Wednesday, November 26, 2008

Reforming Energy Policy

I am writing this post as part of a much delayed, often promised, attempt to deal with the problem of reform of regulation in the economy. One of the reasons why I am starting with energy is that I recently needed to give a presentation to a forum on energy policy, or more specifically whether New Zealand should consider nuclear power. The only reason why I was in any way qualified to talk about the subject was because I have been trained in nuclear reactor engineering, physics, operations and so forth. As such, in many respects, I came to the subject with a relatively open mind on the economics of each of the options, with some suspicions about the economics of certain energy sources.

Energy policy is actually a matter of some importance in the consideration of economics, as it has such a substantial input to so many parts of the economy. The best way to understand how significant it can be is to imagine a situation in which, for example, the UK had access to unlimited free electricity. If we think of this idea, it is becomes apparent how much competitive advantage this would confer. Such an idea is sadly impossible, but it illustrates how important energy actually is.

The most interesting thing about energy policy is how much it is rooted in ideology, and many of the people making the presentations acknowledged this. I found a very good academic paper (1) on the subject, which made the point in reference to the whole way that New Zealand energy policy is framed. It makes worthwhile reading if you believe that energy policy can be anything but rooted in ideology so I have given the reference at the end of the article.

It is impossible for example to extricate any discussion from the consideration of the Man Made Global Warming (MMGW) debate. I am aware that there are some people out there who consider that the science is 'settled', and that anyone who questions the MMGW argument are 'flat earthers'. In all cases the words 'scientific consensus' appears, along with implications that anyone who has a different perspective is 'ignorant'. For all of those that might respond to this post with such arguments, might I suggest that, before you post, you take some trouble to read some philosophy of science. However, this post is not about MMGW, but about reform of the energy provision. The reason why MMGW needs to be dealt with is that it is necessary to accept that there are two arguments, both of which are legitimate, and also that there are debates within the MMGW camp as to how severe the problem actually is, and what should be done about MMGW (e.g. Bjorn Lomborg's arguments against the Kyoto protocol).

My argument about energy reform upsets those who are passionate about MMGW for the reason that my solution does not enforce behaviour, but leaves it to individual discretion. I make no claims fore either side of the argument, but to some individuals, even acknowledging that the debate is not settled is enough reason for condemnation as a heretic.

It is necessary to deal with ideology, for the simple reason that it intrudes so heavily in energy policy, and is creating significant distortions in the role of energy supply. I made this point in the case of New Zealand, where there has just been an election. At first glance, New Zealand appears to have a relatively liberalised market. However, with the change of government, a new energy policy will be implemented, and this will mean that the structure and economics of energy are about to change. If the Conservative Party wins the next election, the same will happen in the UK. Why does this matter?

The simple reason is that, for generating companies, there is no certainty in their long term planning of energy. In particular, whatever the flavour of government, they will implement their own mix of subsidy, cross-subsidisation, planning biases and so forth. In such circumstances, with many energy projects as long term investments, it is quite impossible to plan. As such, I will later address this problem.

Returning to the economics of different energy sources, one of the other presenters looked at the question of nuclear generation in light of the experience in the UK. He pointed out that, whilst the UK government is suggesting that there will be no subsidies for nuclear power, there will in fact be subsidies. I do not have the quotes to hand, but he simply quoted government statements in which the government would make statements such as the nuclear power companies would take their 'share' in the disposal of nuclear waste. As the speaker quite rightly pointed out, who would be taking the rest of the share? One of the interesting points of agreement amongst all of the presenters was that the economics of nuclear power are completely opaque, and that the actual cost of nuclear power is an unknown. Whilst we could all find academic papers, figures from various organisations, there is considerable debate about how to put a real cost on nuclear power generation.

I am hoping that you are starting to see where I am going with this. However, having pointed out that subsidies are hidden in nuclear power provision, it may be worthwhile looking at another example where the costs are buried in cross subsidy. It is impossible not to have noticed the massive expansion in wind power in the UK and, once again, there is considerable debate on what the cost of wind power actually is. My reading on this subject provided some fascinating insights.

