Home Climate Change This Is How Markets - Even Energy Ones - Work

This Is How Markets – Even Energy Ones – Work



It’s not actually possible to control all of the things in an economy. We can, indeed, control price, but that leaves quantity demanded, quantity supplied, somewhat up in the air. We can control quantity supplied and even make a guess as to what quantity demanded is going to be – but that leave price up in the air.

It’s just not possible to control all of the variables at the same time:

Those in charge of making sure the nation’s lights stay on could see a problem looming as they took stock of power flows from suppliers last Tuesday.

With wind turbines spinning slowly on a calm winter’s day, demand rising in the cold weather, and the BritNed link bringing power from the Netherlands unavailable, they needed to increase the buffer for the next day, fast. An urgent call to the market for a potential 584MW of capacity was answered and the notice stood down.

It came at a price, however, with hourly wholesale electricity prices briefly shooting up to £1,000 per MWh – a 10-fold increase.

We were, there, significantly supply constrained. As it happens that was also the time – cold winters’ day with a nice high pressure zone over the UK – that demand rises. So, price goes haywire.

Sure, we used to have another system, which is that we controlled, or at least tried to, the price and varied supply. But to do that of course we need to have our energy supply system built around dispatchable on demand systems. Not so much coal or nuclear, they’re better for baseload, but gas that can be ramped up quickly.

This is not to say that one or the other is more desirable. Even if we do have preferences – I think warm and toasty when we wish to be wins but that’s just a preference. It is that it’s just not possible to control them all.

If we insist on allowing supply to be restricted then we have to leave prices to go haywire.

By analogy and this is one of those analogies that is pretty direct, think of chicken and Venezuela. The folks there thought it would be a really good idea that chicken was cheap. OK, so they set the price of chicken good and cheap. It’s even possible to work out, roughly enough, what the demand for chicken will be when it’s cheap. The bit of such a system you can’t control is how many people will be willing to supply chicken now that the price to be gained from it is less than production cost. As it turned out the answer was pretty much no one. Chicken is therefore cheap and non-existent.

We can do this the other way around as the EU has for some time. Let’s make food expensive by increasing the price paid to producers. OK. That leaves demand trailing a little bit and thus those beef and butter mountains, those wine lakes. But the bit we’re not able to control is supply. It turns out that lots of people would like to produce when there are fat profits from doing so.

This is just what is happening with the electricity supply system. However sensible we think it is, we’ve gone for a system that produces lots of ‘leccie on average but has certain periods of not very much at all. The price must be allowed to run rampant therefore. Simply because we can’t control all of these variables at the same time.

Well, not unless we take direct control of demand as well and while that will work, a bit – smart meters are going in for a reason – it won;t when the entire nation wants to get warm and toasty on a winters’ afternoon.

As with engineering and the faster, better, cheaper trio, we can only pick, at most, two of the three of supply, demand and price. And, in reality, we can really only control one of the three. It being only that one because try to control two of the three too much and black markets will break out which means losing control of all three.

Cheap, plentiful, energy for all, all the time, from supply sources that don’t work all the time just isn’t a possible end state.



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in British English
expunct (ɪkˈspʌŋkt)
VERB (transitive)
1. to delete or erase; blot out; obliterate
2. to wipe out or destroy

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