Spending Money on Foreign Aid instead of Renewables

On the Discussion at BishopHill, commentator Raff asked people whether the $1.7 trillion spent so far on renewables should have been spent on foreign aid instead. This is an extended version of my reply.

The money spent on renewables has been net harmful by any measure. It has not only failed to even dent global emissions growth, it will also fail even if the elusive global agreement is reached as the country targets do not stack up. So the people of the emissions-reducing countries will bear both the cost of those policies and practically all the costs of the unabated warming as well. The costs of those policies have been well above anything justified in the likes of the Stern Review. There are plenty of British examples at Bishop Hill of costs being higher than expected and (often) solutions being much less effective than planned from Wind, solar, CCS, power transmission, domestic energy saving etc. Consequences have been to create a new category of poverty and make our energy supplies less secure. In Spain the squandering of money has been proportionately greater and likely made a significant impact of the severity of the economic depression.1

The initial justification for foreign aid came out of the Harrod and Domar growth models. Lack of economic growth was due to lack of investment, and poor countries cannot get finance for that necessary investment. Foreign Aid, by bridging the “financing gap“, would create the desired rate of economic growth. William Easterly looked at 40 years of data in his 2002 book “The Elusive Quest for Growth“. Out of over 80 countries, he could find just one – Tunisia – where foreign aid conformed to the theory. That is where increased aid was followed by increased investment which was followed by increased growth. There were plenty examples of where countries received huge amounts of aid relative to GDP over decades and their economies shrank. Easterly graphically confirmed what the late Peter Bauer said over thirty years ago – “Official aid is more likely to retard development than to promote it.

In both constraining CO2 emissions and Foreign Aid the evidence shows that the pursuit of these policies is not just useless, but possibly net harmful. An analogy could be made with a doctor who continues to pursue courses of treatment when the evidence shows that the treatment not only does not work, but has known and harmful side effects. In medicine it is accepted that new treatments should be rigorously tested, and results challenged, before being applied. But a challenge to that doctor’s opinion would be a challenge to his expert authority and moral integrity. In constraining CO2 emissions and promoting foreign aid it is even more so.

Notes

  1. The rationale behind this claim is explored in a separate posting.

Kevin Marshall

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.

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

 

UK Energy Research Centre (UKREC) doubly misleads

Yesterday the GWPF and Joanne Nova point to an article in Thursday’s Daily Express which declared

A report from the UK Energy Research Centre also shows the number of those who resolutely do not believe in climate change has more than quadrupled since 2005.

There are two fundamental issues with the press release. First the research shows a much bigger divergence in public opinion from climate orthodoxy than the press release by the QUANGO shows. Second, the opinion poll conducted in England, Scotland and Wales by psychologists had two fundamental errors that fail to connect with the real world situations that people are facing and will face in the renewable energy future.

Public Opinion on Climate Change

The Government funded report shows 19 per cent of people are climate change disbelievers – up from just four per cent in 2005 – while nine per cent did not know.

The Daily Express article only looks at the press release and then speaks to UK Green Party leader Natalie Bennett, who says, who says

Of course, however, the 72 per cent of the public who acknowledge the climate is changing are backed overwhelmingly by the scientific evidence.

If they had clicked on the second link on point 3 (of 5) in the “Notes to the Editors” (below where it says – Ends –) labelled “national survey“, they would have opened up the 62 page “SURVEY FINAL.pdf”. If they had then gone to Appendix B, they would have found the full results of all 72 survey questions. The following is relevant

Q3. How concerned, if at all, are you about climate change, sometimes referred to as ‘global warming’?

“Very” or “Fairly” concerned         74%

“Not very”, or “Not at all” concerned      26%

Don’t know                 1%

However, this should be more relevant.

Q5. Thinking about the causes of climate change, which, if any, of the following best describes your opinion?

CC is entirely or mainly caused by natural processes                 16%

CC is partly caused by natural processes and partly caused by human activity     48%

CC is entirely or mainly caused by human activity                 32%

The survey shows that two-thirds of the public disagree with the “scientists”, and thus disagree with a necessary condition to justify policy – that climate change is a non-trivial problem. The press release hides the real story in obscure places that no journalist has time to find.

The opinion poll failing to address real world situations

The questionnaire started with questions on attitudes to climate change. However, the vast majority of the questions, and the purpose of the survey, was upon the “Public Values, Attitudes and Acceptability” of pursuing the UK’s transformation to “green” energy. As this questionnaire was conducted by the School of Psychology at the University of Cardiff, there are two things one could reasonably expect.

  1. Empathy with the people impacted.
  2. Addressing the costs that people are most likely to face.

In both there is a depersonalisation of the impacts.

One of the most controversial areas of renewables is wind turbines. An innocuous question is

Q22. To what extent would you support or oppose the building of a new wind farm in your area? (By ‘area’ we mean up to approximately 5 miles from your home)?

