Why governments' attempts to pick winners produce more losers than winners.
I was contacted recently by someone who was studying the renewable heat sector. They asked:
We read your blog on Picking Losers and I guess the question is, given that DUKES Table 7.6 gives the existing renewable heat total for 2009 as 966 ktoe, is it that some of the categories that DUKES has as renewable heat, are rejected by DECC as not renewable heat in the 2020 sense?
For example, DUKES lists the technology break down as below.
Solar thermal 69.5
Municipal Waste combustion 31.3
Biomass - landfill gas 13.6
Biomass - sewage sludge 67.9
Biomass - wood domestic 375.2
Biomass - wood industrial 164.6
Biomass - animal biomass 40.3
Biomass - plant 203
As you note in your blog this total is something like 450 ktoe more than the NREAP states for 2010. Is it possible that they decided that there was double counting with electricity or that some of these are not really renewable?
I thought my reply might be of interest to others besides the original questioner, so I have decided to post it here:
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.
Second in the list of this week's lousy initiatives* announced by the Government is the micro-generation Feed-In Tariff (FIT), or "clean-energy cashback" scheme. The micro-gen FIT is a scheme to pay significant amounts of money, over and above its value to consumers, for every unit of electricity generated by renewable generators upto 5 mega-watts (MW) in scale.
You may feel that 5 mega-watts doesn't sound very "micro", and indeed it is enough to supply the needs of several thousand houses, but let's not carp. That is hardly the main issue.
Now, I have to declare an interest. Our company may benefit from this initiative. So I would like to thank all of you for your generosity - your extraordinary, overwhelming generosity. But you can afford it, can't you? It's not like we're all strapped for cash or anything...
Don't take my word for it. The Government has detailed exactly how generous you are being. According to their Impact Assessment (IA) of this initiative, it will cost...
£8.6 billion (bn).
But you can't just look at the costs. You have to weigh the benefits against it. And those come to the princely sum of...
£420 million (m).
That's right. According to the Government, it is worth spending £8.6bn in order to make carbon savings of £420m.
One thing leads to another. The APPGOPO report covered in the previous post refers to the first report by the UK Industry Taskforce on Peak Oil & Energy Security (ITPOES) on "The Oil Crunch: Securing the UK's Energy Future", which has been out for half a year, but I hadn't come across before.
The impact of peak oil isn't hard to anticipate. It's not a volume constriction, it's a price constriction (putting aside for the moment complications like EROEI and carbon impacts). We are more than halfway through the "easy oil". If demand exceeds supply of easy oil, as it will soon once economies start to grow again, the marginal supplies will come from increasingly expensive producers, which will drive up prices dramatically. Costs of carbon and the recursive effect on prices of low EROEI from more marginal production will exacerbate the price-impact. The threat is that we won't be able to afford to do many of the things that were fundamental to our economy, not that the oil couldn't be made available for a while longer if we could afford it. But it may feel like an insufficiency of oil, there not being much difference in practice between "not enough" and "not enough that we can afford".
What won't we be able to afford? Simple: road and air transport.* These two forms of transport are almost completely dependent (99%) on oil, and conversely, the vast majority of our oil consumption (75%) goes to transport (12% goes to non-energy uses like petrochemicals and plastics, less than 0.5% goes to electricity production, and the rest goes to heat). We could relatively easily replace oil in the other energy sectors, but on the road and in the air, we are not remotely ready for the dislocation of high oil prices.
So what do this small group of corporations, who have appointed themselves our spokesmen on this issue, have to say? Their assessment of the risk is well done, but (as usual when a handful of corporations get together on a mission) the solutions they favour are not.
"Peak oil is about much more than transport" (p.28). What a surprise. A group that contains a VILE company, a solar-panel supplier, two businesses in the construction sector, a search-engine provider (???), and three public-transport operators think that peak oil means we need more government intervention in lots of areas that have little to do with peak oil. For instance, they think we need much more solar power (and support to deliver it). They think we need much more (subsidy for) wind and nuclear power (coincidentally, Scottish & Southern Energy, their VILE-company member, has substantial plans for wind and nuclear). We need massive efforts to encourage (read: support) energy-efficient construction. And, on the transport front, we need greater emphasis on (support for) bus and rail public-transport options. The latter is not unreasonable (if self-interested and marginal), and they also promote some more obvious and sensible solutions for the long-run, like increased use of electric transport options, but they have a wilful determination to ignore the technical challenges, they have no suggestion for something as key as international air transport (other than that we shouldn't have any more of it), and they have lots of suggestions for stuff that is marginal at best but which happens to be of interest to their members.