For example, there is a report (2) from DENA, a German energy agency, that raises some rather difficult questions about the economics of wind farms. A diagram from the report is provided below:

The green part of the diagram is the projected capacity of new wind farms in Germany, where wind power has become an increasingly important source of energy generation. I will quote from the report as follows:
'In the year 2015 the conventional power station pool can be reduced by 2,300 MW. This is 6% of the installed wind power capacity of 36,000 MW.'
They go on to say that energy storage systems are needed and that there would need to be enlargement of grid connections between regions to ameliorate the problems. However, there is no escaping the fact that wind energy requires the back up of a source of power that is not subject to the same variability of provision. With a figure of only a 6% capacity credit, there is a substantial problem that to guarantee supply, every MW of wind energy virtually requires a MW elsewhere, and thereby means that the capital expenditure for each MW of capacity needs to be made twice.

As if this were not bad enough, there are substantial problems with how wind power might be integrated into grids. For example, when the wind is blowing, what happens to the capacity in thermal plants? A report from the Irish Grid (3) looked at the economics of what happens to thermal capacity in a situation where it is necessary to adapt to the swings in provision from wind power. They point out that, if thermal plants are run on low loadings they become very inefficient, if they are shut down that increases maintenance costs, as well as being very expensive to start and stop and so forth. Equally, a consortium of energy providers in Germany have written a report (4) in which they point out that switching off capital intensive plants makes the cost effectiveness of these plants very poor (obvious really). Finally there is the cost of attaching these widely distributed plants to the grid, which requires substantial investment, with problems of the economics further hindered by the variability of the units generated versus the capital cost and maintenance of the infrastructure.

As one of these reports pointed out, some of these problems can be ameliorated, but the amelioration involves even greater investments, so does not rectify the substantial additional costs of wind power. All of these problems apply to other variable sources such as wave power and solar power. It becomes apparent that the power generated from these sources is just very, very, very expensive. It is also apparent that the only way that these sources of energy can be viable is through government diktat, direct subsidy and cross-subsidy.

In other words, the introduction of these energy sources is without any economic merit whatsoever. It is here that the MMGW debate enters the picture. For example, the argument is that the true cost of thermal energy is not accounted for, as it does not include the environmental harm that is caused by emissions of CO2. The same argument is being deployed in support of nuclear energy. This has seen the introduction of carbon trading schemes, but carbon trading schemes are actually just another way of implementing a cross-subsidy. It quite literally means that one energy source will provide money to another energy source that generates electricity at a higher cost. Whether there is a real cost to CO2 is a matter of debate, and as I have pointed out earlier there are various arguments even within the MMGW camp as to how much damage CO2 is actually doing. As such, even if accepting the MMGW argument, how can a price be fairly put on CO2 emissions?

There is an even more fundamental problem with the MMGW argument. This is quite simply that raising the cost of conventional power will just serve to further displace economic activity to countries like China. If you are a company that uses a large amount of energy, you will simply move operations to where the power is cheaper, which means countries with no CO2 emissions costs. The oft quoted point that China is building a new coal fired power station every two weeks expresses the problem.

I am hoping that I have now framed the problem. We have a situation in which ideology has seen the introduction of costly sources of energy, thereby driving up the overall costs in the Western economies. The most likely result of this increase in energy costs is the acceleration of the displacement of energy intensive economic activity to countries that have lower cost energy supplies and are likely to see many of the emissions gains offset by displacement. Furthermore, the overall increase in the cost of power will impact on every part of the economy, making almost all activity within the economy more costly. This overall will leave the economy less competitive, and will contribute further to the displacement of economic activity more broadly, such that in the long term the overall distribution of usage of energy will be further displaced to countries like China.

From this perspective, I can now discuss energy policy. The first and most important point that emerges from this discussion is that government needs to get out of the business of determining the energy mix. The solution that I am proposing is quite simple in principle, but would take some deeper consideration to implement in practice.

