Economics Of Plenty

Consider these facts:

1. Polish Energy Market Regulatory Authority (URE) claims that expected average price for energy in wholesale contracts signed for 2009 are at the level of PLN 220 (around USD 75) for 1 MWh.
2. URE is considering making it mandatory to trade energy through commodity exchanges like Polish Energy Exchange (POLPX or TGE). This regulation would be similar to the one in Spain and the rationale behind it is making prices and wholesale energy trading more transparent. At the moment, POLPX takes part in only 2% to 5% of the total wholesale energy trading in Poland.
3. At the same time, URE’s chairman, Mariusz Swora, says that the URE is seriously considering returning to regulation of energy prices for institutional users. At the moment only prices for individual final buyers are regulated which is a result of deregulation efforts made by previous chairman, Adam Szafrański who, by the way, lost his job probably because of his policy of price liberation.

It is true that contracts for 2009 quote prices much higher than the ones in 2008 (around PLN 135 or USD 45 per 1 MWh) but they were negotiated with regime uncertainty [1] in mind, which in this case is showing itself in EU’s climate package that will involve some sort of CO2 emission trading. Unfortunately, the exact shape of the scheme is still a matter of vague declarations even if it is to be precisely formulated before the end of 2008. Polish electric power sector is heavily dependent on coal and very small changes in what EU is going to mandate will bear serious consequences for costs of energy production. This creates a certain level of political risk that has to be included in energy prices just like all other risk factors are, not only when it comes to energy but also in case of cars, fruits, plastic surgery and other goods and services.

It is still not clear how regulation and mandatory commodity exchange wholesale trading are going to work together. Energy producers claim that should price regulation be in full force again they will cut their investment plans and will not have enough resources to maintain (not saying about expanding) their production capacities. At the same time, Swora argues that because of the current crisis (which does not seem to be a big problem in Poland) energy prices must not be allowed to rise substantially as this will make Polish economy less prepared for eventual economic downturn and less competitive in general. But does he really think that Polish economy will be in better condition without energy at all? Are blackouts and low energy prices really more advantageous than higher prices allowing for new investments in production and transmission infrastructure?

[1] Regime uncertainty is a term created and popularized by Robert Higgs in his article on Great Depression. It is a state in which the shape of property rights legislation and market regulation policies in general are known to be changing but the direction of this change is still not known, mainly due to political ad hoc decision making. This rises costs of investments and sometimes stops some investment plans entirely because investors do not know what to expect. Political, short term risk adds itself to inherent market risks making it more attractive to wait for final decisions on the part of regulatory authorities rather than starting the investment process right away.