The European Commission is fighting to lower the price of energy for Europeans in the face of a complicated winter, further intervening in an already over-intervened energy market.
Enemies of the free market consider the “emergency intervention” backed by the Commission in the European energy market as a triumph of social democracy over a liberalism that leaves the economy in the hands of private actors –producers and consumers. Both agree on the price of a good or service, a price that is accepted by the producer because it leaves them a profit margin, and by the consumer because they see the payment as fair for the good they receive.
This “emergency intervention” in Europe would have been a triumph for the State if energy were a free market throughout the Union. But it is far from it. In fact, one might conclude that, from the qualification “emergency” that the president of the Commission, Ursula von der Leyen, used to describe the measures approved this week, they were in fact necessary because the “normal intervention” of the market -which regulates each of the EU countries –has not worked.
A heavily regulated market
“The European electricity market is probably the most intervened in the world. Between 70 and 75% of the electricity tariff in most European countries are regulated costs, subsidies and taxes set by governments and, in the remaining part, the so-called “liberalized” generation, the cost of CO2 allowances has skyrocketed due to those same governments that limit supply of permits and the energy mix is imposed by political decisions,” per economist Daniel Lacalle.
If the electricity market were a free market, you would only pay electricity consumption and some tax on the services you see on your bill. For example, infrastructures must be conserved and it’s only logical that part of this conservation be paid for with public money accounted for in the form of a tax, just like we’ve come to terms with the ever-present VAT. But upon analyzing a €100 electricity bill, we see that only €24 correspond to the cost of production and marketing of the electricity that you’ve consumed, while €22 go toward paying taxes and €54 are used for so-called “regulated costs,” which, as its name suggests, have nothing to do with the market. Among these regulated costs, you’ll find public incentives for renewable energies and cogeneration.
A market cannot be designated “free” if governments decide how the energy that is sold has to be produced – toughening the conditions or directly prohibiting sources such as coal and nuclear energy – and encouraging others with public money – such as renewables. –, or where the pricing system is not directly established. On the contrary, a system with these characteristics is regulated based on generation, where the price per megawatt/hour is set by the most expensive energy –gas, necessary in combined-cycle power plants– while other cheaper sources (hydroelectric, wind, solar and nuclear) can’t sell at lower prices.
Hence the so-called “profits from heaven” that non-gas companies receive and that the Commission now wants to tax: as regulations force them to sell much more expensively than it costs them to produce, their profit margins are considerably increased without incurring added costs.
“It is surprising to read that Europe’s power markets are ‘free markets,’ when governments impose the technologies within the energy mix, monopolize and limit licenses, prohibit investment in some technologies or close others, as well as forcing a rising cost of CO2 permits limiting their supply,” Lacalle adds.
The interventionist system has more or less worked, but the war in Ukraine and Putin’s blackmail have broken the system
Time for deep reforms
This regulation leads to tremendous paradoxes. For example, in these months of war, Spain is buying gas from the United States that is produced there using fracking – pressurized water injections that fracture the rocks in the subsoil to extract hydrocarbons – a method that is expressly prohibited in Spain.
Apart from the fact that with another more efficient model consumers could enjoy lower rates, this interventionist system has worked more or less when conditions have been “normal.” But the war in Ukraine and Putin’s blackmail with gas supply – Russia was, until now, the main supplier of the raw material – and oil have broken the system, and the Member States and Brussels have had to re-intervene in a market that was already sufficiently intervened.
But the problem stems from earlier. As the French newspaper Le Monde put it, “this energy crisis is the painful indicator of a system that could have certain virtues in times of peace, but that has become obsolete today by undermining the interests of Europeans themselves. Much more concerned about the liberalization of its internal market than about sovereignty challenges, the EU finds itself trapped in mechanisms designed within a political framework that today shows its limitations.”
As I said before, one of the measures that the EU will adopt to fight price escalation is to tax renewable and nuclear energies for the “extraordinary benefits” they offer by having to sell the electricity they produce at the highest price set by gas. But these benefits come precisely because regulation prevents them from selling at the price they’re produced at.
It is obvious that, as Le Monde adds, “energy must be defined as a common good protected from short-term artificial competition” that would be detrimental to citizens. The energy market is very complicated and needs certain regulation, but the fact that an intervention is now necessary to avoid unbridled price hikes is not the the free market’s fault, but rather interventionism gone wrong. When this crisis passes and we see its consequences, it’ll be time to consider a radical reform that takes into account business efficiency, consumer welfare and the sustainability of the planet.
Translated from Spanish by Lucia K. Maher