"The state can be … [a] source of mischief and disaster,” Ludwig von Mises, one of history’s most progressive thinkers on market liberalism, once said. The Austrian School economist (1881-1973) argued that when governments start to interfere with market mechanisms, it becomes impossible for them to stop – inevitably leading to endless regulatory tweaks and measures to keep the economy intact.
Now, in an era of dramatic global change, when European energy is becoming less ruled by free markets, it may be time to revisit von Mises. The war in Ukraine’s effects on global political and economic stability has resulted in unprecedented energy price volatility and undermined energy security. On top of that, there is another threat impossible to ignore: climate change and the urgent need to decarbonize.
European politicians are currently grappling with designing the energy market according to these new challenges. As governments have taken the lead in designing future market rules for power and gas, they are also taking the lead in running energy companies too. The German government’s takeover of energy company Uniper and reported negotiations to take over grid operator TenneT, as well as rising stakes in other transmission system operators (TSOs), are examples.
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Governments and regulators must find new ways to work with market participants to design a market frame that supports tomorrow’s energy infrastructure. This new design must integrate renewable energy successfully, keep the lights on with appropriate price signals for backup, storage, and flexibility, and maximize market mechanisms to drive those targets. Overbearing market intervention, and the red tape it poses, threaten to slow progress and innovation at a most crucial time.
Enhancing, modernizing and digitizing grids are critical to integrating renewables – and therefore, a successful energy transition. We need an energy market where the wholesale price of fossil fuels does not hold us back. This requires a massive shift to enabling utilities to build smart grids without interruption to provide abundant, “free” energy sources like the wind and sun.
Source: World Economic forum