Why governments' attempts to pick winners produce more losers than winners.
Imagine you are a politician, elevated after the recent election from shadow to head of a department. You have quite a bit of experience shadowing your department, but to be fair, you haven't had access to all the information and resources that ministers have. You find, on taking charge of your department, that the timetable for some issues is outside your control (e.g. where actions are required by European law). You will have to set out at least a holding position earlier than you would like. It's a pity to be rushed, but you were going to have to rely on your civil servants for much of the detailed drafting anyway, and they have years of experience and a draft close to completion, almost ready for you to sign off. Maybe you are worried a little that the draft may not fully reflect the changes of philosophy and policy that you hope to introduce, but with the addition of some judicious conditionals (i.e. weasel words), you can at least put out something internally consistent and coherent, which avoids commitment to any specific courses of action that you don't want to commit to. At the very least, you and your civil servants should be able to avoid the most egregious mistakes with a little, basic maths and the benefit of your combined years of experience, right? It may not be exactly what you want, but at least it will add up.
Apparently not, if you are Chris Huhne or a civil servant at the Department for Energy and Climate Change (DECC). They have just released the National Renewable Energy Action Plan, which they had to release by June 30 under the EU's Renewables Directive. And it doesn't tally, on even the most basic sanity checks, with the data for the current renewables position.
Take renewable heat (RES-H). Output has been gradually increasing in the UK, from 475 thousand tonnes of oil equivalent (ktoe) in 2005 to 638 ktoe in 2008. Early indications are that 2009 was up again, from 1.4% of total heat supplies in 2008 to 1.6% in 2009 (suggesting a figure of around 720 ktoe). There's no evidence that renewable heat installations are being removed in 2010 - in fact, they are still going in at a modest rate (despite you and your predecessors' continued prevarication on treating it equivalently to renewable electricity or transport). So how much renewable heat do you tell the EU that you expect to be produced in 2010 - not the longest-range forecast you will ever have to pull off?
If you are Huhne or a DECC bureaucrat, you go for 518 ktoe - back to below the level in 2006. And for 2011, you go for 621 ktoe - still below the levels of the most recent years. By 2012, you estimate that we will barely have got above the level that has already been achieved in 2009, even though you give repeated reassurances (with caveats) that you understand that you can't meet the EU and national targets without it, and that you intend to honour the commitment to bring in the Renewable Heat Incentive in April 2011.
In fact, you are so chicken (and have so little faith in your own promises on the RHI), that, of the 6,200 ktoe that you promise will be the annual production of renewable heat in 2020, you project that you will increase annual output by a mere 800 ktoe in the 5 years that you expect the current parliament to last, leaving the remaining 4,600 ktoe to be delivered by your successors in government, between 2015 and 2020 (the classic "hockey stick" projection use by prevaricating politicians whose motto is never to do today something that can be put off until tomorrow, unashamed by the fact that growth never actually follows that pattern in real life).
Or take renewable electricity (RES-E). Its share of gross electricity consumption was 6.6% in 2009, up from 5.4% in 2008. Early data for 2010 indicates that output actually fell by 6.5% in the first quarter of 2010 compared to the same quarter in 2009, while demand was strongly up (thanks to the harsh weather), substantially reducing RES-E's share of total supplies in that quarter compared to the previous year. So what do you project RES-E's share of electricity consumption will be for the whole of 2010? If you are Huhne or a DECC bureaucrat, you go for 9% - a rate of increase that bears no relation to our capabilities or historic trends. The only thing that could possibly deliver it is a dramatic surge in coal prices and/or prices in the EU-ETS, which could see a big increase in co-firing, but the former would have to double or the latter increase fivefold to have that effect, and anyway, co-firing's contribution is still capped, albeit more generously. In practice, the probability of this sort of increase is so small that it wouldn't deserve mentioning as an outlier, let alone use as the one, "central" scenario offered.
How does an intelligent politician with a background in economics, and a bunch of bureaucrats with first access to all the necessary data and hundreds of man-years of experience in the field, end up making such crass errors? Quite simply, because these targets are not set to reflect either what is likely to happen or what ought to happen. They are set on the basis of the advice of the VILE companies (and their associated intellectuals), who continue to try to persuade politicians and civil servants that energy = electricity (with maybe a little gas), that the only type of renewable worth thinking about is renewable electricity (however much the evidence mounts that the leading RES-E technologies are a nightmare for our electricity systems), and that any targets and objectives will therefore have to be delivered primarily through intervention in the electricity market.
The VILEs do so because they are in the business of selling electricity and gas, and support for RES-E will not reduce their sales of electricity and gas (in fact, it will put up the price and margin that they can charge), whereas support for RES-H will reduce their sales of electricity and gas (and their margins, as reduced demand should feed through to lower prices). The intellectuals do so because they love bigness and grandness, whether in ideas or engineering. Big electricity projects are something they can wrap their brains around and invent all sorts of convoluted arguments about how efficient their grand schemes will be, whereas hundreds of thousands of replacement boilers, supplied by thousands of plumbers and heating engineers to no particular grand scheme, just isn't sexy. And the politicians and civil servants follow, because they don't have enough experience of business in the sector to see through the rent-seeking motivations of the main protagonists, and they don't want to challenge such a powerful set of vested interests, whose access to the media and public would drown out the few voices that might oppose the VILEs and their friends. And anyway, they are also in the business of making, selling and delivering grand plans, and it's so much easier to pull those levers in association with a handful of big companies and in the glow of favourable analysis, than to allow the messy, chaotic, unpopular process of discovery in a liquid, competitive market.
And so we commit ourselves once again to a counterproductive set of policies in pursuit of an illusory set of targets.
"The king by the frightful and excessive taxes which he levies on all goods has drawn to himself all the money, and commerce has dried up. There are no rigors and cruelties which have not been employed upon the merchants by the farmers of the customs, a thousand trickeries to find grounds for making confiscations...Besides this, certain merchants, through the favour of the Court, put commerce into monopoly and get privileges given to them to exclude all others...And finally the prohibition of foreign goods, far from turning out well for commerce, is, on the contrary, what has ruined it...And all through this the despotic and sovereign power which prides itself on every whim, on reordering everything and reforming all things by absolute power", quoted in Murray Rothbard, Economic Thought Before Adam Smith.