The rising costs of the Renewables Obligation Certificate Scheme

Summary

The cost of Renewables Obligation Certificate scheme ROCs to covert the UK to renewable electricity has more than doubled in less than four years. Whilst the majority of this increase is down to volume increases and inflation, a significant part is down to switching to higher levels of subsidy, particularly for offshore wind farms. This means that the unit cost of electricity from renewables is rising. One wonders if the DECC has factored this into its projected costs of energy to households.

Main Analysis

In my previous posting “Labour’s Hypocrisy on Rising Energy Bills”, I identified that the rise in energy bills over the last few years was mostly due to rising costs external to the energy companies. I only briefly alluded to the causes. This posting looks at the growth in “Renewables Obligation Certificates” (ROCs), the major vehicle to encourage the energy industry to switch to renewables from fossil fuels. Working out the proportion of the “other cost” increases is difficult to work out, but it could be up to a half.

On the 19th December, the Department for Environment, Energy and Climate Change (DECC), issued a great rash of postings to its website. Amongst these of particular interest was “Energy trends section 6: renewables“. This contains a spreadsheet of interest – ET 6.3 “Renewables obligation: certificates and generation”. This gives monthly data covering the period January 2010 to August 2013.

Not all renewables are equal. Different types of renewables attract different ROC rates per MWh (megawatt-hour) of electricity generated. These vary from 0.25 to 5.00. In practice more than 99% of renewable power generated falls into four bands – 0.50, 1.00, 1.50 and 2.00.

Charting the electricity generated in megawatt hours for the period gives the following graph:-


In less than 4 years there has been a spectacular growth in total electricity generated from renewables, from around 1.5m MWh per month in early 2010, to over 3.0m in early 2013. But there has been even greater growth in the generation of renewables with 2.00 ROCs, and the disappearance of the 0.50 ROCs. This can be better seen by the proportions of generation in each of the ROC bands.


In early 2010, less than 5% of renewables generated qualified for 2 ROCs, whereas by 2013 over 20% did. To show the impact more clearly I have devised three indexes. These include all ROC bands for declarations on a monthly basis. (A very tiny number of schemes have annual declarations.)

  1. Renewable electricity generated qualifying for ROCs.
  2. Renewable Obligation Certificates issued.
  3. The buy-out value of the ROCs. This value is declared by the regulator OFGEM, and inflated each year by the Retail Prices Index. The 2013/14 declaration is here, with all the previous rates.

The index is for 12 month periods, with the period January to December 2010 set to 100.


From the period Jan-Dec 2010 to the period Sept 2012-Aug 2013, volume of renewables electricity generated increased by 80%; volume of ROCs by 116%; and value of ROCs by 140%.

There is a rapid growth in renewables, but the real cost per unit generated is increasing more rapidly. In buy-out values terms, the ROCs issued were worth £862m for Jan-Dec 2010 and £2,069m for Sept 2012-Aug 2013. But what type of renewable is responsible for this real cost per unit increase?

The Growth in Wind Turbine generation and ROCs

A major component of renewables has always been wind turbines, but the proportion is increasing. They are split between onshore and offshore. There are three graphs showing this increase.

  1. The proportion of renewables generated from Wind Turbines


    This shows that not only has the proportion of generation from wind turbines increased from around 40% to nearly 60%. More than 100% of the increased proportion is due to offshore wind turbines with 2.00 ROCs per MWh generated.

  2. Wind generated ROCs as a proportion of ROCs issued


    The share of total ROCS for wind turbines now accounts for over 60% of the total. Around 30% is from offshore wind turbines with 2.00 ROCs per MWh generated.

  3. Index of Changes in Renewables Obligation Credits for wind turbines.


From the period Jan-Dec 2010 to the period Sept 2012-Aug 2013, volume of renewables electricity generated increased by 134%; volume of ROCs by 177%; and value of ROCs by 209%. In buy-out values terms, the ROCs issued for wind turbines were worth £426m (49% of the total) for Jan-Dec 2010 and £1,315m (64% of the total) for Sept 2012-Aug 2013.

The true cost of offshore wind power

This analysis has solely concentrated on ET 6.3. The “Renewable electricity capacity and generation” (ET 6.1) file has some useful data on load factors. For wind turbines I have extracted the annual data.


Offshore wind turbines have around 35% higher load factors than onshore.

The vast majority of income for wind turbines is in two parts. There is the wholesale price at around £60 per MWh and the ROC income, which is £42 for onshore and £84 for offshore.

Per annum, with 35% more load, the offshore wind farm can expect about 90% more income per MWh of capacity than the onshore to cover capital and maintenance costs. It is even worse when compared with the gas-fired alternative. The only income for the generator is the £60 per MWh from selling wholesale, but they have the additional costs of at least £20 per MWh for fuel.

