Panic Journal – Ukraine/Russia version half 4: Energy & Fuel costs, Advantage Order and different Ramblings



With European Fuel and Electrical energy costs buying and selling like “Meme stonks”, it’s time for one more “panic publish”. As at all times, these posts are principally for myself so as to higher construction my ideas and educate myself and shouldn’t be seen as any sort of recommendation.

Simply to shortly revisit the final publish from half 3. One among my predictions again then with regard to the financial affect (sadly) aged fairly properly:

One clarification that I’ve learn is that Russia and Ukraine are solely 2% of International GDP, so a “loss” of those nations isn’t any massive deal. Personally, I do suppose that this isn’t a really helpful quantity. Russian oil and gasoline is powering a big quantity of European (and International) GDP. A provide disruption from Russian oil and gasoline would affect a a lot bigger share of GDP globally and may make Covid-19 provide chain disruption like a toddler social gathering.

Turmoil in European Fuel and Electrical energy markets:

The truth that European Fuel and electrical energy markets face absolute mayhem has now clearly reached the headlines. I’ve stolen two Charts from Twitter(@Schuldensuehner), one displaying electrical energy costs till yesterday, and one pure gasoline:



Regardless of a present pullback, ranges each, for gasoline and electrical energy are someplace between 10x and 20x larger than earlier than the disaster and never sustainable.

Pure Fuel costs are excessive as a result of Russia just isn’t delivering that a lot gasoline anymore, however why did Electrical energy costs explode as properly ? As many people have discovered in the previous couple of days, the principle offender particularly for politicians is the European electrical energy market which works alongside the “Advantage order”.

Advantage order impact

The advantage order impact may be defined as follows:

Within the power trade, the time period ‘advantage order’ describes the sequence during which energy vegetation are designated to ship energy, with the purpose of economically optimizing the electrical energy provide. The advantage order is predicated on the bottom marginal prices.


The mechanism to find out the clearing worth and volumes in an influence change market is predicated on the advantage order curve.

So in my very own phrases, the worth for electrical energy on this system is set by the costliest supply that’s required to fill a given degree of demand.

With the latest spike in gasoline costs (see beneath), the dialogue got here up that Europe wants to maneuver away from the Advantage order system so as to “decouple” electrical energy costs from the gasoline worth.

Apparently, this dialogue already began in March, with Spain and Portugal asking for an exemption, however amongst others, Germany and Netherlands, opposing this. However, Spain and Portugal obtained their (non permanent) exemption.

The weak point of that methods appears to be fairly clear: When the marginal value for the costliest supply may be very excessive, all the opposite producers obtain important windfall income. The worth derived from the Advantage order precept doesn’t care concerning the common value. This seems to be very unfair particularly to the customers, who pay extraordinarily excessive costs so as to make just a few folks/organizations very rich.

So why are we utilizing the Advantage Order precept anyway ?

Earlier than criticizing the Marginal pricing/advantage order precept for the electrical energy market, one factor needs to be clear. This precept applies to virtually all commodity market. This text explains fairly properly that Advantage order/marginal pricing is just the market figuring out the clearing worth based mostly on a given demand and provide.

Why ought to any producer promote a commodity at a lower cost available in the market if he is aware of that the consumers have to pay the upper worth ?

And the subsequent query is in fact: Why use a market mannequin anyway ? The reply is comparatively easy: In idea, the market ought to work its magic by growing provide and lowering demand at larger costs. As well as, for different commodities, costs are additionally buffered by stock ranges, i.e. gamers improve inventories at low costs and promote stock at excessive costs.

The distinctive traits of the electrical energy market is that there’s virtually no related stock. However, for the previous 15 years or so, the system labored fairly properly and stored (non-household) electrical energy costs comparatively steady regardless of important funding into Renewable Vitality as this chart signifies

Ele non household

Such a market mannequin additionally incentives producers to make use of the bottom value manufacturing amenities so as to maximize their income along with including extra low value capacities.

When taking a look at a typical advantage order sequence within the European electrical energy market, we are able to see that even up to now, gasoline was at all times the costliest supply: merit order curve electricity

What additionally turns into clear is that particularly for Germany, in the event you change off Nuclear, you must use extra marginally costly sources for producing electrical energy. the extra you consider it, the extra silly it seems to be to change off the Nuclear plant on this disaster surroundings.

So how does the “Spanish mannequin” appear to be ?

