Thursday, September 16

Market or oligopoly?

The price of electricity has become a serious problem for the economic situation of many families, but also for the economy of thousands of companies, especially small and medium-sized companies, which see their costs significantly increased (by the way, without protests from the CEOE), and affects the budget of expenses of the Town Halls and other institutions. All this implies the increase in the prices of other products, therefore, it increases inflation that begins to threaten the future post-pandemic economic recovery and weakens the purchasing power of workers.

Faced with the situation, Teresa Ribera, vice president of the Government, entrusts herself to the empathy of the energy companies and Pedro Sánchez, president of the Government of the PSOE-UP Coalition promises that in 2021 – when only the receipts of “the light” of 4 months- an amount similar to that paid in 2018 will be paid, for which it will be necessary to do the miracle that those receipts are so low that the total for this year is equal to be equivalent to the whole of 2018. The prices of the wholesale market in September don’t go that way.

Neither the statistics can be twisted so much as to validate the miracle that Pedro Sánchez intends to carry out, nor are the electricity companies a club of empathic institutions. Its profits are clearly high in this market situation (For example, ENDESA has earned 1,394 million euros in 2020, and Iberdrola 3,610 million in the same year, by the way, without significant public exchargers with positions on Boards of Directors of electricity companies speak in defense of the public that they managed).

The reality is quite different from what is explained and essentially consists in that where there is an oligopoly there is no free market and in Spain there is an oligopoly made up of five companies (Endesa, Naturgy -before Gas Natural Fenosa-, Iberdrola, Hidrocantábrico and Viesgo) with a determining role of the first three. These companies also control the vast majority of the electricity system’s retail distribution and marketing companies.

Therefore, the first thing to note is that the energy oligopoly controls and determines the functioning of the market in Spain and that the argument of market freedom and the impositions of Brussels is, to a large extent, false and contradictory.

Let’s see:

In most EU countries, the transfer to consumers of wholesale market prices is regulated by a body independent of the companies. Here it is done directly. The case of Portugal is significant, whose wholesale market is unified with the Spanish one, but where through a body called Entidade Reguladora dos Serviços Energéticos (ERSE) the wholesale price has been reduced by 2021 to 54.52 euros / MWh, according to data from El País from 09-05-2021, page 42 (40% of the price passed on in Spain). Similar systems exist in other EU countries.

Because the formation of the price of electricity is still peculiar. It is a marginalist market structure, that is, it seeks that the price reaches the marginal cost of the most expensive MWh auctioned, so that all energy is paid for the amount of that most expensive MWh. It is a system applied to some raw materials, for example, gold, wheat or sugar, but not to others close to electricity (for example, oil (with differences depending on whether Brent or WTI, or Dubai). But, Furthermore, electricity is not a raw material but the result of an industrial production process.

In Spain, the prices determined by the marginalist market are applied directly to regulated contracts, which affected around 10.7 million customers at the end of 2020 (40% of the total), while the free contract did so to around 16 million, according to data from the National Markets and Competition Commission (CNMC). But in Portugal, to follow a very close example, only 18% of consumers are in the regulated market.

The spokesmen of the electricity companies spread that then what the consumer can do is go to the free market. But at the same time they recognize that this would only generate a change in strategy in companies with the objective (tremendously empathic with the consumer) of guaranteeing their benefits, as we are seeing. To this must be added that the so-called “social bonus” can only be managed with a regulated contract.

Theoretically, the price in a marginal market only depends on the so-called opportunity costs (that is, the costs that the producer would avoid incurring if the plant were shut down and the income that he would renounce if he sold the energy at a more favorable time). Then supply and demand are married at a point that determines quantity and price, the highest as is known.

But you also have to add the fixed costs, because if it is not done, no one would invest in the sector. And they are added quite generously for companies because the benefits are billions of dollars, as we have seen.

The cost of CO2 emissions is another component of the wholesale price. But this fact is scandalous. This cost is a penalty that aims to stimulate companies to introduce technologies and / or energy sources that reduce emissions. However, they are passed on to the consumer’s bill, leaving the oligopoly companies with little incentive to improve their procedures. This, moreover, goes against the objectives of the EU and therefore significant support from Brussels could be relied upon to eliminate this impact.

The so-called charges and tolls are also transferred to the invoice (subsidy for renewables, which the consumer then returns to pay through the invoice -by the way, as we have seen at the most expensive price-, tariff deficit (the supposed debts to companies for their costs of transition to new technologies), aid to companies for the insularity in the Canary Islands and the Balearic Islands, and, how could it be otherwise, commercial benefit.

As a last example, it is enough to see how the traders offer green energy (it is supposed to be produced from renewable sources and without CO2 emissions), but charged at the price of the most expensive and polluting.

All this should be taken into account to focus the problem. Where there is an oligopoly, there is no competitive market because it is intervened, determined and configured by the companies that make up that oligopoly. And in Spain, there are only five companies in the sector and the three most powerful of them control more than 80% of electricity production. Furthermore, marketing in the marginal market is also limited to a small number of companies (eight, according to the sources consulted). Book oligopoly.

Faced with this, in a market of these characteristics, public intervention is a national need, and a real requirement for the market to allocate essential resources such as energy with some efficiency, especially when it comes to a strategic sector that will be decisive. in the future production model. Therefore, it is not just a market problem, it is a question of political will.

A political will that we know will need to be supported by complex measures, the complexity of which is reduced if the objective is clear: to place under public control a vital market for the quality of life of people, for companies and for the sustainable development of the economy, avoiding its control by the oligopoly and thereby increasing competition in prices and production. Something that should have a long way to go before Brussels.

With the clear political objective, there is more than enough technical capacity in Spain to apply market intervention with the necessary package of measures, organized over time, to change the structure of the electricity market. There are examples in other EU countries, to cite one case, France (a notoriously neoliberal government) that can be very useful in our country.

Some of those measures that can be carried out in the short term would be to convene the Ecological Transition and Demographic Challenge Commission, which is precisely chaired by UP, to receive a report from the CNMC on daily compliance with market rules in the formation of the price of the electricity and agree on the necessary recommendations as a result of that report, as well as join the EU countries that are already negotiating with Brussels the restructuring of the market. Also, together with tax cuts in indirect taxes (which are the most unfair) and have been quickly absorbed by the increase in its tax base, it would be convenient to transfer to the Budgets, duly corrected, those charges that should not be paid by current consumers (different types of subsidies) and offset the expense through Corporation Tax. The payment of compensations for CO2 emissions should also be repositioned in the effective fulfillment of its purpose.

Likewise, it is necessary to determine the prices of the marginal market for a year of duration so that they do not have an immediate impact on the invoice, among other measures.

But the fundamental thing is to end the oligopoly in the Spanish market. Without it, there is no way out. It is a problem of democracy, of economic democracy and of national sovereignty. And it is a problem of political will. For this, the creation of a public company is a necessity, which in order to be effective it must incorporate a clear strategy to be at the forefront of the energy transition (which private companies would manage based on the share price) and have a public management model. Nor could Brussels be opposed to this, which admits companies with public control in different EU countries (such as the Italian ENEL, which controls ENDESA, but above all the French EDF with a participation of the French State greater than 80% and 1.2 % from the workers).

Naturally, none of this will be simple, but the formation of an Energy Transition Pact could help this, where the economic sectors that control the oligopoly companies will be at the height of the future needs of the country. A problem of political will for all.

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