Cooking figures not the solution to European energy prices

Government price caps, subsidies and excess profit taxes will not solve Europe’s energy crisis. The best remedy is to increase the supply of all forms of energy.

The cost of energy is rising, creating financial problems for households and businesses. Already before the war in Ukraine, Europe’s energy supply was vulnerable. Energy security had not been a political priority, exacerbated by weak and shortsighted policies. In Germany, but also in other countries, energy became a playing field for populist politics infused with considerable emotion. Germany’s Energiewende jeopardized security on the continent by trading reliance on nuclear power for dependence on Russian natural gas.

Market rules typically dictate that reduced supply will show in increased prices. This is a long-term good as it might push supply higher or demand lower. What is happening now? Russia limited its gas exports, diminishing the amount of gas Europe receives. The only sustainable remedy is to increase the energy supply. However, this takes time and the correct policies.
European politicians are desperately trying to shop around the world for gas. This is not a long-term solution. To improve energy security, the continent needs to become more self- sufficient. To generate investments in energy production – whether renewables, nuclear or something else – investors need to see that markets work. This is also essential for public investments. If such investments lack rentability, they will again burden the people.

The European Commission came in with plans to “stabilize” prices by capping them. The price cap should be “dynamic,” the Commission decided, based on an index that does not yet exist. Gas is presently traded in the Netherlands. A cap means that should the price exceed a certain limit, purchases would not be allowed anymore. Gas prices, with consequences for the cost of electricity, are set on the Rotterdam spot market. The virtual gas trading facility in the Netherlands is called TTF, the abbreviation for Title Transfer Facility.

With the reduction in Russian natural gas supplies, Europe needs more liquified natural gas, or LNG, and this is not necessarily traded through Rotterdam. In fixing prices, the Commission intends to base the price cap on an index it will establish on all daily gas contracts. Whether that makes sense or not is debatable. It could result in higher prices, the opposite of what is intended. The simple fact of the matter is that we must concentrate on generating more of our own energy, and not rely on some alchemic caps and indexes …

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Cooking Figures not the solution

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