European energy crisis

[Aimless]

Understandable doomsday mood all over Europe, in anticipation of a crushing year ahead for many homeowners and their tenants. Even without factoring in coming restrictions to access to Russian natural gas, I think this is going to cause a lot of political turbulence—not to mention deaths and a surge in poverty. I don't know which countries will be hit the hardest, but it's likely poorer countries such as the UK and Eastern European countries will see more deaths than others.

European countries have scant hope of reducing their reliance on natural gas to any meaningful extent in time for next winter. Feel like most govts' best hope is to subsidize energy costs over the coming year, despite risk of perverse incentives and misallocation of public funds. But it won't be enough, and I wonder what the political consequences of people being driven into poverty—or outright dying—will be. Surging populism, protests in the streets. Many political actors will capitalize on this opportunity to criticize renewable energy agendas. I wonder whether eg. the EU's "Green Deal" renovation wave will be sufficient to counter those trends.

In Sweden, many homeowners have recently been hit by very high electricity bills, prompting the swift introduction of a temporary govt. subsidy which has been a little controversial. Much of this money has probably gone to households with large homes—and a lot of disposable income—who haven't seen fit to lock in previously very low electricity prices, or make reasonable upgrades. But what're you gonna do? The wealthy also vote.

[Steely Glint]

But it won't be enough, and I wonder what the political consequences of people being driven into poverty—or outright dying—will be.

Such things have happened before (e.g. austerity). It's hard to predict which types of people dying or living poverty become official because Major Things in the News and which don't. Whatever happens, you can expect the most important thing (protecting the profits of energy companies) to be at the forefront of the minds of the great and good across Europe.

[Steely Glint]

Oh, and apparently future Prime Minister Rishi Sunak doesn't know the difference between a 'discount' and a 'loan'. So that's good.

Twitter Link

[Aimless]

That part was absolutely bonkers, who are these motherfuckers

[rille]

Ha!

So my electricity bill is usually 460 sek in Jan, this year it was 1600 sek.
I’m a computer geek so I have servers running 24/7, my house is 200+ sqm but I use the default district heating system so that doesn’t impact me much.

Of course I feel sorry for home owners that now have 14000 sek bills.

All this thanks to the nuclear haters. (Anti science friends)

The gas prices are over 81 sek gallon…

Food is up 20-30%

It’s going great!!!

At least my house is up factor x2-3 as well as the stock market so I’m technically almost free.

The average salery here is 36000 sek (a qualified guess) which means 27000 sek after taxes.
Divide by 10 and you get ~usd.

[wiggin]

Such things have happened before (e.g. austerity). It's hard to predict which types of people dying or living poverty become official because Major Things in the News and which don't. Whatever happens, you can expect the most important thing (protecting the profits of energy companies) to be at the forefront of the minds of the great and good across Europe.

Which companies are those? Because as I understand it, spot prices being high in Europe have very little to do with the profits of the European companies that actually supply gas/electricity. They're paying those gas prices too since very little of the natural gas used in Europe is actually produced domestically (absent a smallish and diminishing Norwegian contribution). Even if you dropped the European energy distributors/gas suppliers profits to zero, you'd still have a pretty substantial price spike.

What I don't understand is why this is necessarily resulting in a massive price swing in retail gas/energy prices - I had thought it would be pretty standard practice for retail prices to be pegged to longer term (e.g. 6 month) contracts and/or use a price smoothing algorithm over the course of the year. Why retail consumers would be exposed to the spot market is beyond me. We saw some people running into this problem for the electricity spot market in Texas a year back during the cold snap, but that was pretty unusual because it exposed the retail consumer directly to the spot market without any limiters in place (even more unusual than the unwise option that some people took to avoid the fixed price contracts).

I saw some interesting articles suggesting that the issue isn't the spot price per se, but the fact that European gas supplies are managed with very little margin for fluctuations, with gas storage at quite low levels leading into this winter. That seems like a failure of regulation, though I'll be the first to admit that I know very little about the regulatory landscape in Europe wrt energy supplies and price stability. It also suggests that the current energy mix is too heavily reliant on gas - certainly the ongoing phase-out of coal is a good idea, but perhaps they jumped the gun on nukes in e.g. Germany. I also think that the continued reliance on natural gas for heating, irrespective of the electricity generation mix, means that this problem isn't going to go away without a whole lot of changes/updates to individual households.

