Michael Pollitt is Professor of Business Economics at the Judge Business School, University of Cambridge. He is an Assistant Director of the university’s Energy Policy Research Group (EPRG) and a Fellow and Director of Studies in Economics and Management at Sidney Sussex College, Cambridge. Mr. Pollitt is a former external economic advisor to the UK Office of Gas and Electricity Markets (Ofgem). He is a member of the editorial board of the Review of Industrial Organization, Competition and Regulation in Network Industries, Utilities Policy and The Energy Journal. He was a founding co-editor of Economics of Energy and Environmental Policy. Mr. Pollitt has a D.Phil. from the University of Oxford.
Will power prices become more volatile as we move to net zero in Europe?
We should distinguish between retail and wholesale prices. One lesson from gasoline is that high taxes in Europe dampen volatility relative to the US, even though both are exposed to the same underlying volatility in wholesale gasoline prices. The same could happen in power. Higher network costs and fixed costs associated with the energy transition could dampen underlying volatility in retail prices arising for residual use of fossil fuels and wind volatility.
However, wholesale power prices will still be subject to underlying volatility due to fluctuating fossil, carbon and weather-related RES output. Indeed, more dependence on European resources in the power sector, rather than imported fossil fuels could amplify the impacts of shocks rather than dampen them. This is the usual case when effective markets become national rather than global.
What is your opinion on the cop26 agreement? Are the world energy markets ready to embrace it?
On climate, it is good to talk, as this advances understanding and builds support for concerted action. There has been some progress at COP-26. India and Saudi Arabia committed to net zero. The world agreed to move to phase down coal and arrest deforestation. There was progress on common rules for carbon trading. There was also agreement to come back in a year's time to follow up.
However, what needs to happen on concrete policy commitments has not happened. We need to agree to absolute caps on GHG emissions out to 2050 at the global level and to allocate these to countries and regions. This is the only way that we can begin to move towards climate policies which add up at the global level. Without an overarching framework agreement on quantities of emissions we will not limit global temperature rises as intended.
To what extent will the new shape that energy markets are taking will lead to a change in geopolitical balance?
The world is in a state of energy interdependence with fossil fuels. Any large-scale change to current energy flows between regions is potentially destabilising. For instance, a large and sustained drop in fossil fuel prices could destabilise the Middle East and/or Russia. In addition, energy nationalism remains an expensive preference for both importers and exporters of energy. Thus, even as unabated use of fossil fuels declines there remain good prospects for global trading in biofuels, hydrogen and synethetic fuel. If current producers of fossil fuels can transition towards these without significant loss of tax revenue and with good domestic diversification policies, then the potential negative international consequences of reduced trade in unabated fossil fuels can be mitigated.
You can read the interview on CESI Energy Journal, where you can also find the opinions of Laura Cozzi (Chief Energy Modeller IEA) and Anna Creti (Professor of Economics at Paris Dauphine University) at this link.