{"id":8194,"date":"2022-09-30T07:59:47","date_gmt":"2022-09-30T07:59:47","guid":{"rendered":"https:\/\/blogs.bath.ac.uk\/edswahs\/?p=8194"},"modified":"2022-09-30T07:59:47","modified_gmt":"2022-09-30T07:59:47","slug":"a-homogeneous-good","status":"publish","type":"post","link":"https:\/\/blogs.bath.ac.uk\/edswahs\/2022\/09\/30\/a-homogeneous-good\/","title":{"rendered":"A homogeneous good"},"content":{"rendered":"

A month ago, I wrote about the bizarre market for widgets<\/a>; that is, for electricity. \u00a0It began:<\/p>\n

\"Suppose you were in the market for 20 widgets. \u00a0You might put out a call for makers to submit prices. \u00a0So far so good. \u00a0Now suppose one maker offered you 19 at 2p per widget, but that was all they had, and you had to buy the 20th widget at 20p from somebody else. \u00a0You might think that this would cost you 58p for the lot, and you'd be right. \u00a0That might work for widgets but not for electricity in the UK. \u00a0If you were buying 19 MWh (at 2p per unit from a windfarm) and 1MWh (at 20p per unit from a gas generator), you'd have to ... buy all 20 at the higher price. \u00a0This is the madness of the electricity market whose chief aim is to keep the lights on; it second aim seems to be to ensure prices are kept as high as possible. \u00a0Only expensively-educated other-worldly types could have devised a scheme like this.\"<\/p>\n

Exploring all this seeming nonsense, I came across the idea that the problem is that electricity (and natural gas) is a \"homogeneous good\". \u00a0That's to say that current electricity is electricity is electricity ... no matter who produces it or how. \u00a0There aren't\u00a0de luxe<\/em> brands, or ones that squirt faster through the ether to you, or ones with a better perfume.* \u00a0No. \u00a0What you buy is what I buy and this means that peculiarities arise in the markets that mediate between buyers and sellers.<\/p>\n

I was puzzled by all this economist jargon, and it looked like a neat way of keeping prices high, not to say a cartel of sorts. \u00a0Happily, The Economist's Free Exchange<\/a><\/em>\u00a0column, sensing my confusion, came up trumps. \u00a0In an article:\u00a0Power Corrupts, <\/em>it set out how the market works. \u00a0\u00a0It began: \"Europe\u2019s energy market was not built for this crisis. \u00a0It must be reformed without jettisoning what makes it work in normal times\".<\/p>\n

It notes:<\/p>\n

\"Just like in any other market for a homogenous good, the price of power is set by the most expensive supplier. This means that even power plants with low operating costs, such as nuclear ones or wind farms, receive the high prices that gas plants are charging. \u00a0The result is vast profits\u2014and public outrage. Based on forward curves, Morgan Stanley, a bank, reckons that electricity spending in the EU could rise by more than \u20ac800bn, an increase worth an astonishing six percentage points of GDP. \u00a0 Thus politicians have started to ask whether a different pricing mechanism is needed.\"<\/p>\n

Well, it's nice to know that \"Just like in any other market for a homogenous good, the price of power is set by the most expensive supplier<\/em>\" but why is this the case? \u00a0Not even The Economist<\/em> explained this, although it does explain some of the workings of the Grid and the sheer complexity of its operation day-in, day-out. \u00a0My guess is that this market is going to have to get even more complex as supply diversifies even more.<\/p>\n

Meanwhile, renewables producers are getting eye-watering incomes c\/o consumers because their prices are linked to the world price of gas. \u00a0However, and this is less well known, in modern contracts for wind farms etc, there are clauses that require excess profits to flow back to the Treasury, and this is now happening unseen by consumers.<\/p>\n

Thus, the excessive prices we are all paying for renewables-produced electricity is paid back to the Treasury which simply keeps it. \u00a0It follows that the subsidies we are all now about to receive on our electricity costs are (in part at least) flowing from the excess profits of renewables generators. \u00a0You could see this as a windfall tax if you like, though the present government would not say so. \u00a0We are, however, getting (some of) our own money back in a complicated way. \u00a0Actually lowering prices, it seems, is not on.<\/p>\n

There is a problem with older wind \/ solar farms where no such contractual clauses exist. \u00a0Here the government is trying to get some voluntary payments out of them (as opposed to a windfall tax!). \u00a0We shall likely never hear about how successful or not they have been as the Treasury will want to snaffle this as well.<\/p>\n

...............................<\/p>\n

Notes<\/strong><\/p>\n

[1] *There are electricities with a lower or higher carbon footprint depending on source, and this fact is used in company marketing.<\/p>\n

[2] I wrote the other day about the risible communications about the changes to electricity (and gas) costs. \u00a0Here's an example from the government:<\/p>\n

\"From 1st October, a new \u2018Energy Price Guarantee\u2019 will mean a typical UK household will now pay up to an average \u00a32,500 a year on their energy bill for the next two years. This is automatic and applies to all households. \u00a0This will save the average household at least \u00a31,000 a year based on current energy prices from October and is in addition to the \u00a3400 energy bills discount for all households.\"<\/p>\n

\"typical household\", \"average cost\", \"average savings\". \u00a0There is no mention that it is the unit price which is being fixed and that, therefore, the more you use the more expensive it will be. \u00a0No wonder the prime minister was confused yesterday.<\/p>\n","protected":false},"excerpt":{"rendered":"

A month ago, I wrote about the bizarre market for widgets; that is, for electricity. \u00a0It began: \"Suppose you were in the market for 20 widgets. \u00a0You might put out a call for makers to submit prices. \u00a0So far so...<\/p>\n","protected":false},"author":237,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":"","jetpack_post_was_ever_published":false},"categories":[2,4],"tags":[],"class_list":["post-8194","post","type-post","status-publish","format-standard","hentry","category-comment","category-news-and-updates"],"acf":[],"jetpack_featured_media_url":"","jetpack-related-posts":[],"_links":{"self":[{"href":"https:\/\/blogs.bath.ac.uk\/edswahs\/wp-json\/wp\/v2\/posts\/8194","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/blogs.bath.ac.uk\/edswahs\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/blogs.bath.ac.uk\/edswahs\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/blogs.bath.ac.uk\/edswahs\/wp-json\/wp\/v2\/users\/237"}],"replies":[{"embeddable":true,"href":"https:\/\/blogs.bath.ac.uk\/edswahs\/wp-json\/wp\/v2\/comments?post=8194"}],"version-history":[{"count":0,"href":"https:\/\/blogs.bath.ac.uk\/edswahs\/wp-json\/wp\/v2\/posts\/8194\/revisions"}],"wp:attachment":[{"href":"https:\/\/blogs.bath.ac.uk\/edswahs\/wp-json\/wp\/v2\/media?parent=8194"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/blogs.bath.ac.uk\/edswahs\/wp-json\/wp\/v2\/categories?post=8194"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/blogs.bath.ac.uk\/edswahs\/wp-json\/wp\/v2\/tags?post=8194"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}