The distance is relevant. Like the vast majority of people I live in a built-up area. If the world’s tallest building was located five miles from my house, I would likely not be able to see it from the ground floor in any direction. Five miles distant there is an airport with 20 million passengers and 170,000 flight movements a year. I rarely hear an aircraft, as I do not under the usual flight paths. To personalize it, you need to ask people if, when purchasing a house, having a wind turbine located at less than a mile from a house, clearly visible, would affect the decision to buy it.

This depersonalisation of the impacts also includes the benefits. In a remote rural area a nuclear power plant would bring a huge influx of jobs and prosperity, more than thousands of wind farms. There is a relevant example. In the 1960s Caithness boomed as a result of the building Dounreay nuclear research plant. The county is currently being overrun by wind turbines, which do little to replace the jobs lost as the nuclear facility is decommissioned.

Empathizing with the plight of a minority who are adversely affected by renewables is something that should be appreciated. However, for most people, it is the direct impact of renewables that will concern them most. For the vast majority, it is costs that are important. UKERC fully realize that switching from fossil fuels to renewables means receiving power solely in the form of electricity. Therefore, there are questions about switching from gas to electric for heating and cooking, and about the public perceptions of electric cars.

Q23. How positive or negative do you feel about heating with electricity?

Q24. Please indicate how willing you would be, if at all, to use electric heating in your home in the future.

Q25. …what if your friends, family and neighbours used electric heating? How willing would you be, if at all, to use electric heating in the future if this was the case?

Q26. …what if the performance of electric heating was no different to central gas heating systems? How willing would you be, if at all, to use electric heating in the future if this was the case?

Q27. …what if electric heating was significantly cheaper than heating with gas? How willing would you be, if at all, to use electric heating in the future if this was the case?

Q28. How positive or negative do you feel about cooking only with electricity?

Q29. Please indicate how willing you would be, if at all, to cook only with electricity in the future.

Q30. …what if your friends, family and neighbours cooked only with electricity? How willing would you be, if at all, to cook with electricity in the future if this was the case?

Q31. …what if the performance of an electric hob was no different to a gas hob (e.g. it heats up in the same time)? How willing would you be, if at all, to use an electric hob in the future if this was the case?

Q32. …what if cooking with electricity was significantly cheaper than cooking with gas? How willing would you be, if at all, to cook with electricity in the future if this was the case?

Q33. How positive or negative do you feel about driving an electric car?

Q34. Please indicate how willing you would be, if at all, to drive an electric car in the future.

Q35. …what if your friends, family and neighbours drove electric cars? How willing would you be, if at all, to drive an electric car in the future if this was the case?

Q36. …what if the performance of an electric car was the same as a petrol car (e.g. speed, range, availability of charging points)? How willing would you be to drive an electric car in the future if this was the case?

Q37. …what if the cost of buying and running an electric car was significantly less than the cost of a petrol car? How willing would you be, if at all, to drive an electric car in the future if this was the case?

UKREC could say they have dealt with costs in Q27, Q32 and Q37. But this only deals with the scenario if the electric alternative is cheaper. Currently the electric alternative is far more expensive. Maybe twice the cost for heating by electric than gas, and an electric car is around twice the cost (or more) of an equivalent size of diesel car. Will the reality change? There are four reasons why not, which need to be compared with the current domestic price (after distribution costs, reseller costs and reseller margin) of 10p Kwh.

First, is that renewables cost more, in total, per unit of electricity than fossil-fuelled power stations. When I last checked it was 4.1p for onshore turbines and 8.3p Kwh for offshore. This is on top of the wholesale market rate. In addition, there is the STOR energy scheme where the marginal cost per Kwh is over 20p-30p Kwh, and the average cost per Kwh could be 50p or more. Then there are the payments not to shut the things off when the wind blows too strongly.

Second, is that fossil fuels are likely to come down in price than go up. In particular in Britain the shale gas revolution will guarantee supplies for a generation and are more likely to see gas prices fall in real terms, than rise.

Third, is that if we switch energy from gas and petrol/diesel to electric, the amount of electric power generation capacity required will go through the roof. The first point applies even more strongly.

Fourth is that current technologies are developing rapidly as well. For an electric car to become competitive on running costs, it needs to overtake the next generation of diesel cars. For instance, last week I drove one of the current Volkswagen Golf diesels, a 1.6TDI. The fuel consumption of just over 60mpg(1), was at least 25% better than a 2007 Vauxhall (General Motors) Astra 1.7TDI, and 100% better than my first car – the much smaller 1978 Honda Civic 1.2 petrol.

Conclusion

The press release fails to show how far out of line the consensus of climate scientists are with mainstream public opinion. More importantly, a questionnaire commissioned by a QUANGO for renewable energy research and conducted by academic psychologists, fails to address the likely real situations people will face under a renewable future.

Kevin Marshall

  1. For Australians and Europeans, 60 miles per gallon is 4.7 litres per 100km. For those in the United States it is about 50 miles per US gallon.

