Connecting German Policy to the Global Climate Change Issue

Notrickszone, posts that Professor Fritz Vahrenholt calls the green jobs machine a “labeling fraud“. The claimed level of German green jobs is many times the actual figures. This is in response to a couple of comments by “Buddy”.

Buddy,

It is not enough to point out that there is a potential problem. Effective mitigation policy requires

1. Assessing the scale of the potential problem.

2. Assessing the scale of the solution required.

3. Devising policies that will meet that solution.

4. Getting enacted the policies to meet that solution.

5. Effectively enacting those policies.

I welcome your comments, as they illustrate the failure to think the problem through by the so-called “experts”. Exaggerated claims of green jobs does nothing the tackle the alleged problems of rising emissions. Further German policy is one of failure to deliver virtually any promised reductions, but has wasted money on bogus schemes. See for instance

http://notrickszone.com/2014/03/07/economics-expert-slams-german-feed-in-act-calling-it-an-abuse-of-state-power-belongs-in-the-dustbin/

Germany is not alone with policy failures. Globally, renewables have failed to deliver the low-cost, reliable, on demand power of fossil fuels, hence the exaggerated claims for jobs and investment. Given the policy failures, any other country would be mad to sign up to similar policies, even if they believed that without effective carbons reductions future generations will face a climate catastrophe. Politicians will duck the issue, by signing vague agreements to tackle the problem in the future. Yet without the emerging economies successfully combatting carbon emissions, the policy countries will incur all the policy costs now, and leave future generations with practically all the projected catastrophic consequences of global warming. I discussed further here.

The issue of smog is interesting. The worst smogs are in China and India, caused by coal fired power stations. The UNIPCC reckons that the aerosols that make up the smog have a net cooling effect (AR5 and AR4). So tackling air pollution from the dirtiest coal-fired power stations may actually increase warming. Yet in Britain the Clean Air Act had a huge difference on air quality. According to a Centre for Policy Studies Report, globally the policy could save millions of lives.

Kevin Marshall

Why Climate Change Mitigation Policies Will Always Fail

All climate mitigation policies will be of net harm to any country implementing them. There are three reasons for this.

First, mitigation policies will not eliminate all the projected harm of climate change. Policy replaces the unmitigated cost of climate change with a policy cost and a residual climate change cost.

Second, policy proposals are only for the rich countries to reduce emissions and emerging economies to constrain the growth. That means residual climate change costs will be greater, and the burden of cost of reductions will fall on a number of countries will a minority of, and a rapidly diminishing share of, global emissions. Even with the rich nations all succeeding in the British target of 80% reduction by 2050 will still mean global emission levels higher than currently.

Third, there is mounting evidence that actual mitigation costs per tonne of CO2 equivalent saved are considerably more than the economic models assume.

 

Introduction

The Stern Review Summary of Conclusions stated on page vi

Using the results from formal economic models, the Review estimates that if we don’t act, the overall costs and risks of climate change will be equivalent to losing at least 5% of global GDP each year, now and forever. If a wider range of risks and impacts is taken into account, the estimates of damage could rise to 20% of GDP or more.

In contrast, the costs of action – reducing greenhouse gas emissions to avoid the worst impacts of climate change – can be limited to around 1% of global GDP each year.

The Review further stated on pages xvi-xvii

Preliminary calculations adopting the approach to valuation taken in this Review suggest that the social cost of carbon today, is of the order of $85 per tonne of CO2……. This number is well above marginal abatement costs in many sectors.

Many objections to the report look at the cost of climate change. Little discussed are the theoretical issues in implementing a successful policy. By “successful” I mean where the expected outturn of the policy is less than the projected costs of climate change.

 

The basic case

As the Stern review is saying that globally we should replace one set of costs – the projected costs of climate change – will the much lesser costs of climate. Graphically, we replace the climate change costs in blue with policy costs in orange. Costs are positive and benefits negative.

The case for policy is clear.

 

Climate change costs not completely eliminated

Peter Lilley, in his 2012 GWPF report “WHAT IS WRONG WITH STERN?” states on page 8

The benefit of preventing (climate change) entirely would, on his figures, be at least 5% of GDP – but to do so would require not just stopping all further carbon emissions but removing all those accumulated since the industrial revolution. The action he proposes to reduce the worst impacts of global warming by stabilising the atmospheric concentration of greenhouse gases at 550 ppm would, using Stern’s methodology, save some 3.1% of GDP – not 5%.

The mitigation policy seeks to stabilize total greenhouse gas levels are a level equivalent to about double the level of CO2 in 1780.


The case for policy is still clear.

 

Rich Countries Policy Burden

It is accepted that

  1. Rich countries are responsible for most of climate change.
  2. The adverse consequences of unmitigated climate change will be disproportionately endured by the less developed nations (LDNs).

Therefore the moral argument is that the rich countries should bear the cost of policy and they should compensate the LDNs for the future harm that they will endure. The compensation could then be used to offset the harm of climate change.

Rich countries have a smaller population than the LDNs. The policy costs (in orange) for them will more than double. Similarly, compensation (in burnt orange) will be much larger for the rich countries to pay out than for the LDNs who receive it in income. Finally the post-policy climate change costs (in blue) will be still larger for the LDNs.


The rich countries may or may not be better off after policy. Further the LDNs still suffer some harm.

 

Increasing Emissions amongst the emerging nations

Policy must include the emerging nations. This is why.

I have arbitrarily split the countries of the World into three groups

  1. ACEJU – The big industrialised carbon emitters – Australia, Canada, EU, Japan and USA.
  2. BICS – The large emerging nations of Brazil, India, China and South Africa.
  3. ROW – Rest of the World.

