Why governments' attempts to pick winners produce more losers than winners.
I have a post on the effect of the Government's plans to increase by a huge amount our use of intermittent wind power on future prices and availability of electricity on the Institute of Economic Affairs blog.
According to the Guardian:
"The government will today demonstrate its willingness to exert influence over Royal Bank of Scotland and Lloyds Banking Group by announcing £1bn of lending to wind farm developers whose schemes have been becalmed by a lack of cash... The £1bn cash arranged by the government is part of the additional £4bn of EIB lending to support UK energy projects announced in the spring budget."
This brings together several threads I have been following recently: the Government's coopting of EIB funds for their political objectives, the hype, ignorance and political-preference surrounding wind power, the resurgence of "industrial policy", delusional confidence in some quarters about the returns from and security of investments in "green technologies", and the disaster for the effective operation of markets that was the bale-out and nationalization of our most incompetent financial institutions.
Why should the banks prefer one technology over another? Presumably, they should look critically at the business models for projects of all kinds that fall within the EIB's objectives, and disburse the money on the basis of the credibility and suitability of the proposal, not simply on the basis that it uses a technology that the Government seems determined to favour almost to the exclusion of other, often more practical, alternatives.
It's utterly corrupt and stupid. And the Tories and LibDems wouldn't do much different, also having been blinkered by VILE-company rent-seeking.
This is our money they're burning, and our freedom they are destroying. How long before we can have a political option that takes government out of where it doesn't belong? Or (as some people whose political judgment I respect have depressingly concluded) is it hopeless? Must we resign ourselves to continuous decline into a patronage state, where success is achieved not by anticipating correctly and providing efficiently what people need and want, but by influencing governments to implement policy in your favour?
Who will speak for those of us who are aware of the lessons of history and know what that latter world brings? How do we fight it?
UPDATE: By coincidence, I was sent a link today to an article on EIB funds being used to bale out a bankrupt project for a Belgian offshore wind-farm. Financial services are only going to get more politicized and corrupt in the current climate.
The Government intends to rely on renewable electricity to meet the largest part of its renewable-energy targets, and for wind and other intermittent generators to supply most of that renewable electricity. To be precise, they have produced the following graph (p.44) indicating what they think the capacity of the various renewable-generation technologies will be in 2020 compared to last year:
Of this, output from the wind (onshore and offshore), some of the wave and tidal, and most of the small-scale projects will be inconsistent and unpredictable at more than short timescales. That makes up around 32 GW of the capacity envisaged for 2020.
Here is a graph of how our demand for power has varied over the past week, from National Grid's realtime data-display facility:
The vertical scale is in megawatts (MW, of which there are 1000 to a gigawatt, GW). As you can see, the peak demand last Sunday was around 34 GW, and demand at night-time is under 30 GW. So, even if we hypothetically switch everything else off (the nuclear, gas and coal-fired power stations, and the more reliable renewables like bioenergy and hydro), on a windy summer night we may be producing more power than the total demand in the country. And this is only a hypothetical, because much of that alternative capacity cannot just be run up or down to suit the weather patterns.
Conversely, under an anti-cyclonic system in winter, we may have minimal wind output (5% of capacity across the country) and demand of 58 GW or more. The unavailability of around 30 GW from intermittent renewables will not be helpful. The other technologies will want and need to charge very high prices at this time, as they will have to recover their capital and fixed operating costs over fewer periods when they can export, as they will be displaced by wind (etc) for a fair amount of the time.
But this is not good enough for the Government. It is altogether too unambitious. From p.41 of the Renewable Energy Strategy:
"In particular, in the case of offshore wind, our ambitions are for much greater levels of deployment than shown in Chart 2.3. Discussions with the offshore wind industry suggest that far higher levels may indeed be possible. Estimates of what is achievable are nearer to 20 GW and the Strategic Environmental Assessment recently undertaken for offshore energy indicates that a further 25 GW is feasible by 2020, in addition to that already deployed. In all cases, the estimated contributions for each technology in this lead scenario are in no sense an upper limit on our ambitions."
Note 30: "The figure of 25 GW relates to new capacity (on top of existing plans for 8 GW from previous leasing Rounds) in the UK Renewable Energy Zone and the territorial waters of England and Wales, in water depths of up to 60m. The Scottish Executive is in the process of assessing the potential for an additional 6.4 GW in Scottish territorial waters, which is subject to a separate SEA."
