Sunday, June 25, 2017

EXISTENTIAL THREATS FROM CLIMATE CHANGE.


Tragic events in the UK in the last week, the Grenfell Tower fire, remind us of the dangers of not paying attention to readily identifiable risks, and avoiding action for the sake of relatively trivial cost savings. Although it is an issue on a much much longer fuse, there are many analogies that should apply to the way we approach the threat of climate change. It’s not a simplistic cost benefit analysis. It’s about possible risks to our survival, at least in the numbers and the style to which we are accustomed today. This means a sensible approach to the avoidance of catastrophic risk. It also means understanding the science, in this case some of the dynamics of climate.

Discussions in one of the recent BIEE climate policy seminars[1], taken with some of the references that I then pursued, touched on a number of general issues that I have sometimes touched on before in this blog, or which deserve repeat at regular intervals. One is the gross inadequacy of conventional approaches to justification of climate policy in terms of a traditional cost benefit analysis, sometimes grasped enthusiastically by second rate economists as if it were a raison d’etre of their trade. Another is the notion of “tipping points”, associated with particular catastrophic risks to climatic systems, and sometimes ridiculed by climate sceptics; these are essentially points where a small marginal change in one factor, eg temperature, can completely change the dynamics of a climate system. A third is the problem of finding a rational approach to risk uncertainty, and a fourth is the importance of irreversibility. And finally I discovered, buried in an under-reported section of an IPCC report, a simple illustration of why we might want to take seriously the aspiration, from the Paris agreement, for a 1.5o C global warming target.

Let’s start with the illustration, which is a chart showing the pattern of a likely relationship between temperature. The vertical axis is estimated long term sea level rise associated with a given increase in global temperature to a new equilibrium.

Climate Change 2013: The Physical Science Basis. Chapter 13. Sea Level Change
The graph shows a step change in the long term sea level that starts as the global temperature rises. The step change occurs as global temperatures reach about 1.5o C above pre-industrial levels, and adds about five metres of sea level. It is perhaps not entirely coincidence that this is the aspirational target from Paris COP21.
What the chart shows is actually a physical phenomenon that is very easy to explain. It is the melting of land ice, in this case the Greenland ice cap. Up to that point sea level rise is slower and due to other factors such as thermal expansion or glacier melt, as well as smaller land ice reductions. Once the ice has melted it will not reform quickly or easily even if temperature stabilises or falls slightly. In other words the change is irreversible. The change also changes the climate dynamics and accelerates global warming through a feedback effect, as water absorbs more heat than reflective ice cover.
This scale of sea rise, which threatens many if not most major cities, such as London and Shanghai, and countries such as Bangla Desh, as well as much of our most productive agricultural land, might be considered an existential threat to human survival, at least with a continuing population of 8 to 10 billion. Even if this probability were considered quite small, an assumption that is by no means obvious, it is one that most people, facing such a risk in their daily lives, would take a great deal of trouble to avoid. As the simple physics of heat tells us, melting is not an easily reversible process. Land ice melting on this scale would be a catastrophe from which there would be no easy escape.
This is also an where a traditional cost benefit analysis to public policy breaks down. It fails for a number of reasons.
First there is no means to measure the scale of what the costs of serious disruptive climate change might look like, in terms of forced mass migration of hundreds of millions of people, resource conflict, and the destruction of capital assets. Integrated assessment models of the type quoted in the Stern Review, however well intentioned, are simply not fit for this purpose. Second, cost benefit analysis is actually a very limited technique, suitable for the analysis of small incremental changes. It does not deal adequately with radical choices between wholly different paths to the future. Third, it takes no account of inequality. Hardships for poor people are valued less than minor inconveniences for the wealthy.
But most important of all, it depends on the ability to quantify everything, including uncertainty. This is acceptable when it is possible to assign a known probability distribution, but in this context, and many others, that is completely impossible.
This is a field where other professions have long had a more realistic approach. Dr David Hare, a past-President of the Institute and Faculty of Actuaries, puts it very well.
“Climate change is primarily a risk management problem – one of the most important goals of climate change policy should be to limit the probability of a very bad outcome to an acceptably small value.”
The task then is not to find an arbitrary value for a carbon tax, although such a tax is a useful measure. It is to make sure, above all, that a safe policy objective is achieved. 1.5o C, far from being idealistic, may even prove to have been a dangerously conservative target.



[1] I shall not be specific as these seminars meet under the Chatham House Rule and I prefer to minimise the risk of accidentally ascribing an opinion to an identifiable individual.

Monday, June 19, 2017

PLENTY OF POLITICAL DRAMA IN THE UK AND THE US.


Stunned by the range and scale of extraordinary and dramatic events in the last few weeks, this blog has remained very quiet and is only now starting to recover. It will remain quiet and slightly less frequent over most of the summer as the author is also working on some substantial papers about low carbon issues.

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But it’s a good time to review quickly some recent events, in terms of their possible implications for energy and climate policy. Some of the themes may deserve a fuller treatment in due course. Some reflect on earlier postings.

