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Financialization of energy markets
The energy crisis hides a financial crisis caused by speculation in the financial markets associated with the energy market. In August 2022, the hole in Romania’s budget caused by energy price compensation to the end consumer was 42 billion lei. Only 16 had been foreseen. It was only then that the question of measures to counteract the effects of a speculative market was seriously raised. Unfortunately, as we shall see in this episode, Romania has at the head of the institutions that are supposed to regulate the energy market libertarians who fanatically believe in market instruments. Professor Andrei Mocearov explains just how serious the energy market crisis is. We also find out how the software at electricity suppliers has changed and the unfortunate incompetence of civil servants that has led to more than nine versions of the emergency ordinance designed to solve the price problem. We now learn that serious intervention has finally been made in both the electricity and gas markets to balance the situation. Of course, it would have been very good to have a responsible press using this moment to question the ability of the markets to produce low prices. It was the mantra we kept hearing in 2021. Now, after the inevitable disaster has occurred, we’re back to where we started, we’re back to regulation. But without actually understanding what happened at the deep level. The geopolitical situation has complicated things a lot. There is no point in denying it. The problem is that it acted as a smokescreen behind which politicians hid speculation, artificial price increases. Having been sold the illusion that markets will produce lower prices, we have a hole in the budget and regulation. Johan Galtung spoke of structural violence, of violence produced by systemic conditions. I think we have experienced a period in which this kind of violence has been unleashed, leaving plenty of victims. People we don’t mourn because we are not trained to analyse this kind of violence. I recently experienced a situation that shows this grimness: when a colleague brought up the silent deaths of those who kill themselves because they cannot pay. He said that we are not used to rebelling against them. That we see the victims of military conflict in our neighbours and we revolt. But, unfortunately, the suffering next door, the suffering caused by economic causes, is always ignored. And that does not mean, as some may think, that we trivialize the suffering of war. We are merely pointing out mental reflexes. Now, precisely to broaden the perspective from which we look at the energy market a little, we are bringing up this chapter which is very little understood even by some economists and which is, unfortunately, the source of problems and economic violence.
Video (in Romanian)
Transcript (translated):
Andrei Mocearov
And now we come to an even more difficult point.
Maria Cernat
It is the most important thing, the most difficult thing for the common man to understand. When you say electricity, just a little bit, you realize. “Current” – it has something to do with the concrete. But now, when we get into this area, we have speculation, stock exchange trading. I mean these are such abstract things that I think for ordinary people they are very hard to understand. How do they sell energy? I find it interesting: I don’t produce energy, so how do I sell energy if I don’t produce it? How do I take from there and take to there? It’s quite hard to understand.
Andrei Mocearov
You have to understand how markets work, they have to be liquid, there has to be these market makers. You are speculating for the prosperity of citizens.
Maria Cernat
Yes.
Andrei Mocearov
Make the market liquid and citizens prosper.
Maria Cernat
Yes, it just hasn’t been seen yet. What has been seen is a bit backwards.
Andrei Mocearov
You say you don’t understand or that people don’t get it. I’ll tell you a little secret. Most economists don’t understand what’s going on. In fact, everyone is speculating. A French economist used to say we live in a world where non-financial companies are financial speculators on financial markets. And now we have concrete cases. These large energy companies are derivatives, operating in a completely separate market, recognised as an energy market, i.e. with energy products. These hedge funds, derivative instruments, which the French call in plain English speculative. They have a meaning: i.e. you make a big transaction with electricity or gas and you are afraid. You’re afraid because you say to yourself: I’m buying in January and I’m going to buy at a certain price, but prices change and then I may lose. And then these financial instruments come along to protect you.
Maria Cernat
Insurance companies? No.