So that's 8 GW from previous rounds, plus 25 GW of new capacity around England and Wales, plus 6.4 GW around Scotland, plus the 14 GW of onshore wind already assumed and around 5 GW of other intermittent projects. That's 58.4 GW - coincidentally almost exactly the same as the highest level of demand achieved in any half-hour period so far this year. So 99.9% of the time, on a windy day under an "ambitious" scenario for the Government where all this capacity is developed, we would be producing more power than we could use, even if we shut down all other technologies. And for a good part of the year, there would be a risk of producing more than twice as much as we could use.
But that's just a detail. Governments can't let details get in the way of their ambitions.
Renewable energy has a number of benefits and disadvantages. The most significant of the benefits are the avoided carbon emissions and the energy-security benefits. The latter is more debatable - diversity is undoubtedly the key to security; on the other hand, the intermittent renewables, being unreliable, have some negative impacts on security too.
Whatever the pros and cons, one can say that in most regards one type of renewable provides similar benefits (per MWh) to another, and that if we were to distinguish between them at all, it would not be to favour intermittent technologies (wind and wave, in particular). Nevertheless, the Government treats the intermittent technologies very much more favourably than the alternatives.
In the case of onshore wind (which is treated four times more generously than landfill gas, a technology of similar costs and maturity), this is almost completely incomprehensible and unjustifiable. In the case of offshore wind and wave, the justification, such as it is, for generous support is that they are immature, and that generous support to bring on projects now will drive them down the "learning curve" in the belief that they will thus become economic.
The learning curve is a piece of economic mumbo jumbo. But let's pretend that it's not. I posted recently on offshore wind's apparent learning curve to date, which has been strongly upwards (i.e. the more we learn, the more expensive it turns out to be). Now the Government has released a report by Ernst & Young that was commissioned to support their decision to "band up" offshore wind in a review of the Renewables Obligation banding.
DECC don't appear to have made the document publicly available; perhaps even they and E&Y are too embarrassed to expose this drivel to public consideration. So I have attached it here.
The report includes the customary incantation of the "learning curve" mantra, in Appendix C: Industry learning. And indeed, assumptions about learning-curve benefits are included within E&Y's calculations of future costs.
So how much better do E&Y forecast that offshore wind will get as a result of the Government's generosity and the magical properties of "learning curves"?
Well, here is their projected curve for the cost of the turbines:
Oops. Well perhaps they are getting cheaper to put in? Here is E&Y's projection of foundation costs:
Never mind, maybe the electrical infrastructure is getting cheaper?
As E&Y note, "Since more recent projects are located further offshore they see higher electrical infrastructure costs than earlier near-shore projects." Oh dear. Anyone remember the cherry-picking effect, which I have repeatedly pointed out will counterbalance and often outweigh the learning curve?
In all E&Y project that the trend of capital costs will be:
But capital costs aren't the be-all-and-end-all of project economics. Perhaps the operating costs are improving:
Last chance. Will the costs of repair and maintenance improve so much that they make up for all these other increasing costs?
No. Everything about offshore wind is getting more expensive.
So remind me again. Just why are we planning to throw billions of pounds at this technology, and support it to a much greater extent than technologies that deliver the same or greater benefit, are more reliable and less difficult?
Is there any reason other than to provide yet another bung to the Government's corporate pals?
As a postscript, I have to admit that I got a figure wrong in my previous post on this subject. I generously allowed a load factor of 40% for offshore wind's output (i.e. it would produce 40% as much energy as it would if it ran at full power all the time). The industry used to claim around 45%, when it was arguing that it could deliver lots (rather than when it was trying to argue how poor it is). Everyone except the Government knew that was fantasy, but I thought 40% was a reasonably adjusted figure. Apparently not. Ernst & Young have been working for a while now on a figure of 35%. And in the most recent year for which we have figures (2007), the Renewable Energy Foundation's excellent analysis of ROC-Register data shows that the average offshore load factor was 27.1%, lower than the onshore average. I am sorry to have given a misleading impression that offshore wind might have some modest redeeming feature. [PPS: E&Y used 35% in their report supporting the consultation on banding the RO, but I now see that they are allowing 38-44%, depending on project, in this latest report. Don't know how this is justified, considering the performance demonstrated by REF. It all shows that claims that you can calculate what technologies need, rather than simply creating rational incentives and seeing what turns out, is stupid, illusory, and counter-productive. Government never has good-enough information or pure-enough motives for central-planning to be an effective option, whether that planning is implemented by literal command-and-control or through incentives targeted at calculated needs and outcomes.]