The World Bank has data on CO2 emissions by country for the period 1990 to 2010. From this, I compiled the following graph.


In the period 1990 to 2010, annual global CO2 emissions increased by 11.4 billion tonnes, or 51%. To return to 1990 emissions levels would require one group to cease emissions entirely and the other two groups to maintain emissions at 2010 levels. The future emissions growth path potentially makes the problem worse. Consider the comparative growth in population.


Despite the BICS countries increasing its emissions by 230%, emissions per capita are still less than 40% of those of the ACEJU block. Further, the explosive growth of the BICS has not been matched by the Rest of the World. Here the emissions have grown by 45%, but population has grown by 42%. Emissions per capita are still only 35% of those of the AJEJU block.

Any policy reductions by the rich nations will be more than offset by future emissions growth in the rest of the world. There will be little reduction in climate change costs, for either the policy countries or non-policy countries. The situation becomes like this.


The non-policy countries will still see a reduction, but that might be small, even if the policy countries are successful. The disadvantage to the policy countries is inversely related to proportion of global emissions they have at the end of the policy. That in turn is influenced by the future emissions growth in the non-policy countries, as well as the proportion of global emissions in a baseline year.

 

Peer-reviewed costs of Climate Change and Actual Costs of Mitigation

The Stern review should not be taken as the only source. The UNIPCC AR4 Summary for Policymakers in 2007 stated on page 22.

Peer-reviewed estimates of the social cost of carbon in 2005 average US$12 per tonne of CO2, but the range from 100 estimates is large (-$3 to $95/tCO2).

The average social cost is just a seventh of the Stern Review, which was not a study that has been peer-reviewed.

In a previous posting, I calculated that the subsidy of offshore wind farms was equivalent to 3.8 times Stern’s social cost of carbon, and 27 times that of the $12 average of peer-reviewed studies quotes by the UNIPCC. This was a low estimate, not including transmission costs. There might be cheaper ways of abating CO2, but there are lot of failed policies as well. There is also the impact on economic growth to consider, which for emerging economies. So a more realistic situation of a “successful” mitigation policy will look like the one below. That is “successful” in achieving the emission reduction targets.

Points for further investigation

There are a number of issues that are raised in my mind that need further work.

  1. The social cost of carbon defines the expected harm from climate change per tonne of CO2. If a country has quantitative emissions reduction targets, then an absolute upper limit in annual spend can be defined when achieving that target.
  2. This would enable identification of the success of policies within a national plan, along with the overall success of that plan.
  3. The expected CO2 emissions growth in non-policy countries, along with including other greenhouse gas emissions within the analysis.

     

Conclusion

There is no combination of mitigation policies that can produce a less costly outcome than doing nothing. Any government unilaterally (or as part of group representing a minority of global emissions) pursuing such policies will be imposing net harm on its own people, no matter how large the claimed potential impacts of climate change. This conclusion can be reached even if the extreme views of the Stern Review are taken as the potential costs of climate change.

Kevin Marshall

 

Notes

The comparison of emissions growth between countries is derived from “The Climate Fix” by Roger Pielke Jnr. This enlarges on a comment made at Australian Climate Madness blog.

All first time comments are moderated. Please use the comments as a point of contact.

Update 25/02 17.30. Summary and “Points for further investigation” included, along with text changes

10GW of extra offshore wind turbines by 2020 – The Real Costs

Projected 10GW in offshore wind turbines by 2020 to add 5% to electricity and gas bills, and reduce UK CO2 emissions by nearly 2%. Cost to exceed benefits by 3.8 or 27 times.

 

The Telegraph has an article “Offshore wind farm scrapped due to fears over birds

A 200MW extension to the 630MW London Array has been abandoned “over the impact on the red-throated diver, a bird classified as rare or vulnerable by the European Commission“. However,

Ministers say they want between 8GW and 15GW built by 2020, up from 3.6GW now, and suggest a total of about 10GW is most likely.

My comment on this (with references) is

Some statistics to put the 10GW of extra offshore wind power by 2020 in perspective.

Offshore wind power operates at about 35% of nameplate from DECC figures1.

So that will produce about 30,660,000 Mwh of electricity.

At present each megawatt of offshore wind gets 2 renewables obligations certificates, worth £842,8. So that will add £2575m to bills, or about 5%3 of 2012 Electricity AND Gas bills.

But this will help reduce the UKs Carbon emissions. How much?

RenewableUK reckons that each megawatt hour of renewable electricity saves 430kg of CO2 emissions4. So that equates to 13.2 mt, or 1.84% of the 716.4 mt6 1990 baseline emissions.

This has a value as well, called the “social cost of carbon”. The Stern Review reckoned $85t/CO25. The UNIPCC said the average was $126. So that is £675m or £95m towards saving the planet for future generations. Costs are either 3.8 or 27 times the benefits.

 

The costs of £2575m are not the full costs. There are also extra transmission costs, and backup capacity. A more sceptical view would put a much lower social cost of carbon than the $12 of the UNIPCC.

From note 5, the marginal abatement costs of offshore wind turbines are 3.8 times Stern’s estimate. Perhaps somebody should ask Lord Stern where the marginal abatement costs of less than $85 per tonne of CO2 are to be found. There are millions of households and businesses in this country who would love to know.