Andrei Mocearov
It’s not insurance, it’s protection against price volatility. I mean you’re doing a transaction. Conversely, if in the physical transaction you buy, in this one you sell. And then if you lose in the physical transaction, you gain in the financial transaction and vice versa and you’re tanda on mom. All well and good, except these financial transactions are way, way beyond the need for protection. On a physical transaction, for example, and a thousand transactions that take place financially, only one is defensive. The others are purely speculative. It’s a game that’s completely separate even though, apparently, these instruments are linked to energy. A pure financial casino. This issue has arisen in the European Union. You’ll see, it’s interesting. The main culprit is the French commissioner Michel Barnier, who during Barroso’s time, when he was president, was commissioner for financial markets. He came along with… surprise: Mr Ciolos, who was Commissioner for Agriculture with this idea – the integrity of the commodities markets. Why? Because these commodities mean oil. Now it’s also gas, but it also means agricultural products. Ciolos, being on agricultural products, was bothered by the fact that there were very high fluctuations in agricultural products, which were caused by financial speculation, i.e. speculation on the financial markets linked to agricultural markets. Then they came with a communication from the European Commission about the integrity of the markets. This communication was eventually legislated and Regulation 1227/2011 REMIT came. I’m going to go through a bit and come back.
First of all, this regulation recognises that there is a derivatives market, which is an energy market. It also recognises that prices are correlated in the two markets and that physical commodity transactions can be influenced by financial speculation. And then, I give the definition and combat manipulation. Basically, they give a tool to combat manipulation, which artificially causes prices to be at a level that is not justified by physical demand, i.e. fundamentals. And they define market abuse. Prices set in engross markets must reflect the balanced and competitive interplay between supply and demand, and profits cannot be made through market abuse. So the regulation is very good. The point is that spreading false information, misinformation, false or misleading messages are punishable under this regulation. Under these circumstances, Ursula von der Layen should be fined a huge amount.
Maria Cernat
That’s exactly what I was thinking.
Andrei Mocearov
Good.I mean this REMIT is demolished. I mean, that ACER and the ANRE in our country gave some fines. I think there are another 10, 20 fines all over the European Union that are like that, little nibbles. Transactions have increased enormously, it’s a gigantic speculation. Prices have gone up 15 times and they have done nothing. This regulation has practically not been applied. Zero.
And now what has happened because of this terrible speculation? You have to see how these instruments work. There are some brokers and you, the market player, have to make some bets, because that’s what buying and selling in the financial market is. But to make these bets you have to have some money in your account. The products are either energy products or derivative financial products related to law products. If the price of the energy product goes up as it has now, the broker charges you some money to cover the trades in the physical energy product market. It’s called a margin call. But here’s where something else happened. This high inflation has caused central banks to raise interest rates. In fact, it’s a big, global action where it’s a reversal of money printing. Money is being withdrawn, but that has the effect of lowering equities, because we’ve had in the last 10 years, until a year ago, a huge inflation that we didn’t know about, because it’s not calculated by anybody in the financial markets, that is, in financial assets. Inflation certainly was very damaging. It brought a lot of money to those with money, but it was very harmful to the economy. And the central banks and all the Western economies were at a standstill. That’s when this energy shock happened, I say.
In my view, one of the reasons is macroeconomic. The fact is that in these accounts money is not paper money. It is money. Money can be any stock or any bond. There, if you put or ask someone to come with 50,000 euros, you don’t come with cash, you come with 50,000 euros of shares that you give to the broker to have for margin calls. But these have gone down because, fighting inflation, central banks have increased interest rates. Interest rates are inversely proportional to the value of financial assets. So high energy prices on the one hand and falling financial assets on the other have made the margin call rise. In other words, brokers said, “Hey, bring in more money because the money you have is making less!” And now you need more money because energy prices are rising. This hole is 1500 billion, 1.5 trillion. In fact, we are in a financial crisis hidden in the energy crisis, which is even bigger than the financial crisis of 2008, which nobody is talking about. Now I don’t want to take credit for saying that. There are many who know, it’s not a secret. But these 1.5 trillion 1.5 trillion still say something, namely that things are getting out of control.
Maria Cernat
It’s out of control and that for a long time there has been no intervention. Things have gone from bad to worse. Nobody wants to put the brakes on and we’re going deeper and deeper… We’re going down the cliff.
Andrei Mocearov
There was a joke going around back then, after Lehman Brothers collapsed: the crisis erupted when someone asked where the money was. Now the brokers have done that: they asked where the money is. The call on the margin is: “Where’s the money? Because we don’t have the money, get it!” A lot of companies, even energy companies, have fallen for it. So nobody understands how we have these high prices and yet they are bankrupt. That’s because they got into financial speculation. Enel, for example, I read somewhere, speculated not only with derivatives on energy products but also on other financial markets and has a $16 billion hole that the state has to cover.