And another supplementary thought: E&Y's capital cost curve shows capital costs rising towards £3 million per MW. So how did the Government come to the figure of £9 billion they claimed would be invested to deliver the 1300 MW that they estimated the half-billion-pound bung would deliver?
Classic example of corporate rent-seeking in the Business section of today's Sunday Times.
In the past week, the Renewables Obligation (RO) Order 2009 has been passed. This converts the previously (roughly) technology-neutral RO into a targeted mechanism to pay more for carbon-savings from some types of renewable electricity than for others. So (amongst many technologies and several bands) support for landfill gas is reduced by 75% (they get quarter of a ROC for each MWh they produce), while support for offshore wind is increased by 50% (1.5 ROCs per MWh), presumably implying that carbon-savings from offshore wind are six times more valuable than carbon-savings from landfill-gas generation.
But this isn't enough for the ever-subsidy-hungry wind lobby. Despite the hundreds of millions of grant-funding that has been provided to offshore wind, the steering of investment in transmission networks to help the wind industry, and now the corruption of the RO to put more money in their greasy little mits, they want more.
The ST's headline is "Energy firms demand £2bn to save wind farms". Any suggestions for what one could do with the billions of pounds that have been thrown at, or are being demanded by the big energy companies to develop a technology that so far has barely registered an impact on our energy supplies?
And so it goes... When the Government ask which technologies can contribute the most, the big companies tell them that wind is plentiful and cheap. The government duly picks this winner, but then "discovers" that wind isn't quite as plentiful and cheap as they had been told. Indeed, wind (they are now told) will need more support than many of the alternative "losers" that they had chosen to support less generously. And once they have discovered what sort of woman the Government is (as George Bernard Shaw would put it), all the big energy companies have to do is haggle over the price. So they keep discovering that their costs are getting higher, and of course, this justifies the Government in throwing more money at the technology.
Shouldn't it mean that wind should get less, not more? After all, the promises have turned out to be false, and we have discovered that wind is one of the least economic ways of achieving our targets. Shouldn't the Government be revisiting how they could better use the money?
By the way, do you like the way that the ST refers to the wind lobby as "the energy industry"? That is, of course, because the lobby is dominated by the vertically-integrated large energy companies (the VILE companies, for short), the BWEA's perpetual rent-seeking is substantially on behalf of these large members, and the ST know who are behind it, and like the Government, and most commentators, assume the big guys are the industry, rather than just a toxic part of it. Disintegrate the bastards.
And as for getting your analysis from the ST (or most other papers, to be fair), try this sentence from the article for a perfect demonstration of a journalist who hasn't got a clue:
"Increasing the subsidy from one ROC per megawatt to two would triple the revenue that power companies collect for wholesale electricity."
Bishop Hill has rightly pointed out that the current weather is casting the Met. Office's claims of technical superiority in a bad light. But let's not limit it to the Met. Office. It is also making a monkey of wind fanatics.
The current weather presents an interesting challenge to proponents of wind-power. Jeremy Paxman just asked Mike O'Brien how much power is currently being produced by renewables (assuming in standard BBC-style that renewables would deliver power on demand regardless of conditions), to which O'Brien answered truthfully "very little".
Even that is an exaggeration for wind at this precise moment. Just when our needs are greatest, because of the cold weather, our output of wind-power must be less than "very little", because of the same high-pressure system that has caused the cold weather.
Wind-fans argue that if we had better networks, the wind will always be blowing somewhere. But it would need to be a big network, with massive redundancy, in conditions like this. The UK is not remotely big enough. Western Europe wouldn't be big enough. In these conditions, we would need a network that stretched from Scotland to Greece and from Spain to Estonia, to achieve reasonable smoothing through geographical diversity. It would need to be a completely new, DC network because of the losses on AC over that distance. It would need massive duplication of wind capacity over that network. The cost would be immense. And the geopolitical insecurities huge. Hardly an answer to our energy-security problems.
The reality is that wind-power cannot serve much more than the 20% of our electricity demand (7% of our energy demands) that always used to be assumed (before the Renewable Energy Directive made it necessary to lie), and needs standby thermal generation capacity equal to almost the whole of the wind capacity. Like a pan-European HVDC network, keeping those power-stations available but idle won't be cheap.
"Those who want the Government to regulate matters of the mind and spirit are like men who are so afraid of being murdered that they commit suicide to avoid assassination."