Their wilful ignorance of technical challenges, blind optimism, and enthusiasm for the irrelevant (if not downright unhelpful) reaches its peak with their espousal of a 100% renewable-energy objective (p.6).
"The renewables industry is confident that 100% renewables energy supply is possible in 20-40 years, according to the overwhelming consensus of participants at the Tenth Forum on Sustainable Energy, held in Barcelona in April. They should be given the opportunity to prove it."
This is backed up later (p.39) by reference to a number of studies (by renewables enthusiasts) claiming to show that 100% renewables is feasible.
The Government and the opposition parties believe that climate-change and energy policy should revolve around identifying the technical solutions and their potential, calculating what each of them needs to encourage their deployment, and implementing mechanisms that provide just the "right" level of support for those solutions. They do not believe that, to whatever extent Anthropogenic Global Warming is a reality, emissions of greenhouse gases are an externality whose impact (and therefore social cost) is the same however and wherever they are emitted, and that the most efficient way to encourage less to be emitted is to apply that social cost to those emissions regardless of provenance.
Our politicos' assumptions of omniscience and omipotence tend to be undermined by reality. When it comes down to the reality of providing just the "right" level of support, they are amazed to learn (if they ever do) how many variables have to be taken into account, and how often it turns out that the information they were working on was wrong or has changed. Policy-making becomes a process of arbitrarily picking those variables that you will take into account (and about which you hope it is safe to generalize) and those variables that you will ignore and expect those who are disadvantaged just to suck it up, and then regularly changing them in ways that are unpredictable to investors. Such policies thereby achieve the brilliant combination of being altogether too changeable and complex (by taking account of too many variables) and yet partial and insufficiently reflective of the real-world (by ignoring so many inconveniences).
The recent banding of the Renewables Obligation (RO) was one such case, piling further complexity, irrationality and partiality onto many existing layers of partiality, irrationality and complexity. Now we have another case looming. A banded RO might be complex, irrational and partial, but it wasn't complex, partial and irrational enough for the politicians and civil servants. Some variables, particularly scale, weren't sufficiently covered. So they are bringing in a micro-generation Feed-in Tariff (micro-gen FiT), to support similar (though not identical) technologies to the RO, supposedly at a smaller scale, though the upper size threshold for the micro-gen FiT encompasses a large number of the projects currently included in the RO. They are also introducing, at more leisurely pace, a Renewable Heat Incentive (RHI), which will probably work in a similar way to the micro-gen FiT, but in the heat rather than electricity sector, and without (probably) the upper size limit.
The micro-gen FiT will provide a value beyond the ordinary electricity price, for each unit of electricity produced by an eligible micro-generation installation. It will be tailored supposedly to provide the "right" level of support for each technology. But that isn't specific enough, because the economics of a 5 kW micro-gen unit are very different to the economics of a 5 MW "micro-gen" unit (the upper threshold for eligibility, thanks to some strange definition of "micro" for public-choice and rent-seeking reasons) of the same technology. So the Government declared their intention to "band" the micro-gen FiT (and the RHI) not just by technology, but by scale too (and they were also considering banding by type of consumer, but hopefully have abandoned that option).
We know what the effect of banding by scale is. People make all sorts of irrational decisions about the type and size of plant, in order to achieve the maximum level of support under the bands. So, with the proviso that the whole approach is wrong but recognizing that something rubbish was inevitable and trying to minimize the damage, I came up with a suggestion for how they could achieve the same benefits that they wanted to achieve with banding without the harmful effects of banding. The suggestion was to "front-load" the mechanism, so projects would get a higher price for their first X MWh, and then a lower price thereafter. Large projects would get through X in a couple of months and would have to rely on the lower price for most of their lifespan, making the mechanism fairly similar to an unbureaucratic grant for them. Small projects would take years to get through X, and would therefore receive a higher level of support for a longer part of their lifespan. Medium-sized projects would fall in between, in terms of the effect of the front-loading. There were many advantages to this approach, but most importantly, there was no size threshold, so there was no disincentive to install simply the most appropriately-sized unit and technology for the circumstances.
