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Concerning the problem of gas and electricity prices

These days there’s a lot of talking about the problem of electric energy prices. The problem is real and very serious. We have spoken about this with the Quotidiano di Puglia newspaper in an interview featuring one of us, discussing the problems we have incurred during the last year -for excess of trust from our side, which does not exempt us from our share of responsibility- in our former energy consultant.

A question spontaneously arises: are the skyrocketing of electric energy prices, which has neared 0,60 € pr kWh in August, i.e. almost 10 times the price of May 2021, dictated by the free market supply and demand mechanism, subjected to free competition and, therefore, brought to unbearable levels by shrinking gas supplies from our a priori evil nemesis, Russia, or are there any speculative mechanisms behind them, unbeknown to the masses ?
In order to try to answer this question for ourselves, it seemed appropriate to search sources outside of the mainstream sources, always too simplistic and, often and at the same time, too contradictory. Here we would like to share with you the comparative summary of three different Italian analyses we engaged and came up with in the last few days.
The first two essays were published on lavoce.info website, excellent place to delve deeper into economic matters, and they were signed, respectively, by Michele Polo, an economist at the Bocconi university in Milan, about gas price cap problem and by Carlo Andrea Bollino and Lucia Bisconti Parisio, professors at Milano-Bicocca and Perugia universities, concerning electricity price caps. The third analysis is a video interview of Prof. Demostenes Floros, geopolitical analyst and international expert of energy problems at Alma Mater University in Bologna, interviewed at CasaDelsole TV by Margherita Furlan, famous pupil of the late Giulietto Chiesa, in turn a magisterial geopolitics and Russia expert, passed in 2020, an independent news outlet we have been following with extreme interest for a year now.

These are analyses moving from different starting points: Polo, in particular, is more aligned with the anti-Russian mainstream POV, since he explicitly speaks bout legitimacy of the price cap on gas in order to make anti-Russian sanctions more effective; more neutral appears the position of the Bollino-Parisio pair, as long as we stick to the content of their article, whereas Floros is definitely against the NATO-led, and thus US-led, Western system, something he does not try to hide, having plainly declared, here as elsewhere, his support to a diplomatic solution of the crisis.

The purpose of this article is to understand if, independently from such differences in geopolitical views, it is possible to find -even between the lines- some common thread in the analysis of energy markets put forward by such different economists; an intersection of points of view of competent people moving from different ideological standpoint which, by this very reason, can be considered a firmer jumping off point to understand the despicable geopolitical conjunction of events we find ourselves stuck in and of which, maybe, many of us -we are positive- would not have even taken notice, if it were not for surging electricity and gas bills.

Concerning this very last point, before beginning our analysis, we drop a gem for those interested in the top geopolitical analysis worldwide: a very recent interview of Noam Chomsky by Lex Fridman from MIT.

We hereby report summaries of the fundamental points made in the two articles and the interview, to conclude thereafter with our personal considerations,

Michele Polo about gas prices caps

The key of the conundrum is: who is supposed to pay for the gas price?
The obvious answer seem to be to cap the prices paid by families and companies, thereby exposing national resellers, who purchase gas at the spot price negotiated by Eni on the Amsterdam energy market (Ttf) to heavy losses, which should later be compensated by the state coffers and thus, ultimately, by citizens, even though in a way that’s more clearly visible only in the long run.
Therefore, a viable alternative is to cap the gas price purchased from the Russian Federation…but how? There are 27 countries in Europe with different needs confronting Gazprom, the Russian gas monopolist giant. An entity made of 27 different regulatory entities, each regulating its respective national energy market, cannot compete, in terms of cohesion and coherence in negotiations, with Gazprom.
Therefore, the only viable solution would be to hand over regulatory power to the European Commission, so that one sole voice can sit at the negotiations table facing Russia. Taking into account that Russia’s possibility to deviate the path of its gas towards other importers is limited, at the moment, by existing infrastructure, Europe could enjoy the upper hand at the table and win a favourable price in the short term.
This ought to be counterbalanced, at the national level, by laws forcing national energy corporations to make end consumers benefit from the discount they receive. This would immediately and consequently reduce the price of electricity that, as we shall see in the section dedicated to Bollino and Bisconti Parisio’s article, is heavily influenced by the gas price.