Trump. The Trump comedy machine trundles on. Monty Python meets House of Cards is one popular characterisation of recent events (and not just with Trump or the US). But, as I commented earlier in relation to the Paris agreement, the damage of US withdrawal can be exaggerated. It will be limited both by growing appreciation within the US of climate issues, and by the increasing extent to which the rest of the world will simply ignore the US in the framing of its own policies.

The Middle East. Probably of more geopolitical significance are the strange diplomatic initiatives in relation to Saudi Arabia and Quatar. At the very least these risk adding fuel to the flames of conflicts that are already very terrible and will pose problems well beyond their own borders. These are very well explored by David Gardner in the FT.

The Saudis have long so mismanaged their energy resources as to have been forced to consider their own austerity programme, and on current prognostications for oil demand and prices their long term prospects must force some very substantial changes, not least in the very wasteful consumption of energy that has characterised much of the Middle East. We have long thought of the region mainly in terms of its role as a low cost intra-marginal oil producer, but consumption growth has been huge, and it deserves to be taken much more seriously in the broader context of how global adjustments and low carbon policies can be developed. We have to hope this will not be hindered by ill-considered diplomatic and military adventures on all sides.

UK. Bank of England forces financial institution stress tests in relation to climate change. This is another sign that widespread assumption of a low carbon future is gaining traction. Part of this is concern with the liabilities of insurance companies, in relation to some of the bigger risks anticipated from climate change, eg coastal flooding. But another of the Bank’s concerns is with the position of funds that have too much invested in companies that are going to lose out heavily if the world turns even more decisively against fossil fuels. Companies most at risk include coal, especially as the prospects for carbon capture appear to recede. Again this is an issue flagged in an early posting on this site.

And the UK election and Brexit. Direct implications for climate policy seem limited. There is no doubting the multiple close correlations and affinities between the fundamentalist free marketeers, the hard right Brexiters, the Trump camp and fossil fuel lobbies in the US, and refusal to accept the implications of climate science. Politicians like Redwood, Lawson, Trump himself, Farage and UKIP, Rees Mogg and Grayling, together with the small band of pro-Brexit economists, all fit the mould, and the correlations have been noted in earlier postings. But with too many internal battles over Brexit, and the relaxation of austerity,  any threats to UK climate policy, its 2050 legally binding targets or its commitment to Paris seem unlikely, for a host of reasons.

Where do we go on liberalised markets? Both major parties went into the election on a platform that included the prospect of price controls for the energy companies. This deserves a deeper analysis, perhaps, but surely marks the death knell of the liberalised market approach in the UK. The UK government, and most other European governments, intervene extensively in the energy sector.

Sunday, May 28, 2017

TRUMP, MORE NONSENSE ON CLIMATE, AND THE ARGUMENTS MOVE ON

Apologies to readers for a longer than usual gap. This has been the result of travel commitments and the diversion of my time into writing a rather longer piece for another publisher.


The Trump caravan moves on. The recent G7 meetings are reported to have included tense conversations between Trump and other leaders on climate policies. Hitherto Trump’s lack of consistency on the subject has been encouraging, as campaign slogans promoting coal interests meet some wider global realities. And Trump’s unpredictability (to use a kind word) means that even if he eventually comes down on the anti-science side of the argument, the US position will carry less weight in the rest of the world and is less likely to undermine the Paris agreement.
However it is clear that the “refute the science” camp epitomised by climate sceptics such as Trump[1] and the UK’s own Nigel Lawson is increasingly in disarray. In recent years they have relied heavily on the cherry picking of global temperature statistics purporting to show a pause in “warming” since 1998, an unusually hot el Nino year. The statistical analysis was always laughable, but the last two years, coinciding with another el Nino, have driven the last nails into the coffin of this particular piece of sophistry and spurious argument.
The result is we now see the sceptics retreating to another line of defence, essentially that the outcome of increasing CO2 might not be as bad as predicted and therefore might not justify “expensive” action in mitigation. Jonathan Chait reports one such line in the Daily Intelligencer of 1 May, picking up a column from the New York Times in which Bret Stephens, whom he describes as “a conservative refugee from the increasingly Trumpist WSJ”, argues that the certainty of climate science is overrated, while still admitting the reality of warming and the human influence on it.
This at least is progress of a sort. Pre-election Trump treated the science as one of the great hoaxes of all time, so at least there is some recognition of the science. And it is also true that the science is anything but certain in estimating the climatic impacts and their economic and social costs. However this argument, which is developed to suggest that we cannot afford to abandon or reduce our fossil fuel consumption, ignores the reality that the uncertainties over outcomes runs in both directions.
The problem is the implicit argument that the risk is one-sided.  Climate Shock, a 2015 book by two very serious economists, Wagner and Weitzman, argues that we pay too much attention to scientists’ best estimate of the “likely” global warming outturn. What should really concern us is possible underestimation of climate change. The best estimates are both dangerous and expensive.  But the more extreme but still plausible possibilities are terrifying, threatening human civilisation in any form to which we have become accustomed and almost certainly implying a massive involuntary reduction in population.
It is also worrying that the evidence hitherto is to suggest that scientists have if anything erred on the side of not appearing to be alarmist, and that their predictions have proved right, within a range of uncertainty, or have underestimated the warming that has actually occurred.[2]
We do not accept a 10%, or even 1%, chance of a fatal outcome when we take a flight.  Nor should we collectively accept such risks in forming our energy choices. Nor is the cost of effective action impossibly high (although it might become so if we wait too long). It is broadly assumed to be of the order of 1 to 2 percent of GDP, roughly speaking the equivalent of assuming we might reach a given standard of living inn 2050 instead of 2049. It is also, for individual economies, within the boundaries of impacts (on standard of living) brought about by short term fluctuations in the oil price, or by significant changes in government fiscal policies.
We should expect more dubious arguments along these lines from conservative commentators such as Stephens, Lawson, Trump and others. The ideological objective is small government, and fact and logic are twisted to reach the desired political conclusion.