The first point is that there should be no subsidy, no priority, no cross subsidy of any form of energy generation as a result of government policy. The introduction of wind power, and the covert subsidy of nuclear energy explains why this is necessary. Instead of this, the government should have a role in the following:

  1. Stability of supply
  2. Free and fair competition (no cartels etc.)
  3. Immediate environmental impacts
  4. Ensuring freedom of choice in source of energy purchase
  5. Creating a consistent classification of energy source across providers
  6. Some special considerations for nuclear power
The energy mix itself should be left to individual consumers. At its most basic this is a system in which energy sources are classified into broad groups. For example nuclear, geo-thermal, wind, coal etc. The government then has a role to ensure that no company uses any form of cross-subsidy from one energy source to another. This is about free and fair competition.

The result should then be that every individual and business has a clear choice about what energy sources they are willing to pay for at what price. When presented with an energy contract, they will need to given the energy source options, the cost per unit of energy from that source, and then they select which source and then prioritise their selections. e.g. If a person is a Green Party member, they may wish to pay for wind energy, and set this as their number one priority but, because of the variability of supply, they may wish to also select hydro as their second selection and so forth. Likewise a steel manufacturer might want to choose coal, with their only concern being cost effective power. A poorer family might also be concerned with price as their priority, and their concern for the economic well being of their family their greatest concern.

As each selection is made, the trading companies will then be committed to using the payments (once they are received) to purchase energy from their first priority where sufficient supply is available, and by their descending priorities. The role of government in this part of the system is to ensure that the companies purchase according to allocations, and prioritise planning for energy generation methods where there is a shortfall in meeting priorities.

This has several advantages. The first is that, unlike having government determining the energy mix, the choices of individuals and businesses are more likely to be be relatively consistent. The exception to this is energy sources which have high volatility in prices, such as oil. As regular readers will be aware, oil has been something of a roller coaster in terms of price over the last year. However, if an energy company wishes to take risks and invest in and offer this kind of energy provision, the risk is their own. For example, if the price of oil rises above their expectations, then presumably very few people will select oil as a source, which would mean that it would be likely that their capacity would become underutilised, and therefore unprofitable.

In my presentation, I did suggest energy security as being within the remit of government. However, I think that, without cross-subsidy, the energy companies would in any case take this into consideration. This is a question mark, and one which I have not fully resolved in my own mind.

With regards to stability of supply, I do think that government does have a role. By stability, I mean reliably delivering energy through the grid to individuals and business without interruption. In particular, there is a role for ensuring that the overall capacity of generation is measured accurately. I have already pointed out the problems with wind, but there has also been a history of problems with nuclear power, for example 'derating' and failure to deliver on expected capacity. This presents stability of supply problems, in particular with regards to the long time frames from a decision to the actual point where a nuclear power station becomes available as an energy source.

This also returns me to the particular role of nuclear energy that does require direct government attention. There are several points that need to be addressed.

The first of these is the problem of waste. In both the UK and US there has been endless wrangling on the subject of waste storage. Until such time that these arguments are resolved, no more nuclear power should be added. In particular, without a finalised solution to the problems of storage, it is not possible to provide a cost for storage. Furthermore, such storage is over such long time periods that there needs to be some very clever arrangements to work out how to continue payments for site maintenance (a very interesting illustration of this is that there has been considerable discussion of the signage needed such that future generations will still be aware of the dangers in the storage place).

A related problem is the cost of decommissioning. This is a very costly business, and there are still significant question marks over how much it might cost. If the cost exceeds provisions made for the decommissioning, one way or another, the taxpayer will foot the bill. It is not possible to just leave a nuclear power station to rot away. The solutions to date have been to allocate revenue to the eventual clean up. However, the costs of decommissioning have generally been poorly estimated. This raises a more fundamental question; what happens if the investment is made, but the energy becomes relatively expensive. In this situation not enough revenue will have been put aside for the cost of the decommissioning. The example of Italy provides a telling case study of how the costs of abandoning nuclear power can be very high indeed. In short, until someone can come up with a way of guaranteeing these costs can be met, it does not seem that nuclear power can be seen as a viable option. You will note here that I am not against nuclear power, but I am against un-costed nuclear power. It is simply a case that, at the moment, governments are having to sign a blank cheque.

