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How the European Commission reacted to unpaid energy prices
You’d expect a rational view from European officials. Unfortunately, ideological blindness makes them tribesmen of a fundamentalist faith in the efficiency of markets. All solutions to the current crisis must be offered within the framework devised by market advocates and under no circumstances must the current mechanism be disrupted in any way. Andrei Mocearov, a graduate in energy and economics, presents the statements of European officials and puts them in context. Essentially, the reactions of European officials elude the real causes of price increases, fanatically defend the markets and place the responsibility for finding solutions on the Member States on the basis of a so-called toolbox, a regulatory toolkit designed to balance the situation created by rising energy prices. This toolkit contributes to amplifying the effects of the speculative bubble. Why? Because the price has been capped at the consumer, not the supplier. Under these conditions, speculators can raise prices very high. In other words, prices are not capped. They can go up as much as they like. If I, as an individual consumer, do not pay them, it does not mean that they are not paid from the state budget. That means I still pay them but indirectly. Let’s say the price is capped for me at five lei. But the energy supplier sells it for twenty lei. The difference of 15 is paid from the budget. The budget does not grow on trees, it is the result of tax collection from us, from citizens. Watch this episode of our energy soap opera. Andrei Mocearov, a graduate in energy and economics, explains in detail.
Video (in Romanian)
Transcript (translated):
But this electricity market has caused gas prices to be passed on to electricity. And now we’re going to see what the European Union has done.
Maria Cernat
This is very interesting – the chapter that came from the European Union. We said at the beginning of our presentation that unfortunately what we often don’t want to acknowledge is that a big source of misinformation does not come from the bottom up, that is from citizens who supposedly now have access to social networks and misinform. The big source of misinformation, and sadly little combatted, somehow comes from the top down, from the authorities. And that’s when things are really dramatic. Because if you can no longer trust that you have correct, stable information from responsible people, then disinformation is very hard to combat. By elites I don’t just mean politicians; there is also a very well-represented part of the press with a very large audience. Instead of being a watchdog of power and constantly questioning what the authorities say, it only amplifies their messages. The press, instead of being critical, is a mouthpiece for power. Then we have to look a bit at the reaction of the European Union and what has been said from its direction about this whole picture so far.
Andrei Mocearov
The reaction of the European Union has of course changed over time, but basically it has been based on three pillars:
1. Evading the real cause of price rises. We have already shown that the blame was placed before the war on post-pandemic effects and various events that happened globally. And after the war, EXCLUSIVELY on the war.
2. The second pillar is the staunch defence of the way markets work that produced unpayable prices.
3. Placing the responsibility for mitigating pressures primarily on member states. And worse, not by addressing the symptoms. There has been this capping on the end consumer, which is devastating, because it does not solve the problem of prices on the exchanges, and on the other hand creates stable budget holes, hence future austerity.
In October 2021, a tool box was designed, a tool box that offered various tax cuts or direct subsidies to end users, primarily households, but also small and medium-sized enterprises. So, as I said, Member States had to choose from the tool box, but all with financial support for end consumers. Nothing in the market.
I will go through a few.
Adrian Simpson is the Commissioner for Energy. In September, he was saying that electricity prices have gone up because, mainly, natural gas prices are very high and because of post-crisis demand growth. Ð He was blaming September-October 2021 on these elements, when Russia was not yet in play. Blame it on post pandemic and global development.
The European Union has no long-term plan but it makes it very clear that we need to solve the energy problem through renewables. In fact, it completely sidesteps the root cause of the problem and the way the patterns in the electricity market have been created. I explained a little bit before, didn’t I? You can’t just invest in renewables in the transition period. And finally, here’s the first allusion he makes to Russia and the current situation. It underlines that we have to have the ultimate goal of ending our dependence on volatile foreign fossil fuel.
Already in September-October, the geopolitical option was already being prepared in the European Commission’s backrooms, without any connection to war. Maybe they knew there would be war. We won’t know until fifty years later. The European Commission is also defending the electricity market. It believes that it is the one that best serves the need for energy. And of course, it is also considering increasing the share of renewables in order to maintain the stability and predictability of the market. What nonsense! It is precisely predictability and stability that is being destroyed by the model they have created. And it goes on to say very clearly that the green transition must continue, because the increase in energy prices is not linked to renewable energy. High prices would be driven by polluting energy.
It completely misrepresents the situation; I explained that renewable energy cannot be decoupled from polluting energy during the transition period. And because high prices for polluting energy are precisely determined by low prices for renewables. I explained, you can’t take them separately. Thus polluting energy sources become “unprofitable”. In fact, even in Romania, the Oltenia Combine works two days a week. The union bosses there told us, “We’re going bankrupt.” And after that, these prices started to rise. It’s okay, they cover their expenses with these high prices. In fact, they sometimes cover their costs, but only now, with very high prices.
