Raimondas Kuodis, who predicted the collapse of "Perlo Energijas": all the conditions are there for a revolution

"Economist Raimondas Kuodis warned about the fact that some independent electricity suppliers can take advantage of bankruptcy a year ago. After "Perlas Energija" announced on Thursday about the termination of operations, he says that he sees the possibility of canceling liberalization in general.

 

 "Politicians start reacting only when they see that a revolution is imminent. I think all the conditions for that are there," he said in an interview with Delfi.

 

R. Kuodis also explained what flaws he sees in the wholesale liberalization of the electricity market in Europe and the retail electricity market in Lithuania. He also recalled several other liberalization experiments.

 

"This is mockery of the nation, lobbyist games, corruption and bluntness all rolled into one." Such things are unsustainable because sooner or later the public will find that it is being "dumbed down," he said.

 

- A year ago, in one of the shows, you raised the question of what will happen when "promisors fail in business". What will happen now?

 

- People will remain disappointed, and the promisors will be left empty-handed, because that was their natural business model. It has no sources of generation, no pockets from which to finance temporary business fluctuations. 

 

This is a business that is based on the option of bankruptcy, i.e. the ability to walk away with no strings attached if the business fails, and the ability to take profits if the lottery succeeds. And this is precisely where the lottery is.

 

Such a business is unsustainable. I tried to draw the attention of Lithuanian society and politicians to what is happening in the United Kingdom, which is at the vanguard of this "lachatron". There, such "pearls" have been dropping like flies for the past 2 years. People either go to warranty supply or pay for believing this "lachatron".

 

A sane person would understand that no company can guarantee prices very far ahead. There are always challenges - this is in Ukraine, this is elsewhere. They drive the prices very high. Why this happens is a separate topic. There is yet another "lachatron" related to the wholesale market. Now it is regrettable that what I said earlier is coming true.

 

"What do you mean 'lachatron'?"

 

- This is a linguistic innovation that I use to describe the mechanism of fooling people. I don't know what else to call it here. I came up with it many years ago, I don't even remember the occasion, because there are quite a lot of such "lachatrons".

 

- Why do you say that liberalization is a lottery?

 

- Lottery in the sense that it is an asymmetric set of incentives. You promise someone that you will sell electricity for 10 cents for a year, but you know that you will have to buy in real time on the market. If that electricity is going to cost 20 cents on average, you obviously have only two options: go bankrupt (which will save you a bunch of money) or go to the shareholders as a director of the company. Then tell them: "Dear shareholders, take away your Porsche, your house from the wives, because we have to fulfill our obligations."

 

Guess how capitalists behave? They said: nothing personal, it's just business. A fair business would say, well, well, if we're offering fixed rate plans, we've got to find financial derivatives somewhere in the market to hedge against that sort of thing.

 

But here we create another illusion that someone in the market can provide such services for a long time. Because those who insure also have the same incentives to go bankrupt and escape from obligations. In the crisis of 2008-2009, we saw such a huge company AIG, which had insured a large number of contracts in the financial market. What happened to them? They became worthless, and the company had to be saved by the public with public money.

 

Insurance is largely an illusion under capitalism. It's more about shifting risk than destroying it. In other words, we are talking about systemic risk. Of course, there is a deeper topic here, related not only to the energy lottery we are discussing.

 

- "Perlas energija" announced today that users who had fixed plans can expect compensation. Is it comforting?

 

- "Perlas energija" is an example that embodies what we are talking about. These are ticket sellers without a generating source with 100 000 euros capital. Our politicians and regulators allowed them to get into the market with this capital (which probably no longer exists). We see the consequences of that. What they will continue to do and talk about there is not so interesting and does not change the essence.

 

- When liberalization was started, it was said that there will be competition. How did you assess those explanations for why that liberalization started at all?

 

- There are two liberalizations, one wholesale, which is based on the marginal producer principle and which is flawed. The other is retail, which is based on the bankruptcy option that Perlas has just exercised.

 

The origins of those liberalizations are very old, dating back to the end of the 19th century, where capitalists fought against the head-raising Marxist ideas and sponsored the branch of economics called marginalism. European champagne socialists like to talk about people, opportunities, poverty, but they are intellectual hostages of that marginalism. This is where the model comes from, how to balance the electricity market as if it were a cauliflower market. 

 

That the marginal producer with the highest costs determines the market price, while everyone else who had lower costs receives surplus profits as a result.