[1] Trump, like our own Daily Mail climate science specialist Melanie Phillips, has form on matters scientific, having got into deep water on the subject of vaccination and autism. This is another area where the promotion of absurd and indefensible positions has caused huge social damage, but this blog confines itself mainly to energy matters.
[2] Climate change prediction: Erring on the side of least drama.  Brysse, Oreskes, O’Reilly, and Oppenheimer. Global Environmental Change. Volume 23, Issue 1. February 2013


Sunday, May 7, 2017

SHOCK. HORROR. THIS IS A GOVERNMENT THAT DOES NOT BELIEVE IN FREE MARKETS.


Has May pinched Corbyn’s policies (or at least Ed Miliband’s)?


I commented a short while ago  (on 25th April) on the very different treatments handed out to the idea of energy retail price caps, depending on whether they were proposed by Labour or Conservative administrations. To recall the discussion.

[2015]. The Telegraph said prices would go up before Miliband’s freeze, while the Times and the Sun warned the “lurch to the left” risked blackouts. The Times’s editorial described his plan as “flawed in practically every detail”. [2017] … on Sunday, the Sunday Times welcomed May’s price cap as an “attempt to capture the political centre ground”. [Guardian]

This was a timely posting. The FT reports today as follows.     Theresa May said during the Conservative party conference in October last year that she was planning to take action on high bills. Since then, the “big six” power companies have stopped trying to match or better the cheapest deals on the market, according to an analysis by price comparison website uSwitch.

So far this looks like first blood to the Daily Telegraph, as the big energy companies take pre-emptive action to raise prices or at least limit any pretence at aggressive competition. The FT also reports that: Iain Conn, chief executive of British Gas-owner Centrica, Britain’s biggest energy supplier to homes, has said there were people at the heart of the Tory government who “don’t believe in free markets”.  

Alternatively this could be interpreted simply as a recognition that in this particular industry, the principles of free markets and competition are beset by so many sources of market failure that some retreat from neo-liberal ideology was inevitable. An energy industry counterpoint came from Paul Massara, former chief executive of Npower, who said free market competition had not so far encouraged the majority of households to switch to cheaper deals. “Free markets haven’t worked and therefore you need to do something. The question is what is the right solution?”  [again according to the FT]

Watch this space. There will be many even more significant battles ahead within the Tory party around the broader questions of markets and “working for everyone”. But, I suspect, they will not be of great prominence in this election campaign.

Saturday, May 6, 2017

ELECTION IRONIES. WHERE WILL EU ISSUES PLAY INTO UK CLIMATE POLICY?


As the UK moves towards the June general election, there is a widespread assumption of an overwhelming victory for Mrs May’s Conservatives. So it is perhaps time to put a positive spin on this most probable outcome and consider the issues that may arise for UK climate policy.

A very strong personal position for Mrs May, and the crushing of UKIP, will make it much easier for her to agree the inevitable compromises that will be required to secure exit terms that avoid the economic disaster of a no deal exit. Inter alia this is likely to include substantial “divorce payment” even if it is well short of the £ 100 bn plus that is a negotiating position currently hinted at in Brussels. But almost any viable agreement will include other equally substantial disappointments for the diehard Brexiteers.

Energy issues will not be top of the list of problem areas, but Brussels may seek to retain the UK within the EU ETS, ostensibly on the grounds of ensuring “fair” competition in trade. The UK should not resist this too strongly, first because the EU ETS has in any case proved to be a rather ineffective instrument, but more importantly because there are potential longer term advantages to membership of a regional block for trading carbon emissions, should these arrangements ever escape from the cycles of weak adjustment to rapidly changing conditions within an inflexible political framework.

In broader terms the UK would be ill advised to seek to separate itself from continental European systems. Interconnection is a major part of future UK energy plans, and a common basis for trading and interconnection protocols and coordination of interconnection investments has some clear positive benefits to both parties. There are also strong contractual and other relationships in the nuclear industry (including disposal of nuclear waste) which will need to be maintained in some form.

