The other day, Michael Liebreich and I had a lively discussion on his CleaningUp podcast provoked by my call “to blow up the electricity markets”. It was fun but, of course, fell short of a comprehensive analysis of the complex issues pertaining to the political economy of electricity generation and distribution. Following our debate, Michael posted his verdict on it and, in particular, his “four key takeaways”. To further the debate, I have added a comment after each of Michael’s “takeaways”, plus a brief postscript. Hope you enjoy the debate’s afterlife…
Michael Liebreich: Varoufakis’s core argument for nationalisation was that electricity is a natural monopoly because there is only one wire into each house, and therefore that the electricity market is a “fake market” constructed by (corrupt) politicians which does nothing but enrich (rapacious) oligarchs. He appeared not to have thought deeply about the value chain of the electrical system, using the “single wire” argument to demand nationalisation of the whole system, from generators to retailers. He dismissed out of hand the idea that the “single wire” could be competently regulated.
Yanis Varoufakis: There were three planks to my core argument that any electricity market is bound to be a pseudo-market plagued by a propensity toward a natural and grossly inefficient monopoly – Michael only acknowledged the first one.
The ‘single wire’ feature; i.e., electricity comes into your home or business out of a ‘single wire’ in the wall.
Electricity is a totally, undeniably homogeneous, undifferentiated good; in other words, there can be zero competition between providers over its quality
While electricity is an essential input into every single aspect of a modern home’s or business’ activities (from cooking to surfing the net), electricity has no close, or even distant, competitors (Unlike a cable or optic fibre internet connection which one can bypass by turning their smartphone into a hotspot, for most people today electricity can never be accessed except through that one wire from the wall)
If my argument relied only on (1), it would have been open to the charge that telephony & internet services spring out of a single wire too. But it is doesn’t only rely on (1)! In combination with (2) and (3), the natural monopoly proclivities of any electricity market are indisputable. The reason I dismiss the idea of efficient regulation, is that (without even referring to the clear and present danger of regulatory capture) it is demonstrably impossible – not just hard.
To begin with, recall that an electricity market is not like the market for food, metals, maritime services etc., which existed well before any government had a view about them. The single wire point [see (1) above] means that the government must create, or simulate, an electricity pseudo-market. Electricity markets are, in other words, government creations. Furthermore, features (2) and (3) above guarantee huge powers of rent extraction by the few firms that will produce the nation’s electricity. A natural oligopoly of producers manufacturing a homogeneous product inexorably breeds cartel-like behaviour.
As for the retail providers, who compete to buy electricity from this cartel to sell it on to consumers, they too are (by design) a constructed oligopsony whose competition with one another is limited to two dimensions: Billing and hedging. Of those two dimensions, the public may benefit only from smart billing (e.g., rates that react to market conditions second by second – see Takeaway 2 below). In contrast, hedging that uses electricity derivatives provided in the same way and by the same banks that sold Lehman’s its CDOs, leads – and can only lead – to an unmitigated catastrophe: As long as their bets pay off, the companies make a nice little earner but when, eventually, their derivatives have their Lehman’s spasm, they run to the Treasury cap in hand for huge bailouts.
In conclusion, contrary to Michael’s ‘takeway’, only a shallow, highly ideological touching faith in the superiority of markets (aided by taking shots at a straw-man version of the above argument) can lull anyone into the illusion that electricity pseudo-markets can be regulated in the public interest. They cannot – a conclusion borne out by the present sorry state of the privatised electricity markets in the UK and beyond.
Michael Liebreich: Varoufakis also dismissed the idea that there was anything innovative about any private players in the electrical system. He dismissed the software developed by Greg Jackson of Octopus Energy, my guest on Episode 39 of Cleaning Up to deliver time-of-day pricing as something a graduate student working for a national utility could have coded. This mirrors the failure of Professor Mariana Mazzucato, my guest on Episode 67 of Cleaning Up, to acknowledge the innovation and risk-taking involved when private players build teams, secure and integrate technologies, navigate regulations and meet market needs.
Yanis Varoufakis: I do not dismiss the useful innovations in the field of software billing technologies that people like Greg Jackson and hundreds of others have contributed. My point about smart graduate students being able to code such billing software is neither a put down line (unless one wishes to dismiss the ingenuity of graduate students) nor an argument for keeping everything within employees of a government-run enterprise.
My vision for a publicly owned electricity network is not a throwback to the statist 1970s but a vision in tune with a modern electricity commons in which graduate students, good people like Greg Jackson, indeed anyone who wants to have a go, can innovate and peddle their software. How? Take the Apple Store or Google’s Play Store. These software outlets offer the opportunity to countless developers to peddle applications that allow us, the general public, better to utilise our phones, computers, home appliances etc. Since I do not want to see any oligarch own these digital outlets, and take issue with the 30% fees-rent Apple charges, I would love to see them owned by the public. A digital commons, where all sorts of innovative developers can sell their software free from the tyranny either of the state or of some Big Tech mogul.
Come to think of it, is this not how Web1.0 came about? Was it not set up by governments (from the Pentagon to our non-profit universities) so that thousands of developers would furnish us with open protocols thus creating an Internet Commons – which then Big Tech took over and wrecked (Web2.0)?
In short, my vision is one of a new electricity commons that is, at once, a corporate-free zone and a boisterous ecosystem for private developers. This is a far cry from the antiquated statist that Michael tried to portray me as.
TAKEWAY No. 3
Michael Liebreich: Although I felt no listener could come away believing that Varoufakis had a credible plan for managing the electrical system if he were able to nationalise it, I was wrong. Early comments on social media made it clear that many found his arguments persuasive and believe that the current price spike is driven purely by corruption and the profiteering of middlemen. Which is a salutary reminder to all of us technocrats that energy is deeply political and irrational. No matter how obvious the optimal engineering or policy design might be, some, maybe even a majority, will refuse to accept it.
Yanis Varoufakis: It is not for me to tell listeners or readers what to believe. What I do know is that the great bulk of the price spikes in electricity prices is driven by vile speculation in the derivatives markets. I also know that, while the UK sources (on average) its electricity from home grown energy sources, the prices Britons pay have spiked just as much in the UK as they did in countries like mine which rely on imported energy sources. This proves beyond reasonable doubt that the commodification of electricity (not merely its privatisation) exposes a nation’s electricity output to financialised racketeering.
In short, energy is always deeply political. Especially in societies exploited by corporations whose rent-seeking strategy relies heavily on (a) hiding its rent extraction under a veil of market fundamentalism and (b) presenting anyone who rejects its market fundamentalist propaganda as… irrational.
TAKEWAY No. 4
Michael Liebreich: Our conversation was in some ways just the latest round of the Revolution or Reform debate from the early 1970s between radical left professor Herbert Marcuse, promoting revolution, and critical rationalist Sir Karl Popper arguing for reform. Do you get a better outcome by breaking everything and starting again, or by fixing flaws in the current system? That same debate characterises the broader fight between those espousing degrowth (revolution) versus sustainable growth (reform).
Yanis Varoufakis: While honoured by the comparison to Herbert Marcuse, I fear that our debate is far less heroic. The world has changed since the early 1970s. The old arguments between socialists and free-marketeers are buried under the rubble of the Left’s 1991 defeat and the free-marketeers’ 2008 thrashing. Since 2009, permanent socialism for corporations and permanent austerity for the vast majority has created a toxic environment in which the only winners are nasty rent-extracting corporations and hopeless masses. People like Michael and myself have no right to pretend that we are taking further the exciting debates of intellectuals who lived at a time when free-market capitalism was still a possibility and socialism was challenging it.