To its credit, the industry broadly adopted and supported this idea, and extended it from the RHI (for which I had suggested it) to the micro-gen FiT. To rather less credit, but typically for a committee camel, the industry decided that they could improve the concept by making it more complicated, which was the form in which it was promoted to the government. Still, their bastardized version was a lot better than the Government's idea of banding by scale. Amazingly, for anyone with any experience of "consultation" in recent years, there were even some signs that the Government was giving the concept some serious thought.
We still wait for details of the RHI, but the Government has recently provided more detail on how it sees the micro-gen FiT being implemented. And guess what? Front-loading is out, and they are sticking with banding by scale.
We have to assume that this irrationality will apply in due course to the RHI as well. And I have some first-hand experience of the effect of that assumption.
As I have mentioned too often in recent posts, our company supplies wood pellets. I therefore have a stronger-than-average interest in installing a pellet-boiler for my home. As it happens, the cluster of three houses where I live make a particularly suitable opportunity for a micro-district-heating scheme powered by a shared pellet boiler.
We got quotes from a number of suppliers. They sized the project variously at between 60 and 80 kW. The prices unfortunately were all too high to be justifiable by the fuel-cost savings to be made, even though we were displacing the most expensive fossil fuel (LPG) and would have taken a longer-term view than most customers (given the commercial interest). The reasons why the capital costs are too high (and significantly higher than in other countries) is another story, also related to the effect of government intervention.
But sticking to the case in point, the main reason why the value did not justify the investment was the absence of any carbon value. Indeed, the low rate of VAT on domestic fossil fuels effectively creates a negative carbon cost, as those fossil fuels are cheaper than they would be if they were simply treated as any other product in the market. But after extraordinarily-prolonged cases of first myopia and then prevarication, something is on its way: the RHI. Doesn't that make the difference and justify the investment?
For instance, what if (as is not unlikely, but not predictable) they make 50 kW a threshold between one band and another? And what if the level of support for boilers below that size is double the level of support for boilers above that size? How much of a plonker would I look if I now installed a 60 kW boiler? In those circumstances, I will obviously want a 50 kW boiler, and find ways to eke it out (larger buffer tank, or top-up from another heat-source). Or if I really want more than 50 kW, maybe I will divide the project and install two 35 kW boilers, attributing each nominally to a different property to be able to claim the higher rate on each, even though that is a dreadfully economically-inefficient solution compared to one 70 kW boiler. But what if I try to hedge my bets by going for one of these options, and then find that they have set the thresholds at 30 or 100 kW? Sizing sub-optimally is then money down the drain.
Clearly, I can't invest now, precisely because of the thing that is supposed to encourage this market. And whenever I do, I will not necessarily be installing the most suitable setup for the location, but the most suitable setup for the perverse incentives. A government proposal aiming to put right their failure over many years to treat heat equally to other forms of energy has, in practice, created the opposite effect for the foreseeable future. And all because they are so ill-educated in economics and deluded about the quality of their information and competence that they can't just do the simple and right thing: front-loading at the least, or better still scrap most of the existing and proposed mechanisms, replace them with a carbon tax, and let the market figure out where and how carbon can best be saved at less cost than the social cost of the emissions.
One way that politicians and civil servants have tried to drive the uptake of renewables is through the application of what became known as the Merton Rule (after one of the first councils to introduce the measure) to planning policy. The Merton Rule stipulates that developers must include a certain proportion of on-site renewable-energy production (typically 10 or 20 per cent, depending on the council) within the fabric of the buildings they are developing.