There are other particular concerns with nuclear energy that are not too problematic, such as ensuring safe design and operation of reactors. For those who mention Chernobyl, I would point out that the reactor was not designed well, and that the operations that caused the disaster were quite simply foolish. The standards of design in existing Western reactors are far safer, and the generation III reactors even more so. However, all provision of nuclear power would still need to insure themselves against accidents, and without any subsidy.

The last point I have not covered is that of a government role in local environmental impacts. Whatever the form of a utility, having a new utility built is likely to have an impact upon both business and individuals in the locality. In other words, there will be winners and losers. Government does have a role to play in trying to find a compromise between the need to build new energy sources and those who might be losers from such provision. The role should be an alternative to court action, where the parties involved seek government provision of binding arbitration over what the costs might be, and how they are resolved.

I am not sure whether I have argued this as well as I hoped, as there is only so much time I can put into this. The complexity of this issue is such that there is no easy summary, so comments and elaboration are particulalry welcomed (whether positive or negative, excepting those who would like to equate me with a holocaust denier). I mentioned at the start that one of the points in all of this was to highlight the distortions of policy, and also to highlight the element of distortion that is based in ideology.

My main point here is that the effects of these can be ameliorated by opening up the rather opaque business of energy generation to real scrutiny of the costs of each of these sources. In this way, ideological positions can be expressed in real choices. At its most simple, the approach is to delegate choices based upon ideology to the individual. If a person believes that wind power is a 'good thing' they should have the opportunity to support this method. If a person does not support wind power they do not have to subsidise the energy. More to the point, the economy will be able to function better when the real costs of all of these energy sources are explicit. In the case of nuclear power, once the subsidies are removed, it will focus attention on whether this power source really is cost effective. Finally, such a system would hopefully help to stop the displacement of economic activity from countries such as the UK to China. As I have mentioned, all this will do in the long term is move any problems of emmissions to a new place. At the very least, even if you accept MMGW, the problem of displacement needs to be resolved.

I think that, of all of my posts, this will be the most controversial. This is a highly emotive subject, and my request that it be left to individual conscience will not suffice for many. I have also not even started to touch on distribution, which is another area of great complexity. I had hoped to use some work I did on monopoly provision in another sector as a point of comparison, but do not have the time to include this. Above all else, my aim in what I am proposing is to realign energy provision with economic choices, and to remove particular ideological points of view from energy provision policy as a whole, whilst offering people the opportunity to express their ideology if they so please.

Note 1 added 29 November:

A response to the comments on energy reform. I knew, as even as I was writing the post, that it would get some negative comments. As I mentioned it is a very ideologically based subject. With regards to one point, it seems that I did not explain myself very well. I will therefore seek to clarify the point. Lemming commented that wind power just needed subsidy so that the industry could achieve economies of scale. The whole point about my post on these kind of variable sources of power is that they can never be economic, or at least not untill a way is discovered to store their power economically. In light of the fact that this was not understood, I will explain again.

The first point to note is that energy supply is just another form of manufacturing. Instead of manufacturing units of product, it is the manufacture of units of electricity. In both cases something is being converted from one thing into another thing, with (hopefully) more added value in the final product as a result of the conversion process.

I will therefore use the example of ready meals as an analogy, and for the sake of analogy, we will imagine that the ready meals have to be sold to the supermarkets within hours of manufacture (they are delivered hot and genuinely ready). Now, if we have demand for 100 units of ready meals a day, then we will normally build a factory that allows us to manufacture those 100 units per day. However, as we know, demand for products such as ready meals can vary. As such we build storage into the system (warehouses that will keep the product hot), but keep that storage to a minimum, as it increases our costs significantly. We also build a factory that will manufacture with enough of a safety margin sufficient to maintain supply of the ready meals in peaks of demand, perhaps a capacity of 110 units per day.

