The scam of Europe's privatized energy markets

akrainer's Photo
by akrainer
Thursday, Sep 15, 2022 - 10:34

Something about the European energy crisis doesn't quite add up, and the measures considered by governments to mitigate the crisis add up even less. Ever since Margaret Thatcher's government privatized the British energy grid, we've been sold the fairy tale about how private enterprise and transparent, free markets will automagically make everything great. It is always a variant of the same story about how unscrupulous selfishness by each agent in the system somehow magically works to the best advantage of everyone in society.

I tried to understand the details of this power grid privatization and how the transparent power market would spawn competition and lower prices, but the system is not easy to understand, and it appears to be that way by design. Perhaps we're supposed to accept the narrative but gloss over the details. Former Greek Finance Minister Yanis Varoufakis party disentangled this Gordian knot (you can watch his recent interview on this subject at this link).

The Thatcherite privatization model involved breaking up the grid into three parts:

  1. Power generation (the actual power plants producing the electricity),

  2. The grid itself, and

  3. The retail market (where different companies supply electricity to households and businesses).

Producers, the grid and the power providers are all separate businesses and separate entities. The supposed competitive markets for electricity are achieved by simulation, since there can be no real market for electricity (you can't choose from among multiple cables that can bring electricity to your home/business; there can only be one, connected to a single power grid). 

So, what we have in effect, is a fake market: first, the producers form the wholesale price by auctioning their production; the electronic auctions, held in the Netherlands (where the servers are located) are particularly murky business. You'd expect that if the whole point of the system is to deliver low prices that the lowest bids would win these auctions, but the opposite is true: it is the highest bids that carry the day! The winning bids then define the wholesale prices for all providers. The proof that this system achieves the opposite of what we were sold is that since the system had been privatized, the margin between wholesale and retail prices has trebled!

This year, the system has entirely run amok and various efforts by panicked European governments to bring it under control will pile up new scams on top of the original one. In July, the Greek government instituted a mind numbing scheme where electricity prices are capped - supposedly. But in spite of the price cap, the auctions in the Netherlands will continue to form the wholesale price. Here's a concrete example: the price of power from hydroelectric plants was capped at 85 Euros per megawatt/hour. The Dutch auction raised the price to 700 Euros! Here's how the scheme works from there: the producer of that megawatt/hour receives the 700 euros, but then they have to reimburse the difference between the 85 Euros price cap to the Greek state. 

The government does not use this money to provide relief to businesses and households: instead, the government pays that money to energy retail providers. According to Varoufakis, in almost every market in Europe, the same shareholders that own the producers also own the retailers. So, here we have a complicated three-card monte siphoning off massive profits to the utility companies, but so far zero relief for consumers. The actual relief is yet another scam where the Greek government borrows the money with which it subsidizes people's electricity bills. These measures have been implemented in Greece since 6 July of this year and the European Commission has proposed implementing the same idiotic scheme in all EU markets.

If anything, the European energy crisis has revealed (and not the first time either) that our governments are in fact acting as agents of the oligarchy. If the population in a given society can be persuaded that men can get pregnant, they can also be persuaded that auctions that blow up wholesale prices 9-fold is the most efficient way to keep prices low, and that such transparent markets work to the best advantage of everyone in the system. But allowing one group of vested interests to plunder the society will have widespread adverse effects: high energy prices will cause large segments of the European economy to shut down or, at the very least will render their products uncompetitive in world markets. In effect, we have the situation where a parasite has been allowed to kill the host. The unscrupulous selfishness of each agent in the system will not produce the best outcome for all; it might in fact collapse the system. But explain that to the people who think men can get pregnant.


Alex Krainer - @NakedHedgie has worked as a market analyst, researcher, trader and hedge fund manager for over 25 years. He is the creator of I-System Trend Following, publisher of TrendCompass reports and contributing editor at ZeroHedge. His views and opinions are not always for polite society but they are always expressed in sincere pursuit of true knowledge and clear understanding of stuff that matters.

Contributor posts published on Zero Hedge do not necessarily represent the views and opinions of Zero Hedge, and are not selected, edited or screened by Zero Hedge editors.