 

This cannot be done in the electricity market. A lot of energy economists talked about this before liberalization, and they are still talking about it after it. Only we rarely hear their voices. Such a model is not correct, it does not lead to a free market. It leads to the kind of excesses we've seen in recent weeks, when electricity costs €1 per kilowatt-hour, €4, etc.

 

There is clearly something wrong with this model, as it leads to huge profits for those electricity generators who have generation sources that have long paid off. Be it the old nuclear power or hydropower. Surpluses are driven also by those with zero-marginal-cost generation capacity—such as solar and wind farms.

 

Clearly, a model that generates surplus profits because gas is expensive and gas generators are marginal is unsustainable. Everyone who has at least some sense and conscience talked about it, but European politicians moved the cauliflower market to the electricity market. Although these are completely different markets in meaning and configuration.

 

 Another type of liberalization – retail – is based on another neoliberal postulate that the more freedom, the better. No, you don't always have to give people freedom. Especially in cases where the decisions are complex, technically difficult for people to understand. Then we only give them a headache with no real choice. Often people get stuck making that choice.

 

When people have difficulty choosing mobile plans because they have a lot of parameters (some minutes, SMS, data) and they get confused, they don't know which plan is good for them. Now electricity is tied up with various green, blue, red bands. Says: choose. Most people have cognitive, informational limitations and even a lack of desire to make such choices.

 

But people are now faced with a new problem - choose suppliers. I say, everything comes from neoliberalism, which has taken over the European institutions too violently.

 

- I understand from you that this liberalization was doomed to failure from the very beginning. Do you think that today, after Perlas Energija's statement about the suspension of operations, people in government will also understand this?

 

- Ordinary people lack the ability to understand what is really happening, but they have good intuition. When they see the price of electricity at 4 euros per kWh, when they see Perlo games, they realize that something is wrong. They may start to get angry.

 

Politicians only start to react when they see that a revolution is imminent. I think all the conditions are there.

 

The minister begins to explain the intricacies of the Nord Pool algorithm only when some anomalies appear in the market. Then everyone's eyes widen and they see even better offers being rejected. All this is called some kind of paradoxes and so on.

 

My suggestion, which I have repeated for many years, is to look at these neoliberal experiments with society from the ground up. I.e. abandon the principle of the marginal producer, which generates enormous rents, and switch to the principle of average costs, which worked for many years before liberalization.

 

In other words, the big states were able to "average" the price in the market between their various generating sources, which include the cheap (nuclear power or solar and wind) and the expensive (gas-fired power plants). Large state-owned producers can "average" both between installations and over time.

 

If there are any market shocks, they can use their deeper pockets and ability to smooth prices over time, save society and business from these headaches associated with those price jumps to crazy heights that force businesses to make sudden corrections, stop production, supermarkets turn off refrigerators , for people to live in "log wood burning time", etc.

 

Here is an alternative that has existed for many decades, but neoliberals have begun to fix what was not fundamentally broken. This is where the problem lies. Now I hope that European politicians will poop into their pants. If they don't contribute, maybe they will be forced to do so by society. We will return to the white sheet, i.e. i.e. principles that have worked quite successfully for many decades.

 

- Do you really think that it is possible to cancel liberalization and return to public supply? The last stage is suspended.

 

- I do not believe only in the cancellation of God's commandments, which we have in the Ark of the Covenant. I believe in changes to the directives, because they were not invented by God, but by specific politicians, pressured by specific lobbies, who are now sitting back and clapping their hands while watching what is happening.

 

But public patience has its limits. We in Lithuania had a lot of liberalization experiments from which we did not learn. 17 years ago I was talking about the "Age of Leo affair". I was talking about a similar scam in 2010 with low-power "kettles", which was based on exactly the same principle - if there is a city that burns gas, they will build unregulated thermal boilers that are burned with three times cheaper biofuel and we will buy back the project in 3 years.

 

This is mockery of the nation, lobbyist games, corruption and bluntness all rolled into one. Such things are unsustainable because sooner or later the public will find that it is being "dumbed down".

 

I hope, and this is the positive part of all that has been going on here in recent days, that this "lachatron" is crossing the line. Many "lachatrons" fail because greed and stupidity reach a point where the processes die. It happened with cryptocurrencies, it will happen with energy stuff. I hope. And if not, then we will live in the past. It's hard to predict the political consequences of what might happen if we continue with these models."