Now instead of this perfectly normal arrangement, how would we think of a proposal that we build our ready meal factory in an out of the way place, where the workforce were an unusual bunch of people who would only turn up to work when it suited them? Whatever you did, even asking them their views on their plans to arrive for work the next day, you could never be sure whether they would come into work, or how long they would stay. Now these rather odd workers are a vital input into to the production process, but you never know how many are going to arrive on any given day. You know that, on average, maybe 30% of the workforce will arrive for work, but some days none arrive at all. The one advantage of these workers is that they are very, very. very cheap. So cheap that they are nearly free of cost.

Another problem is that the location of these very cheap workers is that they live on a mountain top with no road. As such, you will need to build a new road from the mountain top to the valley below so that you can distribute your ready meals.

The problem that arises from all of this is that you have a contract with several large supermarkets to provide them with your ready meals. As part of that contract, you must provide them with as much of your product as is required. If you do not provide your product, they will de-list you as a supplier. In other words, your business relies upon providing the product reliably. How are we going to manage this problem.

The first solution is to build lots of factories to supply our ready meals because, on average, at least one of the factories is likely to have enough workers available. The trouble is that we are then in the position of having to make lots of factories in which we know that there is going to be idle capacity. This makes the cost of capital for our factories very high. Now, the second problem is that all of these factories need a special road. This increases our capital costs significantly, with each factory requiring its own special road. However, because we have to distribute the factories over many locations, we have the problem that each factory is relatively small. Whilst this makes our factories more reliable, it makes the relative cost of the roads even greater.

The company decides that, whatever the problems, the attraction of the cheap workers is enough justification to do build all the factories. After a while however, they notice that the variability of workers coming into the factories is such that they appear to have wild swings in their capacity to make their ready meals. One of ther operations people analyses the problem and concludes that, the probability is that, on a bad day, only 6% of the workforce will show up for work. This poses a problem because, on a bad day, there will only be 7 ready meals made. This is a guarantee that the contract will be lost.

Someone then comes up with a bright idea. In addition to the factories on the mountains, they can keep a normal factory as well. Whilst the workers in this normal factory are quite expensive, they know that they will be coming to work reliably every day. Whilst they have holidays every year to recuperate, they can plan for these. Furthermore, the factory can be built right next to the highways, making distribution of the ready meals very easy and cheap. They go ahead with this solution, and build a factory with the ability to manufacture 103 ready meals per day (110 - 7). They then have a problem. What happens when there is a good day at the many mountain top factories, a day when all of the workers turn up. It makes sense to send the workers home in the normal factory and shut the factory down.

The trouble is that, when they shut the factory down, they have to switch off all of the heaters for the cooking equipment and the equipment takes a while to run up. This causes several problems:

The first is that bringing the heaters up to temparature is expensive and the other machinery needs more maintenance when it stops and starts. The trouble is that, even when the mountain top workers do show up for work, they occasionally get bored and go home anyway. In this event, the normal factory will have to restart production.

The second problem is that, whilst the normal factory is idle, it is still expensive because it utilised so much capital. Whilst the investment in the factory makes sense when it is producing between 90-103 units, if the capacity drops below this it becomes very expensive for each unit produced.

One person suggests a solution that, with the variability of the mountain top workers, it is possible to vary the output of the normal factory. In other words keep it running most of the time, but adjust the output according to the numbers of workers who show up in the mountain factories. The trouble is that, whilst this is possible, the costs of the normal factory go up, as there is less output but all of the heaters for the food, and production lines, consume a similar amount of energy, regardless of the capacity running through the factory, thereby increasing the cost per unit of ready meal.

Another solution is proposed, and that it to build a huge warehouse, which will keep the ready meals hot and ready, and this would create a sufficient buffer for when the mountain top workers failed to show up for work. The trouble is that building this kind of warehouse would cost a huge amount of money, making this a very, very expensive solution.

In the boardroom of our ready meal factory, they are very worried. They have already spent a lot of money on the mountain top factories, having been told about how great it would be to utlise the cheap workers. They have tried it out, and yet they can not make sense of how to use these cheap workers. If only they were reliable, and turned up to work every day, it would be wonderful. Instead, what they find is that they are using more than twice the amount of capital to have the capacity to provide a capacity of 110 ready meals to their supermarket customers.