Why a particular proportion should be encouraged is not clear. Faced with a choice of a technology that could supply a notional 10% of the property's energy needs for £X at an operating cost of £Y/MWh, or another technology that could supply 80% of the property's energy needs for £2X at an operating cost of £0.1Y/MWh, the rational developer focused on the bottom line (and they mostly are) will install the former as the most cost-effective way to meet the Merton Rules.
Nor is it obvious why one would want to target incentives at new-build, rather than providing equal incentives for the existing housing stock, which is vastly more significant. In one way, older buildings offer greater potential, as the lower energy-efficiency results in more energy-consumption (relative to its size), which means higher utilization of any renewables installed, which means faster recovery of the capital cost.
Nor is it fair to assume, as the planners do, that one knows how much energy a particular technology will contribute in particular circumstances, and how much energy will be consumed in total in that property. It's an arbitrary measure that rewards bullshitters (those who provide inflated claims for how little energy will be required for the building or how much energy their technology will produce).
But let's say that they really could plan and assess this accurately. The system would still encourage perverse outcomes. As a supplier of wood pellets, we are seeing at first hand one of the more perverse consequences.
For individual properties, solar panels (thermal or PV) are probably the winning option for many developers. But for larger properties, such as blocks of flats, installing a pellet-boiler that could meet part of the heat load is often a good option.
To minimize cost and maximize convenience, the pellet boiler will be installed to feed the hot-water buffer tank in tandem with one or more gas boilers. Because the Merton Rule is satisfied regardless of whether the equipment ever runs (it requires only that it should produce a certain amount if it were run), and because gas (and oil) are currently cheaper as fuel than pellets (because of stupid energy policies designed to keep domestic fossil fuels as cheap as possible), the developer has no interest in installing a pellet boiler that will run effectively because the plan is for it to rarely run at all. It will be undersized (because you only need renewables to be able to supply a fraction of the properties' energy, and heat is such a big proportion of the whole). It will be the cheapest model available, regardless of whether that model will give trouble-free and efficient operation. It will have an inadequately-sized fuel store, which further pushes up the cost of running, as many suppliers will not supply small loads, and those that will (such as us) will charge much more per tonne for small, frequent deliveries than large, infrequent deliveries. The fuel-store will be located wherever suits the architect, regardless of whether it is practical to get the pellets to that location. The flange, to which the delivery-lorry connects in order to blow the pellets into the store, will be positioned wherever is convenient to the architect and developer, regardless of whether the delivery lorry can get near it, or can stop there (e.g. on double-yellow and red lines). The reality is that no one intends to run the boiler, so who cares?
Recently, this logic may have taken a step further. A developer is touting around a pair of "barely used" pellet boilers of the cheapest, nastiest type, which he is taking out of one of his sites. Are we seeing the start of the next wave, where developers will install the obligatory renewables just long enough to get signed off by the planners and Building Regulations officers, before taking them out and selling them on for installation in the next development that needs to meet the Merton Rule targets? A handful of boilers and solar panels could deliver multiple permissions and positive SAP ratings. The authorities' figures will show that large numbers of properties are running on renewable energy, while in reality most of those properties carry on being as dependent on fossil fuels as ever. The figures for numbers of properties where renewable boilers were installed will no doubt be presented as a tremendous success, and the authorities will be mystified when our fossil-fuel consumption figures once again don't fall in proportion to the displacement that has supposedly been achieved (just as for EEC/CERT/CESP). There will be more head-scratching, and then someone will come up with an even more complex and perverse scheme to encourage displacement of fossil fuels whilst keeping the costs of those fossil fuels as low as possible. And so the cycle continues...
It's very simple. If you want people to use less of something, you need to make it more expensive. If you try to make them use less of it by pushing efficiency-improvements at them whilst keeping the price cheap, demand will rebound - it's an effect well-known to economists as the Rebound Effect. The purpose of these policies is to get us to reduce our fossil-fuel dependence, whether for environmental, economic, social or energy-security reasons. And yet the Government persists in trying to keep domestic energy prices as low as possible while promoting these policies aiming to reduce our consumption, and all the opposition parties and most of the commentariat support them. We really are cursed with one of the dumbest intellectual classes of any nation on earth.
