- Russian drone strikes targeted Odesa during Czech President Petr Pavel’s visit, resulting in power outages and injuries to civilians.
- Both Russia and Ukraine have accused each other of violating agreements regarding strikes on energy infrastructure.
- Despite ongoing attacks, international delegations continue to meet and discuss the conflict, with aid being provided to Ukraine.
Consumers in New York are incensed by high electricity bills and even higher ones if the electric companies get their rate hike requests approved. British electricity customers are also unhappy with their price increases. Right-wing politicians on both sides of the Atlantic blame it all on those woke renewable energy requirements. Another excuse to see them gone.
Unfortunately for the dogmatists, much of the blame lies with the price of natural gas, or more to the point, the way the price of natural gas sets all electricity prices in regions with the same kind of deregulated market. Remember that deregulating US states copied the UK market mechanism.
The UK had a choice of market mechanisms. It could allow bilateral deals between generators and customers or cause all generators to bid into the market which would pay the highest price needed to get that last generator into operation to all generators. Academic studies indicated that the former method prompted more price competition but generally led to higher prices. The second method led to lower prices as long as the market had enough generators competing but was more prone to price rigging. The UK and the US deregulators chose the latter method.
Now for the problem. That last generator being lured into the market is invariably a gas-fired generator. It would not bid anything lower than the price that it pays for gas, its so-called variable cost. So the price of natural gas sets the bid price for the marginal generator, and this, in turn, sets the price for all generators, including all those that do not burn gas. (This is the essence of what economists call marginal cost pricing.) Even if the market gets the bulk of its electricity from non-gas generators (like coal, nuclear, or hydro), it sets electricity prices based on gas prices. So, gas producers rejoice, but not electricity consumers.
How about another problem? Manufacturers of gas turbines have not scaled up their capacity to manufacture all those units needed to power a largely gas-fired network. Perhaps they haven’t bought into the rise of AI demand or the pullback in the renewable sector. The electricity generators, the politicians, planners and the financial sector like to jump on big ideas quickly the way lemmings jump over cliffs, often with the same result. If the manufacturers don’t make more units, where will they come from in the short term? Might the dash to gas get hot just as another administration moves in and changes the rules?
In sum, gas producers and owners of non-gas generators should reap handsome benefits over the coming four years until either somebody concludes that the problem is the system or an inflation-averse government decides to slow exports to keep the domestic market warm at a low price. Or even worse, new technology overcomes the advantages of gas technology. Then what, stranded gas assets? We’d argue that incumbents should enjoy the good times and let somebody else make the investments in a new capacity.
By Leonard S. Hyman and William I. Tilles – Oilprice.com
Energy News Beat