Notes

  1. DECC stats here, spreadsheet “Renewable electricity capacity and generation (ET 6.1)”. Offshore wind was 35.2% of nameplate in 2012.
  2. https://www.ofgem.gov.uk/ofgem-publications/58136/buy-out-price-and-mututalisation-ceiling-201314.pdf.
  3. In 2012 the big six energy companies charged about £44bn to all customers. 5% rise assumes they have 85% of the market. Graph here, from this article.
  4. From http://www.renewableuk.com/en/renewable-energy/wind-energy/uk-wind-energy-database/figures-explained.cfm, last section “CO2 Reductions (p.a.) in Tonnes”.
  5. The Stern review noted on pages xvi-xvii

    Preliminary calculations adopting the approach to valuation taken in this Review suggest that the social cost of carbon today, is of the order of $85 per tonne of CO2……. This number is well above marginal abatement costs in many sectors.

  6. The UNIPCC AR4 Summary for Policymakers in 2007 stated on page 22.

    Peer-reviewed estimates of the social cost of carbon in 2005 average US$12 per tonne of CO2, but the range from 100 estimates is large (-$3 to $95/tCO2).

  7. Source World Bank data. UK data at http://data.worldbank.org/country/united-kingdom
  8. The current banding is at https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/211292/ro_banding_levels_2013_17.pdf

First-time comments are moderated. Please use the comments as a point of contact, stating this is the case.

Kevin Marshall

 

 

 

 

7.

Understanding the US EIAs Levilized Cost of Electric Generation figures

At Watts Up With That?, Willis Eschenbach has a post “The Levelized Cost of Electric Generation“. These are estimated figures by US Energy Information Agency (EIA) for the costs of power by fuel source, for plants with construction started now that would enter service in 2018. The full table from the EIA in $/MwH is reproduced as Table 1 below.

Willis makes the valid point that every unit of “non-dispatchable” power (i.e. renewables with no power on demand) capacity, there must be an equal amount of dispatchable power to back it up. He does not follow this up. Non-dispatchable power does not need to be fully-covered by the expensive high-efficiency fossil-fuelled power stations. The most extreme conditions of peak power demands but no wind can be met by diesel generators. These are relatively low capital cost, but with high unit costs of output. They still add to the costs of renewables, along with reducing the CO2 savings. In terms of the large scale fossil-fuelled power stations gas is clearly better than coal. Combined cycle gas has half the capital cost per unit as conventional coal so dropping the utilisation will have a much smaller impact on unit costs. Further it can be switched on or off much quicker than conventional coal. Combined the actual additional cost of renewables is lower than he implies.

As I have been looking into the subsidies that renewables receive in the UK, I would like to observations. To understand these comments in the context of Willis Eschenbach’s post please note:-

  • In the UK, all generated electricity is paid the wholesale price (approx $0.09 kwh at present).
  • In addition renewables receive renewables obligation credits or ROCs. Biomass (wood pellets usually imported from USA) and onshore wind receive 1 ROC per megawatt hour. Offshore wind receives 2 ROCs. With a ROC worth $0.07 kwh (£42.02 MwH), onshore wind and biomass receives $0.16 kwh and offshore wind $0.23 kwh.
  • Currency conversion is at £1.00 = £1.66. Willis uses kilowatt hours for his simplified summary, whereas as the EIA uses megawatt hours.

Revenue is somewhat different to the costs, but there are a few observations possible.

  1. Capacity utilisation for onshore wind is assumed at 34% and 37% for offshore. For the UK, actual average utilisation as 26% for onshore and 35% for offshore. On that basis, US costs for onshore wind would rise from $0.087 to $0.117 kwh. Here are the figures from the most recent four available years.

  2. Biomass in the UK consists of burning non-fossil fuels in existing coal-fired power stations. It is more expensive than coal because (a) fuel cost per tonne is more than coal and (b) output per tonne is slightly less than coal. I would want to know why the capital cost per kwh is 20% lower and why the variable costs are just 45% higher. On fuel costs alone the 0.2 ROCs per Mwh would be more than generous for biomass. Based on figures from April to August 2013, the full year subsidy saving of this change would be in the order of £300m or $500m per annum.
  3. The transmission investment is vastly understated. Like in the UK, the cost of transmission for a power station investor is likely in connecting the power station to the nearest point on the national grid, regardless of the capacity of the line. To obtain 34% efficiency, wind turbines need to be placed in highly exposed areas, such as hill-tops. Population centres, and established grid networks, tend to be on the plains, or in sheltered valleys. In the UK, the best locations for wind turbines are in the far North of Scotland. To effectively connect this to main grid means upgrading about 400 miles of transmission lines to enable around 5-10GW of power at peak generation. This capital cost could be as much as the wind turbines themselves. Fossil-fuelled power stations tend to be located near existing power stations. These in turn are near to the existing grid infrastructure. The upshot is that wind turbines have much higher transmission costs than fossil-fuelled power stations. The difference could be a number of cents per kilowatt hour.

Kevin Marshall

The Nub of the Climate Change Policy Problem

Over at the Conversation, Climate Scientist Mike Hulme has a short article “Science can’t settle what should be done about climate change“. He argues the politics, not science, must take centre stage. He makes four points.

  • How do we value future public goods and natural assets relative to their value today?
  • Is “commodifying” nature appropriate?
  • The morality of technologies for mitigation or adaptation. For instance, fracking and GM crops.
  • The role of national governments against multilateral treaties or international governing bodies. Also the consequent impacts on democracy.

Christopher Wright (Professor of Organisation Studies at University of Sydney) commented

The one problem I have with the above analysis is that the focus on climate science has been a quite deliberate strategy by those seeking to deny or cast doubt on the urgency of the problem. This has meant the debate has continually stalled around issues of whether climate change is a problem or not. The science highlights that it is a very big problem indeed. However, while the science continues to be questioned, we will be unable to have the serious policy conversation about what we need to do to avoid catastrophic changes to our ecosystem.

