Michael Liebreich The most recent piece of yours that I read was called Time to Blow Up Electricity Markets. Give us your overview of the energy situation that we face now in Europe.
Yanis Varoufakis The idea of electricity markets is a contradiction in terms; it always was. The simple reality is that it is a natural monopoly. There is only one wire coming out of your wall, whether it's your home, your office, or your factory. So what happens is you have the state coming in simulating a market and creating the semblance of a marketplace. I always thought that it was madness, and the depth of the madness becomes apparent when you have an energy crisis. Now what we have is a situation where the wholesale and deep-seated irrationality of the notion of an electricity market is coming to the surface as a result of the escalation of the price of the of the one fuel which provides the marginal cost of the pricing system: natural gas. The UK has done magnificently well in installing renewables; more than half of your electricity comes from renewables, so shouldn't be affected at all by the price of natural gas… Why is it affected by the price of natural gas? Because you have marginal-cost pricing. You've got all this free energy being produced by wind farms in the North Sea, and you pay for these kilowatt hours as if they were produced by the most expensive producer... Now that is a scandal, because you have the government playing the role of the monopolist, allowing the privateers to extract monopoly profits out of the population.
Michael Liebreich So you would presumably applaud Kier Starmer, who has come out in the UK and said he wants to have GB Energy? You would like all energy generation to be nationalized?
Yanis Varoufakis I would. Because we have a very pressing task ahead, which is the transition to renewables. We need very quickly to move away from the economies of scale, factory-based notion of power generation. The future is smart, decentralized grids, with very small units generating electricity, whether these are solar and small windmills, heat pumps or green hydrogen-producing units, that need to be grounded in the communities; communities must have ownership rights over both the electricity that is generated and the actual machinery. But that needs to be designed. In the current system, even companies that charge very high price cost margins are more or less bankrupt, because they seek to hedge their future prices. So, you have this absurd situation where you've got companies that make hefty rents being bankrupt at the same time, because they have borrowed so heavily in order to invest in derivatives that stabilize their long-term electricity prices. So, the market that the state has created, following the Thatcherite privatization of the Central Electricity Board, is absurd. It is just an abomination.
Michael Liebreich Clearly it’s the role of the state to provide a secure electricity network. But who would decide prices in this world, with so many different players?
Yanis Varoufakis It's a good question. If you want to regulate an oligopoly, a duopoly let's say, there are two ways of doing it. One is to set a price cap. And the other is to take over one of the two producers, and use the public ownership of the producer to set prices low in order to force the privateer to follow through and also reduce prices, otherwise, they will lose their market. Now, my view is that, in a publicly-owned grid, the state that needs to control at least in the first phases, the larger baseline, the base load producers. The state can lead price formation through a policy of average cost pricing plus 5%. In order to give space to privateers to operate without giving them an opportunity to extract massive economic rents.
Michael Liebreich The markets are not just electricity, there are lots of separate markets. How is a state-owned monopoly going to be able to hire the talent to optimize the supply and demand of electricity in every distributed grid?
Yanis Varoufakis Your point is that complexity means that simulated markets work better. My point is exactly the opposite. That greater complexity means that a centrally planned system, utilizing modern IT technologies is far better placed than a marketplace, which is made far more unstable, primarily because of the speculation and the derivative trades that go hand in hand with every one of the of these sub-markets. Can I give you an example of such a magnificently functioning, centrally-planned system? Amazon. Amazon may be private, but when it comes to its organization, it operates like Gosplan, like the Soviet Union. The fact that it's owned by Jeff Bezos doesn't mean anything. It's one organization; there is no market within Amazon. There are suppliers and there are buyers, like you and me ordering books or whatever from Amazon. But the system is a centrally-planned system, using artificial intelligence, using a sequence of warehouses. This is what I'm advocating, except that it should be publicly owned. And not owned by Jeff Bezos.
Michael Liebreich I really encourage you to listen to our episode with Greg Jackson because he is basically building the Amazon of the of the electricity system. But the idea that he would have come out of a centrally-planned system is, to my mind, ridiculous.
Yanis Varoufakis I don't want a snazzy electricity system. And I really do not get moved by the analogy of an electricity system that produces the equivalent of Zoom and TikTok. The bloody thing is meant to produce one thing: homogeneous electricity. We do not aim for an output that is heterogeneous, and all singing, all dancing. We just want a steady electricity supply that guarantees low prices, and ample quantities, especially for the people out there who as we speak, have no access to affordable electricity at a time of a horrendous cost of living crisis. When it comes to electricity, I prefer a boring electricity system that actually makes the smooth transition to green technologies, and which guarantees the many out there who are struggling an electricity supply that prevents energy poverty from being the flip side of the coin of huge economic rents for very few smart guys.
Michael Liebreich Providing boring cheap electricity requires just the vastest levels of innovation. I'm struggling to see a single state-owned model that has delivered that.
Yanis Varoufakis Oh, yes. I mean, there's no doubt that it hasn't happened yet. But then again, just because something hasn't happened yet doesn't mean that it's not the right way of going, right? The point I'm making is this: you and I agree on a number of things. One of them is that whatever grid we have, it should leave room and space for innovators to come in, do snazzy things and improve the efficiency of the system at the margin. And if you have lots of them then the whole system is going to become far more efficient. The question is who owns the large components of the system? The fact is that there are people out there paying huge, huge prices for kilowatt hours that were produced very cheaply. Do you do this through regulating the market? Or do you follow my cue, which is to say these things should be publicly owned. In the end, Michael, I have no doubt that it boils down to ideology. Margaret Thatcher was a rebel in the sense that she blew up what existed. And I'm saying that what she created is now blowing itself up. And for me, regulation is sticky plaster.
Michael Liebreich You founded your own political party, a pan-European movement, or a multi-country party, which is very ambitious. But you've also said that you don't give a damn if it fails?
Yanis Varoufakis A preface, first. Especially in this country, which is bankrupt and small, and has a tradition of corruption, the discussion we're having is not even interesting. Intellectual discussion, like the one we're having is beside the point. It's us together, caring about efficiency versus the brute force of an oligarchy that cares only about owning everything. Now I very much fear that this Greek disease is, as always, spreading across the continent. And unless we have a political movement that can speak to the minds and hearts of the Germans, the Austrians, the French, the Italians, the Spaniards and the Greeks, since we are a European Union, then politics is simply never going to succeed in overcoming the inertia, the brute force of business interests that are very much aligned along cartel lines across Europe. So, I strongly believe that if politics is going to be relevant in Europe, in the European Union, we need to develop transnational political parties. National political parties issue manifestos and offer all sorts of things to them, which when they get into power they cannot deliver because it's a transnational pan-European system, and national governments can simply not find solutions that are good for Italy, but not good for Europe, good for Greece, but not good for Europe. Transnational, pan-European political parties, like the one we're trying to create, is the last chance of democracy in Europe. Do I care whether it fails? I care whether it fails or not. But, the fact that there is a very strong probability that what we're trying to do is going to fail, is no argument for not doing it. In that sense, I don't give a damn.