Even when there is reasonably good day, when a good number of the mountain top workers arrive for work, they are not making the gains they expected, because of the increased costs in the normal factory offset many of those gains. They note that stopping and starting the factory increases maintenance costs, and that the cost of bringing all their heaters up to temparature is surprisingly high. On the other hand, if they leave them on, and run their factory at low capacity, then the cost per unit is painfully high. But they must have the full capacity if they are to stay in is no good asking the supermarkets to allow for days when there will be few ready meals available. They demand that they are always supplied reliably with the ready meals...

The only conclusion that the board can come to is that, whilst those cheap workers looked so enticing, it is not possible to use them when they are so unreliable. Any savings on worker costs are largely offset by the costs that this loads on the normal factory, and with the high cost of capital, the capital allocation to each ready meal unit has doubled. This is making their ready meals much more expensive per unit, not cheaper. If they could only find a cheap way to store the capacity of mountain top workers, it might just work, but even then the additional capital costs of having so many small factories will still make it questionable as to whether this will be cost effective.

This is exactly the problem facing wind and wave energy, and to a lesser extent solar energy. Whilst hydro and geo-thermal power can offer reliable energy, these other 'green' energy sources are like pouring money into a great big black hole. Tidal power has predictability, but has other problems. In this case it is predictable as an energy source, but it is again of variable strength, at different times. Whilst tidal energy might produce a least a little power at any given time, the efficiency of energy utilisation at low levels of tidal flow magnify the losses. In a few cases, it might be possible to engineer solutions to get around these problems, so tidal energy remains a possible source of 'green' energy. However, whether reliable schemes could be engineered that might supply energy at a reasonable cost is questionable. On this subject, each scheme needs to be evaluated on a case by case basis.

At the heart of all of these problems is that, as yet, no one has come up with a cheap solution to the energy storage problems. This is the only way that these variable generation methods might make sense, but even then there are often the increased capital costs to supply these sources to the grid (wind and wave power in particular). In other words, the problems of energy storage just make these energy sources even more capital intensive, and therefore much more expensive as a source of each unit generated. Whilst such energy storage solutions remove the need for doubling the capital cost of each MW generated, they merely displace the capital cost to energy storage. Either way, the energy cost is absurdly expensive.

One alternative proposed is the use of electric cars, with the electric car batteries acting as reserve of supply. However, until such time as everyone has switched to electric cars, this is speculative, and does not address the problem that wind power capacity is being put in place now, even though it is unusable in any economic or sensible way. I am not sure that this is a 'green' solution either, as batteries have their own negative environmental impacts. However, this is beyond what I want to discuss here, and not something I have looked into.

Essentially, as it stands, wind power is just a 'feel good' solution that offers no real solution at all.
I hope that this goes some way to clarifying my point.

Note 2 added 29 November:

Another point made was to ask how me might know whether supplies of some materials might be subsidised in another country. I have no problem with the idea that another country might want to subsidise the cost of energy in the UK. If they wish to do so it is very foolish of them, but is all well and good, as they are indirectly giving away their wealth to the UK.

Note 3 added 29 November:

A couple of posters made the point that people would vote with their wallets, and would presumably not accept the 'green' solutions. Here we come to the crux of it. For some people, they believe in MMGW, and believe that any price is worth paying to ameliorate the effects. Others are sceptical, and believe that there is no substance behind the claims. For many others, the reality is that they care more for their immediate economic concerns, having a job and so forth. This is, for example, the point made by China as a whole, but equally applies to individuals. If the Chinese government accepted MMGW, they would act in concert with other countries in acting to ameliorate the effects, as it is something that will start to effect them as much as anyone else. However, they are not acting, and presumably just do not accept the case for MMGW. Whilst they make the right noises, their behaviour is not consistent with this. It can not be emphasised enough that they will be effected equally by MMGW if it is correct, and they would not act as they do if it was going to harm themselves.