Maria Cernat
If it was the prices before, they wouldn’t have been able to work so little.
Andrei Mocearov
Maybe I’m not very polite, but what he’s saying is … I don’t want to make an ideological or political accusation. It’s nonsense what he says, that the high price has nothing to do with renewables. Precisely that it is related to this unfortunate combination where renewables are stimulated by the market and not by state intervention. Even the conservative American economists I told you about, that it was a conversation between the MS and the Institute of Technology people, say there needs to be a little bit of central planning. And even they talk about how complicated it is to replicate through market mechanisms those equations from the national dispatcher. So they knew.
This is where it’s interesting how northern Europe, Austria, Denmark, Germany, Estonia, Finland, Ireland, Luxembourg. Lithuania write a letter on October 25. Discussions had started. For example, Bruno Le Maire, the French economy minister, came to the meeting of European finance ministers because they started discussing the financing of these games and he said it was absurd. The electricity market model was quite a pressure. Even the Romanian Finance Minister at the time signed the letter together with the Spanish, the French, the Greeks and the Czechs, I think, asking for the decoupling of the price from the price of electricity.
But here is the letter of the nine, in which we read. I’ve put it directly in English again, in the original. You should know. They say, “Don’t touch the market!” It’s the same nonsense they go on to say, they defend the integrated energy market very much, and finally they say “We cannot support any measure that conflicts with the electricity and gas market.” For example, ad hoc reforms for the wholesale electricity market because there was a lot of discussion at the time, in October, but they refused measures to regulate the market.
Maria Cernat
It was a borderline situation and I remember that some statements like that appeared in the press: Sir, it’s not really working, we have to start to….
Andrei Mocearov
Let’s start fighting. I mean, in the European Union we saw some energy councils, to broadcast publicly. And there were a lot of people attacking especially speculation in the carbon market. Who were those councils with? With ministers. But few of these ministers understood that in fact the speculation was actually in the gas market and that it was a fierce defence of the markets.
Here’s a bunch of slides. And I’ll give a very significant example, which even appears in a European Commission communication from May. The European Commission, on 26 April, held a consultation meeting with stakeholders. Organisations, market players and even non-governmental organisations are listed. Even those did not have a clear vision. Speaking of the press and non-governmental organisations, they were on the side of the elites. National regulators, think tanks – sounds spectacular.
The consultation showed a high degree of convergence. What is convergence? First, there was support for developing short-term measures. This means they don’t want to change anything structurally, to avoid unintended consequences for security of energy supply, decarbonisation and the integrity of the European market. “Let’s not touch the market”. Then there was a particular focus on measures directly aimed at household consumers and small businesses. Again we are looking at symptoms, not causes.
Maria Cernat
Isn’t that absurd, Professor? Because if you say: well, we’re putting a price on the consumer. That means that I, Maria Cernat, won’t pay more than 5 lei, the price can go up, and the state will pay the difference over 5 lei, right? That means it doesn’t take from me, but it takes from the budget.
Andrei Mocearov
Take from the other pocket.
Maria Cernat
We give…
Andrei Mocearov
From your money. Future ones.
Maria Cernat
Exactly. Let’s say the supplier sells for 20 lei. If there’s no price cap there, why did you cap it for me? Now I’ll pay 5 lei, and the state will pay 20 lei to the supplier and the 15 lei difference to me.
Andrei Mocearov
That’s what happened in Romania in the first phase. There was a hole in the budget. This is the recipe for severe austerity in the future.
Maria Cernat
Right.
Andrei Mocearov
The market was at risk, in the view of suppliers, of significant distortions that would have resulted from interventions that would have directly affected its functioning. You realise that the European Commission brought together all the relevant players at that time. I am sort of joking and saying that they are living in a kind of meta verse. They are completely disconnected from the real world. This saddens me because I, by the nature of my occupation, have had the opportunity to read a lot about some experts. Moreover, I have even spoken to European Commission officials, experts from various countries, national parliaments and governments. And if 25-20-15 years ago, even 10 years ago, opinions were much more nuanced and divided. There were a lot of people and there was no consensus, in the sense that not all of them would have signed this communiqué, which states that the risk of significant distortions arising from interventions directly affecting the functioning of the wholesale market would not have existed.
They are, in fact, denying reality, being completely detached from the problems of the population. By proposing this, they are in fact doing it at the expense of the citizens, at huge cost. Apropos of what I said. If the supplier had charged you 20 lei instead of 5 lei, you wouldn’t have paid. That’s why I’m going to say that it’s a matter of government complicity, because these unpaid prices have been paid by governments without asking us if we agree to take the money. I mean it’s a profoundly undemocratic act.
Maria Cernat
That’s how they trick you, it looks like the state is giving. Well, where does the state get the money from, if not from you? I mean, what, does it take it from the well?