Here's a graph from the Renewable Energy Strategy, of a type that the Government has been growing increasingly fond, as it steps up the complexity of its efforts to calculate outcomes and costs of support policies:
The first and most important point is that it is remarkable how precisely the Government believes it is possible to predict the costs of achieving the 2020 target. But let's nevertheless play the game of pretending that these figures are worth applying some critical thought to.
It is amazing how much the marginal resource costs of various technologies within the three sectors cluster together. One would have thought that one of the fundamental features of marginal costs is that they vary across the piece, and don't proceed in a few large steps. For example, it seems that there are no opportunites for renewable heat that incur marginal resource costs of between £15/MWh (the second, dark-blue block) and £70/MWh (the eighth, mustard-yellow block).
Perhaps I am holding them to too high a standard, and the mustard-yellow block is (for example) intended to contain all potential renewable-heat projects with marginal resource costs between £15 and £70/MWh. But in that case, why does the chart distinguish consecutive blocks of transport energy with marginal-resource costs of £20, £35 and £40/MWh (approximately, see the third, fourth and fifth blocks in the graph)? Couldn't they all have been lumped together like the 10% (mustard-yellow) heat block, or the 24% (sixth, salmon-coloured) electricity block? And doesn't this contradict Government policy on support mechanisms, which tries to tailor the support-level to ensure that projects all get only just enough to make them viable (projects of each technology being consistent in cost and the Government's knowledge perfect).
It was a miserable budget. Lots of people got screwed. The main ones will be picked up by the commentariat. Let me add to that list a group who many might imagine had done quite well: renewable developers.
But didn't Darling throw lots of money at renewables?
Well, sort of.
The headline was £525 million "uplift in support for offshore wind investments" that "is expected to support £9 billion of investment and power up to 2.8 million homes". Pretty generous, right?
The way this money will be delivered is by "banding up" offshore wind under the Renewables Obligation (RO). Therein lies the rub.
SUMMARY: Ken Livingstone's solar panels for City Hall are nearly ready to switch on. They cost something over half a million pounds, and could reasonably be expected to deliver around 75 MWh a year (not enough for 20 typical houses). For the same money, you could get over 2,000 MWh from a wind turbine, maybe 8,000 MWh from conversion of waste to energy, and yet more carbon-savings if invested into renewable heat or insulation improvements for London houses. Or he could simply have let taxpayers keep their money and make their own decisions about what to do with it. What follows is an examination of whether there are any rational grounds for this sort of wasteful expenditure, or whether this is a classic example of the triumph of style over substance.
Demos recently published a booklet called The Disrupters, on the subject of low-carbon innovation. There's a lot of nu-speak, and not much consideration of hard economics, but it's not a bad publication - some of the examples cited are genuinely interesting, and some of the lessons taken from their experiences are the right ones. It provides the jumping-off point for this post not because of the publication itself, but because of a picture that they casually used today to promote their podcast on the subject.
It is a picture of City Hall, home of Ken Livingstone and the Greater London Authority, in which solar panels can just be seen being installed. I hadn't realised they were going solar at the GLA, but, photovoltaics (PV) being the least economic of all renewables, I thought I'd look into it a little to see what we could learn from this case.
The most detailed information available comes from the London Climate Change Agency (LCCA), which states that they are installing 70 kW of panels, which will generate "3.1million kWh of renewable electricity over their lifetime". This, they say, "will reduce the CO2 emissions of City Hall by 3,000 tonnes in its lifetime – enough to fill 3,000 hot air balloons". Elsewhere, we find the Authority scaling this down to 1,000 tonnes of CO2-savings over a 20-year lifetime, though still filling 3,000 balloons. 3,000 tonnes is quoted on another site. Let's assume the intended figures are 3,000 tonnes and 20 years. How does that stack up?
Two government bodies - Ofgem (the electricity and gas regulator) and the Energy Savings Trust (EST) - are consulting simultaneously on what to do about green electricity tariffs, those electricity-supply deals, like NPower Juice or Scottish & Southern RSPB fund, which allow you to think you are being green. Both Ofgem and EST are interested not in the fundamentals of whether these tariffs really are green, but how best to maintain the fiction that they are. I have sent the following email to both of them in response to their consultations:
Our company is a leading generator of renewable electricity. We commissioned our first plant in 1987, and last year generated over 300 GWh of renewable electricity.
