Flare me to the moon

The melody playing out in the electricity market today is reminiscent of the freezing of the interbank markets in 2008. The nerve centre of European energy trading, the wholesale market, is in a state of epilepsy, as yet barely visible to the end consumer. The rise in prices over the past two years has pushed the price of electricity to a level equivalent to $700 per barrel of oil. Margin calls total nearly €1.5 trillion, consuming the cash of industry players as surely as Gazprom flares precious flammable steam rather than delivering it to Europe via Nord Stream 1.

Although in 2021 wind power will have failed before French nuclear power this year, the price explosion is due less to a lack of capacity than to the way the wholesale price is calculated. If it goes up to the sky, or even to the moon, it is because it is calculated according to the price of CO2 and fossil fuels (gas in particular), which are themselves correlated! 

The mechanism for calculating the price of electricity must therefore be reformed: this is the purpose of the summit on 9 September, when the alchemists of the European Commission will attempt to shape the new philosopher’s stone that will allow the price of electricity to be decoupled from that of gas, while encouraging producers to invest relentlessly in renewables.

This energy price boom, the main topic of politics this autumn, is dictating Christine Lagarde and investors’ concerns about the intensity of the presumed recession that the glowing price of energy is pushing us towards. According to Goldman Sachs, the European energy bill could be as high as €2,000 billion, or 15% of European GDP…

The alarm of the social emergency is sounding. The alarm of the social emergency is sounding, starting in the United Kingdom where the effect of inflation on households is currently the most violent. As she begins her term of office with the Queen’s funeral, the new Prime Minister Liz Truss is making her first promises to the people: thanks to the velvet hand of the woman who, paradoxically, likes to be compared to Thatcher, British households will only have to pay £2,500 on their bills, compared to the £3,350 estimated by Ofgem (the British regulator for the gas and electricity markets). Across the Channel, an inventory of possible countermeasures is being drawn up: exceptional taxes on hydrocarbon producers, collateral guarantees on derivatives markets, a cap on Russian import prices, electricity rationing (10-15% for consumers, plus incentives to reduce consumption by 5% during peak hours). In total, the aim is to reduce the energy burden by 650 billion… But just as money is not created without printing debt, an expense is not erased without being recorded elsewhere.

The claim held by the energy producer on the fragile consumer or company thus becomes a State claim. It is added to the debt and to the public interest burden.  The end of whatever it takes has not yet come! And this comes at a time when Lagarde is cutting the ECB’s biggest rate hike in a very long time. We have thus entered the delicate period when monetary and fiscal policies diverge.

It is in these rather uncomfortable phases that interest rates and exchange rates become the most delicate to anticipate… If everyone agrees that the dollar is too expensive, it is harder to agree on which currency to hold in order to bet on its decline… Unless Putin cracks or the winter is exceptionally kind to us, the Euro is not yet the ideal candidate against the greenback…

Thomas Planell, Portfolio manager – analyst at DNCA. This article was finalised in September 9th, 2022.

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