Tuesday, March 28, 2023
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Panic Journal – Ukraine/Russia version half 4: Energy & Gasoline costs, Advantage Order and different Ramblings


With European Gasoline and Electrical energy costs buying and selling like “Meme stonks”, it’s time for an additional “panic publish”. As all the time, these posts are largely for myself with a purpose to higher construction my ideas and educate myself and shouldn’t be seen as any form of recommendation.

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

One rationalization that I’ve learn is that Russia and Ukraine are solely 2% of International GDP, so a “loss” of those international locations isn’t any large deal. Personally, I do suppose that this isn’t a really helpful quantity. Russian oil and fuel is powering a major quantity of European (and International) GDP. A provide disruption from Russian oil and fuel would influence a a lot bigger share of GDP globally and may make Covid-19 provide chain disruption like a toddler occasion.

Turmoil in European Gasoline and Electrical energy markets:

The truth that European Gasoline 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 fuel:



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

Pure Gasoline costs are excessive as a result of Russia shouldn’t be delivering that a lot fuel 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 could be defined as follows:

Within the vitality trade, the time period ‘advantage order’ describes the sequence by which energy crops are designated to ship energy, with the goal 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 trade market is predicated on the advantage order curve.

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

With the current spike in fuel costs (see under), the dialogue got here up that Europe wants to maneuver away from the Advantage order system with a purpose to “decouple” electrical energy costs from the fuel 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 techniques appears to be fairly clear: When the marginal value for the costliest supply may be very excessive, all the opposite producers obtain vital windfall income. The value derived from the Advantage order precept doesn’t care concerning the common value. This seems to be very unfair particularly to the shoppers, who pay extraordinarily excessive costs with a purpose to make a couple of individuals/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 ought 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 primarily based 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 must pay the upper worth ?

And the subsequent query is after all: Why use a market mannequin anyway ? The reply is comparatively easy: In concept, the market ought to work its magic by growing provide and lowering demand at greater 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 vital 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 services with a purpose 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 will see that even prior to now, fuel was all the time the costliest supply: merit order curve electricity

What additionally turns into clear is that particularly for Germany, if you happen to change off Nuclear, you’ll want to 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 setting.

So how does the “Spanish mannequin” appear like ?

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 fuel costs following Russia’s unjustified assault on Ukraine has led to greater electrical energy costs throughout the EU. On this context, in Might 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 goal of lowering their manufacturing prices and, in the end, the worth within the wholesale electrical energy market, to the good thing about shoppers.

The measure will apply till 31 Might 2023. The help will take the type of a cost that operates as a direct grant to electrical energy producers geared toward financing a part of their gasoline value. The day by day cost will probably be calculated primarily based on the worth distinction between the market worth of pure fuel and a fuel worth cap set at a mean 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 will probably 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 will probably 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 originally 40EUR/MWh. I believe that didn’t look so unhealthy at first, however with present fuel costs I’m questioning, how lengthy Spain and Portugal are ready to take action. That is clearly an experiment with a brief time period influence however unknown long run effetcs.

The French mannequin:

France as 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 difficulty as a major a part of their capability is Nuclear with comparatively low marginal costs. Nevertheless, because of the upkeep of their Fleet, France must import loads of electrical energy in the intervening time which is able to make this cover very costly.

Different EU international locations:

Different international locations have launched a wide range of measures, largely some subsidies and a few additional taxes, however all of them quite quick time period oriented.

Abstract of measures:

When taking a look at all these measures, the miserable truth is that each one these measures assume that by the start of 2023 every thing is again OK and so they solely deal with the symptom (excessive electrical energy costs) and never the basis trigger (Pure fuel consumption is greater than provide).

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

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

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

What I discovered far more fascinating 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 had been shopping for impartial of any worth degree. What shouldn’t be very well-known within the public is the truth that as a part of the brand new legislation for minimal ranges of the German Gasoline storage websites, the German Authorities additionally awarded themselves the mandate to purchase Pure Gasoline why an organization referred to as THE (Buying and selling Hub Europe). THE is a personal firm owned by numerous Gasoline Transport networks.

To me it’s not clear how a lot cash they already spent however its appears to be no less than one thing within the Neighborhood of 20 bn EUR. And as that is after all not their very own cash and so they have “strategic targets”, nobody cares concerning the worth that the are paying.

Within the German Wirtschaftswoche, there was an fascinating interview with a German Vitality dealer who confirms the influence of  Germany as a Gasoline 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 Gasoline 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 fuel 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 way in which

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

It began with Putin declaring battle and sanctions, however now we appear to be spiraling into Authorities intervention overdrive. Attributable to rising Pure fuel costs, the German Authorities had launched a “Gasumlage” which it has now to vary 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 international locations. Energie Wien, a neighborhood Austrian utility appears to be quick 10 bn EUR or extra.  Poland appears to be quick some vital quantities of Pure Gasoline 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 influence. And naturally everybody one desires to tax these evil Renewable Vitality operators who earn these obscene quantities of unjustified income.

All of those actions nevertheless 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 useful to scrub oneself solely with washcloth as an alternative of showering, after mentioning that he after all 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 vitality in vital quantities and a few coordination at European degree.

Ready for Magic to occur in 2023

Everybody now’s specializing in how one can “survive” the winter 2022/2023, most measure are very quick time period. Implicitly everybody appears to consider that each one issues are going away in Spring 2023.

Nevertheless I’m not so positive. Sure, hopefully already at yr finish, two new LNG terminals ought to be up and working,with extra of them coming, supplied that each one the LNG could be purchased together with the delivery capability. Nevertheless few giant infrastructure tasks in Germany have been accomplished in time prior to now few years. Additionally, these Terminals, no less than not the primary two can’t totally change the Russian fuel. And when the storage is empty in Spring, the identical cycle begins as properly.

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

My inflation fee shouldn’t be your inflation fee & time lags

One other statement that I make on a private degree is, that opposite to as an example meals or petrol, worth will increase in electrical energy and fuel hit individuals very in another way on a person foundation and with a major time lags.

Personally as an example, i’ve not obtained 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 in a position to refill my nonetheless in February at an appropriate worth.

Up to now 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 positive what influence that can have on social cohesion and this can add loads of uncertainty for the subsequent months /years.


To be sincere, I’ve the sensation that I may barely scratch the floor of this subject. 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 battle, once more, this won’t be over as shortly as many individuals suppose. Possibly we’ve seen a peak within the European Wholesale costs for a while, however the demand / provide imbalance for pure fuel won’t go away by Authorities intervention right into a fairly properly functioning electrical energy market, perhaps even the other.

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

Our legislators 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 fuel costs ?”. For me the higher query can be: “How will I not get damage badly by longer than anticipated turmoil in vitality markets ?”.

I is likely to be incorrect, however I believe it’s nonetheless higher to play protection for a while to come back as an alternative of attempting to Yolo into the subsequent alternative.

For the portfolio, I already diminished my positions in German Renewable shares at first of the week, apart from ABO Wind. I’m actually nervous of some form of silly “Robin Hood tax” for renewable producers.

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

Keep secure & keep heat.



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