My state has various complex subsidies set up to help improve energy efficiency (e.g. insulation, windows, etc.) and reduce greenhouse gas emissions (shifting away from natural gas and heating oil). But those are frankly complex and hard to navigate, so even the relatively well-informed homeowner finds it difficult. And it requires capital that a lot of lower income homes simply don't have. I imagine other parallel systems in Europe experience similar challenges, so finding a solution to this reliance on natural gas is not going to be easy.

[Steely Glint]

Which companies are those? Because as I understand it, spot prices being high in Europe have very little to do with the profits of the European companies that actually supply gas/electricity. They're paying those gas prices too since very little of the natural gas used in Europe is actually produced domestically (absent a smallish and diminishing Norwegian contribution). Even if you dropped the European energy distributors/gas suppliers profits to zero, you'd still have a pretty substantial price spike.

What I don't understand is why this is necessarily resulting in a massive price swing in retail gas/energy prices - I had thought it would be pretty standard practice for retail prices to be pegged to longer term (e.g. 6 month) contracts and/or use a price smoothing algorithm over the course of the year. Why retail consumers would be exposed to the spot market is beyond me. We saw some people running into this problem for the electricity spot market in Texas a year back during the cold snap, but that was pretty unusual because it exposed the retail consumer directly to the spot market without any limiters in place (even more unusual than the unwise option that some people took to avoid the fixed price contracts).

So, this is a strictly UK based answer:

It's the energy suppliers I am referring to. In the UK, there is an energy price cap - this is the maximum energy suppliers are allowed to charge consumers, and it exists to stop them jacking up the prices and then engorging themselves like a tick attached to the arse of a dairy cow.

However, in response to the rise in wholesale prices, the regulator ofgem has decided to do a massive hike of the price cap, increasing it by 54%. This will come in to effect in April. It will hit anyone on a variable rate almost immediately and will hit anyone on a fixed rate whenever they renew their contract.

So, they are protecting their profits by making a regulatory change allowing them to pass the cost spike along to consumers. EDIT: Oh, and the £200 is basically a subsidy to the suppliers.

[wiggin]

Ah, yes changing the rules of the game seems like a bad idea. Of course, if the cap will put them out of business, they'd have to do something, but arbitrarily allowing much higher pricing for retail customers seems like a bad way to do it.

[Steely Glint]

Twitter Link

Come the summer, expect a barrage of op-eds in which the writer is utter mystified about why consumer spending is down, despite the end of the pandemic. Could it be that people are still afraid to go out? Shops still require masks? Netflix? Wordle? We may never know.

[Being]

Found this in the covid-19 thread,

In the interest of posterity, I predict this pandemic will produce a degree of stagflation never seen in recorded history. Prices will soar and wages will stagnate. Wealth inequality will increase and homelessness will become how we define poverty.

[Steely Glint]

Always a safe bet.

[wiggin]

Twitter Link

Come the summer, expect a barrage of op-eds in which the writer is utter mystified about why consumer spending is down, despite the end of the pandemic. Could it be that people are still afraid to go out? Shops still require masks? Netflix? Wordle? We may never know.

I was amazed he said that. The BoE's job is to realize there's inflation pressure and adjust interest rates accordingly, not to ask the public to adopt a stiff upper lip.

[Steely Glint]

I didn't go down well, either, which should not have been surprising but they pretty much live in their own little world down there.

[wiggin]

Of course, the reality is that increasing interest rates will indirectly put downward pressure on wages and employment. But that is rather different than asking UK workers to take one for the team.

[Steely Glint]

If you weren't aware, they already did hike interest rates to 0.5, so I guess this would be as well as, not instead of.

[wiggin]

Yes, but either their rate hike is sufficient and they should shut their traps, or it's insufficient and they should increase rates more or use other measures (eg macroprudential policy et Al).

[Hazir]

It's surprising how much UK politicians and policy makers these days sound like their Turkish counterparts. But where in Turkey they throw money of declining value at you and tell you to eat less, in the UK they cut out the money part altogether in their suggestions to the public. One in 10 Brits today have to choose between heating and eating I read in a newspaper article yesterday (shock and horror, a dutch printed one, so no link).