Soaring gas and electricity prices in Europe is a warning to Modi’s government not to amend the law to favor “electricity traders”
The current crisis in Europe of soaring gas prices, coupled with a cold snap, shows that any part of the world transition to green energy will not be easy. It also highlights the complexity of such a transition, that energy is not just about choosing the right technology, but also has economic and geopolitical dimensions.
The European Union has compounded its green transition problem by choosing a fully market-based approach to gas pricing. As we saw earlier in Texas, such policies fail during the vagaries of the weather, pushing gas prices to levels where the poor may simply have to turn off their heat. In winter gas prices skyrocket in the European Union, as they did last year and again this year.
For India and its electricity grid, a lesson is clear. Markets do not solve the problem of energy pricing because they require planning, long-term investments and price stability. The electricity sector will face a catastrophe if it is handed over to the electricity traders as proposed. This is what the so-called separation of the wires from the electricity they carry means in the amendment proposed by the Modi government to the existing electricity law.
Let’s look at the current gas problem in Europe, in particular the European Union (EU). The EU has chosen gas as the fuel of choice for power generation as it moves away from coal and nuclear while investing heavily in wind and solar. The argument is that gas would provide the EU with a transitional fuel for its low carbon trajectory, as it produces fewer emissions than coal.
As I wrote earlier, the problem with green power is that it requires a much larger capacity addition that planners overlook. At higher latitudes, in winter, the days are shorter and therefore we have fewer hours of sunshine. This seasonal problem with solar power has worsened in Europe with weak winds this year, reducing electricity production from wind turbines.
The European Union has relied heavily on gas to achieve its short- and medium-term goals for reducing greenhouse gas emissions. It’s another question that gas is a short-term solution at best as it still emits half as much greenhouse gases as coal. Gas can be stored to meet short term and seasonal needs, and even production is easily increased from gas fields with the required pumping capacity. All of this requires advanced planning and an investment in excess capacity to meet the demands of daily or seasonal fluctuations.
Unfortunately, the EU firmly believes that markets magically solve all problems. It has entered into long-term price contracts for gas at spot and short-term prices; unlike China, India and Japan which all have long term contracts indexed to the price of oil.
Why does the price of gas affect the price of electricity in the EU? After all, natural gas only accounts for around 25 percent of the EU’s electricity production. Unfortunately for the population, not only gas but also electricity markets have been “liberalized” as part of market reforms in the EU. The network’s energy mix is determined by auctions in the energy market, during which electricity producers offer their prices and the quantity they will supply to the electricity network.
These offers are accepted, from the lowest to the highest, until the demand forecast for the next day is fully satisfied. The price of the last bidder then becomes the price of all producers. In the language of economists, this is its “marginal price” discovered through market auctions and, therefore, the “natural” price of electricity.
Currently, the marginal producer is natural gas, and that is why the price of gas also determines the price of electricity in Europe. This explains the almost 200% increase in the price of electricity in Europe last year. This year, according to the EU, “gas prices are rising globally, but more significantly in regional net importing markets like Asia and the EU. WE”.
Coupling the gas and electricity markets using the marginal price as the price of all producers means that if gas spot prices triple as they have now, electricity prices will too. No prizes for guessing who is hit hardest by such increases! Although there has been criticism of using the marginal price as the price of electricity for all providers regardless of their respective costs, neoliberal beliefs in the god of the market have reigned supreme in Europe.
Russia has long term contracts as well as short term contracts with EU countries. Putin mocked the EU’s fascination with spot and gas prices and said he was ready to supply more gas through long-term contracts. Although European Commission officials agree that Russia has honored its long-term commitments, they say Russia could do more to meet the EU’s short-term needs, which are at the root of the huge soaring gas prices.
The question here is whether or not you believe in the efficiency of markets. You cannot pretend the markets are better when spot prices are low, like in the summer, and lose that belief in the winter by asking Russia to provide more in order to “control” the market price. And if the markets are indeed the best, why not help the market by speeding up regulatory approvals for Nord Stream 2?
This brings us to the thorny issue of the EU and Russia. The Ukrainian crisis which is shaking up relations between the EU and Russia is also closely linked to gas. Pipelines from Russia via Ukraine and Poland, as well as the submarine Nord Stream 1 currently supply most of Russian gas to the EU. Russia also has additional capacity via the newly commissioned Nord Stream 2 to supply more gas to Europe.
There is no doubt that Nord Stream 2 is caught not only in regulatory issues but also in the geopolitics of gas in Europe. The United States has pressured Germany not to allow the entry into service of Nord Stream 2, including the threat of sanctions. It was practically Angela Merkel’s last major decision to resist this pressure and force the United States to back down. The Ukrainian crisis has created additional pressure on Germany to postpone Nord Stream 2, even if it means worsening its double crisis in gas and electricity prices.
The net winner in all of this is the United States, which gets a buyer for its more expensive fracking gas. Russia currently supplies around 40 percent of the EU’s gas. If that drops, the US, which supplies less than five percent of the EU’s gas, could be a big winner. The US interest in sanctioning Russian gas and not bringing Nord Stream 2 into service has as much to do with its support for Ukraine as it does with Russia not becoming too important to the EU. . This could lead to a common pan-European market and greater Eurasian consolidation.
Much like in East and Southeast Asia, the United States has a vested interest in stopping trade based on geography rather than politics. Interestingly, the gas pipelines connecting the Soviet Union to Western Europe were built during the Cold War, when geography and commerce took precedence over Cold War politics.
The United States wants to focus on NATO and the Indo-Pacific because it is focused on the oceans. NATO is, after all, the North Atlantic Treaty Organization, and of course the Indo-Pacific means the Indian and Pacific Oceans. In geographic terms, the oceans are not separate but a continuous body covering over 70 percent of the world’s surface with three main islands: Eurasia, Africa and the Americas. In this, Eurasia is by far the largest island, with over 70 percent of the world’s population. This is why the United States does not want such a consolidation.
We are going through perhaps the greatest transition our civilization has ever seen in meeting the challenge of climate change. It needs an energy transition that cannot be achieved through markets favoring immediate profits over long-term societal gains. If gas is indeed the transitional fuel, at least for Europe, it needs long-term policies for integrating its gas network with gas fields with adequate storage. And he must stop playing with his energy and our climate future for the benefit of the United States.
For India, the lessons are clear. Markets don’t work for infrastructure. Long term planning with state leadership is what we need to provide electricity to all Indians and our green transition; instead of a mystical belief in electricity markets artificially created by a few regulators framing rules favoring private producers of electricity: Ambani, Adani, Tata and Birla.
Courtesy: People’s Democracy
Views are personal