As talked about above, Spain and Portugal have been granted exemptions to the free market mannequin already.  This doc right here describes how they attempt to handle the state of affairs:

The sustained improve in gasoline costs following Russia’s unjustified assault on Ukraine has led to larger electrical energy costs throughout the EU. On this context, in Could 2022, Spain and Portugal notified to the Fee their intention to undertake a €8.4 billion measure (€6.3 billion for Spain and €2.1 billion for Portugal) to decrease the enter prices of fossil fuel-fired energy stations with the purpose of lowering their manufacturing prices and, in the end, the worth within the wholesale electrical energy market, to the advantage of customers.

The measure will apply till 31 Could 2023. The assist will take the type of a cost that operates as a direct grant to electrical energy producers geared toward financing a part of their gas value. The every day cost might be calculated based mostly on the worth distinction between the market worth of pure gasoline and a gasoline worth cap set at a median of €48.8/MWh in the course of the period of the measure. Extra particularly, in the course of the first six months of the applying of the measure, the precise worth cap might be set at €40/MWh. As of the seventh month, the worth cap will improve by €5 monthly, leading to a worth cap of €70/MWh within the twelfth month.

The measure might be financed by: (i) a part of the so-called ‘congestion revenue’ (i.e. the revenue obtained by the Spanish Transmission System Operator as results of cross-border electrical energy commerce between France and Spain), and (ii) a cost imposed by Spain and Portugal on consumers benefiting from the measure.

So the Authorities is paying Energy produces the distinction between the market worth and a cap of in the beginning 40EUR/MWh. I believe that didn’t look so unhealthy to start with, however with present gasoline costs I’m questioning, how lengthy Spain and Portugal are in a position to take action. That is clearly an experiment with a brief time period affect however unknown long run effetcs.

The French mannequin:

France compared has merely capped electrical energy costs till the top of 2022. That’s comparatively straightforward as a lot of the electrical energy provide in France is Authorities owned (EDF). And whereas they’re at it, they determined to take EDF non-public in July to maintain the losses within the household. For France, the cap is much less of a problem as a big a part of their capability is Nuclear with comparatively low marginal costs. Nevertheless, because of the upkeep of their Fleet, France must import quite a lot of electrical energy in the mean time which is able to make this cover very costly.

Different EU nations:

Different nations have launched a wide range of measures, principally some subsidies and a few additional taxes, however all of them moderately quick time period oriented.

Abstract of measures:

When taking a look at all these measures, the miserable reality is that every one these measures assume that by the start of 2023 all the pieces is again OK they usually solely deal with the symptom (excessive electrical energy costs) and never the foundation trigger (Pure gasoline consumption is larger than provide).

The Pure Fuel market – German Authorities as a brand new, worth insensitive purchaser

So it’s not precisely scorching information, that little or no gasoline is flowing from Russia. However NatGas costs rallied considerably within the earlier weeks, regardless of consumption being already so much decrease than in earlier years.

On Monday, the German Minister of Economic system and commerce launched some “nice information”: German Fuel storage ranges are larger than initially deliberate and he expects Pure Fuel costs to go down. To date so good.

What I discovered way more attention-grabbing is that this a part of his assertion: “Das führe dazu, “dass wir nicht mehr für jeden Preis einkaufen werden. “ So what he’s successfully saying is that up till the weekend, they have been shopping for unbiased of any worth degree. What just isn’t very well-known within the public is the truth that as a part of the brand new legislation for minimal ranges of the German Fuel storage websites, the German Authorities additionally awarded themselves the mandate to purchase Pure Fuel why an organization known as THE (Buying and selling Hub Europe). THE is a personal firm owned by numerous Fuel Transport networks.

To me it’s not clear how a lot cash they already spent however its appears to be not less than one thing within the Neighborhood of 20 bn EUR. And as that is in fact not their very own cash they usually have “strategic objectives”, nobody cares concerning the worth that the are paying.

Within the German Wirtschaftswoche, there was an attention-grabbing interview with a German Vitality dealer who confirms the affect of  Germany as a Fuel purchaser on electrical energy costs:

Und noch ein wichtiger Akteur ist auf dem Markt.

Wen meinen Sie?
Ich meine auf dem Gasmarkt. Über das Advantage-Order-System hat der Gaspreis eine direkte Auswirkung auf den Strompreis. Und der Gaspreis ist zuletzt auch dadurch getrieben worden, dass die Buying and selling Hub Europe, der Gasmarktverantwortliche in Deutschland, im Auftrag der Bundesregierung für bis zu 15 Milliarden Euro Fuel einkauft, um die Speicher zu füllen. Das hat durchaus Auswirkungen. Das kommt meiner Meinung nach zu kurz in der Diskussion.