It is not our intention to reply in detail to your consultations on Developing Guidelines for Green Supply and Accreditation of Green Tariffs, because we believe that it is not practical to sell genuinely green electricity to customers in the current UK market, and that all the tariffs being described as green are perpetrating a fraud on their customers. It is meaningless to debate which form of the fraud is more or less green, and how they might better be administrated.
Time was that the first questions that The Economist, confronted by a proposal, would pose were: "is it a good idea?" and "is it economic?" No longer, under the regime that has ruled there for the past eighteen months or so. They really ought to change the name of the magazine.
This week's edition reports on ideas for distributing and storing renewable electricity. The articles are placed in the Science and technology section, presumably on the basis that it takes science to do it, though the ideas on which the articles are based are over a century old. On this basis, their reports on the automotive industry ought to go in the Science and technology section too. It takes science to make the internal combustion engine work.
The ideas considered are that (a) we can smooth out the intermittency of certain types of renewable electricity if we have a big enough grid, and (b) we can store some of that intermittent energy, to use it when we want it rather than when it is available, by compressing air. Well yes, of course we can do it, but is it a good idea? All sorts of things are feasible that aren't worth doing.
The excellent Bishop Hill has spotted an announcement by ScottishPower that they are looking to contract farmers to grow energy crops for their Cockenzie and Longannet coal-fired power stations. I can shed (I hope) a little more light on this announcement. It should not be taken at face-value.
Lord Jones of Birmingham (try not to laugh) made his maiden speech in the House of Lords today, on the subject of the Energy White Paper. In a largely unremarkable spiel, most of which simply restated government position, the only comments that went beyond that position were the following:
"In the UK, we are used to being largely self-sufficient in terms of our electricity generation: the people are used to it. But times are changing, and they are changing at a time of rising demand and prices and at a time when energy supplies are becoming increasingly politicised. This is not a position anyone in this country will be comfortable with."
"If nuclear is not available to the energy market as an option, it is likely that in its place much of the new investment will be in gas or coal generation, which, of course, emits higher levels of carbon and leaves us increasingly dependent upon imports for this nation’s electricity generation."
So the argument is being warmed-up that nuclear power somehow reduces our dependence on imports and therefore increases our energy security. Let's have a look at that.
Firstly, nuclear power, as part of the portfolio alongside gas, coal and renewables, does contribute to the diversity of our electricity supplies. Diversity, it is widely recognised amongst energy-policy experts, is the key to security. I am not disputing that point.
But Lord Jones is going beyond that. He is slipping into the realms of autarky - the false economic notion that we are more secure if we are self-sufficient. Though it is a view that is slipping out increasingly often nowadays (I heard a Merrill Lynch energy analyst make the same error recently, before quickly retreating from it when challenged), it is a view that carries little weight amongst serious analysts. We were never more self-sufficient than when we produced most of our electricity from British coal. And our electricity supplies were never less secure, thanks to the dominant position in which this put the mining unions.
But even if it were a valid position, are Lord Jones's claims true? Are we "used to being largely self-sufficient"? And will we be less dependent on imports if we have nuclear rather than gas or coal?
The answer is "no" to both these questions. We import all our uranium for the nuclear power stations, and we have been importing a large proportion of the coal for our coal-fired power stations since the mid-1980s. We are not used to being self-sufficient, and importing uranium will not make us less dependent on imports than importing other fuels. And if it is "rising demand and prices" that Digby is worried about, he should have a look at uranium prices - a tenfold increase in the last few years makes the increases in fossil-fuel prices look insignificant.
This is not an argument against nuclear. This is only one small part of the issue. But it is an unfounded appeal to economic nationalism that ought not to be part of the debate. It makes one suspicious about the merits of the case for nuclear, if these are the tactics that Lord Jones and his political masters have decided to resort to.
One of the things that America does better than us Europeans is its inclination to give (at least in business) another chance to those who at first don't succeed. Whilst bankruptcy is seen in Europe as evidence that someone is not to be trusted with money, in America it is far less of an obstacle to raising money for another venture.