There are signs that Mrs May is moving sharply away from the market fundamentalism that has characterised much of the Right of the Tory party, and especially its members most closely associated with campaigning for Brexit. The evidence for this has been most clear in terms of her ambitions for a government that “works for all of the people”. But its most concrete manifestation to date has been in the threat of a “price cap” for the energy utilities. This would be the death knell for the liberalised market as we have known it.

A further irony has been the revelation that price caps currently apply in about half of other EU countries, indicating (whatever general view one takes on their wisdom) that much or most of the EU has not followed the UK market liberalised market model very far down the road. The UK is retreating further towards a more typical EU paradigm of mixed market and interventionist approaches. All the while the Commission itself has been pushing to move faster to liberalised and UK-inspired “single market” solutions. The irony is that at the point of its departure the UK will actually be moving into closer alignment with its neighbours, at least in terms of its general philosophy.

There have been suggestions that consumer bills will be prioritised over renewables investment. On the other hand a government that works for “all the people” may also be predisposed to projects that can show a substantial wider benefit to the economy. Industrial strategy may be back in fashion, and is unlikely to be directed to new fossil technologies except (just possibly) in renewed interest in carbon capture (CCS). It is more likely that nuclear programmes will be maintained, and projects such as the West Coast tidal lagoons, which can show major external benefits (as well as carbon saving) will get some serious attention.

The negotiations have clearly got off to a bad start, with a trio of apparent incompetents in key roles. This does not augur well for either any sort of agreement, or even less for a “good deal” for the UK. But we have to hope that sense will prevail. If it does, and even though Brexit is not the preferred scenario for most Greens and others engaged with climate policy,  then there is no reason to despair of at least some continued progress in UK climate policy.

Tuesday, April 25, 2017

PRICE CAPS.  HYPOCRISY GOES INTO OVERDRIVE, BUT ARE WE WITNESSING THE DEATH OF NEO-LIBERAL PRINCIPLES FOR THE ENERGY SECTOR?


As we head at increasing speed for the policy train wreck of the forthcoming Brexit negotiations, the British political class (and MPs by an overwhelming majority) has chosen to divert our attention into one of the most pointless general elections of all time. This will inter alia call a temporary halt to the searching examination of false promises and expectations, and simple untruths,  that Hillary Benn’s House of Commons Select Committee on Leaving the European Union has been conducting. Readers not looking for the usual energy policy content of this blog may wish to read no further and refer instead to the Committee’s recent reports. These tend to be understated, but the material is there. In due course we will no doubt learn more about the effectiveness of EU exit in curbing immigration, boosts to our national income, the wonderful new trade deals on offer from Donald Trump, and much, much more.

POLICY TRAIN WRECK


However in the meantime the campaign will provide a useful opportunity for our leaders to hide from reality. Nevertheless connoisseurs of duplicity, smoke and mirrors, and hypocrisy, if not satiated by other aspects of the Brexit debate, can still find some rich material in campaign discussions on the subject of energy prices. The subject of energy price caps has come to the fore, just as it did before the 2015 election, with Ed Miliband’s promotion of the idea.

2015. RED ED'S POLITICS OF THE BANANA REPUBLIC.  like the pledge to cap energy prices, [these policies]  … merely serve to stoke up the politics of division. [Daily Mail].  “And despite the criticism of many experts, he remains committed to the principle of using State power to cap energy prices, with bills frozen by law until 2017, which strikes me as economically illiterate.” crowed another Mail columnist. BACK TO THE BAD OLD DAYS, the Daily Mail front page had screamed earlier in September 2013 on the same price cap issue. For the Spectator it had been MILIBAND'S LA-LA LURCH TO THE LEFT.

2017. But when the Mail reported earlier this month on Tory plans to take action on bills in the face of the latest rise by one of the big six energy companies, such statist intervention had become CRACKDOWN ON ENERGY RIP-OFFS. The Telegraph said prices would go up before Miliband’s freeze, while the Times and the Sun warned the “lurch to the left” risked blackouts. The Times’s editorial described his plan as “flawed in practically every detail”. [But] on Sunday, the Sunday Times welcomed May’s price cap as an “attempt to capture the political centre ground”. [Guardian]

The ironies in the contradictory treatment of the same policy when promoted by different factions are amusing. But actually there is a deeper significance to this volte face from the party of market fundamentalists.

As it happens I regard the use of price caps as misguided under most circumstances, now putting myself at odds with both Labour and Conservative. Obvious reasons are the risk that interventions confined to price will reduce supply and deter investment, and that it is better to address the disease (market failure) rather than the symptom. Nor do I entirely buy the view that the energy companies are making excess profits (see an earlier posting). But the endorsement by the Conservative party[1] of such a quintessentially statist, interventionist approach signals something more than simple electoral opportunism. It arguably represents the end of the road for the pretences of market liberalisation. This is certainly so in the UK, arguably the pioneer of deregulatory principles and their application.