My reply (with references) is

Science might point to a very big problem, but it cannot translate that into coherent policy terms. Nor can it weigh that against the effectiveness of policies, nor the harms policies can cause. Economics is central to asking those questions. The key figure that encapsulates the predicted harm of climate change is the social cost of carbon SCC, expressed in tonnes of CO2 equivalent. In 2006 Stern measured this as $85/tCO21. A year later the AR4 SPM2 stated a range of -$3 to $95/tCO2 from peer reviewed studies, with an average of $12/tCO2.

The key figure for the effectiveness to policy is the marginal abatement cost. Basically this refers to the marginal cost of preventing a tonne of CO2 equivalent entering the atmosphere. For policy to be of net benefit, MAC needs to be less than SCC.

$85 is about £52, and $12 about £7.50. In the UK onshore wind turbines receive a direct subsidy equivalent to £98/tCO23 saved, and offshore £195/tCO2. Then there are the extra costs of transmission lines, and other costs which could double those figures.

Then you need to recognize that a global problem will not be solved by unilateralist policies by a country with producing less than 2% of global emissions. So the UK is impoverished now by harmful, ineffectual, policies, and still future generations suffer >90% of the consequences of unmitigated climate change. Mike Hulme’s four points above are in addition to this, weighing further against mitigation policy.

Notes

  1. The Stern review noted on pages xvi-xvii

    Preliminary calculations adopting the approach to valuation taken in this Review suggest that the social cost of carbon today, is of the order of $85 per tonne of CO2……. This number is well above marginal abatement costs in many sectors.

  2. The UNIPCC AR4 Summary for Policymakers in 2007 stated on page 22.

    Peer-reviewed estimates of the social cost of carbon in 2005 average US$12 per tonne of CO2, but the range from 100 estimates is large (-$3 to $95/tCO2).

  3. The renewables obligation credit (ROC) buy-out price is currently £42.02 per megawatt hour, as determined by OFGEM. The British renewable industry lobby group renewableUK, uses DECC’s carbon saving figure of 430g/kWh, as stated in an appendix to the Energy Efficiency Innovation Review in 2005. £42.02/.430 = £97.67. Onshore wind turbines get one ROC per MWh generated, offshore wind turbines 2 ROCs.

Kevin Marshall

Jo Nova discusses Mike Hulme’s four points here.

The Irony of Ironbridge

The traditional way of producing iron was in small batches, using charcoal as the fuel. In 1709 Abraham Darby I built the world’s first blast furnace fuelled by coke. This enabled a continuous process to be used for production, enabling much greater quantities to be produced. What is more, charcoal is derived from wood, which was by then becoming increasingly scarce in Britain. Coke comes from coal, of which there were increasingly plentiful supplies. The unit costs of iron production therefore came down for the reasons of increased productivity and a cheaper, more plentiful, energy source. Without this switch the industrial revolution would not have started. The reason for building the blast furnace in Coalbrookdale should be obvious.

Darby’s grandson Abraham Darby III used this cheap iron to build, in 1779 the world’s first bridge from fabricated from cast iron. The village by this bridge and the gorge encompassing Coalbrookdale are now known as Ironbridge. It is now a major tourist attraction.

There has been a coal-fired power station in the Ironbridge Gorge since the 1930s. The directions from the site of the original blast furnace are below. The original 200MW facility was replaced in 1969 and 1970 by the twin 500MW facilities seen today. In 2012, one of those facilities was modified to accept wooden pellets that are imported from North America. The will generate up to £100,000,000 a year in renewables obligation certificates, increasing the cost of the electricity to consumers by 75%.

Globally forests are still declining. Wood is a scarce resource and expensive, with the price only likely to increase. Known coal reserves are sufficient to supply current global requirements for centuries, is cheap and the price is falling. Ironbridge can now claim to both a birthplace of the industrial revolution, and a symbol of sending the benefits of the industrial revolution into reverse. Spot the irony.

Is there a latent problem with wind turbines?

In a posting “Accelerated Depreciation” Bishop hill says

This article at a blog called Billo The Wisp is important if true. Turbine gearbox failures apparently happen typically after 5-7 years rather than the 20 years that we are normally led to believe wind turbines last for. Moreover, their failure can be completely catastrophic, leading to the destruction of the whole turbine.

My comment is quite sceptical.

I do not think that the thrust of this post is correct – that there is a problem that gearboxes in that they will only last for 5-7 years, that has been around for 25 years and that it was so serious that the US government set up a special department to investigate in 2007. Despite all of this, there is still a largely hidden and hugely costly problem of which people are not aware. Having been in the engineering industry for a number of years I would consider the following if involved in the decision to set up a wind farm.

First, wind turbines are electro-mechanical devices. They need servicing and occasional overhauling. Ease of maintenance is important, including the replacement of major components. I would want a recommended maintenance program, along with projected parts costs, required maintenance equipment (e.g. a crane) and standard labour hours.

Second, I would want data on long-term historical performance, service and maintenance costs of each manufacturer’s equipment.

Third, if there was a large wind farm, I would include some spare parts, including major components that should last the life of the equipment. This may include have complete sets of spare parts that can be quickly swapped out – so major maintenance can be done in a workshop and not 200 metres in the air.

Fourth, I would cross-check this against industry journals. Wind turbine manufacture is a huge business with a number of manufacturers selling into a large number of countries. Issues are discussed, like in any industry.

The largest wind farms cost hundreds of millions. Businesses are not naïve. Even with large potential profits, there is always more money to be made through proper investment appraisal and protecting that investment through a thorough maintenance programme. If a major component of a wind turbine only lasted a third the length of time of the main structure, then replacing that component would become a part of the life-time costs. There would be huge incentives to minimize those costs through better design, such as ease of replacement of bearings. The only issue is that the real costs of wind turbines will never come down to a level where subsidies are no longer required.