But not all failures are noble. A good test of whether someone who has failed deserves another shot is their attitude to the failure. An acknowledgement of mistakes made, and an understanding of the lessons learned and how to avoid repeating them, should be viewed as a mark of strength. Conversely, blaming others for the previous failure should be viewed as a warning of intellectual and moral weakness and the likelihood of repeat offending.
This came to mind when reading an interview in the Financial Times with Professor Robert Merton, Nobel-prize-winning economist at Harvard University. Prof. Merton was a partner in the Long Term Capital Management (LTCM) hedge fund, which imploded in 1998. I am sure that Prof. Merton is a clever and honourable man, but his explanation for that failure, as reported in the FT, suggests that one should be very wary of utilising the services of the consultancies (IFL and Trinsum) in which he is now engaged (notice that he is no longer risking people's money directly, but charging to advise other people how to risk their money). Many see the collapse of LTCM as symbolising "the perils of excessive speculation", but:
"The causes of the hedge fund's collapse, though, are widely misunderstood, says Robert Merton. While some observers blamed events on the faith that the fund placed in financial models - founded on a belief in rational markets - Prof Merton says the real problem was the way that LTCM's counterparties behaved. When the fund started to suffer losses, the counterparties did not behave as proponents of finance science - or rational markets - predicted. Instead, they sold assets in a seemingly indiscriminate panic, triggering market swings more violent than anything Prof Merton expected."
This displays not only a staggering ignorance of economic history - has the bursting of a bubble ever been accompanied by anything other than "indiscriminate panic"? - but an equally staggering level of hubris. It is not the models that were at fault for failing to reflect actual behaviour, it was the people who were at fault for failing to behave as the models said they should have done. This is a man who sets altogether too much faith in models. That is a warning not to set too much faith in him.
As any psychologist can tell you, denial can manifest itself outwardly in destructive ways. I recently attended a workshop where a member of the British Government's Renewables Advisory Board (RAB) introduced himself as a serial founder of renewable-energy businesses. His explanation for why he had had to start again after his previous adventure in biomass-fired power-generation: the Government had failed to take account of the fact that his technology was more expensive than some, when it had created a competitive market in renewable electricity. Well, isn't that always the problem when businesses struggle - that the Government has failed to compensate for their lack of competitiveness?
The production of ethanol from corn as a replacement/supplement for petrol is coming under increased attack from environmentalists. This month's Ecologist and today's Independent both led with a destructive assessment of its merits.
I do not claim to know whether ethanol is a good or bad solution to our energy problems. But I do know that George Bush and Tony Blair don't know, and neither do Zac Goldsmith (editor of The Ecologist) and Simon Kelner (editor-in-chief of The Independent). Because they are trying to establish the case by claim, counter-claim and posturing, little light is shed on the issue. And because no mechanism exists that simply values carbon equally from all its sources, we have no way of discovering in a market the reality that is being obfuscated in discussion. As usual, sweeping generalisations ("this technology is good/bad regardless") that ignore changing circumstances are a good sign that people are busy picking losers rather than allowing the most efficient and appropriate solutions for the circumstances to emerge and evolve.
Sometimes the debates seem intended to confuse, not illuminate. Perhaps this is the real objective. For an alternative take on the ethanol debate in America and people's motivations in presenting their arguments, have a look at the What's That Smell? site. The author's hostility to a local development has produced a scathing analysis of the process by which politicians and lobbyists adopt and promote losers for their own interests. Just remember that the other side - opponents of ethanol - have their own agenda too.
It is a commonplace of economics that competition drives down prices. Economies of scale drive down costs. The combination of the two may achieve the lowest prices. But normally one would not expect cartels to deliver low prices, however much the privileged position of the cartel-members allowed them to achieve economies of scale. Rather the reverse.
