I agree that privatisation of utilities was a bad idea. However, none of that explains what is happening now. The current situation is a textbook economics case, and so are the possible measures in the toolbox, although the choice between them is political rather than economic. The story goes like this:
Russia cuts energy supplies to Europe. This raises prises a lot, because the price elasticity of demand for energy is low, and certainly in the short run. For the same reason, Russia also receives more for less gas. In the meantime short run demand went up because countries frantically tried to fill their reservoirs to avoid shortages in the coming winter (expensive gas is better than no gas). This has been expensive but successful: reservoirs are full, and prices have since come down quite a bit. To secure alternative supplies LNG terminals have been opened, again at pretty great expense. The Netherlands did not normally import LNG, but now have capacity that is enough for 40% of our annual consumption, by activating a mothballed LNG terminal in Rotterdam, built for precisely such situations, and by leasing two floating terminals for the Eemshaven, in the immediate vicinity of the international pipelines.
High prices are bad for business, and for consumers. In fact, they are very bad. So what can be done?
One option is to leave the market to its own. The attraction is that at such high prices supplies will increase, because alternative supplies such as LNG become competitive, and demand will go down because businesses and consumers will invest in energy savings like home insulation, heat pumps, hydrogen fuel, etc. Unfortunately, this is more a long run solution. In the short run the effect can be devastating.
So the social and economic consequences are unattractive. The alternative would be maximum prices, but that discourages supply. So somehow the state will have to subsidize the gap between the market price and what is felt to be a socially and economically acceptable price. However, this is expensive, and particularly if everyone is subsidized. In that case we either all pay more taxes, or we push the bill into the future. A second problem with this policy is that it reduces the incentive to save energy. But there are some options:
Some energy producers currently make windfall profits because their production costs are now well below the market price for energy. This is true for nuclear, for wind, and for solar power. And it is true for the remaining suppliers of natural gas, such as Norway or to some extent the Netherlands. The solution is a windfal tax, such as was decided yesterday by the EU. The revenue can then be used to pay for some of the subsidies, reducing the strain on the government's budget. The other option is to only have a (very low) maximum price for the first slice of energy consumption by households and small businesses, and allow market prices for anything above this. This favours the poor who consume less on average, avoids subsidizing energy consumption by those who can afford the high prices, and retains the incentive to reduce demand. Technically, the desired income effect comes from the lower average price, but the high marginal price safeguards the strength of the incentive.
This is textbook economics. When it comes to deciding which levers to pull, that is obviously a political decision.
Sorry I could not help teaching a bit of economics - I hope it clarifies some. But now back to stories about this summer's heatwave.
Russia cuts energy supplies to Europe. This raises prises a lot, because the price elasticity of demand for energy is low, and certainly in the short run. For the same reason, Russia also receives more for less gas. In the meantime short run demand went up because countries frantically tried to fill their reservoirs to avoid shortages in the coming winter (expensive gas is better than no gas). This has been expensive but successful: reservoirs are full, and prices have since come down quite a bit. To secure alternative supplies LNG terminals have been opened, again at pretty great expense. The Netherlands did not normally import LNG, but now have capacity that is enough for 40% of our annual consumption, by activating a mothballed LNG terminal in Rotterdam, built for precisely such situations, and by leasing two floating terminals for the Eemshaven, in the immediate vicinity of the international pipelines.
High prices are bad for business, and for consumers. In fact, they are very bad. So what can be done?
One option is to leave the market to its own. The attraction is that at such high prices supplies will increase, because alternative supplies such as LNG become competitive, and demand will go down because businesses and consumers will invest in energy savings like home insulation, heat pumps, hydrogen fuel, etc. Unfortunately, this is more a long run solution. In the short run the effect can be devastating.
So the social and economic consequences are unattractive. The alternative would be maximum prices, but that discourages supply. So somehow the state will have to subsidize the gap between the market price and what is felt to be a socially and economically acceptable price. However, this is expensive, and particularly if everyone is subsidized. In that case we either all pay more taxes, or we push the bill into the future. A second problem with this policy is that it reduces the incentive to save energy. But there are some options:
Some energy producers currently make windfall profits because their production costs are now well below the market price for energy. This is true for nuclear, for wind, and for solar power. And it is true for the remaining suppliers of natural gas, such as Norway or to some extent the Netherlands. The solution is a windfal tax, such as was decided yesterday by the EU. The revenue can then be used to pay for some of the subsidies, reducing the strain on the government's budget. The other option is to only have a (very low) maximum price for the first slice of energy consumption by households and small businesses, and allow market prices for anything above this. This favours the poor who consume less on average, avoids subsidizing energy consumption by those who can afford the high prices, and retains the incentive to reduce demand. Technically, the desired income effect comes from the lower average price, but the high marginal price safeguards the strength of the incentive.
This is textbook economics. When it comes to deciding which levers to pull, that is obviously a political decision.
Sorry I could not help teaching a bit of economics - I hope it clarifies some. But now back to stories about this summer's heatwave.
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