Biomass

An area not covered is the growth in the use of Biomass / other fuels at coal-fired power stations. This will be in a posting next year.

Questions on the subsidising of offshore wind turbines

  1. Given that prior to 2010 offshore wind farms were being commissioned with ROCs of 1.00 and 1.50, how much of this increased rate of 2.0 accommodates greater costs (more distant from the shore, and in deeper water) and how much gives greater profits?
  2. Given that a gas-fired power station can cover its operating and capital costs with less than £40 per MWh, should we be considering alternative, and less reliable, forms of electricity generation that seem to need up to four times the income to operate?
  3. Was any independent studies done of the costs of wind-generated power in setting the ROC rates, or was it just on the advice of the renewables industry and a DECC desperate to meet its carbon budget?
  4. Have the DECC factored in the need to give ever higher levels of subsidies to meet renewables targets?

Kevin Marshall

Ed Miliband fails to link to New Year Message

At 2.05pm on 30/12/13 I got a New Year message from Ed Milliband


Manic Beancounter,

Later today, my New Year’s message for 2014 will be released. I want you to see it first.

Across the country this year, people often asked me if I understand the severity of the cost-of-living crisis, and what a Labour government could do differently to tackle it. It’s a good and fair question.

Here’s the answer I’ve been giving to the members, supporters and voters who ask — and which I also want to share with you:


Watch my New Year’s message

We’ve achieved an amazing amount together over the last twelve months: we’ve built our campaign across the country and — because of the generosity of supporters like you — we now have an organiser lined up for each one of our key seats.

If we work hard, listen to people, and make our case right, this will be the last full year of this Tory-led government.

With my very best wishes for 2014; I know we’re going to achieve more great things together.

Ed


 

 
 

Problem is, when I click on this message I get

Oops! Google Chrome could not find a_ction.labour.org.uk

Did you mean: labour.org.uk

We all make mistakes, but Labour seem to be making a habit of it. On the flagship “Freeze that Bill” policy

  1. No link to the policy content on the Labour Party website.

Go to http://www.labour.org.uk/home and you will still find


This still takes me to this page.


There is still no way you can link to Ed’s Energy Plan, as announced on 29th November, from the Labour Party Website. For those interested it can be found here.

2. On the video there is still a faulty link. 

At 1.22 to 1.26 Labour put up a websitehttp://www.labour.org.uk/freezethatbill

    When it should be

        http://www.labour.org.uk/freeze-that-bill


3. On Ed’s message is a bogus link

At http://www.labour.org.uk/freezethatbill there is a link to freezethatbill.com. This actually links in to

Labour are meant to be the party of slick presentation and spin. Clearly they are missing Peter Mandelson and Alistair Campbell.

Kevin Marshall

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

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

Ed Milibands claims to have published an “energy green paper” untrue

Update 20.00

I owe the Ed Miliband and the Labour Party an apology with reservations. They did publish an “energy green paper” on Friday. The reservations are

  1. It was published at http://www.yourbritain.org.uk/agenda-2015/policy-review/policy-review/energy-green-paper. (Alexa, has no country data for the site)
  2. My mistake was to use the key words “Labour Energy Green Paper” in my bing search. There is (7pm) no reference to this in the first 50 hits, but there are references to the Labour Party website. Even the Chelmsford Weekly News article (No Alexa country data for this site) makes 20.
  3. The Labour Party Website (UK Alexa rank 9,080) still does not reference the document.
  4. The website referred to on the video (http://www.labour.org.uk/freezethatbill) is inaccurate. It should read http://www.labour.org.uk/freeze-that-bill. Even here you will not find a link to the energy green paper.

My mistake, in accusing Ed Miliband of not publishing the paper when he had, was due to a misconception. I assumed that Labour Party spin doctors would be super-efficient, and so the failure to publish would be due to simple, but embarrassing, clerical errors. Having now read the paper, it would seem to go a bit deeper than that.

 

Labour’s claim to have published a green paper on energy is untrue. There is no link on the internet to any document, whether freely available, or to purchase.

BishopHill reported on Friday 29th November that Labour Party leader Ed Miliband had launched a “Green paper on energy”, proposing a freeze in energy price is Labour wins power in 2015. At the BBC there is a video of Ed Miliband saying

…and what Britain needs is Labour’s strong and credible plan, that we are publishing today, to freeze energy prices until 2017 and reform a broken energy market so it properly works for business and families.

As I always like to read the original source material, I went to look for it.

