N°18 novembre 2021 The sharp rise of natural gas and electricity market prices has and will have serious consequences on consumers' bills.
A delicate situation for a French government during an election campaign. Like its predecessors the government swears only by the market and privatization and it is responsible for the situation as it is indeed the heir to the long tradition of French governments. Governments which rely on Capital and its market to replace in an "efficient" way the public services organized around large institutions or nationalized companies. Today, the world of work is footing the bill. The liberalization of the energy sector at European level and the privatizations have only resulted in the degradation of the right to energy. It costs the Nation dearly. Since EDF was converted into a public limited company in 2004, 64 billion euros in dividends have been paid by EDF and Engie. Decisions to increase the Regulated Electricity Sale Tariff (TRV) result directly from the policy of opening the electricity market to competition and from the NOME law (New Organization of the Electricity Market) of 2010, organizing this market by making a quarter of EDF's nuclear production available to "alternative suppliers" by ARENH (Regulated Access to Historic Nuclear Electricity). Decisions to increase the Regulated Sales Tariff, such as the 10% increase, are only intended to artificially maintain the profitability and survival of "alternative suppliers". Prime Minister Castex today says he is disappointed with the market: empty rhetoric to avoid taking political responsibility for the situation! But what are these market laws?
Although sophisticated mathematical models describe their operations the laws of the market are are stunningly simple: the more prices fall, the more demand increases, but the more prices fall, the more the supply falls and the more the supply falls the more prices rise.
This basic scheme does not work with such flexibility for all goods. Indeed, if a good is needed, such as gas or electricity, an increase in supply prices will have little depressing effect on demand because consumers need heat in winter and light after dark. This is why certain basic necessities have long been taken out of the market by, for example, carrying out the almost total nationalization of the energy sector after WWII and the Liberation. This was before the balance of power enabled Capital to also invest in these fields of activity, in particular by remotely controlling and organizing the destruction of public services by states through European directives that they jointly write and apply. While the French finance minister denounces the market manipulation of the Russians who have not delivered the gas in order to drive up prices, the head of Total quietly explains that the market is functioning properly. The Minister develops a rather funny conspiracy theory for even if it were so, why hadn't the Russians thought about it sooner? In panic, he calls for an emergency European meeting because he believes, unlike the head of Total, that the single European market model for energy (in fact gas and electricity) is obsolete. But anyone familiar with the specifics of the gas and electricity supply chain had already understood that the old modes of operation were more reliable to ensure the sustainability and efficiency of these chains.
Gas and electricity: how does it work?
In about twenty years there has been a complete transformation in the functioning of the gas and electricity sector without those directly affected – the great mass of consumers, being aware of it and having been consulted.
Concerning gas, before the opening of the energy market and the privatization of GdF, there was an import monopoly (GdF) which negotiated quantities and prices with producers (Dutch, Russian, Norwegian, Algerian). Its negotiating power was strong because it was proportional to the quantities requested. This system was not specific to France in Europe. As the bilateral contracts covered all the needs and as gas is storable, it was not necessary to organize a market. These contracts were signed for 20 to 30 years with indexation formulas on competing gas products, ie fuel oils. Liberalization has led GdF to retrocede part of the long-term contracts to competitors and the gas operators to resort to calls on gas markets which had been organized (in the Netherlands in particular). Today, the price of gas depends almost exclusively on the balance of supply and demand. The current new system therefore introduces a risk on the price of gas (see news) in addition to a risk on the quantities whereas in the old system, only a major technical or political incident (for example Ukraine had captured gas intended for other buyers in the 2000s) could interrupt the supply, the price risk being covered by long-term contracts. Consequently, establishing a price risk, implies that exceptional gains are also achievable. These gains will be made by gas producers but also by market intermediaries.
For electricity the pattern is different since it is produced locally on the one hand, and electricity is not storable on the other hand. At all times, production must equal consumption. For electricity – and this is of major importance – what makes the price is not supply / demand trade-offs, since the demand varies little in relation to the price (electricity is an essential good), but what is called the "supply curve".
Let's take an example: imagine that the demand for the day is 10 billion KWh (10 TWh). Producers offer 12 TWh but each at a different price which reflects their costs, including margins. The “market price” will be the highest price for the KWh selected. For this reason, while France produces very little electricity from fuels, through the European market it is charged a price that corresponds to that of gas production in Germany (or coal in Poland). It was therefore foreseeable that the mixing in a single market of dissimilar electrical systems would create disruption. France, which has one of the least expensive production systems because nuclear electricity is unrivaled (except for wind turbines... but they are subsidized), had no interest in this market. The others countries even less, because without French nuclear power market prices would be even higher (because in the absence of nuclear power, the oldest coal or fuel power stations more expensive and more CO2 emitting would have to be started). Under EDF’s national monopoly, selling prices reflected the cost of supplying electricity, not an accounting cost, but a cost that included future developments of the generation fleet planned by EDF.
From a Capital perspective, the current situation is not particularly worrying. Rising energy prices are even good business for operators. For campaigning politicians, this crisis is a bit embarrassing but their proposals are nothing but hot air. While Castex claims he wants to build a "shield" against the price increases, in fact he is only postponing them until later thus avoiding too heavy a telescoping with the presidential election and he does not call into question either the privatizations or the single energy market!
For the world of work, it is another matter: the bills go up and as a tax payer it pays through direct and indirect taxes the aids taken from the State budget. The only demand cannot be an increase in the energy voucher but the disappearance of the gas and electricity market, which after all is a very recent creation.
To put an end to speculation on electricity and gas, these essential and vital goods, the battle must be waged to demand the abandonment of the European gas and electricity market and, in the immediate future, to fight and get a price freeze, go back on privatizations. This implies regaining full control of the Nation over strategic choices, including nuclear power, over the energy sector by the complete nationalization of the entire sector which goes from research and development to production and distribution.