NB a source of the reliability claims is this June 2010 article, which is now 3.5 years old.

Labour’s Hypocrisy on Rising Energy Bills

If you go to the Labour Party’s website there is an announcement.

Clicking down will take you to energy price calculator. I found out with Ed’s policy I could save £112 per year.

Two weeks after the announcement, still no links to the actual plan, but there is a video to watch.

Just one minute and twenty-six seconds for a distinguished actor to say the following:-

How do you feel when you see your energy bill sitting at the front door and you know that it is going to be even higher than the last one?

And how do you feel when you read in the newspaper that your energy providers’ profits are up yet again?

Millions of ordinary families are struggling to keep up with bills. Bills that are rising faster than wages.

Since David Cameron became Prime Minister, he’s allowed gas and electricity to rise by an average of £300 a year and sat by as energy companies make record profits. Under this Government a privileged few come before hard-families. Ed Miliband and Labour are going to change that. Ed’s energy plan will mean a tough new regulator with the power to challenge the energy companies and keep prices down. Under Ed’s energy plan gas and electricity bills will be frozen. That’s right frozen. Under the Tories you have overpaid. Labour will fight the cost of living crisis and build an economy that works for working people.

The inference is that your bills are rising solely due to the ever-increasing profits of the energy companies. Further the nasty Tories had it in their power stop it. Along will come Labour and stop all that.

I have looked up the figures. Since the 2009, the energy regulator OFGEM has required the six big energy companies to produce financial data by five segments. That is for electricity generation, along with supply data for electricity and gas, each split between domestic and non-domestic supply. I have analysed all four years of data for the six companies, using links provided by OFGEM. There is, of course, no financial data available for 2013 as the year has yet to finish.

If Labour are correct in their inference of price rises being due to increasing profits then profits will be increasing as a percentage of sales. With the typical household’s bill rising by over 20% between May 2010 and the end of 2012, profits as a percentage of revenue would be rising sharply. The following shows the percentage components of revenue.

The narrow band in purple for profit increased from 1.8% of sales to 3.8%. It is not increasing profits that have caused the price rises. The reason for doubling is because, in total, the six major companies lost money on gas supply in 2009. Nor is there a sharp difference between domestic and non-domestic supply margins. You could claim that the energy companies are making more money on generation instead. They are not, as the full margins, by segment, by year, show below.

The total sales breakdown enhances the picture.

Although total are broadly the same in 2009 and 2012, revenue from domestic customers was 13%, whilst that from non-domestic customers was 17% lower. The reason Labour have a higher figure is they rely on OFGEM’s notional average user, who uses the same amount of energy year-in-year out. Real hard-working families have responded to rising prices by reducing consumption.

What is most important is why unit costs have risen. Labour are correct when they say it is not due to the wholesale price of energy. As already demonstrated, they are incorrect to say it is due to rising profits. The real reason is “other costs”. These rose from 32% to 40% of revenue in just four years. That is from £14.1bn to £17.7bn in just four years or a 25% increase. On declining volumes this is more significant for consumers.

These figures are corroborated by a breakdown by my energy supplier, Scottish Power.

With VAT at 5%, the Scottish power says that its charges to the domestic customer in 2013 are made up of 53% for fuel and 43% for other charges. This compares to the industry average in 2012 of 55.7% for fuel and 40.6% for “other costs” plus “amortization”. The higher proportion of other charges to domestic customers is to be expected, as small domestic customers have lower costs. The relevant domestic figures from the big six are 51.8% for fuel and 44.0% for other charges. Given the obviously rounded Scottish Power figures, they are remarkably close to the industry average.

The supply market is fiercely competitive, hence the real reason for the ability of customers to save money by switching suppliers. Therefore it is doubtful that internal costs will have risen. What has risen is the delivery of the energy to the home (National Grid, local delivery, and cost of meters), along with green levies. So it is likely over 75% of the price increases to the customer are due to factors outside of the energy supplier’s control.

Where does responsibility lie for the above-inflation price increases?

The dash for “clean” energy to save the planet is enshrined in the Climate Change Act 2008. It was pushed through the House of Commons when Ed Miliband was Environment Secretary. This accelerated the growth in green levies and the requirement for a more extensive grid network to carry the wind-generated electricity from remote turbines. Delve further in the profits on electricity generation and you will find that fossil fuel generation has margins of 10%. A price freeze will eliminate the supply profits in six months, and the generation profits in two years. The is a sure way to get a near monopoly in gas supply, and cause the rapid shut-down of three-quarters of generating capacity. It is an act of gross hypocrisy by Ed Miliband to threaten to destroy a competitive industry to remedy a problem that he is responsible for.

 

NB First time comments are moderated. The comments can be used as a point of contact.

Kevin Marshall

Tyndall Centre’s New Totalitarianism

Updated with more examples 14/12/13 11am

The Tyndall Centre for Climate Change Research (HQ at the University of East Anglia, with branch office just down road from me at Manchester University) held The Radical Emission Reduction Conference: 10-11 December 2013 at the offices of the Royal Society. Joanne Nova reporting on the conference quoted the following:-

Today, in 2013, we face an unavoidably radical future. We either continue with rising emissions and reap the radical repercussions of severe climate change, or we acknowledge that we have a choice and pursue radical emission reductions: No longer is there a non- radical option.

My first reaction was

These people have not discovered logic or the real world outside of their groups. For instance

1. Where are the robust, unambiguous, forecasts of “severe climate change” impacts? Lacking this, the “do-nothing” scenario could be an alternative.

2. Radical emission reduction policies may not work. Useless policies could end up causing mass impoverishment, leaving future generations much less able to cope with the coming climate apocalypse.

