Political dogmas cause high energy bills

Energy prices are rising fast. Households with a short-term contract sometimes see their bills rise by several hundred euros. People with low incomes, in particular, can encounter problems. Can things be done differently? Univers talked to energy economists Bert Willems and Reyer Gerlagh about the current situation on the energy market.

“The rapid rise in energy prices does surprise me one bit,” says associate professor Bert Willems. “Mind you, this is not only happening in Europe. Also in China, for example, prices are high because the country no longer imports coal from Australia. There is also a shortage on the LNG market (Liquified Natural Gas, ed.) that is transported via ships.

“For Europe, natural gas production is mainly through Norway, Russia, and to a lesser extent, England. In Asia, gas is mainly imported by Japan. In America, the United States and Canada have an internal gas market. Therefore, there is not really a global gas market, but the fact that many European countries want to import gas does push up the price.”

The demand for imported gas arises from a combination of circumstances, Willems points out. “The buffer that Europe normally has is missing. This is because Norway has had problems with gas production and because there was a cold winter, which caused us to consume more gas. There has been less extraction production, so our reservoirs are emptier than normal.”

To have enough gas for the winter period, the market is anticipating higher gas prices. This leads to a shift from electricity production to coal. Willems: “The extra CO₂ emissions from coal are compensated by the ETS system (Emissions Trading System, ed.) by a reduction of CO₂ emissions in other sectors. This is a good example of the flexibility of markets.”

New situation

And several European countries, including the Netherlands, have not anticipated this sufficiently, Willems believes. “At the moment the demand for gas is not extremely high. What’s bothering us more is that we have to import more than is contractually agreed because we don’t have the reserves. That makes it an expensive undertaking.

“The Netherlands also has to get used to a new situation. In the past we were a gas producer, and a high price was good for us. That production is now being scaled back, making us dependent on other countries.”

One of those countries is Russia. The relationship between Russia and the EU is not one to write home about, but according to Willems, that does not pose any problems for the gas supply. “The Russians will keep their promises. The main question is what Russia’s export capacity is. I don’t know if the Russians’ gas production is currently large enough to be able to export much more than was agreed.”

Risk model

According to Willems, there are lessons to be learned from the current crisis. The economist says that households can only protect themselves to a limited extent against high gas prices by entering into long-term contracts. “On the market there are only contracts available for 1 to 3 years, and if your contract just expires during a price boom, you’re out of luck.”

According to Willems, energy companies could focus more on the long term. “We see that certain (small) power companies have adopted a too aggressive risk model when buying gas. If you know that you have to sell a certain amount of gas to your customers at a fixed price, then you should buy that gas for the long term.

“Long-term commitments require long-term contracts with your suppliers. If you only make short-term agreements while you have to deliver for the long term at a fixed price, then things can go wrong.”

“Sufficient wealth”

According to Willems, the fact that the responsible companies have not made enough long-term agreements is due to an economic mechanism. “The problem is that risk premiums are paid when electricity companies sign long-term agreements with suppliers. That makes it attractive for those companies to make short-term purchases.

“That’s not a problem if those companies have enough wealth to keep buying when prices are rising. The same applies to households, the only difference being that in some cases they lack sufficient wealth, which is why they are now in trouble,” Willems concludes.

Professor Reyer Gerlagh believes that the problem has a political dimension as well as an economic one. He believes that the households that have concluded short-term contracts are also part of the problem.

“It’s not necessarily complicated,” says Gerlagh. “As a household, you can also secure your prices for the longer term, but that is usually more expensive. So, the question arises whether we think consumers should have the right to make that choice themselves. Or do we think the government should protect consumers from making choices that they themselves cannot bear the consequences of?

“Our liberal government believes that you shouldn’t protect citizens too much, but you should call out when things go wrong,” Gerlagh said.

Not economically literate enough

According to the economist, it is a bad idea to let citizens make this assessment. In addition to economic knowledge, knowledge of the energy market is also required to decide whether a short-term or long-term contract is the best option.

“Ninety-five percent of the people are not economically literate enough to fully understand the advantages and disadvantages of one contract over another. And that’s something that companies, including those outside the energy sector, structurally exploit, or abuse—depending on how you look at it.”

Doctrine

“In recent years, the policy has always been that people should choose for themselves. The fact that they are not always able to choose is not very interesting to the government. The government applies the dogma that free choice is important, so it doesn’t want to guide people.

“People should be able to choose meat in the supermarket that has been produced in an animal-unworthy way, and people should be able to choose an energy contract of which they cannot bear the consequences the moment prices go up. That’s the liberal doctrine.”

The solution advocated by Gerlagh is quite simple: “People who have high energy bills relative to their income should not be able to conclude short-term energy contracts. They should be obliged to have a long-term energy price as standard. And then that market will look different too.”

Energy transition

For the energy transition, the energy problem is not good news, Gerlagh fears. “For the past year, the government has been feasting on spending money. Suddenly, they were allowed to; they’ve acquired a taste for it. So now they want to compensate people handsomely. The proposal is to reduce the energy tax for households.

“Then that compensation is handed out to me too, while I don’t need it. The result is that in a few years other expenses will have to be reduced; then the salaries of teachers and nurses will be kept low, and there will be no money available for the energy transition.”

Every euro can only be spent once, says the economist. It is, therefore, necessary to think carefully about the measures to be taken if the government is not to run into problems later on. Gerlagh: “You could also allow all lower incomes to improve financially, for example by raising the minimum income.

“Another option is to levy the rent tax that is currently levied on all social housing on those rental properties with a poor energy label. This will ensure that the energy transition accelerates. The current package of measures does not sufficiently assist the energy transition.”

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