Network costs, which can account for a third or more of a domestic consumer’s bill, have always been heavily regulated, even after privatisation in 1990. Generation investment is now almost entirely dictated by government, either directly through support for nuclear or renewables, or more indirectly through centrally controlled capacity auctions. The remaining element of the electricity supply chain, retail supply, has always been at best pseudo competitive, but that too is now being taken under the umbrella of government. What all this amounts to is the complete capitulation of the neo-liberal approach, at least in the energy sector.

It is surely time to recognise that this is a sector beset by market failure and that we need, not a series of ad hoc sticking plasters but a complete re-think of how we want the sector to operate and how we can better structure it to use the real dynamics that can come from competitive markets in driving efficiency and innovation. There is no point in pretending that we are still operating a laissez-faire competitive system, or that government can remove itself from the multiple policy choices and commitments that the sector, and particularly a low carbon power sector, will require.

There are further ironies and further opportunities for amusing speculation. The UK is not alone in wrestling with the paradoxes of the flawed neo-liberal paradigm. My last posting discussed a significant issue arising in a German and EU context. The EU followed the UK up the hill of unbundling and market solutions, but at least 15-20 years behind. The dawning realisation in the UK of the need to reverse direction and head downhill will shortly see it meeting an EU still struggling towards the summit.

But will this be an element in Brexit or future trade negotiations? And if we struggle to get back into the EU in (say) 2025 will be obliged to make further reverse policy changes to meet the EU energy sector and competition and state aid rules at that time. Or will the EU by then also have learned something from our experience as well as their own?



[1] This is after all the party of the ayatollahs of free market fundamentalism such as Redwood, Lawson, Lilley et al.

Tuesday, April 11, 2017

ANOTHER CLASH BETWEEN EU COMPETITION LAW AND SENSIBLE ENERGY POLICY


The EU has launched an investigation into German plans to create a strategic electricity reserve, exploring if the measures amount to illegal state-aid that will distort competition in the electricity market. (FT, 7 April 2017)

Prima facie this episode represents a failure to understand, let alone resolve, a fundamental dilemma of electricity wholesale markets.  This is a failure that potentially has quite profound implications for the ways in which European reliability standards and security of supply are defined, and for effective governance of the sector. The UK, originally a prime mover in liberalised markets and operating regimes that replaced the old style world of command and control, may think it is immune from these problems in the post-Brexit world. If so it is mistaken[1]. Pressures to remain part of some form of the single market will be intense.  

EU competition economists continue to misunderstand some of the fundamentals of efficient electricity markets. Most European markets are already, from the perspective of a free market purist, compromised by numerous policy interventions. From the perspective of theorists of the second best, they are also compromised by the inadequacies of EU efforts to introduce carbon trading regimes that produce a carbon price reflective of the true externalities associated with climate change. While low carbon policy is stuck firmly in the world of the second best, you no longer need to be a Nobel prize-winning economist[2] to appreciate that, in this sector at least, competition policy should be fighting an uphill battle to be taken seriously. This is certainly true from a perspective of maximising public and private good. (Politically the priorities are sometimes different of course.)

But the issue of energy-only markets is, in the context of electricity, even more fundamental. It is a simple to state but quite subtle problem. The efficient operation of energy markets has always been posited on the concept of a merit order of generating plant ranked in order of fuel costs (and in principle other short term variable costs of operation). The most expensive plant required to operate sets a “system marginal cost” and this is the basis for a wholesale market price.

Unfortunately this is a wholesale price that is intrinsically incapable of supporting investment in, or continued maintenance of, sufficient generating capacity to meet peak demands. To demonstrate this one has only to ask what reward be earned by a plant that operates only at peak, and, when it operates, is rewarded only by its own short run marginal cost. There is no reward for this plant, and indeed reliance only on system marginal cost pricing would ensure that all capacity was likely to be under-rewarded to some degree. A preponderance of low carbon plant (eg wind or nuclear), with low, zero or negative marginal cost in operation, will ensure that this issue – “paying for capacity” - is accentuated.

Two types of resolution can be proposed for this problem. The first is a “market” solution that relies on scarcity or supply shortages to raise prices to a sufficient degree to ration demand, and for sufficiently long to induce new investment. This is a “purist” solution that has, unsurprisingly, generally proved unacceptable to regulators and governments. It assumes generators will be “allowed” to make substantial excess profits over long periods (to compensate for the long spells of surplus capacity and ultra-low prices).

The alternative is to instigate some form of capacity market. However this necessarily represents some form of central intervention. Inter alia, within a system of capacity auctions, someone has to decide how much capacity is required, and this in turn requires a view on what is an acceptable standard of generation security and reliability of supply. While we might imagine [3], and possibly even create, a world where the reliability of the power supply is left entirely to the market, that is not the world we currently inhabit. The German government is quite sensibly taking steps to remedy some very clear deficiencies in the electricity market and to protect its own consumers and industries (and voters).