3. Radical emission reduction policies may be both necessary and work in theory, but will never be enacted because “radical” activists have not learnt the art of persuasion and appreciating that other points of view are possible.

Following an initial reading of the conference abstracts, this initial reaction was somewhat understated. The 1.01MB file is at radicalplanabstracts.pdf. Some notes.

The Philosopher’s case for Totalitarianism

On pages 15 to 17 is ‘Responsibility for radical change in emission of greenhouse gases’

Page 16

Generally it is acceptable to frame scenarios of climate change in terms of cost-efficiency, percentages of emission reduction or the target atmospheric CO2 concentration. Yet we develop the argument that predefining the outcome of any change limits the possible processes leading to this change. In fact, when we already know the necessary outcome, the change that is necessary cannot be considered radical at all.

Page 17

For the radical change in greenhouse gas emissions the responsibility towards the radicalness of change means that those involved in the climate change negotiations and policy-making need to let go of their preconceived notions of climate, change, and general structure of cause and effect, science and human life.

And in conclusion

We argue that one cannot desire radical change without acknowledging that we (individuals and institutions) may be swept off our feet, that we may lose influence and control. We need to accept that modifications are not going to bring about radical emission reductions. What we need is radical change, including radical change in our own backyard, our understanding of leadership and in our own epistemic notions of what change means.

All that matters is saving the planet. It is not about saving the planet for future generations, as we humans do not matter. It is not about the climate models being accurate – as they are supposed to about modelling cause (increasing greenhouse gas levels) with the effect (catastrophic anthropogenic global warming). And it is not science.

The Economist’s case for Totalitarianism

On pages 7 to 9 is ‘Demand-side regulation in the policy mix to achieve radical CO2 reductions: modelling global decarbonisation with E3MG

Page 7

Radical reductions in CO2 emissions from reductions in consumption of fossil fuels across the economy could be modelled as coming from changes in life-styles, regulations or prices or a mix of all three. The main demand-side sources arise from the use of fossil fuels in buildings, transport and industry, and indirectly, via the use of electricity generated from fossil fuels. We assume that the power sector becomes decarbonised via a mix of emission trading schemes and regulations. We then consider the implications of a rapid reduction in demand-side fossil-fuel use coming from higher energy prices and regulation of equipment standards and energy efficiency.

To achieve the plan, all the advanced countries (and some not-so-advanced like Belarus) will introduce emissions trading schemes ETS with low tariffs in 2015, sharply escalating after 2020. Emerging economies (e.g. China, Brazil & Mexico) will introduce schemes in 2020 at lower rates. By 2030, in conjunction with tougher economic regulations, coal-fired power stations will be phased out.

With respect to the regulations

These effects are then strengthened from 2020 onwards, with the energy saving, the associated investment and increase in prices all rising by some 17%pa. By 2030 the strength of the regulations is about 5 times that assumed by the IEA. The scale of this increase gives an indication of just how strong regulations have to become.

Italics mine. The plan will only work if it far, far tougher than anything yet on the table. At least the models predict that there will be a small net benefit.

The Increase in investment, including indirect effects, is about 4% above the reference scenario by 2030. Combined with the effects of revenue recycling and the lower growth in world oil prices, it generates more output and employment, raising both growth rates by some 0.2 percentage points each year over the decade.

So in China, which has had near 10% annual growth for over two decades based on cheap coal-based energy, can switch to much more expensive and less reliable “clean” energy sources, with a small net benefit. Hmmm.

People will change their lifestyles if they are unable to afford to do otherwise. Businesses who do not respond will be expropriated for the common good, and their denialist bosses sent to be re-educated in labour camps. The plan will work, and the economic models are infallible. Any deviation from the plan will be therefore be due to economic sabotage.

The Psychologist sees a problem – but does not want to say so

On pages 12 to 13 is ‘Psychology of human acceptance and engagement

A short abstract, quoted in full

The need to voluntarily write off fossil fuel reserves is now clear. The continuing exponential nature of CO2 emissions tells us that none of the talk and action to date on climate change has produced a detectable dent in the trajectory. It also strongly suggests that since efficiency and innovation have gone hand in hand with emissions growth, they are, in themselves, more likely to be integral to the dynamics of growth than to enable mitigation. The exponentiality further suggests that a feedback mechanism needs breaking at the global system level; there is plenty of evidence that local reductions are absorbed elsewhere in the system, like a squeezed balloon.

(Especially in the absence of very widespread CCS), a global constraint on the extraction of fuel is a ‘must have’. All actions can therefore be viewed in terms of their contribution to the conditions under which the global socio- economic system might shift to one in which humans have voluntarily agreed to leave fuel in the ground. Such conditions are more than the cocktail of science, politics, technology and economics to which most climate change analysis, including the above summary, is constrained. The most critically lacking element is the psychology of human acceptance of and engagement with a problem such as climate change, characterised by its abstraction, uncertainty and inescapably global systemic nature. We need to view this as an unsolved mystery, the most ignored part of the puzzle and critical to bridging the void between rationale analysis and policy.

My interpretation is that human beings do not want to sacrifice their immediate interests to some ill-defined and distant goals spoken by some “Johnny foreigners” who do not share their values. Further, leaders of energy-producing authoritarian countries will not leave these fossil fuels in the ground when they know that to do so would lead to economic collapse, swiftly followed by a violent overthrow of their regimes and their possible deaths.

The Social Scientist’s case for a Dictatorship

On pages 23 to 25 is ‘Social science prospects for radical change’

The only acknowledged truth is from the UNIPCC and the Stern Review. No acknowledgement that contrary perspectives are possible.

