While European governments are running around like headless chickens in an attempt to lower energy prices, in an attempt to avoid uproar when winter kicks in, let us shed some light.
Gas prices are determined by international market mechanisms. The price follows the demand, and it is even so influenced by
futures, availability of distribution channels, transportation means, and conversion facilities.
Capping the gas price on the international trading platforms can only result in worldwide chaos. The net result will be a supply problem in Europe, even if local gas reserves are fully accomplished before winter. It is easy to compute that they are insufficient.
Capping the gas price on a national scale can only be done by pouring in tax money, so this would establish yet another
non-transparant compensation mechanism, with inherent perverse effects all over.
Increasing the availability of gas distribution channels, transportation means, and conversion facilities is a huge effort, both in time and money. It is by no means a short term solution.
On the short term, only a regularisation of the international turmoil can reduce the gas price. So this is the primary goal of international diplomacy. Nations providing gas will not be inclined to take the lead, however short-sighted this may be in the end.
So this brings us to the electricity prices. In contrast to the gas price, the solution is really easy.
As explained in a previous blog, the European electricity price is de facto determined by the gas price, as the electricity
price is equal to the marginal cost of the last kWh produced. In practice, this proves to be a kWh produced by a gas fired plant.
If a producer owns both gas fired plants, which produce at extremely high marginal cost, and wind parks, which produce at an extremely low marginal cost, the producer will be tempted to fire gas plants while shutting down wind turbines, officially to not destabilise the power grid, but in reality to optimise its total profit. Remember that the contribution of wind parks to the total electricity production is both
marginal and intermittent.
In the mean time, solar farms and nuclear plants producing at a very low cost too, generate a huge margin. It is very convenient for the owner that solar farms and nuclear plants cannot be regulated down: you CANNOT shut down the sun, and you SHOULD not moderate the Belgian nuclear plants from a safety point of view. Or to avoid generating unnecessary nuclear waste, for that matter.
While the government cannot “determine” or “cap” the gas price, the only action the European government should take is:
1) set up a new pricing mechanism for electricity based on the real production cost of each production unit. These costs are very well monitored by the owners of the production facilities, in spite of what they may claim.
2) allow a fair profit margin for each production type, taking into account the estimated needs for future investments, including the solution of any legacy problems.
3) make a decision of which future investments are relevant for each type of production.
4) set up a priority mechanism to start and stop production units based on a constrained optimisation algorithm: minimise the electricity production cost within the constraints of pollution limits and safety requirements. Today these decisions are taken by the producers with the sole purpose to optimise their private profits.
5) make sure the system is scalable to meet future needs. Take into account that fossil fuels will need to be banned from the energy mix as soon as possible. Study and evaluate all systems for CO2-neutral synthetic fuel production.
This requires no construction sites or licensing efforts, not even a review of the energy tax mechanisms.