EML-friendly consumer sheep in Europe: the ones who change from abattoir to abattoir the most readily !

Compared to the UK, or even newcomers to EML/EMR like the ex-Warsaw Pact eastern countries of the EU27, and the PIIGS, Germany lags woefully behind.

Only 28 percent of Germans have changed their electricity supplier since 1998, and a shamefully small 18 percent have changed their gas suppliers, but in the UK, despite its fantastic public debt, rising unemployment, massive trade deficit and very high average energy prices - unlike fuddy duddy Germany - some 61 percent of domestic electricity and 58 percent of gas customers have moved supplier at least once, according to the UK Department of Energy and Climate Change. Details like how much these consumers pay - they pay more in the UK, Ireland and east European countries, than in Germany - are not media friendly, so usually fall off the advertising for Monte Carlo energy. Commission mandarins trumpet that Germany, under Mrkel, is doing all it can to shake the dice and get the sheep moving: as of early 2012 Germany had a theoretical 1055 suppliers of electricity. But how many power producers are upstream of these distributors, who "add value" to electricity, by delivering it along cables and wires that in most EU27 countries are 50 - 100 years old ?

Germany has a larger number of producers than most, that is four-only electric power producers accounting for nearly 80 percent of all electricity supply. These producers (E.On, RWE, EnBW, Vattenfall) are to be sure 'historic', and are heavily integrated with German society and politics, as well as the economy, but the bad news for casino capitalists is that about 10 percent of German electricity is produced by municipal utilities (the Stadtwerke). These 'fossil remains' of the early postwar period, originally not-for-profit municipal entities servicing urban needs, are today reappearing and growing. Along with the other 10 percent suppliers, who are mainly renewable energy providers, the German upstream power production picture is not EML/EMR friendly.

The political line of enraged German energy consumers is that sheep want liberalization in their choice of refusing all the on-line abattoirs. Adding the threats of EML/EMR to the strange monster of energy transition, and the European economy falling apart - with the Germans supposedly having to pay for it - has created a dangerous cocktail of the Molotov type for the Merkel government.


Highly predictably, the Merkel government forced through new regulations to give the EML process a push forward. Maintaining the obligatory Neolib mix of pomposity and hypocrisy, this new surge for EML/EMR is claimed by the Merkel government as giving consumers a better and truer picture of their energy use, to inform them of their choices, with totally transparent information requirements, like monthly bills that clearly say how much energy they used and who they can call in the supplier company to talk with about the bill. Since the May 31, 2011 surprise announcement of Angela Merkel that Germany will totally abandon nuclear power by Jan 1, 2022, all the 'historic suppliers' have suffered heavy mauling by public opinion, investors, and politicians. Most have suffered internal palace revolutions and among them, their CEOs have been sacked or relegated to lower status. Foreign-owned (Swedish-owned) Vattenfall, which is dominant in northern Germany and Berlin, paid a particularly high price. The reason was nuclear: Vattenfall is the operator and part owner of nuclear facilities in Brokdorf, Brunsbüttel, and Krümmel, which are favoured sites of regular and massive anti-nuclear energy demonstrations. Little or nothing to do with tariffs and supposed "value added services" from newcomer suppliers, at least 30,000 Vattenfall customers quit, and moved to its rivals including Lichtblick, Greenpeace Energy, Naturstrom, Hamburg Energie, and Lekker Strom: in fact any supplier that had either little or no nuclear-generated energy in their so-called 'portfolios'.

The fake promise of EML/EMR - it will deliver cheaper energy - has been around for decades, in all EU27 states including Germany, making it totally unsurprising that German power consumers are so unwilling to change supplier. Surveys made by German consumer organizations and government agencies underline the greatest fear of users is being cheated by "disingenuous energy suppliers".

Probably 35 - 40 percent of people have not changed their supplier because, like their European counterpart consumers, they can click through the Internet sites of so-called discount suppliers and see what the future offers: suppliers usually with no power production capacities, who usually hide price-gouging hikes in their supply offer, after the honeymoon period, or simply go into receivership with all the consumers' cash they can grab. The roulette wheel turns.

Surprising to admirers of the Neoliberal no alternative, Germany's local and municipal public utilities, the Stadtwerke, are still standing and even thriving - which also bodes ill for the Neolib power grab. In the 1990s, cities that traditionally owned Stadtwerke started selling them to the Big Four, but the trend has now reversed and municipalities are buying back shares in the utilities. Since 2007, 44 new local public utilities have been set up and more than 100 private concession contracts for energy distribution networks and service delivery have been taken back into public hands. Some have gone that extra mile to satisfy the basically political motivation which makes German consumers reject EML/EMR and dangerous energy - by divesting from nuclear power and developing green energy supply packages.


The biggest irony possible is therefore playing out in Germany, today. Not stealthy, but open re-nationalization at city and state (Lander) level is taking place because a mix of Neoliberal sloganizing and an almost panic-driven urge to develop renewable energy To Save the Planet have so shaken up public certainty and confidence in energy supplies. People want certainty for their energy supplies, not roulette wheel special offers.

Von Neuman and his colleagues, back in the Los Alamos days watched their renowned chief Enrico Fermi throw away the rule book, and throw piles of mikado-type sticks on the ground, to get insights on modelling quantum energy outcomes. It was the end of thermodynamic certainty.

For Germany's Energiewende, aiming at 35% renewable energy in the power generating mix by about 2020 the role of thermodynamics in the size and structure of heat-and-power supplies, from all sources of energy, makes the city-scale choice the best. Back up power for intermittent renewable supplies can more easily use the previously waste heat from previously remote fossil fuel power plants, as power and energy systems are better sized and related to user needs. How this process plays out will be critical to the European energy transition plan, called the "climate-energy package", which itself is stacking the dice, or the mikado sticks against the old style Neoliberal casino model of society and the economy.

Municipal sized and scaled energy supply systems, or "local area energy networks" that are outside the trader gambling purview, are already accompanied by industrial corporate energy development, by major industrial producers in Germany. All major carmakers and heavy industrial companies and "konzerns" or business groups now have their own corporate energy plans. These often target the production of 75% or more of corporate electric power needs within 10-15 years, and large reductions in corporate power needs - without a single spin of the roulette wheel, and because of the fear of unpredictable and high power prices, and possible supply interruptions.

Breaking up, or breaking down the hoped-for "pan European energy trading space", which itself is technologically impossible, is therefore under way in Germany. Several strands are surprising, at least to some: the re-nationalization of energy. The breakaway from the neoliberal No Alternative is clear and is now set to accelerate. *****

By Andrew McKillop


Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Co-author 'The Doomsday Machine', Palgrave Macmillan USA, 2012

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

© 2012 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

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