Chicken, politics and the electricity bill: or how to make what was already bad worse – Domingo Soriano

“Imagine that you go to the butcher shop to buy chicken, some sausages, some minced meat and a good beef tenderloin. And when you go to pay, they want to charge you everything at the price of the tenderloin. Well, something similar is what happens with the electricity bill.

This is how it is explained the price of electricity in Spain. Different goods and services are used so that the metaphor is not too repetitive. We have heard examples of fishmongers selling pangasius at the price of bluefin tuna and butcher shops selling chicken at the price of sirloin. And although the image may vary slightly, the bottom line is the same: they are ripping us off. The electricity companies illegitimately sell us the MWh of nuclear or hydro (which have very low variable costs) at the price of gas, which is now skyrocketing, achieving windfall profits that they neither deserve nor should we pay them. That is why they celebrate the intervention of the Government in the market and that Iberian exception that it seems that we have wrested from Brussels, although we still do not know how it will develop.

Marginal note: Although it is not the subject of this article, it is curious that renewables are almost never talked about, when these are the ones that take the most margin when gas prices are so high.

Side note 2: Nor does anyone seem willing to explain the most obvious, that the design of the Spanish electricity market is the consequence of political decisions, with broad social support, taken over decades. We may not know it… but we pay the electricity bill that we have decided “we!” to pay.

About the electricity market, in Spain and in other countries (I don’t think it works much better in other places), a lot could be written. Here, for example, Manuel Hidalgo criticized the auction format adopted in Spain with good arguments. For its part, Manuel Fernandez Ordonezcollaborator of Free market, defended it in this other article also with just as reasonable reasons. At this point, I’m closer to the good Mafo, among other things because I feel like they’re cheating me out of solitaire: first they get very technical and tell me that electricity is a natural monopoly and an essential public service, so I don’t know you can leave that law of the jungle that is supposed to be the free market; then they assure that it must be strictly regulated and without leaving a loophole for maneuver for the operators, because if not, they would deceive us; then years are spent designing laws, control bodies, supervisors and public companies to exercise that surveillance; and then, when things don’t go as planned, they blame those who came in to play with those same rules that they told us it was essential that they impose.

But that discussion, more technical, barely enters the public debate. There what remains is the chicken and the sirloin. And that is a lie.

First, the most obvious: in electricity there is no chicken and sirloin. There are MWh and they are all the same. If we want a metaphor, we could use that of the reservoir into which various streams of water flow. Once the water is inside the tank, its origin is indistinguishable. And if we fill a tanker truck with that water, we won’t know where that water comes from.

In electricity, this means: (1) that we cannot buy cheap-renewable-chicken or expensive-gas-steak; we can only buy MWh and price discrimination based on origin is not easy at all. And (2) that those marketers who claim that the electricity they sell is “100% renewable” are kidding us. Can’t the Ministry of Consumer Affairs act on this?

But again to hen and sirloin. And to the pricing system.

can they be finished marginal market changes? Yes, however with out mendacity. The costs with which the electrical energy corporations enter the public sale are decided by the mechanism of that public sale. If we alter that mechanism, corporations may also change their affords.

Another metaphor, not similar, however extra related:

  • A tour operator opens an public sale with dozens of accommodations, visitor homes and even personal properties in Seville.
  • The firm units some necessities for lodging and tells the institutions that it’s going to pay all of them the identical: “Make me an offer with a minimum for each day of the year; but I will pay you according to the last price per room that enters the system” .
  • The least expensive bidder is all the time a resort that’s open all 12 months spherical. Your variable prices (only one particular person to wash the rooms) are very low, so it’s best to cost one thing… even when it is somewhat.
  • Your supply? €20 per room each day of the 12 months, from January 1 to December 31.

Can we all the time pay €20 to this resort, even on the Fair or Easter? No. The managers of this institution make a suggestion of €20 per night time as a result of they know that at the preferred occasions of the 12 months even personal flats will enter the public sale, which in change for a number of hundred euros per night time, are keen to accommodate a customer for a number of days, so long as the price may be very excessive.

So why is that supply mounted at €20? The logic is evident. The resort managers assume: “On February 15, when there are hardly any tourists in Seville, it is convenient for me to have full rooms, even if it is charging the minimum that covers my variables. At €20, if this tour operator has 30 travelers, perhaps I I take the 30 and that’s what I get. On Holy Thursday I will not charge €20, because that day there will be tens of thousands of tourists asking for a room; there will be private houses that offer theirs; and they will do it for a lot of money, because if not, They would not be compensated for the costs of tidying up the stay for a few days. And for that night I will charge the same as them.”

