The former Belgian prime minister Jean-Luc Dehaene became famous with the phrase: “we will solve the problems only when they manifest themselves”. After reading the plan of our Belgian energy minister Wathelet for the future of Belgium’s power generation, it looks like we now have a new generation of politicians that solve the problems of the future. Should we hail such a policy for being visionary? I have been claiming myself in the past that the recent under-investment in power production capacity in Belgium is a problem. This plan wants to tackle that, so I should be cheering, shouldn’t I? However, I would be more enthusiastic about mister Wathelet’s plan if the text wasn’t so mired in French-style ‘dirigisme’ and a lack of empiric realism. It’s good that we start planning for a future with less nuclear energy and more renewable. But an exaggeration of intermittency and capacity issues and a lack of trust in markets might produce political interventions that cause unnecessary costs and disturb the markets.
Also, I’m slightly disappointed that Mr. Wathelets plan isn’t clearer about one of its most important aspects for the end consumer. One nuclear power station (in Tihange) will be exempted from closure as of 2015. Its operator will be compensated at cost-price plus and he will be obliged to put this electricity at the disposal of alternative (i.e. not GdF-Suez) suppliers. Vice-prime-minister Johan Vandelanotte, brother in arms (against GdF-Suez) of Melchior Wathelet explained the plan to the Flemish public. He claimed that putting cheaper wholesale electricity at the disposal of alternative suppliers would create more competition and lower prices in the retail market. Hello? At least mister Wathelet’s plan does mention the marginal cost pricing mechanism. He seems to be aware of it. But apparently he couldn’t get the concept explained to mister Vandelanotte. However, like I said, the text is very unclear on how this will be done exactly. Maybe we will see some sort of Arenh-like principle surface in the next months. But then we have to remark that we are speaking here of an amount of nuclear power that is less than 10% of all the electricity consumed in Belgium. If they manage to sell this to end clients at a cost of 20 euro below the market price, this would mean a 2 euro per MWh reduction of the average Belgian power cost. This is a bit more than 1% on the power bill of the average Belgian household, 2% for a big consumer … Nice if you can tell the public that you will reduce their power bills in an election year. Even nicer if no journalist at all is sharp enough to ask you by how much.
On the other hand, our energy minister wants to do something about the lack of investment in gas-fired power generation in Belgium. He wants to stimulate owners of gas-fired assets to keep those open. He is also talking about capacity payments for gas-fired power stations. In his plan, he mentions the usage of the differential between market prices and the cost price plus pricing of the nuclear power station to compensate for the extra cost of upholding gas-fired power generation capacities. Does this mean that nothing will be left for lowering “the cost for the people”?
This obviously brings us to the question of empiric realism. Mr. Wathelets plan states (my translation): “Belgium is already in a situation of strong tension between supply and demand of electricity”. If that would be the case, I would expect that: Belgian wholesale market prices rise high above the surrounding markets, that the peakload – baseload differential in Belgium rises sharply and that spark spreads rise to historic highs. Well, none of these can be seen in the markets. On the contrary, peakload – baseload has never been lower than today, and even more so, spark spread has dropped to a historic low. The low spark spreads is why operators of gas-fired power stations are knocking on Mr. Wathelets door for getting capacity-based compensation. And in my world, if a price falls to a historic low, this means that there is over-capacity, not a shortage. There seems to be too much supply on our electricity grid, rather than not enough. Maybe Mr. Dehaene wasn’t that stupid after all. Maybe we should be very heedful when politicians start solving problems that are not there (yet?).
This misapprehension of the energy supply situation is according to me due to the underestimation that many analysts make of the following phenomena:
- The effect of inter-connection, which means that looking at the Belgian supply and demand situation is always short-sighted. You have to look at the situation in the Benelux + France + Germany market. Mr. Wathelets plan does mention inter-connectivity. However, it is considering it as a purely technical issue, the ability of surrounding countries to help out in times of supply shortages. The plan doesn’t seem to grasp that in today’s market, inter-connectivity is a daily economic reality. Energy is sent across the border for financial arbitrage reasons, not because of technical shortages. Belgian gas-fired power stations are going through tough times due to the rapid expansion in the past years of Dutch gas-fired capacity (a large amount of it in CHP units in greenhouses). Have you remarked, Mr. Wathelet, that in the week of your plan’s announcement, Essent has opened its renewed Clauscentrale just across the border? That its capacity extension is already covering a large part of the supply shortage that you fear? And with its 58% efficiency, it still has positive spark spreads even on baseload with current prices? Wouldn’t it be a waste of money then if we give capacity payments to less efficient units in our own country? Should I read your plan as a manifesto of economic nationalism? Rather waste money on Belgian inefficient power stations than give it to the efficient Dutchmen across our border?
