Análisis Once again the price of energy

01/02/2017

As it happened last year, December and January have been bad months for the price of electricity. So bad that, as it also happened last year, a climate of social unrest has been fostered, in part, accompanied by the usual doses of political demagogy. And so much social unrest that, as it also happened last year, regulatory modifications have been noted “in the heat of the moment” so that allegedly this does not happen again. Nevertheless, in fact, nobody can claim that we hadn’t been warned.

When we discuss the price of electricity, it has to be clear what we are talking about. We can talk about the price shaped in the wholesale market and the price paid by the consumer in the “energy bill”.

Let’s start with the first one. The wholesale market is the meeting ground between generators and marketers, where the electrical power is bought and sold hour by hour and it must give the real price signals; it’s necessary for the safety and the economy, it must point out the scarcity, it must be homogeneous with those of other countries, and it also responds to a mandatory European standard (in fact, even the matching algorithms and the IT software are European).

And it must really be like this. The only way for the system to be really efficient is to reflect the actual cost of generating and consuming electrical power at all times. Thereby, the right signals which contribute to optimize the system and to an efficient allocation of the resources.

The reason for the high prices of the wholesale market seen in the last weeks must be looked for in a series of matching circumstances and in the very nature of the product.

Electricity is difficult and expensive to store, and it must be generated at the same time it is consumed. Furthermore, we need different power generating technologies (nuclear, thermal, hydropower, wind, gas…) and every technology has its own characteristics and costs that affect the final price. Same levels of generation might have very different costs depending on the used mix. That’s why the generating cost may change from one time to another.

Furthermore, the generation structure depends on non-manageable external factors. If it concurs, as it has happened these days, that there’s drought, no wind, a wave of cold water, we have shortage of gas supply from Algeria which increase the prices of gas in Spain in relation to the prices in our environment and, on top of that, France has 8 nuclear power plants unavailable (we stop importing and start exporting electrical power), the result is that the price of generating electrical power goes up.

Once we reach this point we should ask ourselves, are we in front of a problem of the electricity wholesale market? The reasoned response is no. Generally, according to the data of the very European Commission, the price of the wholesale market in Spain is quite similar on average to the rest of Europe. The problem of the wholesale market is not in the price or in the marginalist allocation mechanism of it, because it is not demonstrated that other systems, uniquely known as “pay as bid” generate lower prices.

The problem that has showed up in the last weeks is a problem of volatility. Volatility that, at the same time, is related to political decisions, -and, therefore, as a country-, that we have taken in relation to the participation of the renewable energies in the electricity generation mix. It’s not about judging such decisions, which naturally are legitimate, but exposing that each regulating option produces different effects.

Volatility in the wholesale market can’t be eliminated with a regulatory reform. And, in fact, we have to foresee that it will tend to increase as our generation mix becomes more renewable, because the renewable generation –also the hydropower, besides wind power, solar power and photovoltaic power- is subject to external factors that we can’t control. The average price does not have to increase, but the volatility of the price will increase, and the prices will be higher every time we need to use the bearing capacity, as for example, the thermal generation. Only when the renewable generation is competitive in market prices and when the batteries and other storage technologies are substantially cheaper and improve their efficiency, when storing electricity is easy and cheap, said volatility of the prices will tend to decrease.

In fact, the problem of the price of the electricity is not in the price of the wholesale market, but in the price that the consumer receives and pays. And there are two reasons why it’s there. The first one because, after last year’s reform, around 12 million consumers are subject to a fixed tariff, known as PCPV (Voluntary Price for the Small Consumer), which exposes them directly to the time volatility of the wholesale market, and to the high prices of the last weeks. The second, because the price that the final consumer in Spain pays is artificially high due to what is known as externalities, this is, all the elements that aren’t energy and transport networks that are included in the bill.

In its 2015 monitoring report (November 2016), ACER, the European regulator, highlights that the average of the costs of the electricity prices alien to the supply (externalities) constitutes for the European residential consumers 38% more of their bill. In Spain, the weight of the externalities is 50%, which means 30% more. Compared to “the price of light” (energy and nets) of Spain with the European average, isolated from those externalities, electricity in Spain is even 10.4% cheaper.

Externalities, consisting of taxes, other regulated costs, etc.) and the subsidies for renewable energies (a third of the total of the externalities) are the ones increasing the bills in Europe and, relatively, more in Spain. Thus, ACER points out that while the gas prices for residential consumers decreased by 4% in the EU in 2015 regarding the previous year, electricity prices increased by around 2%. In fact, the electricity tariff has not stopped increasing since 2008 (around 30%).

The real problem is handling an artificially high “energy bill” which, moreover, is exposed for practically half of the consumers, to the volatility of the wholesale market when said consumers, in any case, don’t have any tools to optimize those price signals and, in many cases, are subjected to a financial vulnerability that result in financial stress situations these months that we could avoid.

Solutions are on the table. The European Commission recommends in the Winter Package published in November the elimination of the regulated tariffs and the special attention to the most vulnerable groups. The market already has the right tools to cover the risk of the price volatility to the consumers.

The retail market, in which only the marketers compete among themselves, is competitive enough for the consumers to rely on it. The retail market has currently 404 marketers. Each consumer can choose freely the supplier he wants. There are suppliers for all tastes (cooperative societies, municipal companies, big multinational companies, start-ups, corporate groups which supply other products and services, etc) and they provide all sorts of offers adapted for the different needs. And the quality of the product is exactly the same in all cases. Few product or services markets have so many suppliers, with a high level of competition that allows the prevention of the collusion, and with exact quality.

Regarding the reduction of externalities, ACER, the European regulator, has revealed the possibility that the cost of the action by the weather through the subsidized renewable energies be shared by other energy sectors, different from the electric and also CO2 generators, which would allow the reduction of the electricity price for the final consumer. The CNMC has also joined this thesis and has added, quite rightly, that the imposition that taxes directly the generation of electricity since 2013 should be checked because of the distortive effects on the marginal generation technologies and on the market.

In the end, this situation of social unrest should not take us to hasty conclusions about the regulation of the electricity wholesale market. The problem is that the final consumers in Spain receive an artificially higher price than our reference partners and, moreover, more than half of them are subjected to a uncontrollable and unpredictable volatility. There are many things to fix before changing something that works in the electricity market.


Translated by Clara Ayuso

 

#electricidad #regulación