Interesting is the case of German Uniper which is actually a firm. The parent company is Finnish. First the German state gave them 15 billion euros. Then it saw that it was still not working and nationalised 99% of it, paying 29 million. That was in January, at the beginning of the year or December 2008, it didn’t borrow from the Finnish group anyway for ten billion. Everybody says, “Gentleman, they’re having a hard time because they don’t send gas to Russia anymore.” No! They collapsed because of financial speculation. In reality, this hole they have has little or nothing to do with Russian gas. It has primarily to do with financial speculation. For example. Sweden and Finland. Serious countries. They have already helped their companies with 33 billion lei.
Maria Cernat
In fact, it practically covers the hole resulting from these speculations.
Andrei Mocearov
It’s similar to what happened in the great financial crisis of 2009. Some money is being produced. Bail out means when the state steps in and rescues private companies from bankruptcy. But a large bail out. This 1.5 trillion is related only to energy companies. There’s another disaster with the pension system. I won’t say any more now, we’ll be here till morning.
Maria Cernat
We’ll discuss pensions another time.
Now let’s see what happened in Romania. I was surprised to see that at some point in Romania there was talk of compensating, of capping. It seems to me that there was, at least on the PSD side, at some point, a desire for regulation. I heard him… I don’t remember exactly who he was, but he was from the PSD, and he said that they had found a trick, because in this pro-market context you have to be very clever as a politician, to know how to pack. And then they said something like, “Of course we are pro-market, but now there is a crisis and that’s why we have to regulate.” And then they found this thing. They found this excuse of crisis and somehow managed to sell the idea of regulation, so to speak. But so far tell us what has happened
Andrei Mocearov
I don’t want to brag. And the PSD, that is, the leaders of the PSD and PNL, had my interview in Libertatea on the table. There were reactions, but let’s leave it at that. Only if they had taken my interview in Libertatea seriously, on 29 January this year they wouldn’t have done the stupid things they did. I’m afraid that it wasn’t necessarily ideological inclination, which exists, in the sense that we are more libertarian than the European Commission. Ideologically, there are a lot of libertarians here, more radical than anywhere else, but here I think it was pure incompetence. Sure, and a few shysters who took advantage.
A disaster has happened. We picked the worst solution out of that tool box. I’ll be right back. In August, the ANRE went to the Ministry of Energy and then the Ministry of Energy went to the Ministry of Finance with the bill. You may have been on vacation in August, and they were probably on vacation, but they freaked out. The budget rectification is usually done at the end of August; then they rushed through the ordinance on the first of September, which, I might add, is now law. After they saw what the European Union was saying, they put things right, after getting scared. The hole in the budget was so big that they couldn’t pay on the estimates they had originally made. When they read the interview, they didn’t want to understand it.
Maria Cernat
AND then…
Andrei Mocearov
Yes. They made financial compensation conditional on a consumption threshold set at the end consumer. And, as you have noticed very well, with the example of 5 lei and 20 lei. This not only allowed, but also stimulated not the market cap, but the skyrocketing of prices on the purchasing market. The opposite has happened: unlimited increases in electricity purchase prices. And then came the bill. We will soon see how much: we have 42 billion, when they had only budgeted for 16 billion. The 42 billion bill was only until September, and 16 billion was planned for the whole year. It was a shock. I think the Minister of Finance fell off his chair. And, well, they got alert and quickly did what they had to do, they corrected. Now things are corrected. Sure, there’s still a hole in the budget. Structurally, nothing has changed, but we are in line with what Europe has proposed. One of the characteristics of the Romanian market is, as I said, economic libertarianism. The famous vice-president of the regulatory authority talks about fishing, he uses this fishing metaphor. We have to make do, we have to fish for ourselves, we don’t get fish. It’s a purely libertarian metaphor, devised by those who believe in market fundamentalists, who believe that the market is divine and should not be regulated in any form.
Maria Cernat
You see, that’s why it would be nice to have some magical power to make this gentleman live like this in a one-room apartment, a studio flat on the outskirts of Bucharest, with two dependent children and a minimum wage. And then, say yes, we’ll leave a fishing rod at your door. Then let’s see how it goes.