Tried at http://www.labour.org.uk/news, which announces:-

The Energy Green Paper sets out the steps a One Nation Labour government will take while we reset the market during the 20 month price freeze to ensure energy is affordable and available…

But no link on the site to a pdf, neither a link to a shop where I might procure a paper copy of the green paper.

It gets worse. In the home page, the lower part for the last couple of days has this:-


It says

Read Ed Miliband’s energy plan

The link is to http://action.labour.org.uk/page/s/energy-calculator/.


No details of the plan. No details of the links to a plan. But there is a link to a video of 1.26 minutes long.

At 1.22 there is a link to “labour.org.uk/freezethatbill”.


This takes me straight back to http://action.labour.org.uk/page/s/energy-calculator. The details do not exist.

Further, there is no link at the BBC, The Mirror, The Guardian, at Sky News, nor a number of other websites that have run the story.

The Labour Spin Doctors have been so concerned to get out the media message, they forgot the substance.

Kevin Marshall

 

 

Energy Firms making bigger AND smaller profits

We have heard a lot recently about how rising electricity and gas prices are a result of the large profits of the energy companies. Ed Milliband went on the attack at the Labour Party Conference, proposing a price freeze if Labour gets into power. With energy prices going up 10% a year I wandered how large these profits must be. The BBC today gives some clues.

Regulator Ofgem says the big six energy suppliers saw profit margins in the supply of gas and electricity rise to 4.3% in 2012, up from 2.8% in 2011.

And the watchdog says supplier profit per household customer rose to £53 last year, from £30 a year earlier.

However, the power generation profit margins at the firms fell from 24% in 2011 to 20% in 2012.

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

So the retail profits have increased, but the overall profits have decreased. This is despite turnover having increased due a large hike in prices. It is a incorrect to say that the double-digit price increases paid for larger profits of the big six energy suppliers. The following tries to explain why.

Ofgem has not uploaded this latest data to its website, so I have to piece together from what is available. Factsheet 118 details the comparison of 2011 with 2010. It says

 

•     the average profit margin across all six suppliers for

supplying gas and electricity to homes and businesses

declined from 3.8 per cent in 2010 to 3.1 per cent in

2011

•     the margins in generation, however, increased from

18.4 per cent in 2010 to 24.4 per cent in 2011. This is

because of higher wholesale electricity prices. Typical

generation margins also tend to be higher than in supply

to finance the capital investment needed to build power

stations.

A summary of these figures is below


In other words, there is mostly an about face from the very profitable 2011, but still much higher profits than in 2010.

Given that the profits from power generation are much higher, we need to look at this more closely. What should be recognized is the relevant rate of return generation is not ROS (Return on Sales), but ROCE (Return on Capital Employed). An indicator of this can be gleaned from Ofgem’s summaries of the major’s accounts for 2011.

For example, Scottish power has two power sectors. In 2011 it had an EBIT of 168.5 on sales of 1677.0 on “generation” and EBIT of 91.0 on sales of 172.0 on “renewables”. So the older generation has a ROS of just 10%, and the newer, cleaner, renewables a ROS of 53%. To some extent this is not surprising. Renewables – mostly wind turbines – require a huge upfront capital investment, but low operating costs. Also, the renewables capital stock is much newer. But an additional figure is also revealing – the terra-watt hours sold. The “generation” produces £82.60m/TWh, whilst “renewables” produces £101.20m/TWh.

The only other producer to give a split of energy generation is EDF energy, only this time between nuclear and non-nuclear. For nuclear power, the ROS is 40% and £48m/TWh, and for non-nuclear power, the ROS is 10% and £47m/TWh. With Hinckley C, the guaranteed index-linked rate is a minimum £92.50m/TWh.

Thoughts

  1. The large profits are in power generation.
  2. The profits in terms of ROS will increase with new investments, even if ROCE stays the same.
  3. The profits in terms of ROS will additionally increase with the investment in renewables and nuclear, even if ROCE stays the same as initial outlay per unit of electricity is much higher, and the operating costs are tiny, when compared with a coal or gas-fired power stations.
  4. Higher capital investment will mean above-inflation rises in headline profits and ROS, even if the proper measure of profit for generation – ROCE – stays the same.
  5. The responsibility for the Climate Change Act 2008, that generates the higher ROS figures (and much more expensive electricity) is primarily due to the last Labour Government. It was steered through by the then Environment Secretary Ed Miliband. To freeze retail prices will reduce the ROCE of the energy companies, giving a clear signal not to invest in the power generating capacity to stop the lights going out. If you want lower prices and profits, then have a truly liberalized market with fossil fuels given equal status.

Kevin Marshall

 

John McDonnell should be cast to the political fringes

John McDonell’s jest that if he could go back in time he would “assassinate Thatcher” has caused some, rightfully, harsh words from Iain Dale. Here is my response.

