Confidence in markets without political intervention can fail. While some markets can function almost unnoticed and require little attention from governments, many do not at all – they need to be actively designed and regulated, and only governments can provide policy oversight.
Here the markets are international, governments have to coordinate. If the design or regulation of domestic markets or international coordination is flawed, dysfunction and political consequences will follow.
The two major problems facing government in Ireland, housing and energy, stem from failures in market design and regulation.
When it comes to housing, failure is inherently homegrown. There is no blame on the common European housing policy, supply has been curtailed while demand has soared and the culprits were domestic. But there is a global market for key energy products and a common EU framework for trading. Last Wednesday, the European Commission finally acknowledged that the European energy market is not working and immediate action is needed.
Flaws in market design were highlighted by the arming of Russian gas supplies, but date back to poor EU decisions made in the 1990s, well understood by critics at the time.
It is not easy to create a market for gas or electricity with numerous competing producers able to deliver reliably under all circumstances.
Two critical flaws in EU policy, both criticized by economists and engineers when they emerged, are dependence on gas, when gas fields and pipelines are in the hands of monopoly suppliers, and an electricity market that is too sensitive to gas price fluctuations reacted.
The second shortcoming is now to be addressed: the Commission accepts that pricing electricity largely on the basis of the marginal cost of gas production creates windfall profits for non-gas producers. The Irish government would do well to defer its response until European policy is settled.
The first shortcoming, over-reliance on pipeline gas mainly from Russia, can only be partially addressed in the short term by diversifying access to LNG, the global availability of which can replace missing Russian supplies. Every EU member is expected to help by keeping Russian gas in the ground, facilitating LNG imports and improving domestic production as much as possible.
Ireland has not announced any plans under either heading. The EU country most to blame for increasing exposure to Russia was Germany through early nuclear power plant closures, a bet-on-house policy on pipeline gas imports and underinvestment in power transmission infrastructure. The faulty market design amplifies German mistakes and passes on the resulting costs elsewhere.
The immediate pressure on the Irish Government is to subsidize household and business energy bills, through borrowing, as has been done during the no-spending response to the Covid emergency. The difference is that the European Central Bank is no longer printing money to keep governments’ borrowing costs low, and any country that borrows too much could be left to its own devices.
Further rate hikes by the ECB are inevitable and in due course the ECB could become a seller of government bonds, driving up debt service costs. The yield on 10-year Italian bonds broke 4 percent again last week after being below 1 percent a year ago. Those calling for broader spending are inviting the government to bet that the risk of a new eurozone sovereign debt crisis can be ignored.
One form of overspending would be permanent price subsidies for end users, with wholesale costs being compensated by the state. If financed by borrowing, the countries with the highest levels of legacy debt, including Ireland, would take the greatest risk.
No country, not even the former UK, would be wise to adopt a unilateral wholesale-level price cap policy in the electricity or gas markets given the widespread trading across Europe’s borders.
The UK is both an importer and an exporter and existing flows need to be maintained as much as possible. If there are to be price caps, they need to be coordinated and sensitive to the risk of market disruptions. Unilateral price caps could backfire and Ireland is in a weak position to flout the policies of the only country with which it trades gas and electricity directly, the UK.
EU members are urged by the Commission to consider domestic measures to limit energy demand next winter. On Thursday it was reported that Tánaiste Leo Varadkar advocates subsidies for manufacturing companies in addition to measures for budgets, mentioning in particular exporters, which consume a lot of energy.
This crisis differs from the Covid emergency, when energy intensity would have been an idiosyncratic basis for differentiated support. Gas and electricity shortages could indeed occur this time, and contingency plans for rationing are being prepared by government departments and agencies.
One is DETE, the Tánaiste Department of Enterprise, Trade and Employment, which may need to deliberate on priorities between companies willing to pay high prices if some have to be turned down.
Under these circumstances, would DETE really favor energy-intensive exporters over others?
The government’s headaches include so-called utility companies going under, most recently Panda, a spin-off of the waste management business. There have also been a number of failures in the UK, essentially because these companies, who have nothing to supply as they buy on the wholesale markets, did not have sufficient capital resources to deliver on the price promises made to end-users.
They received permission to trade, in Panda’s case, from the Commission for the Regulation of Utilities. The failure of these companies transfers their loss-making obligations to solvent operators, including ESB, who must cover the costs of long-standing customers who never signed up for the offerings offered by the failed entrants.
In the UK, there has been criticism of the regulator, which has been accused of allowing suppliers without sufficient capital. The same question needs to be asked of the Irish regulator.
https://www.independent.ie/opinion/comment/poor-decisions-at-eu-level-have-led-to-current-energy-crisis-41997208.html Wrong decisions at EU level have led to the current energy crisis