Since the annual State of the European Union speech (I recommend you watch it in its entirety, it was about even more powerful and important issues than energy), many people have been waiting with bated breath to find out exactly what will happen to our electricity and gas bills in the winter.

To clarify from the beginning (I’ll explain more technical issues below so everyone understands), from this speech I totally agree:

• seeks to decouple the gas price from the artificial spot price on the Dutch TTF exchange
• we will avoid replacing dependence on one autocratic regime (Putin’s Russia) with dependence on another autocratic regime (China) in critical areas such as energy, and concrete steps are being taken to do so
• we have massively reduced the import of Russian gas from 40 to 9% and will not return to the way it was
• we need to be careful this winter and tighten our belts where there is a risk, such as reducing electricity consumption during “peak” periods (translation: when more electricity generated from gas is consumed)
• Short-term solutions (how we deal with a possible winter crisis) must be separated from long-term measures (how we organize energy markets so as not to jeopardize the transition to 2050).

AND I do not agree with:

• we need to change the electricity market model from the “marginal price” model.
• excessive taxation (unless it is temporary) of companies in the oil, gas, coal or renewable industries.

In order to understand what was said today, it is necessary to explain a little context.

I. High energy prices

In recent months, the price of energy carriers (gas, electricity) in Europe has increased significantly, reaching a level that is 10 times higher than the prices of 2019 or 2020.

1. Gas market. In the EU, there is still no “European market” for gas, a common place where any seller can meet any buyer. I cannot buy liquefied gas from Romania that enters the EU via Spain. The market consists of agreements between buyers and sellers depending on how the gas can be transported. Contracts come in many types, from short-term to very long-term. As a rule, the two partners agree on some “unbiased” price provisions, so many contracts have the EU trading platform (the Dutch stock exchange TTF) as a price reference. However, very small volumes are traded on this exchange compared to all European consumption, a few percent. The fact that almost all gas transactions in Europe are recorded at this price means that if an unexpected event occurs that pushes prices up or down just as dramatically, all gas in the EU is sold and bought at volatile prices. That is why it is really necessary to think about some price benchmarks that can be used by contractual partners, which relate to how much gas is available and how much gas is demanded in the European market as a whole, and which are not affected by exceptional events that affect prices in one scholarship.

In recent months, Gazprom has been actively manipulating prices on this TTF exchange. In short, any announcement of a supply cut, anywhere, led to a sharp rise in prices due to the momentary panic of the participants in this exchange (what if the Russians also cut off gas to others?). But if I am a European manufacturer and have a contract with a European buyer, and we have agreed among ourselves that the price is “the same as from TTF”, the price between us rises for the simple reason that somewhere someone is panicking so as not to cut off the gas to the Russians, although the gas our contract has nothing to do with what the Russians are doing!

2. Electricity market. I won’t go into microeconomics here (for those interested, I explained it in more detail here), but the “marginal price model” or “order of merit” means that the price of electricity is determined by the most expensive producer who finds a buyer. There is nothing special about it, this is how absolutely every liberalized market works. In theory, this means nothing more than that producers who manage to produce more cheaply/more efficiently get higher profits, just as buyers who are willing to pay a lot for a certain product benefit if they find it cheaper on the counter. Back to the electricity market, the problem we have today is that there is a demand for energy, buyers are willing to pay almost anything to avoid running out, but the last producers to enter the market, the most expensive or inefficient, are precisely those that produced on coal and gas. The solution to this problem, which the market itself shows us, consists in an urgent increase in the capacity of all producers with lower costs: renewable, hydro, nuclear.

Very important: The reason why we have achieved high electricity prices is because until now investments in gas-fired power plants were massively encouraged. Let’s remember “gas is a transition fuel”. Recall that Germany, for example, closed its nuclear power plant, investing in gas plants to offset nuclear power until a future full transition to renewable energy sources. In other EU countries, they invested in gas power to compensate for the intermittency of renewable energy (if it is not raining, windy, or sunny); Gas investments were even encouraged and are encouraged – we are given money from the Modernization Fund to build some more gas plants. The fundamental problem is that gas has been “too cheap” until now, which is why we have become so dependent on it. We were on infusions from Gazprom and we liked it. Gas plants are indeed a solution if they are not too expensive to produce electricity, and this is a reality that is changing right before our eyes. We will never have “cheap gas from Gazprom” again. From now on, we will have cheaper gas than today, but more expensive than in 2019-2020. It will not be 10 times more expensive than in 2019-2020, as it is now, but, let’s say, 2 times more expensive when we buy more liquefied gas on the world market.

To summarize: the price of gas in the EU has artificially increased due to Gazprom’s manipulation of the TTF exchange and the fact that even those who do not trade there rely on artificial price fixing; and the price of electricity exploded, not because “the market model is wrong”, but because artificially, through administrative decisions, because of “it’s okay, the Russians give us cheap gas”, we increased our dependence on gas for electricity generation, and now we pay for the consequences.

II. What was actually talked about in the EU

Seeing our ditamai problem, everyone is now frantically trying to find solutions at high prices. However, it is important to clearly separate the discussion between what we do now, in time, in the coming months, and how we organize ourselves in the long term. The separation is important because in the long term we need quick investment in alternative energy sources (gas from other sources, electricity from something other than gas) but that won’t keep us warm in the winter. So, for now, we need a solution to quell the real hysteria in the TTF stock market and at the same time not run out of gas. But we need to make sure that solving the crisis now doesn’t lead to a longer crisis – so that we don’t discourage investment in alternative energy beyond this winter.

Although everyone wants to solve the “price problem”, there is no moderate discussion. Simply put, last week’s meeting of energy ministers broadly discussed “gas price ceilings” and “changing the electricity market model.” Now there is no surer way to achieve generalized cacophony than to discuss in terms that everyone understands differently.

For example, what does “gas price ceiling” mean?

One thing is clear, that Russian gas, let’s not buy gas from Russians from now on, except at the maximum price set at the European level – this does not solve the problem, for this winter we are not talking about new contracts.

Another understood that we should no longer buy imported gas except at the price set by the EU. Not from Norway, not from the US, not from Qatar – which was impossible, because the US, Norway or Qatar will not sell you gas at a capped price here, as long as they can sell it at a higher price elsewhere.

Another understood that the Commission would buy gas at whatever price it found and then pay the difference up to the maximum amount that the end user would pay. What a complete absurdity: tomorrow “Gazprom” will estimate you at 17,000, and the Commission has to pay the difference from European taxpayers’ money up to 1,000, 500 or whatever, that is, to directly finance the war in Ukraine!

But on electricity?

One realized that it is necessary to create two markets, one “electricity on gas”, the other “electricity on something else”, let’s make a mix – the way it was with us, when we regulated the price of gas and gave Nikolay cheap gas. .

Another understood that we should tax renewables to give money to consumers to continue buying expensive gas-fired electricity – and we also saw at home what a “temporary overtaxation” meant, without exception, turned into a permanent overtaxation.

And so on.

When you hear that “consensus has not been reached”, it is because everyone understands the same words differently and it is a dialogue of the deaf.

It wouldn’t be a drama if we didn’t reach an agreement, because in reality we live much better than we think: unlike last year at this time, we have diversified gas sources, almost full storage, better interconnections, more consumption is diversified. If it had been cold last winter, we would have had no energy; this year (in the EU) this risk no longer exists. The only serious risk is not to take hasty and panicked measures that will destroy the energy market in the long term, jeopardizing the EU’s energy security and the transition to “net zero in 2050”. Read the full article and comment Contributors. .ro