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Wednesday, July 24, 2024

Let’s avoid monopolising the electricity market

By: Dr Mitja Steinbacher, Dean of the Faculty of Law and Business Sciences

Pricing on the single European electricity market is highly developed and offers the possibility of effective protection against price risks in the supply of electricity to end users. A major drawback of the single electricity market is the high level of monopolisation in the supply of electricity to the power grid, which is characterised by the relatively high presence of state property in power plants. The electricity market could fulfil its mission only under conditions of availability of energy in the network in different time frames according to the needs of electricity traders.

In the current situation, I cannot imagine a more efficient way of distributing electricity to customers than with the help of a single electricity market. But as is the case with any market, the electricity market also depends on the suppliers’ ability to provide the requested quantities, namely in the agreed manner and to the agreed extent. Prices on the single European electricity market have been rising for a long time, with the beginnings of growth going back well before the beginning of Russian aggression against Ukraine. The reasons for the increase in electricity prices are multifaceted, but in this case, they are mostly associated with the policy of replacing cheaper and more reliable sources of electricity with more expensive and less reliable sources, while simultaneously increasing the need for stable sources due to the electrification of transport. The price acceleration that we are witnessing happened with the reduction of the use of gas for the needs of electricity production, which triggered a supply crunch that cannot be replaced quickly. The supply crunch is intensifying amid uncertainty over a possible escalation of Russian aggression in Ukraine.

This drop in supply is not excessively large in terms of quantity compared to the total electricity produced, especially considering the possibility of supplying Ukrainian electricity to the European electricity system. After the full integration of the Ukrainian electricity system with the European one, we can actually expect an increase in the supply of electricity for European customers and thus a decrease in the price of electricity and a reduction in the risks associated with the supply of electricity. The condition for integration is not so much technological as it is geostrategic. The point is that Ukraine must indisputably win the war with Russia, otherwise there will be no integration. In the event of Russia’s victory, the disintegration of the single European electricity market may take place, with the possible predominance of aspirations for self-sufficiency in electricity. Such tendencies can lead to political polarisation and the popularisation of nationalist tendencies. The ultimate outcome may be an “economic clash” for electricity resources between the nations of the European Union, which would result in a more expensive and less reliable supply of electricity for all of us. If the Russians win their war against the Ukrainians, easing the supply crunch will require considerable political wisdom to support flexibility in engaging cheaper sources of electricity, preferably in a way that makes these sources less dependent on the changing political coalitions and political sentiments.

At the moment, the energy crisis remains at the level of price fluctuation, which is still manageable. As long as the purchasing power of European economies is high enough, the price increase can still be passed. The problem will arise if politicians give in to the temptation to centrally plan the electricity market and start setting electricity prices for everyone instead of the market. In the circumstances of a rigid supply, as currently applies to the production of electricity, the solution cannot be found in price restrictions and nationalisations of an already oligopolistic supply, which is already under the strong control of the state. Price restrictions in the context of free pricing and rigid supply lead to monopolisation of price and supply, which is at least contrary to anti-monopoly legislation. The solution lies elsewhere: in the search for ways to relax the supply, which leads to the comprehensive decentralisation of electricity production, and in the withdrawal of politics from the energy sector.

It was precisely the rigidity of the supply of electricity dictated by the states and not the flexibility of prices on the market for determining the price of electricity that got us into the current price trap. The market just said there was something wrong with the supply. Price is a market signal about the rarity of a good relative to its desirability. The electricity market is not completely free, as one would mistakenly think, but is predominantly state oligopolistic, i.e., rigid on the supply side. Rigidity in the supply of electricity due to the oligopolistic nature of the supply of electricity led us into a price-political trap when tied to Russian gas. A way out of this trap is only possible with maximum relaxation of the supply of electricity, which is the opposite of establishing price restrictions. They would give us a false sense of security against price fluctuations, which are food for making rational economic decisions. In the context of oligopolistic supply, the introduction of a price cap will destroy free pricing, which is currently the only flexible part of the electricity market. If we know that prices, by their fundamental function, ensure that resources are efficiently distributed among demanders, we can quickly conclude that, under these conditions, the market of supply and demand for electricity would quickly develop into something very similar to a state monopoly.


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