Andrei Mocearov
Like printing money, which was also a trick. They go on to say that current price formation ensures efficient use of resources. That’s the night of the mind, because current price formation is completely wrong. We have already seen what is happening in the gas market. We do not yet know what is happening on the financial ones. Is there resource efficiency in the electricity market? The resources should have gone to green energy as well as polluting energy in transition.
American economists say the market is not working here. I would say that the current law of short-term intervention leads to the fear that external influences in price formation could drive up gas demand in the EU, undermining the energy transition, These EU-wide measures, I would say, could remove the incentive, even a short-term one, to hedge the risk of high prices. They don’t want any short-term intervention because it affects financial transactions that are usually done on hydro. Well, this one I don’t think many people read. It’s official. The IEA communication can be read by anyone. A conclave of so-called specialists, interested actors, have gathered there, saying all the crazy things, but everything, everything is a lie and stupidity from A to Z. In all these conclusions in which there was consensus there is nothing true. At a time when there were unpayable prices in the market, they are the ones the press is defending.
Maria Cernat
And they insist on it.
Andrei Mocearov
That’s why I say they seem to be in metavers. I mean they seem to be in a completely parallel world. And I repeat, this could not have happened 10-15 years ago. I have attended meetings, for example in the European Parliament, where there were clear opposition views. Of course, some people came and said that, but they were contradicted on the spot. Oh, now it seems there was consensus.
And finally, the preference for intervention in gas markets. Why are you defending the electricity market so strongly? And here, of course, the interventions must be very temporary and with clear deadlines. It’s the same kind of short-term measures. That seems to me to be the worst thing. Back in October, when Bruno Le Maire and others, including our ministers, raised objections, what did the European Commission and the Nordic group do? Let us see. We ask the European ANRE to tell us whether the markets are working well or not. It comes in April with the answer and we make decisions. They did a report, in which they said that not only do the markets work perfectly, but they also said that any interventionist approach, the greater it is, the greater the danger of price distortion. They completely opposed any intervention. Moreover, they recommended what they called market-makers, i.e. more speculation made to increase liquidity in the markets. What do you want more liquidity on? We’ll see. You have a 1.5 trillion euro hole in the energy-related financial markets. The irony is that this report came in April, when tensions in the EU were rising.
Prices were high, there was the dispute with Russia, there were those sanctions packages going on, and there was increasing pressure on member states to sort it all out. There was social pressure in those countries. And then Ursula von der Layen, actually ignoring this report, started to say: yes, we are going to tamper with the market, including the electricity market and so on. I mean in October 2021 they told us where everything is going perfectly, but still it was considered appropriate to ask Acer (the European equivalent of ANRE). Acer comes in April and says: indeed, everything is going perfectly and don’t interfere in the market. And Ursula, in response, says: “We are not going to intervene”. It was all a political speech. We’ll see what happens next.
The European Commission kept to cynical jokes. I’m sorry to have to say this, because I am basically pro-European. My whole career has been linked to the European Union. I am sorry that I now have to criticise so strongly.
Maria Cernat
There’s not much to choose..
Andrei Mocearov
This is the reality.
Maria Cernat
We can’t even move forward. I always say that it’s important for us pro-Europeans to be critical, because if we don’t end up in these mythologies of blood and Dacians…
Andrei Mocearov
Yes, there is talk of Roexit, but it is not a solution. As bad as the EU is, outside the EU it would be even worse. Examples are numerous. What is happening in the east is a nightmare. Even without war it was an economic nightmare. Finally, here comes the EU reaction with economic harakiri, cutting energy from Russia. I have put this slide here because there are some small discrepancies in the Commission communication of 23 March compared to the political message coming from the technocrats in the committee. Here, in yellow, is the gas market. Volatility is high and not fully correlated with fundamentals. So, I recognise that there is some speculation. This is where the European Commission proposed for the first time to intervene including in the market. Did I say why? Because there was pressure from the states. But what the European Commission is doing has its drawbacks. The drawbacks are so great that what it is proposing has practically no advantages. But that’s how the democratic exercise worked. We responded to the request of the states.
In September 2022, the suggestions come. The first thing is to limit influence. The second thing is to reduce the high prices caused by exceptional market conditions, which in a subsidiary way are related to the energy market. And finally, thirdly, ensuring better functioning of the market. That is, again, an acknowledgement that there is excessive price volatility that is not driven by supply and demand fundamentals. But again, the things I have highlighted here are completely absent from the political discourse that people hear in the media discourse. Nobody here has conveyed the fact that, in fact, the European Commission’s texts do acknowledge this somewhere, don’t they? that there is volatility. We do not see it on the front page, not in the foreground, not emphasising that we have excessive volatility in the markets, that it is not related to supply and demand, that it is financial speculation or speculation of the commodity in question. Commercial, not financial.