McDonnell should be held up as an extreme element of New Labour thinking. It is OK to say something in jest, no matter how ludicrous, if it generates applause. It is but the uglier side of political spin. We can see through this one, but not as easily see through

1. “Labour Investment v. Tory Cuts”

2. “Beyond boom and bust”

3. Investment with no monetary returns funded through the deficit.

4. Daily government initiatives based on politically funded “research” that any objective researcher would throw in the waste bin.(And were, mostly binned once they had filled the news bulletins for a day).

 Iain Dale and Dan Hannan often have good things to say about their opponents, as did Tony Blair about Mrs Thatcher. If mainstream politicians cannot see the good in mainstream opponents, then they should not be cast to the fringes, for they are unlikely to have the ability to see their own faults. They should not be a candidate for the leader of the opposition.

Cameron gets the message on the Legacy of Labour

David Cameron yesterday started blaming the current deficit problems on the last Labour Government.  Benedict Brogan on his Telegraph Blog quotes Cameron

 “I think people understand by now that the debt crisis is the legacy of the last government. But exactly the same applies to the action we will need to take to deal with it. If there are cuts – they are part of that legacy.”

I have been thinking along the same lines for a while now. See for instance.

http://manicbeancounter.wordpress.com/2010/03/21/the-impact-of-labour-on-the-current-crisis/

http://manicbeancounter.wordpress.com/2010/03/22/the-economic-legacy-of-labour-a-summary-for-the-tories/

http://manicbeancounter.wordpress.com/2010/03/24/the-golden-rule-has-lead-to-economic-ruin/

http://manicbeancounter.wordpress.com/2010/04/04/labour-bashing-business-to-save-facing-their-awful-reality/

I believe it is as important for the future to understand the political element of how Labour went so wrong. The Golden Rule and the denial of the problem until it was too late have made a serious recession into a painful period of painful cuts in expenditure and large tax rises. This nation will be poorer for a generation as a result.

Higher Tax Rates – a Poison Pill for Government Finances?

John Redwood and the Adam Smith Institute may have inadvertently exposed a poison pill left by the outgoing Labour Government.

I completely agree with the contention that in the medium to long term higher tax rates reduce revenue. The ASI obtain this conclusion from the analysis of Capital Gains Tax Rates and revenues over the past fifty years. However, looking at the ASI’s graph on page 3, suggests something important for short-term tax policy as well.

For instance, in 1986, the year before tax rates rose from 20% to 28%, revenue rose 96%. In 2002, the year before tax rates dropped from 20% to 15%, tax revenue dropped 26%.

The expectation of a change in tax rates is highly significant on short–term revenue as people optimise the year in which they declare the capital gains

The UK had just the same effect with income tax in March. The deficit for the last financial year was £11bn lower than forecast in the last budget, (due to higher tax receipts from top earners than expected), and over £20bn lower than forecast last autumn.

In the budget I would therefore expect an adjustment for lower than expected tax revenues from higher rate tax payers in next month’s budget of at least £10bn.

Cutting the Deficit – The PR aspect for the Tories.

There is growing recognition that the job of cutting the deficit will destroy the electoral prospects of those carrying out the task for a generation. Capitalists at work, have (very much tongue in cheek) suggested that a war might be needed to save the next government, much as the Falklands boosted the Tories and helped win the 1983 General Election. A war would certainly help, but such a dreadful circumstance should not be wished upon the nation. The Falklands War was a minor skirmish with a decisive victory that helped topple a dictatorship.

Another way is to encourage the general public to despise Labour – something that Cameron has avoided. There is plenty to go out, for instance:-

  1. The structural deficit (the bit that needs to be closed) is Brown’s fault. I estimate by 2015, around £750bn (over 50%) of the national debt will be as a consequence of the deficits built up in the boom years.
  2. Uncovering the partisan attitudes of the civil service and the political appointees. Encouraging whistleblowers and conducting audits may help.
  3. Launching enquiries and audits into major projects – for instance the widening of the M25, the NHS computer system, GPs pay rises, estimating the cost of Brown’s raid on pensions, why the banks got out of line etc.
  4. Tories emphasising unconditional forgiveness to those who have been taken in by the Labour Spin doctrines that got us in this mess.
  5. Emphasize that Labour have betrayed their core voters.
  6. Launching the initiatives to minimize the pain and maximize the gain from the necessary cuts.
  7. Changing the emphasis from promoting the interests of party/ideology to the government serving the people.

 

The Tories should do this not only to drive home the contribution that Labour has had in our current crisis, but also to give a positive vision for the future. One where governments will learn from past mistakes and learn the limits of what they can accomplish.

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