Every day, this resort fees probably the most it may well, however bids for the minimal it is keen to open for. If we inform him “you will get exactly what you bid”, then every day he’ll calculate how a lot he can take out. And no, it is not going to supply the identical at Easter as on February 15. His incentive additionally adjustments utterly: now he is aware of that it’s in his finest curiosity to offer the very best worth, even whether it is low; with the brand new system, it encourages you to hunt the very best with which you may make a revenue.

The dialogue on this case must be whether or not the electrics are dishonest the system (it’s as if the resort owned the institution and a personal home with which tips to the tour operator, as a result of, as well as, he is aware of upfront the vacationers that he has for every day and the affords of the remainder of the accommodations). But the hen and sirloin metaphor would not assist in any respect to this debate, as a result of it’s absurd and since it doesn’t clarify the truth of the system.

Of course, this additionally comes into play. the “heavenly benefits” and that concept of ​​”if they bid at 10, why do we pay them at 100″. Sectors during which affords are made “at a loss” (on this case, it might be, under the common worth however above the marginal worth) there are various. Hotels, just like the one in our instance, typically do that. Also the airways: think about that somebody proposed “since the airlines sell tickets at €10… let’s force them to do it always”.

No, it is the opposite method round: airways promote some tickets pulled of worth, as a result of they know that they may be capable to promote others at €500. What they assume is, on days of low demand, “I’d rather take 10-12 more people on the plane almost for free, than not take them at all.” But if we compelled them to cost the identical worth to everybody, they’d by no means supply anybody the lowered charge.

The secret is within the common costs: If I do know {that a} journey prices me a mean of €50 per passenger per 12 months, I’ll attempt to make my common worth from January to December above that stage. If I do not get it, I’ll have losses. It is true that, altering the charges each day, there could also be days during which I’m keen on placing a charge decrease than that worth: these days when no person flies and, as I do know that the aircraft will nonetheless be within the air, I want to get probably the most out of it, albeit little. But if a lousy-day deal turns into a should for the remainder of the 12 months, then I will not do it. Because my goal all year long must be to put myself above €50. Today I can fly charging 10… but when I cost 10 each day, I should shut that line.

With electrics, one thing related occurs. That some days they’ll cost little or no (or that they provide nearly zero) doesn’t imply that they’ll do it each day. If each day we pay them little or no above their marginal worth, they may begin to go bankrupt or exit of enterprise.

And all this with out talking of the remuneration of the investments. As we defined on the time, when somebody asks for financing to, for instance, construct a facility, he raises a enterprise plans with completely different situations: from probably the most pessimistic to probably the most optimistic. To every one, he offers a proportion, relying on the choices he has.

Well, the message that Spain is sending lately is that two guidelines work right here: if issues go unsuitable, you lose; however in the event you do very properly, we restrict the profit. In the brief time period it may be politically very enticing. But within the medium time period, it will restrict investments or make them dearer. Who goes to place cash in a rustic that takes the scissors out of you if issues are going very well? Even if it have been luck: it might be true that nuclear or hydroelectric crops don’t have anything to do with making fuel dearer. In that case, do they deserve the additional advantages? That is to look from at present what was not thought-about like that on the time. What corporations calculate are situations and chances; they usually make investments if the common anticipated return (which would be the results of the nice and the dangerous, the distinctive and the horrible) is larger than the common return of different funding alternate options. But taking away the nice years as a result of they’re good is dishonest. It is as if an investor in new corporations, who places his cash in 10 expertise corporations understanding that 9 will go bankrupt… we take away the large earnings of the tenth as a result of they’re very excessive and it appears unfair to us that the capitalist accomplice takes nearly all of it .

I do know that the electrical energy market is just not the identical. In reality, right here the situations of the enterprise plans They embrace each financial and regulatory points. Actually, if I’m sincere, I the large electrics I do not notably like them. They are a difficult sector, consistently taking part in the trick of political energy and making an attempt to make use of it to their benefit. I’m not sorry that the identical politicians who give them with one hand, take them away with the opposite. They partly deserve it. But the arguments of those that level to them (and who’re those who need much more intervention out there) are even worse than them.

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