Andrei Mocearov
He’ll tell us that he couldn’t possibly get into this situation, that he knows how to fish and has fished, and now he’s vice-president of A.N.R.E. and has other businesses. These market fundamentalists here have encouraged spot market trading more than in the EU. Even in the memo of 1 September it says 52%, but at one time there were also 60% trading limits. Spot market trading should just do the fine tuning if anything. I would abolish them completely, but whatever, let’s say they only do fine tuning. Because electricity and gas consumption is known anyway, there don’t seem to be 50% fluctuations. A company that sells us gas or the law knows about how much they can’t lose all their customers, or if they have customers who suddenly consume more or suddenly less. So an electricity supplier’s portfolio is plus-minus 10%, the maximum based is 50%. So on the spot market you should fine-tune the maximum 10%. In Spain it’s 4%.
We talked about the budget hole of 3-4% of GDP, but it’s a proof of incompetence and that’s dramatic. I shouldn’t have said it so bluntly, but I’m saying it anyway. Unfortunately, the civil service in the ministries is the result of decades of PSD-isation and PNL-isation. USR isn’t in the game, it hasn’t been in power much. PSD and PNL used the criterion of political loyalty and not the criterion of competence. To that you probably add of course the school and many other things, but these people in the ministries are not able to write a law. To write a law you need a bit of brains. In addition, you have to know European politics and Romanian politics, i.e. other Romanian laws. It’s not a simple job, it’s a lot of work, even overtime, if you’re a serious person.
In our case there were nine software changes from the electricity suppliers that reflected the actual number of variants. Every ordinance they wrote, they wrote badly and had to be rectified. From the office there they were not able to write and predict, when they wrote something, what would happen as a result. And I’ll give you just one example: in Romania they have capped the progressive tax, i.e. if you exceed the consumption of 300 kilowatt hours, you pay the maximum price of 1.3 for all consumption. How can you know if that person has consumed 200, 99.9 or 300 point one? You don’t. For that you’d have to have consumption online all the time, like in Germany. In Germany you have a server and you know how much every German consumes at any time. We don’t have that, so you have to be completely incompetent to put such a provision in the law, even when people have been told about these things. You know the decision came from the government and the Senate. There was a mindless deputy – this is not a civil servant – a politician who made an amendment to the last ordinance that passed through the Chamber of Deputies, something to the effect that if you consume more than 300 lei, you pay the whole thing. Imagine if Enel or the company you subscribe to comes and tells you that you have 301. You say: “No sir, I consumed 299!” Neither can Enel prove that you have consumed 301 kilowatt hours, nor can you prove that you have consumed 299 unless you have a smart meter that registers you online. So you say: “Look, on November 24 I had 299. On the 25th I had 301!” Which one do we count? So it’s total madness. But things have basically settled down. And then there are the misleading commercial practices of suppliers, although here European legislation is very strict. I have a particular story of my own…
Maria Cernat
Did you receive one of those €5,000 invoices?
Andrei Mocearov
No, it’s much more complicated, I mean there are some fine points. No, I didn’t.
Maria Cernat
A friend of mine woke up, poor guy, in a three-room or four-room apartment, with an invoice for 5,000 euros.
Andrei Mocearov
Yes, yes, yes, it’s a mutual friend. I know. That’s how I ended up doing the interview for Libertatea. In fact, he recommended me; he told Libertatea and told them that a friend of his said it was economic hooliganism that was going on. That’s how I ended up doing the interview. With the support that the state has given, Romania has an honourable 4th place – it missed the podium by 3% and that’s just for January. Now we’re at the top, we’re sitting pretty on the budget hole.
There’s also a map of energy prices. It was taken recently, on 2 December, but the map is absolutely similar every day, only the prices differ. There are days when prices are higher and days when prices are lower. In August it was 700, this 381.
Maria Cernat
Yes, yes, yes, I know we were at 700. That there was something incredible.
Andrei Mocearov
Romania is on top. The Czech Republic has more and usually Italy. Here you can see two things: the Nordics are cheaper. You can see Spain – here are the prices in the shop window. I don’t want to digress. It’s a trick there, they’re not real. I mean the Spanish and Portuguese actually pay well, but anyway they have lower prices and don’t use less gas either. I explained why gas makes electricity expensive, because that’s an average price. Both in Spain and Portugal, and in Sweden, Finland and Norway, it’s not always the break-even price, because they only use gas at peak times. And in Poland they have coal, and coal is cheaper than gas, i.e. they cover the peaks with coal. That’s why in Poland it will always be better. I repeat, it’s a low price per day. Now this ordinance has been proposed and it’s ok, in my opinion. However, high prices still remain and no structural reform is made. That only solves local problems. More anyway you can’t really do it on your own, because there are European laws. So the capping is done in steps for household consumers, partial capping for certain categories of non-household consumers, public institutions, SMEs and so on. This is very important.
