The Oil Drum: Europe

Speaking of nuclear:

British Energy shares slide on output concerns

Shares in British Energy dived 8 per cent yesterday as problems at two of its nuclear power stations threatened to slash output a year after boiler cracks forced two of its other plants to close all winter.

British Energy shares led the FTSE 100 index down after the UK's biggest power generator said it had shut two more reactors after finding an "issue related to a wire winding" in the boiler closure unit at its Hartlepool-1 plant.

The weekend closures left almost half of British Energy's nuclear reactors offline yesterday morning and revived memories of its Hinkley Point and Hunterston nuclear power stations being closed throughout last winter.

Brown should pray for a warm winter...

Speaking of market mechanisms: an Op-Ed in yesterday's FT:

Energy liberalisation leads to higher prices

(...) what is liberalisation expected to achieve? A more competitive and transparent market and thereby lower prices is the stock reply. A possible relationship between liberalised markets and security of supply has been a more recent emphasis.

Such aspirations could be dismissed on the grounds that the gas and electricity industries are inherently unsuitable industries for competition. Here, though, I would like to challenge them by drawing attention to the impact of liberalisation on the three main cost components that make up the prices paid by households (...) the wholesale cost of gas and electricity, the cost of transmission and distribution and the cost of supply (billing and marketing).

(...)

First, as should be anticipated, liberalisation increases aggregate supply costs for domestic customers (increased marketing costs, duplicated billing infrastructure, switching costs etc). Second, the level of these costs can be unrelated to the actual cost of supply as energy companies defend or increase their downstream profit margins. Third, while supply costs for gas and electricity should not be too different (the billing process is the same), in 2006 they were only £16 for gas, but jumped to £88 for electricity - providing a clear indication that a squeeze on gas supply margins brought about by the rising wholesale cost of UK gas was compensated for at the expense of electricity customers.

Full liberalisation in electricity and gas has either not got off the ground or has died a death elsewhere in the world. Through its impact on wholesale pricing and on supply costs and margins it is likely to result in both higher and more arbitrary prices, as well as making a lottery of investment incentives. But the European Commission presses on regardless at the expense of addressing more urgent energy problems. Somewhat ironically, its efforts are mainly sustained by the UK.

On wholesale markets, the author has this to add:

The impact of liberalisation on wholesale costs is problematic in that short-term markets increasingly price electricity or gas delivered under long-term contracts. Such indexation to short-term markets (for example to month-ahead or day-ahead prices) is wrongly seen as a virtuous indicator of liberalisation, when in fact these markets establish a volatile flexibility premium as buyers and sellers seek to balance their positions when delivery day approaches and options increasingly diminish.
To counterpose them with "old-fashioned" long-term contracts and allow them to set a price for baseload supplies contracted for perhaps years in advance of a delivery day is therefore misplaced - such long-term supplies are more appropriately indexed to a wider basket of commodities, including alternative fuels, in order to reflect the different risk profile they offer. This is not a trivial matter: gas indexation has ruined otherwise viable businesses in the UK and made long-term investment decisions hazardous.

(Note - investment banks and traders love volatility - it's a great source of profits for them. In essence, deregulation has forced utilities to outsource volatility management - with the added twist that they pay more for it than before...)