- The decrease in power demand in that Central-Western-European (CWE) market, see my earlier blog article on the dogma of rising energy prices. Ever since I work in the energy markets, grid companies have been screaming that there were shortages ahead and that the lights would go out. It’s logic that they do so, if they convince politicians of this, they are allowed to make larger investments, increasing the cost basis on which their fixed percentage margins are based.
- The rapid increase of renewable power generation in the CWE market.
Moreover, analysts in general, and this plan in particular, have a lack in holistic reasoning capacities to bring all this information on all these trends together in an over-arching view. The person writing the text of Mr. Wathelets plan seems to have been aware of this, as on page 29 it reads (my translation again):
“It is therefore necessary to analyze the reasons why the market doesn’t compensate such type of unities (flexible power stations) that become more and more necessary due to the evolution of the production parc (more and more intermittent). Even if we have certain intuitions (the mechanisms of subsidies for renewable, the coexistence of an incompressible and intermittent production, etc.), such an analysis is of a great complexity and surpasses the Belgian borders”.
Hello, Mr. Wathelet, what are you saying here? I have observed that the empirical facts don’t match my analysis. Despite more renewable on the grid, the spark spreads don’t go up, creating an economic problem for our gas-fired power stations. I have a hunch for what reasons. But really analyzing this is too complicated for me. Especially as it would demand that I have a look outside my own small country. However, realizing this doesn’t stop me from hammering out a new policy. If I were a university professor and this was your thesis, I would write ‘fail’ on it!
I think I know why Mr. Wathelet is so eager for political intervention to solve the “problem” of a lack of Belgian power supply. A problem he wants to solve before it manifests itself and, as he acknowledges in his own plan, which he hasn’t even really studied very well. Like so many Walloon politicians, he is looking to Paris for policy guidance. And French energy politics are all about the primacy of politics over economics, the so-called dirigisme. Mr. Wathelet’s plan is expressing skepticism over the market’s possibilities of solving supply and demand equations. On page 21 he says about peaker plant capacities (indeed, my translation):
“The reserves are activated when the security of supply is threatened and when the price level has surpassed a certain threshold level, two phenomena that often coincide”.
Hello again, Mr. Wathelet? Often and not always? Can you give me one example of where the market has failed to activate peakload power stations when necessary? Which black-out in the Belgian market in the past decade was caused by a failure of the market? If something like that happened, why wasn’t it more reported in the press? I am training two new consultants at my company and last week I explained the market mechanisms (day ahead nominations, spot markets, balancing regimes) that match supply and demand in our power market. I told them that it is an absolute miracle that these market mechanisms manage to do the job, every single hour of the day, year in, year out. Have a closer look at how the markets function Mr. Wathelet, and maybe you will come to grow a little bit more respect for its effectiveness and efficiency.
Mr. Wathelet is also claiming that investment in the energy sector is always moving with bust and boom cycles, due to the slow reaction of investment to price cycles as it takes up to six years to go from investment decision to plant opening. This is true in Belgium, not in China. And one of the main reasons for this slowness is, as acknowledged in the plan, the painful process of getting licenses (i.e. politics, and not markets). I’m glad to hear that you want to do something about that. Again, we should be careful that we don’t over-estimate this bust-and-boom cycle slowness. If I look at price developments in many different liberalized markets (Scandinavia, power-island UK, e.g.), I don’t really find phases in which prices rise to hopelessly high levels due to under-investment. The real catastrophes happened when governments intervened (California, Spain). Moreover, we should again be very careful of short-sighted analysis, we have to look outside our borders. Energy companies invest in the CWE market, not in Belgium. And the over-investment in gas-fired capacities in the Netherlands will continue to dampen our spark spreads and peakload differentials for quite some time to come. What scares me about the plans for capacity payments or other subsidies to gas-fired power stations in Belgium, is that they will add to the current over-capacity. They might have a very perverse effect, contributing to the problem they are supposed to solve, namely low income on low-efficiency gas-fired power stations. Also, in a broad market like CWE, we shouldn’t under-estimate that shortage situations can more easily be compensated.
It is good that we finally have a government that seriously considers our security of supply situation. The decision to keep open Tihange post 2015 is probably a good one (although I’ll regret having written this if we would ever have a nuclear incident in our vicinity). It’s a good thing, that they think about giving Elia more responsibilities for keeping open super peak power stations. But with a bit more empiric realism and trust in markets, I would be more confident that technically and economically effective measures will be taken.