However in this “non paper’s” text there are two things to note: that intervention on gas prices must be strongly correlated with consumption reduction. But the coolest is that Europe was able to import gas because the price was high. In fact, it’s a “non-paper” that is made at the request of the states in order to find a solution to cap the price of gas on the wholesale market. And the European Commission, through this non-paper, is saying: “The price is high, we won’t be able to buy any more.” Why do I call it a non-paper? We’ll see why: the commission has no intention of capping the price. Ursula only tried to cap Russian gas. There were 16 countries that opposed it and proposed that we still get cheap gas from the Russians, because American gas is expensive. But even the states that opposed it were of the opinion that the Russians would not give us any more gas at all and that we would be completely left out. Ursula, in her argument, said that the Russians would not be able to afford to cut off our energy supply completely because they would run out of money; so she reasoned that it was worth trying to put a cap on it.
At this point there is a regulation that comes under increasing pressure from the states and in fact social pressure that is growing. This regulation is a sort of solution to reduce electricity consumption at peak times. This is not, in fact, the best solution. But is there still a cap on electricity?
Maria Cernat
Exactly, yes.
Andrei Mocearov
180 euros per hour, revenue from the market. But what’s more important: the ordinance given to us took this into account and was able to cap it for three years from now. It decided to cap even higher, not only on consumers, appropriate forms of price control for up to three years. Our ordinance until 2025 used this regulation. That’s a lot. Originally the ordinance provided for measures until 31 March 2023.
Maria Cernat
Here I have a question: is this 180 euros a higher price than before? We have capped it, but at a higher price than before?
Andrei Mocearov
Of course it has increased.
Maria Cernat
But at least there’s no more volatility and you can’t prepare.
Andrei Mocearov
Prices had even reached 300 euros. 180 is not reasonable, it’s still very high, but some measures have been taken. Basically, no structural measures have been taken, all measures are taken for fear of social upheaval. Those who propose these measures, that is my conviction, that is, the current ideological composition in the Commission and in the northern European countries in particular, do not allow the creation of a critical mass for a structural reform of the market.
What is at work now is the fear of social upheaval. This pushes them to produce capping regulations. They don’t believe in that, they believe in the market. Incidentally, there have been EU member states – I’m still finding out what goes on behind the scenes of these meetings – as the Financial Times jokes, who have criticised the ideological profile of some Commission officials, calling them “market fundamentalists”, precisely because they oppose any regulation. That’s not harmony, that’s discussion. Not everyone falls in line and says “yes, sir!” You’ll see that the European Commission’s latest proposal has been completely scrapped. I don’t know what they will do in the future. And here, I say, the Commission is keeping a joke: it came up with a ceiling of 275 euros. It’s gone mad. It’s gas, not electricity.
Maria Cernat
There it was 80.
Andrei Mocearov
But two conditions have to be met. One is that this ceiling must last two weeks. But most importantly, it has to be 50 euros per megawatt hour higher than the average price of liquid gas for 10 days. That is, we cap it, but it must not be lower than this price. And a difference of 58 times American gas. Of course one of the energy people at Bruegel, who is also a blogger, a very important think tank, said “it’s a joke!” (it’s a joke!) They have all kinds of studies and they are bound by their condition and he said simply: it’s a joke.
In the Council of Ministers and the Polish minister also said it’s a joke and in general he was massively rejected with this proposal. Besides, it would never have been implemented. In August, when the price was high, over 300 euro megawatt/.hour, the conditions were not met, because it did not last more than two weeks and it was not 58 euro more expensive than the average American gas. So even at the most difficult time in August, this regulation would not have applied.
Maria Cernat
So now I understand. So it has to be 10 times worse than it was to get a cap anyway at a higher price than we had. I mean that’s great.
Andrei Mocearov
Whoever said it is a serious man, who has studies, is consulted even by the European Commission. He organises meetings; there are specialist professors there. I was simply shocked by the regulation proposed by the European Commission. I said that politicians still talk nonsense, but this nonsense is shrouded in a veneer of plausibility that is hard to see through if you are not very careful. You can fall into that trap. It’s pure cynicism, hard to explain. One should investigate in the sense of journalistic or scientific curiosity: how was it possible for the European Commission to come up with this proposal?
There’s something else, the argument comes up, something absolutely shocking is said there. I didn’t put it in the presentation, I’m saying it now, namely that Russia sabotaged the Nord Stream pipelines and the EU knows for sure. Although we have an investigation that is totally opaque, nobody knows anything about it. It has not been said who did what, and the European Commission can afford to write in the official document that Russia, in fact, blew up the pipeline. Maybe Russia did this, but there is no finished investigation. No, that’s not what an analyst says, it’s not a top entertainer and the man a nobody, not in an official Commission document. That seemed top notch to me. But there it is. It’s December 2022.
This article was originally published in Romanian here.
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