How can we discuss the energy crisis when journalists are so ignorant?
It is a bit frustrating to write about energy when the complexity of the markets is so easily misunderstood. You’d expect papers like the Financial Times to have a better grasp of what they write about, but sadly this is not always the case…
For instance, in today’s article, EU to unveil emergency measures to curb soaring energy prices, they have this paragraph:
Brussels has been wary of ripping up the current market pricing system, given that it provides the basis for future investments in renewables and other power infrastructure.
How can they write this? The current market pricing system, based on spot prices, hinders investments in renewables, and investment has only been possible because workarounds have been put in place, like feed-in-tariffs in the past, and contracts for differences more recently. These regulatory regimes allow renewables, which have high fixed costs (linked to high upfront investments) but low marginal costs, find a price regime based on stable long term prices rather than volatile short term spot prices that can bring them to their knees in periods of low short term prices, even if their average long term price is competitive. These solutions are partly outside the “normal” market and are regularly criticized as providing “subsidies” to renewables even though they generate rather low long term prices (like <40 GBP/MWh for offshore wind in the UK), so it is absurd to say that “the current market provides the basis for investment”.
And these mechanisms, which offer fixed prices to producers, also offer fixed price to consumers, which provides a natural hedge against the current high prices in the wholesale market: the buyer of all that cheap electricity (either the local utility, a grid-related entity or a public body) can more easily maintain cheaper regulated retail prices if it has access to fixed price electricity.
So:
it is the exceptions to the current market pricing system that allow investment in renewables
these exceptions are also providing a natural solution to high energy prices by ensuring that renewables are sold at a low price
The high power prices are necessary to ensure the short term balance of the system in the face of a serious supply shock (less gas from Russia, and less nuclear power from France), by triggering new supply (coal, LNG imports, etc) and demand destruction. Any solution that prevents high wholesale prices will lead to distortions in the market and will not solve the physical imbalance. but high wholesale prices need not translate into high retail prices if consumers can benefit from the low cost of production of renewables under long term contracts.
All energy sector is very political. The question remains - will the surplus from CfDs for RES will be enough to sensibly lower the energy cost to more then a relatively small group of retail consumers. Although - it is a temporary solution anyhow, as larger volumes of renewables will lower the price anyhow. The key is then - how to encourage more investment in RES through right policies.
What about prices of electricity paid by industry? Shall they by compensated the same way as consumers? Their consumption is even bigger then consumers’ and they also need lower prices to stay competitive…