In other words MMGW is not accepted by everyone, and the cost of the solutions will be real costs upon the economy. As I have pointed out, the real cost of 'green' energy is that manufacturing will move from the countries with high energy costs to those with low energy costs. In other words, as I have emphasised, the high cost of energy in the West will just see further displacement of economic activity to economies such as China.

The really big users of energy, such as aluminium smelters, will move very quickly to another country if energy prices go up significantly. The only way this can be prevented from doing so is through heavy subsidisation of inefficient methods of energy generation. However, subsidy comes from taxation (or government borrowing in the current poor economic approach) and therefore still makes doing business more expensive, just indirectly. In the case of energy being priced without subsidy, big energy consumers will move to another country. This will be direct and visible, and would cause an outcry. On the other hand, with subsidy, the cost of the subsidy will be more evenly spread accross the economy. This means an increase in costs for every individual and business. This means the overall competitive position is weakened, and creates an aditional incentive for all business to move to the East. The effect will be the same as, for example, as big energy hungry companies moving to the East, but it will just be less visible. As such, subsidy is a more politically acceptable way of displacing jobs and businesses to the East.

In the event that this happens, the gains in reduction of CO2 emmissions will be minimal, but with the commensurate damage to the economy. This brings me back to the point about energy users voting with their wallets. If a business thinks that it can afford 'green' energy, and still stay in business, then they have that option. They might even promote their business as being 'green' for doing so, and gain competitive advantage in doing so. On the other hand, if a company does not believe that they can afford the high costs of 'green' energy, they can continue to use conventional sources of energy.

Equally, in the case of individual choices, for a family who may be on low income, where energy use is a large percentage of their expenditure, they have the choice of where their priorities are. The economics of energy is that high energy costs fall disproportionately on the poorer members of society, as it makes up a greater part of their income. Added to this, the disappearance of manufacturing jobs disproportianately impacts upon the less well educated, so has a greater effect on the less wealthy.

The point I am trying to make here is that expensive energy is a luxury. If one group of people think that their priority is 'green' energy, they should be allowed to pay for it, but if another group does not have that priority, then why should they have to pay for it, and pay for the consequences to the economy. The cost of 'green' energy is fine, as long as it can be afforded. I am simply saying, let individuals and businesses decide whether they can bear that cost. After all, for every increase in the unit cost of power, there will be a percentage increase in displacement of industry and economic activityto the East, meaning the impact of 'green' energy policy will be minimised.

Were the introduction of 'green' energy universal, including places like China, the net effect would be a reduction in output around the world, as energy input costs would go up. However, I would be far more amenable to such a situation, as the cost would not be falling disproportinately upon the Western economies, with the minimal effectiveness caused be the displacement of economic activity that goes with such a scenario.

I am aware that this is a contentious subject, and knew that it would upset some people. However, I would rather that we faced up to the real costs and minimal impacts of adopting expensive energy production. I hope that the blog does not lose readers because of what I am saying but, alas, I try to view the world as it is, not how we would like it to be. I therefore just see 'green' energy as another element that will contribute to the decline of the West relative to the East. Even if accepting MMGW, the 'green' policies of the West will make very little overall impact. And the cost will be high in terms of economic decline.

(1) Gunn, C 1997, 'Energy efficiency vs economic efficiency? : New Zealand electricity sector reform in the context of the national energy policy objective', Energy Policy, vol. 25, no. 2, pp. 241-54.

(2) Tiedemann, A 2006, Grid Integration of Wind Energy - Results of Dena's Gridstudy, IEA Workshop on 'Integration of Renewables into Electiricty Grids'

(3) ESB National Grid 2004, Impact of Wind Power Generation in Ireland on the Operation of Conventional Plant and the Economic Implications

(4) DEWI, E.On, EWI et al (2005), Planning of the Grid Integration of Wind Energy in Germany Onshore and Offshore up to the Year 2020

Note 1: Sorry I have not referenced more, which was my original intention, but the time this has taken is longer than I had hoped. If I have time I may return to this and add some more references. If I do so, I will as always note that I have made changes.