Maria Cernat
I would like to say, because it is very important, for example, to cap for schools, but especially for hospitals.
Andrei Mocearov
Sure, it’s capped at 85% of consumption. One lion per kilowatt. But what’s more important is the budget hole scare – they’ve devised financial compensation limited to a maximum imposed purchase price. They imposed with the purchase price 1300 lei. What you were saying: they can’t raise the unlimited price. Now profits from transactions are taxed at 98% and those from exports at 100%. There has been a lot of intervention. Of course, my question is: why do prices have to be so high? Why do we have to tax instead of producing a market with low prices? But that requires a structural reform of market models. These are things that are not being done.
Maria Cernat
Now, after so many years of pushing in the wrong direction.
Andrei Mocearov
Exactly, and the most spectacular thing that has happened is the centralized, partial purchase at a regulated price of 450 lei per megawatt. Estimates are that a third of the prices will be regulated. The operator who will buy power will buy 450 lei megawatt hours from the market and sell it all for 450 lei. This is a semi-regulated price. What will it be like in practice? It is not known exactly, but it is taken from the French model. In fact, France and Singapore are the only countries still resisting liberalisation. Only 6% is not a natural monopoly. Moreover, the group is neither in France nor in Singapore. In Singapore, the energy system is owned by the Ministry of Finance. But, as in France, where nuclear power is dominant, L’ Electricite de France, however, is a kind of natural monopoly, and the company is still obliged to sell some of it. That’s how it is here. It’s taken after the French model, but not entirely, as we don’t have only nuclear power. I mean, this 450 lei per megawatt hour does not only come from the market, it comes from the production made by the state. Hydro, nuclear, coal. Because, fortunately, most companies are state-owned.
Maria Cernat
Yes, yes, that’s where I’m getting to, but at the end, I don’t really understand how this comes about, state producer and private supplier? Why is it very complicated? Why don’t we cut out all these middlemen and buy directly from the state and goodbye to all the speculators?
Andrei Mocearov
Because a lot of people in Romania say that, in fact, all this nonsense whereby prices have risen is convenient because the state takes money back either through taxes, dividends or whatever. That it’s actually a gain for the state. It’s completely false. The state loses and the citizens lose first and foremost, not to mention the fact that these high prices dislocate the economy. In reality, all this nonsense gives financial advantages to some players in the market, not to the suppliers who are in direct contact with us. And my main response is that they are state-owned enterprises, operating in a deregulated or poorly regulated market. The fact that they are state-owned enterprises has no significance. Some of them operate as if there were no market, because the market is in fact closed. But that was possible because the European Union also removed that temporary regulation. Well, temporary for three years. The bad part is that I, after seeing that 3 year thing, thought that the 3 years were put in because there is a forecast that says the war in Ukraine will last 3 years.
Maria Cernat
It’s very possible. I thought so too.
Andrei Mocearov
I’ve seen that and Putin who said it will be a long war, so everybody is in consensus. Which is terrible.
Maria Cernat
Yes, yes.
Andrei Mocearov
Yes, and I’m not talking… Of course there are human lives there, but I’m also talking about the economic consequences. It’s not only about Ukraine, it’s also about us, about the European Union. However, in these three years, compensation means holes in the budget.
Maria Cernat
Right.
Andrei Mocearov
The gas option: again a single, unconditional cap for domestic consumers. Conditional capping for non-household consumers. And here, because there is a duopoly, two large gas companies, there is a fixed price for the sale of natural gas from domestic production, which is intended for domestic customers and suppliers or heat producers. Here a clear cap has been put on the market and that was said from the beginning. Of course the ceiling is high, but it is not exaggerated. I mean, this 150 lei per megawatt hour corresponds to about 30 lei euro per megawatt hour. But the price of gas over the last decade has hovered between 10 and 30 euros. So it’s somehow the highest price in the last decade, which is still low.
This transcript was originally published in Romanian, here.
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