[Skybird]

Power and Strawberries - the NZZ writes:
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Brussels is discovering what it means when prices are determined by supply and demand. Instead of ranting about "market failure" and "excess profits", EU Commission President von der Leyen should call on her compatriots to keep nuclear power plants online.

"The electricity markets are no longer functioning, they are not fulfilling their purpose": this is how EU Commission President Ursula von der Leyen commented this week on the volatility on the electricity exchanges.

Certainly, prices on the exchanges where electricity is traded in Europe have increased enormously since Russia's attack on Ukraine. This is hitting energy-intensive companies in Europe, and the bill will also be salty for some medium-sized companies.

But is this already a case of "market failure," as von der Leyen insinuates? The electricity market does not function according to some obscure rules, but like any other market. Let's take the market for strawberries: There's the farmer who's just getting his turn to meet demand. He will at least want to cover his costs, otherwise he would not sell. Any farmer who can offer cheaper than him will also sell her strawberries - at the price charged by the farmer who is just about to deliver the last unit in demand.

The farmer thus makes a nice profit, can invest in new fields and seeds, so that next year the strawberry harvest will be bigger and the price will tend to fall.

This "market design" was not forced on anyone, but is entirely voluntary. The situation is very similar in the electricity market. There, the "expensive farmer" is the gas-fired power plant. At present, gas-fired power plants often produce the last kilowatt hours that can still be sold on the market. Since the price of gas has increased more than tenfold, their production costs have risen sharply.

The counterparts to the "efficient farmer" in the example are nuclear power, hydroelectric power, and wind and solar power - they all produce much more cheaply, but receive the same price for the kilowatt-hour as the gas-fired power plants. After all, electricity is electricity.

High prices now signal two things: electricity consumers will pull out all the stops to curb their consumption. This may go so far as to cause certain companies to temporarily stop their machines. These savings will help us get through the winter.

But there is a second effect: the high price of electricity, which is expected to continue in the markets for the next few years, will also stimulate investments: in renewables, which are quickly amortized, but also in hydropower and perhaps - if the technology had not been locked out - even in nuclear power. In any case, supply will increase over time, which will put pressure on prices.

So far, so unspectacular, one would think. The market is working. But politicians are now flirting with price caps for electricity: some for the entire electricity market, the EU Commission for those types of generation that are cheaper than gas-fired power plants. In the latter case, to stay with the example, the cheaply producing strawberry farmer would be additionally taxed - it would be a kind of "excess profits tax."

In their working paper, EU officials speak of legal certainty for countries and consumers. But such ad hoc interventions in functioning markets are poison for the investment climate. In any case, the danger of intervention spirals is great. Those who set up power plants tie up their capital for the long term and need legal certainty. No one - not even Brussels - can conjure up away the basic problem that there is an enormous shortage of energy throughout Europe this winter.

The Commission President is shooting the messenger with her philippic and obscuring the causes of the misery. Incidentally, the nuclear phase-out in her home country of Germany has also contributed to this. One of the rare opportunities to increase the supply of electricity somewhat in the short term would be to allow the German nuclear power plants to continue running in 2023. That's what von der Leyen should be working toward - instead of ranting about alleged market failures and excess profits.
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