Authors’ comment: this option is being vehemently discussed in EU power palaces, but it’s not free of difficulties, among which the presence of such actors as Hungary who have been pursuing politics misaligned with respect to Russo-phobic diktats coming from the Brussels, in turn dictated by Washington.
It is reason for smiling, just in these last few days, the hysteria of the mainstream, among which pseudo-journalists like Lili Gruber are the pivots, when they report that Nord Stream 1 and Nord Stream 2 pipelines were blown off by their own owners, the Russians, exactly those who have the most at stake to keep energy supplies to EU and ensuing profits going. Thinking that the United States would let such a negotiations table be opened, when they are so much interested in cutting ties between Russia and the EU, beside becoming EU’s main LNG suppliers, for absurdly high prices, is naïve at best, in our humble opinion.

Bollino e Bisconti Parisio about electricity price gaps

Interesting article, useful to understand the mechanism underpinning the financial mechanism leading to the formation of electricity price and why this is influenced by gas prices. Beyond the graphs and technicalities, which can make this article a tough chew for the average reader with no exposure to economics, the bottom line is:
in ordinary market regimes, the energy price per MWh is determined by the highest among the producers’ ask prices. For instance, if a photovoltaic plant provides energy for 0 €/MWh, an idroelectric plant for 20, a coal-fueled plant at 40 and a gas-fueled one at 60, then in perfectly efficient markets – which do not really exists but are an ideal reasonably closely approximated by normal economic regimes, according to classic economic theory a revenue for for the solar plant determined by the gas plant ask price is a rightful compensation for the required capital expenditure to set it up.
However, in the absolutely exceptional conditions we are going through, where the electrical energy provided by the gas-fueled plant nears 400€/MWh, such a huge profit margin for energy produced otherwise is far in excess of what is reasonable, since the cost of their energy source stays invariant.

The proposed solution seems, in the authors’ words, a Columbus’s egg: different caps for the price of electric energy produced from different sources, since the skyrocketing of the price of the gas-produced electricity, which pushes the Unique National Price (PUN in Italian) of electricity, on the grounds of which the cost of our electricity bills is computed, to the consumers’ detriment. Therefore, the PUN could be computed as a weighted average, where weights for the various prices would be proportional to the percentage of electricity produced with the respective energy source.

Author’s comment: it is clear that such an intervention would not completely solve the problem, since electricity produced from gas dominates the market, but it would dampen it significantly. Doing the math, 37,5% of the bill’s face value would be immediately spared by the end consumer, on the condition of forcing by law a homogeneous distribution of savings among users. This would cost nothing to the state coffers.
If one wishes to be malicious, one might wonder if this solution is actually a Columbus’ egg, i.e. a late strike of genius. Maybe it may appear so to the general public, who knows little or nothing about energy prices formation mechanisms, but not to those who make a living from energy markets. Perhaps Prof. Demostenes Floros, whose interview we analyze next, is not wrong when he plainly states that the resigning government is more of an expression of the interests of financial powers rather than of the beating industrial heart of our country.

Demostenes Floros: financial speculations at the Amsterdam stock exchange, energy geopolitics and future scenarios

Floros’ dissection of the workings of the gas exchange in Amsterdam (TTF) is crystalline: it is a market with very few actors, i.e. an oligopoly. When there is little capital flowing around, a single operator is in a position to induce, via its sole actions, strong price oscillations. ENI purchases gas on this market and, since the second half of 2021, it’ is has been scoring record profits, beside denying producing contracts to minister Cingolani, despite the Italian state being a stakeholder for 30% of ENI’s capitalization, which says a lot about the level of transparency of the system and the overwhelmingly greater importance of the private interest over the public one.