So simply to reiterate this level: The German Authorities as a purchaser has been pushing up the worth of pure gasoline thorough its worth insensitive purchases. This in flip will increase the worth of Electrical energy and this triggers the want to dismantle the “unfair” present system. Congratulations.

Extra Authorities interventions on the best way

What turns into increasingly more clear is that all motion of the Authorities results in some results which in flip require extra Authorities intervention and so forth.

It began with Putin declaring conflict and sanctions, however now we appear to be spiraling into Authorities intervention overdrive. Because of rising Pure gasoline costs, the German Authorities had launched a “Gasumlage” which it has now to alter once more. Then it needed to bail out Uniper once more, then it might want to bail out both native utilities, retail clients or each.

The ache is spreading to different nations. Energie Wien, an area Austrian utility appears to be quick 10 bn EUR or extra.  Poland appears to be quick some important quantities of Pure Fuel as properly for the winter.

Nevertheless the EU desires to dismantle the Electrical energy market that has labored fairly properly for the previous 15-20 years or so with unknown long run affect. And naturally everybody one desires to tax these evil Renewable Vitality operators who earn these obscene quantities of unjustified income.

All of those actions nonetheless do little to handle the precise drawback or may truly create the other impact: Demand must be decrease and provide must be elevated.

With regard to demand discount, my favourite piece recommendation is that of Mr. Kretschmer, the Inexperienced Prime Minister of the State Baden Wuerthemberg, who really helpful to clean oneself solely with washcloth as a substitute of showering, after mentioning that he in fact owns a photo voltaic PV roof and a wooden pellet heating.

What I’m lacking is a structured plan with clear incentives to save lots of power in important quantities and a few coordination at European degree.

Ready for Magic to occur in 2023

Everybody now could be specializing in find out how to “survive” the winter 2022/2023, most measure are very quick time period. Implicitly everybody appears to imagine that every one issues are going away in Spring 2023.

Nevertheless I’m not so certain. Sure, hopefully already at 12 months finish, two new LNG terminals needs to be up and working,with extra of them coming, supplied that every one the LNG may be purchased together with the delivery capability. Nevertheless few massive infrastructure initiatives in Germany have been accomplished in time up to now few years. Additionally, these Terminals, not less than not the primary two can not totally exchange the Russian gasoline. And when the storage is empty in Spring, the identical cycle begins as properly.

So for a while within the foreseeable future, Pure Fuel might be a really scarce commodity in Europe. Nevertheless virtually all the Authorities actions are solely focusing on the quick time period signs.

My inflation charge just isn’t your inflation charge & time lags

One other remark that I make on a private degree is, that opposite to for example meals or petrol, worth will increase in electrical energy and gasoline hit folks very in another way on a person foundation and with a big time lags.

Personally for example, i’ve not acquired any discover from my native utility on any electrical energy worth improve and for causes out of my management, I’m heating with wooden pellets, the place I used to be capable of replenish my nonetheless in February at a suitable worth.

To date I have no idea anybody personally whose payments have gone up 10x, however for some pals, payments and month-to-month installments are beginning to improve considerably.

I’m not but certain what affect that can have on social cohesion and it will add quite a lot of uncertainty for the subsequent months /years.


To be trustworthy, I’ve the sensation that I might barely scratch the floor of this matter. However nonetheless the query stays:  what are the implications of all these observations above ?

My intestine feeling is, that just like the start of the Ukraine conflict, once more, this is not going to be over as shortly as many individuals suppose. Perhaps we now have seen a peak within the European Wholesale costs for a while, however the demand / provide imbalance for pure gasoline is not going to go away by Authorities intervention right into a fairly properly functioning electrical energy market, possibly even the other.

Additionally the consequences on German and European family incomes will solely materialize over an extended time frame.

Our flesh pressers appear to be in populist “exercise” mode which could make issues worse earlier than they get higher.

From lots of people I hear the query: “How can I revenue from excessive electrical energy /Pure gasoline costs ?”. For me the higher query can be: “How will I not get harm badly by longer than anticipated turmoil in power markets ?”.

I may be fallacious, however I believe it’s nonetheless higher to play protection for a while to return as a substitute of making an attempt to Yolo into the subsequent alternative.

For the portfolio, I already decreased my positions in German Renewable shares to start with of the week, except for ABO Wind. I’m actually anxious of some sort of silly “Robin Hood tax” for renewable producers.

Additionally, I believe one nonetheless needs to be very cautious with regard to power intensive companies with little pricing energy and discretionary shopper items. I might be additionally very cautious with leveraged residential actual property as the actual ache for renters will simply begin. I now it’s boring, however “high quality stays king”.

Keep protected & keep heat.

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