At the same time it is impossible to imagine, given the interconnections of the German power networks, that an intervention of this kind can take place without having significant effects on wider EU markets. The idea that a strategic reserve can be insulated from the market, or “held outside the market” is intrinsically unconvincing. If used it necessarily impacts prices during the periods of shortage on which investors are relying to recover their capital costs.

We can see instantly why devotees of the single market in energy have objected to the idea of capacity markets. Capacity markets raise immediately the question of who should be responsible for setting the security standard. The standard must surely be common across the whole market to avoid distortions, but who is to set the standard – Brussels or Berlin? Brussels, one suspects, is not yet ready to answer this question. It prefers instead to cling to the illusion that an energy only market can actually deliver reliable secure supplies across Europe without introducing market volatility and price instabilities.

The UK has its own conflicts to resolve in terms of getting markets to work efficiently in support of energy and policy objectives. But interconnection and other trade issues will ensure it is, even post Brexit, unlikely to be immune from the effects of security and market issues within the EU.




[1] A recent BIEE seminar addressed this subject, identifying the numerous questions that arise for the UK over continued participation in the emissions trading scheme and a range of interconnection agreements.

[2] We are however indebted to Nobel prize winners for pointing out what may now seem, to some of us at least, simple truths. The subject deserves a much longer posting, but a very quick summary of its flavour can be gained from reading a recent issue of Prospect magazine, and an interview with Nobel laureate Joseph Stiglitz.

Another recognised glitch in the elegant mathematical proofs of the wisdom of the invisible hand was known as “the theory of the second best.” This qualifies the presumption for unfettered markets with the caveat that as soon as you’re dealing with an imperfect world, then there is no guarantee that taking away any single distortion will make things better, rather than worse. [Prospect Magazine. October 2016]

In other words enforcing a rigid competition policy doctrine in a market already massively compromised by the carbon externality, may make things worse. It can and does, as we have pointed out in earlier postings. See for example: EU EMISSIONS TRADING SCHEME AND EUROPE’S CLIMATE POLICY. A FLAGSHIP FLOUNDERING.

Thursday, March 30, 2017

OVERTURNING THE OBAMA LEGACY ON CLIMATE.  OR IS TRUMP UNLIKELY TO TRUMP PARIS ?




END OF THE ROAD FOR FOSSIL DINOSAURS AND THE ANTI-SCIENCE BRIGADE.

The new US administration has been assumed to be bad news on climate issues. The Trump constituency, and indeed much of the Republican voting base, has been built around an improbable coalition that, inter alia, includes substantial direct vested interests in the form of the oil and coal business lobbies, right-wing ideologies and evangelical movements that reject a now incontrovertible climate science as an “inconvenient truth”, and a significant number of constituencies of the “left behind” in America’s rustbelt, where declining industries have been major employers of labour.

As an aside, there are some unsurprising parallels with the UK – Redwood, Rees-Mogg, and Lawson being just a few of the examples of a virulent and quasi-religious climate science denial,  and quite strong fundamentalist views on other political and economic issues. Brexit like Trump represented a coalition of particular "free market" political ideologies and a "left behind" rejection of a perceived elite. The current trio of Brexit ministers - Davis, Fox and Johnson, despite some equivocation for political advantage, have a distinctly flaky record on this subject.[1]

Ironically it has been reported (FT. 27 March 2017) that the ever unpredictable Boris Johnson is trying to persuade Trump not to withdraw from the Paris agreement.

Trump Follow-through on Climate Policies

The recent news on Trump regime activities has been more cheerful than might have been expected. Although his appointment of an apparently rabid sceptic, Scott Pruitt, as Environmental Protection Agency Administrator(EPA), was met with dismay, Pruitt has been refusing to overturn the so-called “endangerment finding" of the agency in 2009[2], and suffering considerable pressure from conservative Republicans as a result.

There is no doubting Trump’s dislike in principle of climate policies, but as with his dislike of Obamacare, it is proving slightly more difficult to express this in practical terms. His Secretary of State, former ExxonMobil executive Rex Tillerson, wants to keep the US in the Paris Agreement, and ExxonMobil, the world's largest publicly traded oil and gas company, is urging the White House to do just that.

The most powerful argument for the USA not to abrogate Paris is likely to be, sadly not the overwhelming human importance of climate change as an existential threat, but the damage to the US standing in the world, together with the loss of opportunities for US businesses in relation to low carbon technologies.

A Missed Opportunity

There was also an emissions reduction strategy that Trump could have followed to the benefit of his rustbelt constituents. It would have been to target infrastructure spending to the benefit of areas heavily dependent on basic industries and coal in particular. Carbon capture and storage would have been a natural choice and might even have offered a lifeline of sorts to a declining coal industry.

Limitations on Trump Damage

Trump is clearly not good news for ambitious climate policies, so a corollary of his current troubles is some degree of relief among those who do worry about future climate. But, apart from expectations of his possible impotence in key policy areas (cf Obamacare) the following considerations might allow us to be slightly more cheerful.

