Opinion

Edward Hadas

Static in the electricity market

Edward Hadas
Jul 24, 2013 13:41 UTC

Let me start with a confession. I do not fully understand what the Federal Energy Regulatory Commission says Barclays did wrong in the U.S. electricity market, and I am not entirely sure about the claimed misdeeds of JPMorgan. But my inability may well have less to do with my inadequacies than with the fundamental futility of trying to use financial markets to set the price of electricity.

Very approximately, FERC says Barclays sold electricity in order to manipulate a price index in ways that created profit on related positions in a related financial market. The UK bank plans to contest the $453 million judgment. According to news reports, JPMorgan is about to agree to pay almost as much to settle charges that it unfairly solicited “make whole” payments, which compensate utilities for setting up but not actually running power plants on a particular day.

I am not competent to judge the banks’ legal and moral culpability, because the details are little short of diabolical. The jargon includes the “volume-weighted average price of the dailies’ trading”, not to mention spot markets, day ahead markets, physical positions, fixed-to-floating contracts and nodes. Still, FERC’s summary of electricity trading in its latest annual review suggests there is problem. Purely financial strategies can easily play an unhealthily large role in a market where, according to the watchdog, financial volumes represented about 100 times the physical volumes.

These bank-regulator disputes are arcane, but they are evidence in a basic debate about whether market thinking is appropriate for electricity. The argument has been going on for several decades. On the winning side are the enthusiasts for competition, liberalisation and the use of supply and demand to set prices. On the other side, in my view, are almost all the facts.

Competition makes little sense in electricity. The transmission and distribution of power are what economists call “natural monopolies” – it is ridiculously expensive to have more than one set of power lines. It is less ridiculous to consider different power plants as competitors, but it is much more sensible to think of an integrated system which includes everything from huge nuclear facilities down to rooftop solar units.

The lesson of Fukushima

Edward Hadas
Mar 7, 2012 15:01 UTC

The first anniversary of Japan’s nuclear disaster is a good time to take stock. Opponents and proponents of nuclear power are doing so, and they have come to the same conclusion: “We were right all along.”

The meltdown at the Fukushima power plant is certainly grist for the mill of the anti-nuclear crowd. It forced the evacuation of 300,000 people and will cost as much as $250 billion to clean up, according to the Japan Center for Economic Research. If a natural disaster can trigger such a dangerous, disruptive and expensive crisis in a country as advanced as Japan, then it’s impossible to guarantee safety anywhere. Efforts to do the impossible will make nuclear power even more expensive and, by some analyses including that of the Worldwatch Institute, it already costs more than solar energy.

The technical and economic data, though, may offer less support for the anti-nuclear brigade than the images from Fukushima, including explosions, mass evacuations to escape the deadly and invisible threat of radiation, and workers in white safety suits. The pictures reinforce the visceral fear that radioactivity is just too hot to handle.

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