August 28, 2022
The six months old war in Ukraine is pitched as Democratic vs Autocratic. In fact, it is a competition of free-market capitalism and socialism with planned economy. There is no end insight for the Ukraine war yet, but the way EU members struggling with energy crisis is absolutely betraying the free-market capitalism principle. The call of Government imposed price cap on “madness’ of runway electric power prices must be the last resort for those EU politicians. But there is no guarantee that this risky/rushed policy change will work after all. Obviously, UK has tried and suffered. It is risky also because once the power price is capped, what price of another commodity might be the next to be capped? Especially, the war in Ukraine could last for years so European economy will keep suffering, should food price be capped?
The idea of decoupling electric power price from natural gas price is dangerous. Because it amounts to dismantle energy market system via political actions. Have these politicians thought about how difficult would it be to rebuild a free market system? The serious downside risk is that government-controlled energy market is the beginning for socialism. May be that will be the end of the current major power competition! May everyone live happily forever in utopian society!
EU politicians do not seem to realize that all these hardships were caused by their ill-conceived sanctions against Russian energy after the war in Ukraine started on February 24, 2022. The worst case were any social unrest in this winter, it will be very difficult for any democratically elected government to stay in power!
Austria backs EU cap to end ‘madness’ of runaway power prices
Sun, August 28, 2022 at 9:12 AM
VIENNA (Reuters) – Austrian Chancellor Karl Nehammer backs a European Union-wide cap on runaway electricity prices, he said in a statement issued by his office on Sunday.
Austria’s conservative-led government was initially sceptical at the idea of capping power prices but it has warmed to the idea as they have continued to rise in line with soaring gas prices following Russia’s invasion of Ukraine.
“We must finally stop the madness that is taking place in energy markets. And that can only happen through a European solution,” the statement quoted Nehammer as saying, adding that he would seek to convince holdouts in the bloc.
“Something has to happen at last. This market will not regulate itself in its current form. I call on all the EU 27 (member states) to stand together to stop this price explosion immediately.”
The market price for electricity must come back down and must be decoupled from gas to bring it closer to actual production costs, Nehammer said.
“We cannot let (Russian President Vladimir) Putin determine the European electricity price every day,” he added.
The Czech Republic, which holds the rotating EU presidency, will propose an extraordinary meeting of the EU Energy Council as soon as possible to deal with soaring energy prices, Czech government officials said on Friday as they seek to build European support for energy price caps.
German Finance Chief Sounds Alarm on Soaring Power Prices
Iain Rogers Sun, August 28, 2022 at 4:01 AM
German Finance Minister Christian Lindner said the government needs to address soaring power prices “with the utmost urgency,” as a leading economist warned of a “gigantic shock” looming for Europe’s biggest economy.
In an interview with Bild am Sonntag newspaper, Lindner said swift action is required or “inflation will be increasingly driven by an electricity crisis.” The power market should be overhauled so that prices are no longer coupled to ever-more expensive gas, generating billions of euros in profits for operators of wind, solar and coal facilities “at the expense of consumers,” he added.
Amid warnings of blackouts and social unrest this winter, Europe’s politicians have earmarked about 280 billion euros ($279 billion) to ease the pain for businesses and households, but the aid risks being dwarfed by the scale of the emergency.
According to a “conservative” estimate by the Dusseldorf-based institute, companies, households and the state will have to shoulder an extra burden of more than 200 billion euros next year, or about 5% of gross domestic product, Dullien said Friday in a series of tweets.
Surging power prices are the result of a “market failure,” Czech Prime Minister Petr Fiala said, and called for an EU-wide measure to cap them. He is seeking backing for the idea among other member states and plans to discuss possible price limits with Scholz at talks in Prague on Monday.
If a European solution cannot be agreed in the short term, “a suspension of electricity trading and temporary price regulation by the state” should be considered, Weil, who is running for re-election in October, said in an emailed statement.
In the longer term, German Economy Minister Robert Habeck wants to overhaul the power market to decouple the price customers pay from gas prices, Handelsblatt newspaper reported Friday, citing a ministry spokeswoman.
The UK Price Cap Has Plunged Millions Into Energy Poverty
Editor OilPrice.com Sun, August 28, 2022 at 2:00 PM
On Friday 26th August, energy regulator Ofgem announced the new price cap for household energy bills will be £3,549 per year. The cap indicates the maximum amount that suppliers are able to charge their customers per unit of gas and electricity used, as well as setting a cost for the daily standing charge, and will come into effect on October 1st. The price cap currently stands at £1,971 per year, based on typical use for the average household, which is already a 54% increase on the £1,277 per year that was in place between October 2021 and March 2022.
Boom or Bust
Before diving into the present situation, it is worth glancing back at the winter of 2021/22, during which it seemed like there was a small energy supplier collapsing every week. The most notable of these collapses was Bulb, a company that provided over 1.5 million customers with their gas and electricity before ceasing to trade in late 2021 and entering into special administration on November 24th of the same year; a state of uncertainty in which it remains to this day.
A key reason behind the fall of so many small energy companies was Ofgem’s price cap. The mechanism, introduced by Theresa May’s government in 2019, was intended to prevent consumers who stayed loyal to their energy providers from having to pay higher energy tariffs than those who frequently changed providers to secure more favorable deals. While this seems an arguably admirable attempt to eliminate the profiteering of energy companies at the expense of the average consumer, the unintended consequences of introducing the price cap are now reverberating around the market louder than ever.
The price gap changed the landscape of the energy market in the UK because it gave a significant advantage to those companies with sufficiently deep pockets to hedge, or forward-buy, wholesale energy. The giants of the industry, such as Centrica-owned British Gas or Eon, were therefore at a significant advantage to those smaller players who would purchase their wholesale energy on shorter-term contracts. When Natural Gas prices started to rise and push the cost of wholesale energy above the price cap last winter, those companies who were buying at those high prices were therefore unable to pass on their costs to their customers, leading to the wave of suppliers collapsing last year.
Time to Reconsider the Cap?
Friday’s price cap announcement will make for bleak news for households and it is unfortunately a situation that is only likely to worsen. The new cap that will take effect on October 1st is only fixed until the end of the year, and another announcement will be made on November 24th regarding the limit for the period January 1st to March 31st, 2023. Predictions made by analytics firm Cornwall Insights previously suggest that the new year could bring a further raise of 31%, bringing the annual total up to the region of £4,500 per year for an average household. However, to coincide with the actual cap rise on the morning of Friday 26th August, Cornwall Insights have updated their forecast price cap for Q1 2023 to an eye-watering £5,386 per year.
It is clear that whatever the reality of the increased bills that households will face for their gas and electricity, some kind of change is needed to the domestic energy market. Cornwall Insights, when commenting on Friday’s rise, stated that the cap was “never meant to be a permanent solution” and called for a review of all “viable alternatives” that could be implemented in its place.
Ultimately, any suggestions for long-term solutions to protect low-income households from crippling energy bills in an increasingly volatile world for oil and gas prices do not solve the immediate issue. Action to address the crisis from the government is yet to appear in a genuinely meaningful form, and though this may change following the confirmation of the UK’s new Prime Minister on September 5th, many are understandably calling for a faster response.