Note 2: Kecske, thanks for the link. I had come accross this outfit through my reading of the Economist but had not looked into the subject further. Very interesting. The link is to a site that has a pragmatic and interesting approach to environmentalism. However, they still accept subsidy and distortions as part of their philosophy.


  1. On first reading, if I have understand correctly, I don't see how this greatly improves on the system we have today (maybe I am missing something). It relies on the ordinary person understanding something about energy generation, and assumes that suppliers won't just concentrate on short term profit. I may be wrong, but I have always assumed that in their hearts, Westerners know that the cheap stuff they consume is produced by small children in sweatshops. I can't imagine many consciences being troubled by ticking the 'coal' or 'gas' box if it is cheaper in the short term, even if it does ruin forests in nearby countries or obliges us to turn a blind eye to the activities of the Russians. And how do we ensure that prices of supplies bought in from foreign countries are not being subsidised?

    As regards the necessity for subsidies and so on, if, for example, wind power can only fall in price when economies of scale kick in, this will not happen without some form of subsidy to give it a 'kick start'. Similarly, power generation need not only be one way: it has been suggested that if everyone drove an electric car - which would be charging from the grid for most of the time - the cars' batteries would make a superb reservoir for meeting short term excess demand (particularly useful for stabilising wind energy generation you could imagine). It is hard to see how a such a 'holistic' system could come about without all sorts of cross subsidies and government intervention.

  2. As far as the RMI and subsidies are concerned, I'm minded of the old saying "you can't reason someone out of a position they didn't reason themselves into".

    The current energy market was created in no small part by deliberate distortions of the market by governments and corporations.

    For instance, there is no way that customers of electricity from nuclear energy pay the full market price of storing nuclear waste for centuries - there is a tacit understanding that the cost is borne by government, so it's artificially cheap.

    So I'm yet to be conviced that it can easily extricate itself without some use of subsidy or intervention to correct those distortions.

  3. I think Lemming is right. This is the first post of yours which didn't hit the mark for me.

    going purely for the free market approach works in many cases. But in some cases, like this one, it is counter-productive because too many people will let their conscience be dictated by their wallets.

    Not that I blame them for that, its just not going to solve problems or give technology a chance to grow.

    You're on fire this week, though! Three posts in short succession! Keep them coming!

  4. I do hear what you're saying, Mark, and I know you're right in conventional terms. For example, if the true cost of power generation is known, and not subsidised, this will encourage people to insulate their homes: a perfect example of the 'invisible hand' in action. I didn't mean to come across as so negative!

    I'm just not convinced that 'the invisible hand' is *always* the best solution in this and other areas. It feels to me as though it is often quite likely to get stuck in a 'local minimum'.

    Here are some questions:

    Do we know how variable 'green' sources of energy are on average over a large area? i.e. if we linked wind turbines together over the area of a country or a continent would we find it a reliable source of power? Even if it occasionally fell to near zero, would this happen so slowly that we had plenty of notice to do something about it? (whatever 'something' might be?)

    Could society cope with virtual power drop-outs if we used electronics to split incoming power into two circuits in our homes and businesses, one for critical and the other for not-so-critical functions? (A variation on different tariffs based on time of day.) Then more variability in the supply could be tolerated.

    You dismiss the potential problem of subsidies from other countries, but why is it any different from domestic subsidies which you say must be eliminated in order to allow the market to operate efficiently? Isn't it possible that a foreign supplier offering very cheap power as a tactic persuades us to phase out our domestic power sources only to find that their prices go up later, leaving us with no alternative but to pay?

  5. Hydrogen is the solution to the problem of Wind and Solar being variable and thus needing backup generation (coal, gas etc powerstations). We should be using Solar and Wind to generate elctricity to make hydrogen not for electric power. Hydrogne is a fine way to store energy and relatively safe too. We then convert ALL our transport to hydrogen power either as internal combustion engines or fuel cell powered electric vehicles. Conversion of all transport could be mandated by goverments. No cross subsidy etc. Oil would start to become a raw material commodity rather than a power source commodity. Or am I being too simplistic?

  6. Not relevant to this article, but interesting nevertheless:


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