-The Obama achievements within the US were in any case quite limited. The practical consequences of a possibly quite short Trump presidency are therefore less important than they might have been, particularly if much of the US and indeed US business continues to “get on with the job”

-The real importance of Paris did not reside in achievement of legally binding targets (it failed on this) but in the universal recognition of the issues and the degree of commitment shown, at least in principle.

-US backsliding is unfortunate, but is very unlikely to be copied by China or other major emitters. It will, like most Trump policies, diminish US influence, but it will not derail the Paris process of gradually ratcheting up commitments.



                                                                                                          .













[1] David Davis 2009. BBC report. He said evidence suggested the earth was cooling, not warming, and that recently leaked e-mails had shown leading scientists "conspiring to rig the figures to support arlly their theories". [a wholly untrue allegation as shown by subsequent inquiry]
Liam Fox has generally voted against measures to mitigate climate change.
Boris Johnson. Telegraph article. I am speaking only as a layman who observes that there is plenty of snow in our winters these days, and who wonders whether it might be time for government to start taking seriously the possibility — however remote — that Corbyn [Brother of Jeremy and well known unofficial weather forecaster and contrarian on this subject] is right.

[2] The endangerment finding declared that greenhouse gas emissions threaten human health and welfare and made EPA legally responsible for regulating carbon dioxide. It later set in motion much of former President Barack Obama's climate agenda.

Monday, March 27, 2017

HEAT NETWORKS AND NEW INDUSTRIAL STRATEGIES


The Institute for Public Policy Research (IPPR) is intending shortly to bring out a report on heat networks and the decarbonisation of the heat sector. A recent workshop addressed some of the specifics of this subject and in particular the potential linkages with industrial strategy, a concept that is back in mainstream policy discussions after years in the wilderness. We should support strongly efforts to create a coherent policy for the heat sector but we should not underestimate the scale of the obstacles to achieving the objectives. These include getting a clear direction of travel on the evolution of the power sector, not least on the future of carbon capture, and also the sheer scale of what will be involved in retro-fitting a high proportion of the UK housing stock with connections to a heat network. A national body, with the scope to develop a coherent strategy, encourage best practice, and assist and advise local authority initiatives, should be part of the answer.

This blog has touched on the heat sector before[1], as it is clearly fundamental to achievement of UK (and other geographies’) low carbon objectives. Heat networks are also an important component of the future options, choices and scenarios considered by a number of bodies that are concerned with energy policy and decarbonisation, including the Energy Technologies Institute (ETI) and Committee on Climate Change (CCC).  So this is a subject that matters a lot and has several dimensions.

Industrial strategy.

A first reaction to the introduction of industrial strategy as an additional objective in the decarbonisation agenda should perhaps be caution. Industrial strategy is most often associated with overcoming barriers to the development of new technologies, eg by funding research and development or helping develop supply chains, and is sometimes loosely associated, pejoratively or not, with “picking winners”.

Heat networks, on the other hand, are very large investments in pipes to transport hot water, and then retrofitting buildings to make use of the heat provided.   This includes digging trenches, laying pipes, and a lot of construction activity, most likely as a retrofit. The network per se can be to a significant degree technology neutral, and indeed one claimed benefit for heat networks is that there is some flexibility over how they are fuelled. But the networks themselves do not represent any very radical technological shift. Linkages to supply chains and technology choice, the stuff of industrial strategy, are, on this reading of the problems, less obvious issues.

They might instead be more accurately be described as major infrastructure spend, which can have substantial macro-economic benefits, as a stimulus when this is appropriate, and as an instrument in rebalancing the economy, particularly if associated with efforts to prioritise relatively depressed areas. But in the broader context of influencing future patterns of UK manufacturing, the links with industrial strategy are prima facie less clear.

However decisions on future heat networks are also inseparable from other big choices and other big developments within a decarbonisation programme, since these introduce a number of constraints and preferences.  For example, one plausible direction of travel is to associate heat networks with generation based on fossil fuel with carbon capture (CCS). In this context the cancellation of support for a CCS programme in November 2015 is very unfortunate. But had it gone ahead, or were it to be reinstated, it would predispose early schemes to proximity with new CO2 gathering networks and facilities. And of course CCS would have had its own “industrial strategy” questions as to whether the UK would be a leader or a follower and an importer or exporter of the technology.

Energy Sector Choices for Decarbonisation

Embarking on a major investment in a new heat network requires, therefore, a clear view of what are the options for sourcing the primary energy input to the scheme. This in turn needs to be consistent with an overall approach to decarbonisation. Industrial strategy enters the equation as soon as we start thinking about management of primary energy sources, most obviously for carbon capture, possibly for “modular nuclear” (an ETI favourite), for hydrogen (if we go down that route), and possibly for heat storage technologies. Those are all areas where industrial strategy might determine whether we lead or follow, and end up as exporters or importers.

