Government-induced Energy Crisis

Have the central authorities in Europe been crowding out the role of private parties in making energy markets work?

Why had prices for coal mined in Ukraine been linked to prices established in the ICE Rotterdam Coal Futures market?

This question had come up while waiting for coffee at a shop that occupied a footprint no larger than a postage stage.  A cold day in Kiev.  Crowded space.  The windows were getting steamy as everyone crowded in there shared their respiratory viruses.  This was late 2019, after news had started coming out of Wuhan about the coronavirus.  I think we all got it (COVID), before anyone knew to get hysterical.  I had this nagging, stubborn cough.  It took weeks to go away.

The coffee at the Yellow Cup was really very good. Ukrainians appreciate a good brew.

But, good question about the pricing of coal.  The off-the-shelf rationalization would be that coal from Ukraine is plugged into markets that serve demands in Central and Western Europe.  Coal coming from across the Atlantic (from Canada and the United States) also serve those same demands.  Thus, geographically dispersed suppliers between Russia, Ukraine and the Americas find themselves effectively competing with each other for sales to buyers in a European market.

The futures market indicates prices for coal absent shipping costs.  When constructing a “delivered price”—the price that a given buyer actually pays for coal sourced from a given seller—a prospective buyer and seller can look up prevailing prices for the coal, which are common to everyone, and then sort out the costs of actually delivering the coal.  Those costs will vary from one specific transaction to the next.

One can imagine a European coal market operating without the benefit of a Rotterdam futures market.  Buyers (mostly entities operating coal-fired electricity generation facilities) could get on the phone and bargain with suppliers and shipping entities in Ukraine, in America, in Canada, in Wherever over the final delivered price.  On an economist’s notepad, the market for coal would look the same.  But, the futures market enables participants to streamline the process of finding market-clearing prices for the coal component in delivered prices.  Bargaining then involves less time and energy trying to figure out what coal is going for.

Meanwhile, in a piece titled “Europe’s looming coal crisis,” Politico reports that supply bottlenecks are messing up the delivery of coal from the ports on the North Sea to sites in Germany and Poland.  Lower than average precipitation has complicated shipment by barge from the coal shipping terminals to sites up river.

Much of the EU’s coal — which arrives via ports in Amsterdam, Rotterdam and Antwerp — travels along the Rhine River by barge.  Uncharacteristically high temperatures this month have lowered the river's water levels to 65 centimeters, reducing how much cargo barges can carry by two-thirds, ...

Although power plants typically have their own stockyards, coal that can't be delivered to them is typically stored in ports to await further transport, …

Bad luck, it seems.  Who knows how much coal has not been coming out of Ukraine (by rail?), and the politics over the war in Ukraine will imminently force buyers to give up on access to Russian coal.  And now the gods have complicated access to coal coming from across the Atlantic.  The effects of the logistical bottleneck show up in the Rotterdam futures prices:

Here is a subtle point: It looks like buyers up river have been bidding up the prices for the constrained stream of coal coming out of the coal shipping terminals at the North Sea ports.  Sellers would likely be happy to sell more at lower prices.  But now they find themselves competing with the coal that is already stocked up in those same shipping terminals.  Stated differently: It is not as though some cabal of coal suppliers has suddenly coalesced and is screwing over buyers.  Rather, buyers have capacity in their own stockyards to accommodate more coal, and they are scrambling to build up those stocks, but too little coal is making it across logistical networks.  Buyers thus end up competing with each other for the coal that is making it through the system.

Meanwhile, note that it is not the case that markets have only just started to reveal indications of strain.  Prices had already been moving up steadily through the summer of last year (2021) before topping out in October.  They spiked right after the invasion of Ukraine, and they have been volatile and elevated since then. 

Looking all the way back to 2009 suggests that the recent strains in the market are remarkable:

The object of the Politico piece is to identify the supply bottlenecks and then to illuminate the fact that the central authorities in Europe (and especially in Germany and Poland) have done a bad job of anticipating the bottlenecks and then doing something about them before they had become a problem.  For example:

Poland's Energy Minister Anna Moskwa admitted Friday in an interview that the government "face[s] a difficult task" in overcoming logistical issues with deliveries. But she insisted it was "not true" there would not be enough coal for the winter, citing new contracts under negotiation.

Here’s a question: What business do the central authorities, in the guise of the Ministry of Energy, have in managing “logistical issues with deliveries,” and do they also have a direct hand in negotiating “new contracts”?  Is the private sector not managing the logistics and contracting?  And, if the private sector had been managing these things, might it have done a better job of anticipating and remedying bottlenecks?  Basically, buyers may now be bidding up prices for the coal.  But, absent regulation or interference from the ministries, would buyers have done a better job of anticipating problems and thus find themselves better stocked with coal?  Or have things like environmental regulations kept them from stocking up?  It would be nice if our friends at Politico would dig in to such questions.

Alas, the Politico piece does not pose questions about the role of the private sector and does not illuminate anything about the regulation of energy markets, but one can guess that private entities might have already scrambled to adapt supplies to supply shocks such as the political decision to cut off purchases of Russian coal. 

According to an investigation by the Polish news outlet Onet, Prime Minister Mateusz Morawiecki was warned by his own Cabinet in early March that sanctioning Russian coal could result in a massive shortfall and was urged to set up a new strategic coal reserve. But he did not act on the warning, nor did his government carry out a formal impact assessment of the EU's proposed coal sanctions before voting in favor of them, Onet reported.

Again, is it really the responsibility of the government to setup a “strategic coal reserve” when, conceivably, private parties might have been able to stock up on coal on their own?  Which just leads to another question: Have private parties failed to stock up on coal on their own, and, if so, why not?  Do diktats from the Ministry of Energy and Climate Ministry prevent private parties from autonomously making adaptations to supply shocks in the market? 

Hence more questions; What are those diktats?  Have carbon regulations frustrated private parties from dealing with contingencies both foreseen and unforeseen?  Are the public policy failures not failures of the central authorities to build up “strategic” reserves of coal and other fuels but failures induced by centralized control of otherwise private entities that operate in the generation and distribution of electricity … as well as in managing the logistics of their own supplies?