The system hasn’t always worked this way: the spot market, where gas prices are negotiated before entering the pipelined leading it to end consumers, has existed since the late ’90s. Before, its price used to be tied to oil price, so it used to dynamically adjust to stay in line with it, with a lag of approximately 6 months. This fostered its stability. The switchover to a more “financial” system, where the price is not connected to that of any other commodity, was imposed on Russia by the starts-and-stripes-led West. Since 2021, the gas price at the TTF has increased by over 400% !!! The fact that the contracts by which ENI purchases gas have not been produced to the public attention is reason of no small concern…

The common lore is focused a lot on transitioning, in the medium run, to Algerian supplies, to renewables in the long run. Let us do some math about it:

  • Algeria, through its state-participated firm Sonatrach, has already increased its yearly gas output from 12 to 21 billion cubic meters from 2020 through 2022, with superhuman efforts; it has pledged to further increase it by 9 billions, but it hasn’t updated its guarantees to actually make it, cautiously. Even if it were the case, in the very best case, we would, by then, have replaced only 17 of the 29 billion cubic meters we used to import from the Russian federation, i.e. not even 60%. This means we will be forced into rationing, in the short run, unless next winter is extremely mild. And however it goes, such a state of things will imply anyway, soon enough, a tremendous blow on the Italian manufacturing sector, a great deal of which won’t make it through.
  • The so much blazoned energy transition cannot happen without natural gas pivoting it: the world GDP is 100 trillions, whereas the estimated cost of the energy transition, i.e. for the building of the infrastructure needed all over the world, is 150 trillion within 2050. Who is going to pay, if the economy is not going to be propped up by fossil fuels meanwhile?
    Not to mention the so eagerly awaited technological breakthroughs which should solve the present problems of intermittent access to renewable energies: the low energy density produced per unit surface by a renewable energy plant and the inherent intermittence of the latter’s availability.
    Such a transition would be quickly possible, as per a British study from two years ago, only if we all were amenable to cut our energy consumption by 60%! Rather unlikely…

It is true that the capitalist economic system, based on accumulation, won’t be able to last forever, if it keeps relying on fossil fuels. We can debate this, of course. More realistically, for the time being, our attention ought to focus on moderating the harshness of the present geopolitical situation.

Author’s comments: we have already reported some time ago the foolishness of the political decisions that are drawing us beyond the economical and political no turning back point, making Russia, our main energy supplier, our political and military enemy, for matters concerning only Russia and neighbouring Ukraine, together with its extremists and authoritarian regime (no less authoritarian than the Russian government, perhaps even worse and we hold ourselves accountable for such statements) by which Ukraine is led, put in office and financially backed by the Unites States, as they have openly conceded. Now someone is waking up and suggesting that, perhaps, opening a negotiation would be hopeful, only after the stranglehold of electricity bills has woken them up. The balance and sharpness of such analysts as Floros would be a blessing for the public debate, if only they could find some space in the mainstream. Which then would not be mainstream, past that point.

Conclusions

We think that the high-level view we have offered does not need any comments, just as the common thread running through the pieces jumps to one’s attention immediately.
Perhaps we may add that, as we have mentioned elsewhere, to the present ongoing worsening of negotiations with Russia we would prefer a softer attitude, as Italy and as Europe. So much more so in the light of the fact that, studying Ukraine’s post-war history, one can easily surmise that western mistakes have been plentiful and abhorrent and that the presence, in Kiev, of such a Russian-blood-thirsty regime, which is in plain sight for anybody willing to be properly informed and to look beyond the smoke curtain waived by the puppet leading it, is not going to be beneficial to anybody but those who hope for a weakened and fragmented Europe.

Mirko Serino and Francesco Panarese

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