Institutional Factors

Operation of heat networks is correctly seen by IPPR as a function that belongs to a substantial degree with local authorities, and this in turn raises some important questions about the ability of local authorities to finance very substantial capital investments, and also about the subsequent regulation of the sector and the protection of consumers who may have had limited choice over their participation. These are discussed in more depth on the Decarbonising Heat page, but future issues include:

·         possible wide divergence between costs and prices in different towns and cities, reflecting geographical advantages (eg density), access to different low carbon technologies, divergences between earlier and later schemes, and so on.

·         a high proportion of fixed costs, where there is no obviously “correct” or unique methodology for charging; inter alia this allows significant price discrimination eg in favour of social housing.

These and other questions indicate the desirability of confronting these potential issues at an early stage in order to establish some principles for the future funding in construction and operation of large scale urban heat network schemes.
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Taken together these issues make a strong case for an expanding role for the existing Heat Networks Development Unit, possibly as a new National Heat Authority, a body with a much greater ability to interact with the other major players in UK decarbonisation, including the energy companies, National Grid, and the Committee on Climate Change.



[1] See the separate page – DECARBONISING HEAT , a 2016 posting Policies for Decarbonising Heat., and an earlier blog Difficult Questions for Combined Heat and Power.

Tuesday, March 21, 2017

ENERGY COMPANIES. VILLAINS OR VICTIMS IN THE PRICE CAP DEBATE?


Theresa May’s Conservatives have been rediscovering the virtues of a number of what were once familiar Labour themes, but perhaps their most surprising volte-face is the threat to impose price caps on at least some energy utility tariffs.  Populist interventions in what are supposed, in theory at least, to be competitive markets, are often bad news from a perspective of efficient markets and effective policy. And Ed Miliband and Labour were pilloried for this suggestion. On the other hand there is little evidence that the current UK retail market is working effectively, there is evidence that “captive” or “loyal” consumers get a bad deal, and consumers appear to be no happier with their utilities than in the “bad old days” of nationalised industry.

The real problem, at least in the electricity sector, is that there are a number of features of current market arrangements that are seriously dysfunctional. This is in large measure a reflection of “energy only” approaches to the construction of wholesale prices that are “baked in” to much of current thinking. Energy only wholesale prices, based around short run marginal costs, are incapable of rewarding investment. This has been a problem of the UK market since the NETA reforms in 2000, and has become an increasing problem for the rest of Europe. The UK government is now grappling with the resulting problems, including threats to supply security, through the mechanisms of capacity auctions, but these are aimed primarily at incentives for new capacity.

This is by no means a problem unique to the UK. It has been very evident for German companies in the power sector, and has had a number of adverse effects on their balance sheets, and may have damaged their ability to invest in new low carbon or indeed any form of generation, most notably in nuclear power (for RWE and EON).

The fundamental issue is that investors in infrastructure require the support of assurances over their long term revenue stream, support that had in the past normally been provided either by long term contractual or government commitment, or by the security of vertically integrated monopoly. To a significant degree the owners of conventional thermal generating plant lost that support, and found themselves in possession of stranded assets that find it increasingly hard to earn revenue in a world where marginal costs are often zero. Many of the companies anticipated the strategic problem many years ago and found at least a partial solution through vertical integration into the retail business, where market imperfections allowed them to recover some excess profit to compensate for the losses to which they were exposed in respect of their stranded assets.

The utilities, in this interpretation of events, can be viewed as both victims and villains. On the one hand older thermal plant constitutes an asset that has been stranded, at least partly through government policies for the power sector. As victims of this process, their attempt to recover lost ground through vertical integration was a necessary and logical response to that position. However this does imply that vertical integration confers an ability to exploit some form of market power, and is in some sense anti-competitive. The power that accrues to the supply companies comes through the inertia of their customers. That allows them to be portrayed as the villains.

As an illustration of this undue market power, we might contrast typical margins in retail supply with the view taken by previous regulatory bodies.  Prior to the introduction of retail competition, supply margins were generally assumed to be very low.  Thus a 1995 Monopolies and Mergers Commission Review held that 1.0% margin for Scottish hydro supply business was too high and set it at 0.5%.  Retail supply is not capital intensive and the “value added” is limited. In setting price controls in 1998, Offer and Ofgas considered a margin on sales of 1.5% would adequately take into account the increased risks from the introduction of competition.

In the “competitive” UK retail sector, margins have varied but have often been around 4%. Prima facie this looks like the extraction of extra revenue from the consumer for a function, supply, in which the retailer adds next to nothing in the way of extra value. If we add to this some of the extra costs of competing to do business (eg marketing costs) this does not look like good value for the consumer. Suppliers compete aggressively to maintain or gain market share, but a large number of consumers do not want the chore of perpetually searching for the best deal, and would prefer simply to get an uncomplicated service at a fair and reasonable price.

However it seems unlikely that imposition of a government price cap will resolve the deeper underlying issues of the power sector. What we really need is a more fundamental re-think of what we expect from retailers. My own view, expressed in more detail on another page, is that retail supply should be playing a much bigger role in shaping the future of the power sector, and that there are ways in which retail supply could become genuinely innovative and competitive.