Social psychologists, among others, have drawn attention to the potential for climate mitigation which could be unlocked through the application of insights into the affective, cognitive, value-based, and social and broader contextual determinants of people’s actions.

Social Scientists must change the way we think.

Despite the acknowledged need to understand and influence the role of the individual in contributing to climate change, the disparity between what might be and what has been achieved has become discomfiting.

 

They are not getting the message across, and they cannot understand why.

 

With the exception of the establishment of a small number of iconic behaviours such as recycling, it has proved extremely difficult to bring about meaningful transformations in personal emissions at either the individual or societal level. On the basis of a number of reviews, it would seem that whilst some change is achievable, there are profound limits to what can be accomplished using current, conventional approaches.

 

Translation – we need more power.

 

Current methods of persuasion have failed. We need something different.

 

First up is control of the press, followed by enforced re-education have been the historical approaches.

 

There has been an expectation that change be confined to small-scale and undemanding changes in behaviour (for example, switching off unused appliances); a concomitant neglect of highly impactful activities because of the perceived political infeasibility of doing so (for example, levels of consumption);

 

Translation – we need more power.

 

… a reluctance on the part of social scientists to take strong normative positions (specifically, to see themselves as advocates for change rather than disinterested theoreticians);

 

Translation – we need stronger and more dogmatic beliefs in the cause.

 

…. and a lack of integration – and at times outright hostility – between different disciplinary traditions (for example between behavioural science and social practice based approaches).

 

Translation – we need only achieve this power if we unite into a unified force.

 

In the first instance, we suggest that a radical social science of climate change mitigation would set out deliberately to enter territory which is complex and often seemingly intractable – but where personal emissions are significant.

 

Basically ban the use of cars and forget about foreign holidays in aeroplanes. Persuade people to do without the elements of consumerist society, such as designer clothes, televisions, computers, washing machines, Christmas etc.

 

That these behavioural changes are nothing to do with combatting a global climate change problem is shown by a very telling omission. There is no mention of any country other than the UK.

 

Democracy and human rights may have to be suspended

 

On pages 25 to 26- ‘Is wartime mobilisation a suitable policy model for rapid national climate mitigation?

 

The abstract concludes

 

We find that, while wartime experience suggests some potential strategies for rapid climate mitigation in the areas of finance and labour, it also has severe limitations, resulting from its lack of democratic processes. Furthermore, since restructuring the existing socio-economic system to mitigate climate change is more complex than fighting a war and since the threat of climate change is less obvious to non-scientists, it is unlikely that the public will be unified in support of such executive action.

 

Again, nothing about the global economy, just the UK.

 

And opportunities exploited for a radical redistribution of emissions

 

On pages 27 to 29 is ‘Personal carbon trading in a radical future

 

Personal carbon trading (PCT) is a radical and innovative mitigation policy which offers an equitable means of reducing emissions from household energy use and personal travel. PCT offers two dimensions of fairness – firstly, everyone gets an equal carbon allowance, a ‘fair share’. Secondly, modelling of the impacts of a PCT scheme shows it would be progressive and would disadvantage fewer low-income people than an alternative policy of carbon taxation.

 

Everyone will be allocated an equal share, and the computer models show that it will work.

 

What is left out is the problem of rolling this out globally to solve a global problem.

 

As I always say, compare and contrast my interpretations with what is actually written. When a publicly-funded body brings together a number of academics from different disciplines, all calling for massively increased power, there is something amiss. When it is held within the UK’s “academy of sciences” building, it is being given an official veneer of respectability.

 

NB First time comments are moderated. The comments can be used as a point of contact.

Kevin Marshall

Notes Labour’s Analysis of the Energy Market

Labour’s Green Paper on Energy has been found by Alex Cull (comment at Dec 2, 2013 at 1:03 PM) at the site “Your Britain“, in the Agenda 2015 section. Having read it, I can see why the Labour Party are not keen for the electorate to find the document. Some quick observations, that I believe are sufficient to show that Labour have not bottomed out the only, let alone the best, explanation of why retail prices have risen so fast in last few years. What this clearly shows is that Labour’s proposed policy freeze is not just misplaced; it is positively harmful to Britain having future low-cost and secure energy supplies.

Note 03/12/13: This post will be added to over the coming days.

Update 04/12/13: Note on declining investment in “clean energy”

Billions not Millions

The Executive Summary states

Lack of competition in the retail market has resulted in consumers paying £3.6m more than they need to each year.

Caption to Table 1 on page 7 states

Lack of competition in the retail market has resulted in consumers paying £3.6 billion more than they need to

Error in Calculation

The source of the £3.6bn is from Which?

The consumer group Which? found that 75 per cent of customers are on the most expensive tariffs offered by suppliers – their standard tariff – and are not getting the cheapest deal in the market. They estimate that since 2011, families across the country have paid £3.6 billion a year more than they need to as a result. That means that households are on average paying £136 each year because the retail market is not working in the way that a competitive market should. If this market was genuinely competitive, energy companies would face stronger incentives to drive their costs down and pass savings to consumers through lower prices and cheaper tariffs; but this is not happening.

That implies that

  1. In a perfectly competitive market, the single price would be the very cheapest rate available.
  2. As a consequence the big six energy companies are pocketing the difference.

So, there is a monopoly profit of greater than £3.6bn. Ofgem monitors the big six energy firms. The BBC reported on 25th November that

Overall, profits in generation and supply across the half-dozen firms fell from £3.9bn in 2011 to £3.7bn in 2012.

So the competitive market profit fell from £0.3bn to £0.1bn? I don’t think so. The price differential is due to competition working, not due to its’ failure. Like in many areas, if you shop around you can get a better deal than those who do not, as sellers will discount to win your business. If you do not shop around, you will get a bad deal. Look at insurance, hotel rooms, flights or even consumer goods. Reducing competition will cause profits will rise, and the savvy consumer will lose out. Regulate enough and even those who never haggle will not get a good deal.