Not according to this Government, though. In setting up Phase 2 of the Low Carbon Buildings Programme, they have consciously created a 7-member cartel in order to generate economies of scale. Here is the justification from the DTI website:
"Phase 2 has an innovative design – a framework-type arrangement has been set up in order to provide an element of certainty for those suppliers who successfully competed to be part of the framework. Recipients of grants will have to purchase their microgeneration technologies from these framework suppliers. This should allow those suppliers to offer lower costs (with the larger volumes bringing economies of scale) and, in the knowledge they will be receiving large numbers of orders, feel able to make the investments in the supply chain required to develop the microgeneration industry."
The £50 million scheme is limited to five technologies: biomass heating, ground-source heat-pumps (GSHPs), solar thermal, solar photovoltaic (PV) and wind. It is limited to projects of specific size (no more than 50 kW electrical or 45 kW thermal). It is limited to the public sector and charitable organisations. It is limited to seven "framework suppliers".
It does not even treat the selected technologies or suppliers equally (details obscured in the FAQ for the scheme). Some suppliers are eligible to supply some technologies, and some are eligible to supply others. Only one (British Gas) is eligible to supply all technologies. No more than three of the seven is eligible to supply any one type of technology. If you want a combination of more than one technology, your choice is likely to be down to one or two potential suppliers.
Even the technologies included within the limited range of options are treated differently. While some renewable technologies are excluded completely, even those technologies that have been included do not face a level playing-field within this very partial structure. Photovoltaics are eligible for 50% grants, GSHPs and wood-fired boilers for 35% and solar thermal and wind for 30%. The justification provided for this differential treatment is that "The grant percentages are based on analysis by the DTI." Very enlightening.
I am no fan of wind energy. It is hugely over-rated. But, like most energy sources, it has its place. To dismiss it or condemn it out-of-hand is as distorted a view as to hail it as the solution to all our energy problems.
The Times today printed a damning article on an urban wind installation. A turbine installed four weeks ago at the home of Mr John Large, it reports, "has so far generated four kilowatts of electricity", compared to an average household's consumption of "23kw every day", and offering a return of "9p a week" compared to the £13,000 that Mr Large spent on the installation.
As many were quick to point out in comments on the article at The Times's website, and on many blogs, the journalist's ignorance of basic energy and engineering was revealed by his use of terminology. Kilowatts (or kW - lower-case k, upper-case W) are a measure of potential - the capability to deliver a given amount of energy in a given time if working at full load. Kilowatt-hours (kWh - as above, plus lower-case h) are a measure of energy - specifically the amount of energy produced if an engine with the potential to produce 1 kW is run at full load continuously for one hour. The phrase "has so far generated four kilowatts" is therefore a nonsense - kW contain no notion of time, so one cannot say that any number of kW have been generated "so far".
"23kw every day" is likewise wrong, not only in the spelling, but also in fact - to the extent that averages are in any way meaningful (which is a very limited extent), the figure should be 23 kWh, not 23 kW. 23 kW every day would, according to the best interpretation one could put on it (23 kW of demand continuously for 24 hours) equate to 552 kWh per day, which is way over the top. As it is, even 23 kWh per day is excessive - total domestic consumption of electricity in the UK is around 115 TWh (1 TWh = 1 billion kWh) each year, which is equivalent to around 4,800 kWh per household annually (there are just over 24 million households in the UK), or 13 kWh per household per day.
Renewable electricity in the UK is supported primarily by the Renewables Obligation (RO), an obligation on licenced electricity suppliers to purchase a proportion of their electricity from renewable sources. Most types of renewable electricity are eligible, and every unit from every eligible project is treated as having an equal value to the environment. Until now, that is....
Offshore wind has turned out to be much more expensive than envisaged. In the consultation document to the Government's recent Energy Review (published in January), cost estimates for offshore wind were listed from a variety of sources, ranging between 2-3p/kWh (the Government's own estimates) and 6-7.6p/kWh (although this estimate was projected to fall steadily to 3-4.6p/kWh by 2020). Renewable electricity has been worth over 9p/kWh for a while, and on top of that, offshore wind projects have been awarded over £100m in grants. Yet no offshore wind projects were being pushed forward. Something didn't stack up.
"Even the striving for equality by means of a directed economy can result only in an officially enforced inequality - an authoritarian determination of the status of each individual in the new hierarchical order."