Decline in those switching suppliers

…. a confusing system of 900 tariffs makes it hard for consumers to actively engage in this market. Since 2008, the number of people switching energy supplier has fallen by over 50 per cent, and switching levels are now at the lowest level on record. Low levels of switching means that the big energy companies have a ‘captured market’ which reduces the incentives to keep prices competitive.

Fig 1 shows a decline in number of people transferring between suppliers between year to year. This shows a decline from around … to …. Is this evidence of a decline?

All other things being equal, then it is evidence of declining competitiveness. But all other things are not equal. A supplier can take action to retain the business. There is passive action and non-passive action.

Passive action is when the customer tries to move away, or threatens to. They are can offered a better deal to retain the business.

Proactive action is to offer the customer a better deal. For instance, I moved supplier in 2012 on a 12 month contract. In July, just before the end of the deal, the supplier offered me their best deal. This I accepted, after a quick check.

A decline in transfers could therefore be due to suppliers taking action to retain custom. This saves on their costs, and consumer’s inconvenience, whilst keeping the market competitive. As the cost to energy companies is less, this can keep overall costs down.

A test of this is to look at the differential between the standard tariff and the competitive tariffs over time for each supplier. If that has widened over time in line with the decrease in those switching then the Labour Party are correct. If it has widened, I would be surprised given the increasing number and sophistication of the price comparison websites. It would be a failure both of government policy over many years and the market to respond to those incentives.

Differential between wholesale and retail prices

Figure 2 on page 11 is meant illustrate for the electricity and gas markets how the wholesale prices have stayed roughly the same, but the retail prices have widened. The graphic for the electricity market is shown below.

The explanation is as follows.

Wholesale energy prices have been relatively stable since the winter of 2011, rising by an average of 1 per cent a year. However, the large energy companies have increased energy prices by an average of 10.4 per cent a year over this period (Figure 3). This has led to a growing gap between wholesale and retail prices that cannot be explained by the growth in network costs or policy costs which account for 20 per cent and nine per cent of the bill respectively.

So the explanation is derived from the following logic

  1. Prices have risen by over 30% in the last 3 years.
  2. Wholesale prices form the biggest part of the cost to the consumer and have not moved very much.
  3. Other costs have grown, but now only account for 29% of the bill.
  4. By implication, the profits of the energy companies have increased at the expense of the consumer.

Let us first assume that the scales are comparable. The left hand scale is the wholesale cost in £/MWh. The right hand scale in the average annual retail cost per household. In 2010 the average household was paying about £430 for their electricity, compared with £550 in Jan-2013. The wholesale price component rose from around £280 to £310. So “other costs” rose by around £90. This is a huge increase in costs. With around 26 million households, this is around £2.4bn – well on the way to accounting for the £3.6bn claimed above. There is gas as well remember, so there could be an argument.

But what are the other costs?

These include

  1. Standing charges. The costs of operating the National Grid, and replacing meters in homes, along with subsidies for the poor.
  2. Renewables Obligations (RO) and Feed-in-tariffs (FIT). That is the subsidies that the owners of wind turbines and solar panels get over and above the wholesale price of electricity. For instance, operators of offshore wind turbines will get a similar amount in RO as from the market price.
  3. The small, but growing STOR scheme.
  4. The fixed costs of the retail operation. That is the staff to produce the bills, operate the call centres, along with the cost of a sales force to get you to switch.
  5. The net is the retail margin.

Let us assume that “network costs or policy costs” and policy costs doubled in three years as a proportion of the total electricity bill. That is from 14.5% to 29%. That would be £97 of the £90 increase in margin. This hypothetical example needs to be tested with actual data. However, the lack of the rise in profits is corroborated by OFGEM figures for the Big 6 Energy Companies, as I summarized out last week.

The margins on “supply” have not increased, and are still at the level of a discount supermarket. The margins on “generation” derive from selling at wholesale and the proceeds of the subsidies. Unless Labour are implying that the “Big 6″ are guilty of false reporting to OFGEM, the vast majority of the increase in differential between wholesale cost and selling price is accounted for by factors other than profits to the energy companies. Labour are implying the vast majority of the increase in differential between wholesale cost and selling price is accounted for by the profits to the energy companies, and therefore misleading the electorate.

Interpretation of clean energy investment figures

Figure 4 is the following chart

The fall in investment, at a time when it should be accelerating, is a result of the policy environment and protracted decision-making by Government. The Government has been widely blamed for failing to provide the policy certainty needed to de-risk investment.

There is an alternative way to interpret this data. Labour lost the general election in May 2010. What might be more significant is the passage of the Climate Change Act 2008. In the next year investment was nearly 3 times higher, then falling each year since. The Climate Change Act 2008 greatly enhanced the incentives for “clean energy” investment, hence the leap. There are only a finite number of opportunities, so the investment is reducing year-on-year. This being despite the biggest source of revenue coming from index-linked subsidies loaded onto electricity bills. Another reason is that many in the industry saw problems with the technology, that are only now coming to light. In particular the lifespan of the turbines might be shorter than previously thought. Further, the opposition to the wind turbines (where most of the investment is concentrated) is increasing, such as against the proposed Atlantic Array that would have blighted the Bristol Channel. Campaigners are also increasingly concerned about noise pollution.

Therefore, I propose that declining investment is not due to Government spin doctors failing to sweet-talk big business, but due to the reality of “clean energy” turning out to fall far short of the sales patter.

NB First time comments are moderated. The comments can be used as a point of contact.

Kevin Marshall

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