China’s Renewable Policy in Context – The Ningxia Example

China has been lauded for an aggressive renewable policy, particularly for wind turbines. When you next hear praise for this policy, consider the example of the Ningxia Hui Autonomous Region in Mid-China. There are wind turbines being developed here, but only in the context of massive industrial development. That primary motive for the industrial development in this area is coal. For instance

Sun Mountain has something China needs very badly to feed the thundering beast of its economy: 14.6 billion tons of coal reserves lying under its rocky, arid desert. There are also 5 billion tons of limestone, nearly 2 billion tons of dolomite, and – a modern touch this – 300 days of wind power per year. But there is no doubt that King Coal, a tyrannical monarch who has devoured land and lives in Ningxia for the past 50 years, rules Sun Mountain. If China is to quench its thirst for electricity and industrial chemicals the old king will be on the throne for many years to come.

The scale of the development is seen from another, 2008, article.

Shenhua Ningxia Coal Industry Company….. has begun construction of a 1000 square kilometer coal-chemical complex in northwest China’s Ningxia province. The 280 billion yuan (40 billion USD) project, located at Ningdong, 42 kilometers southeast of provincial capital, Yinchuan, will include coal production, electricity generation and coal chemicals, including coal to liquid fuel conversion (CTL). (Italics mine)

The coal will be partly used for power generation.

By the time the base is fully operational in 2020 it will have eight power plants with a capacity of 30 million KW.

That is eight power plants in one small region, each bigger than anything in Britain. But why develop coal to liquid fuel conversion?

With China’s crude oil imports rising 12.3 percent to 163.17 million tons in 2007, and the price of oil reaching $140 a barrel in 2008, one of the most keenly watched facilities in the Ningdong base will be its coal to oil conversion plants.

As of 2013, one of these plants is already in operation, and should be producing the equivalent of 70,000 barrels per day (bpd) if the mid-2006 forecasts were correct. The other is being constructed, with a capacity of over 90,000 bpd. Although these two plants will only provide the equivalent of 4% of the 163.17 million tonnes imported in 2007, China has huge reserves of coal. Further, Ningxia is one of just 30 main coal producing areas.

This 2008 article admits to drawbacks of CTL.

Coal liquefaction projects have many drawbacks from the point of view of the environment and resource conservation. Firstly they consume vast amounts of water, which is a huge concern in China’s dry northwest. Fifty-seven percent of the land area of Ningxia is desert. The Ningdong coal-chemical base will draw 100 million tons of water from the Yellow river every year. Secondly, the process of liquefying coal emits much more carbon dioxide than conventional coal fired power stations. When fully operational, the Ningdong base will discharge 80,000 cubic meters of Carbon Dioxide (CO2) per day …….. Finally, while liquefied coal fuels provide an alternative to crude oil, they are not necessarily an efficient use of coal. It takes four to five tons of coal to produce one ton of oil, so coal to oil projects deplete coal reserves much more rapidly than conventional coal power generation.

Therefore, China’s rush into renewables should be seen as just a small part of the general industrialisation of China, whilst minimising dependence on external energy sources. The eco-image, such as support for Earth Day and Kite Tournaments is just to keep the environmentalists from trying to sabotage China’s rush to western levels of prosperity for 1300 million people.

IPCC & Greenpeace

The Shub Niggurath (Hattip BishopHill) arguments against the IPCC’s SSREN growth figures are complex. The Greenpeace model on which they were based basically took a baseline projection and backcast from there. A cursory look at the figure GDP figures shows that the economic models point to knife-edge scenario. The economic models indicate that the wrong combination of policies, but successfully applied, could cause a global depression for a nigh-on a generation and lead to 330 million less people in 2050 than the do-nothing scenario. But successful combination of policies will have absolutely no economic impact.

Shub examines this table :-

Table 10.3, page 1187, chapter 10 IPCC SRREN

(Page 32 of 106 in Chapter 10. Download available from here)

I have looked at the GDP per capita and population figures.


To see whether the per capita GDP projections are realistic, I have first estimated the implied annual growth rates. The IEA calculates a baseline of around 2% growth to 2030. The German Aerospace Centre then believes growth rates will fall to 1.7% in the following 20 years. Why, I am not sure, but it certainly gives a lower target to aim at. Projecting the 2030 to 2050 growth rate forward to the end of the century gives a GDP per capita (in 2005 constant values) of $56,000. That is a greater than five-fold increase in 93 years.

On a similar basis there are two scenarios examined for climate change policies. In the Category III+IV case, growth rates drop to 0.5% until 2030. It then picks up to 2% per annum. Why a policy that reduces global growth by 75% for 23 years should then cause a rebound is beyond me. However, the impact on living standards is profound. Almost 30% lower by 2030. Even if the higher growth is extrapolated to the end of the century, future generations are still 12% worse off than if nothing was done.

But the Category I+II case makes this global policy disaster seem mild by comparison. Here the assume is that global output per capita will fall year-on-year by 0.5% for nearly a generation. That is falling living standards for 23 years, ending up at little over half what they were in 2007. This scenario will be little changed in 2050 or 2100. Falling living standards mean lower life expectancy and a reduction in population growth. The model reflects this by projecting that these climate change policies will lead to 330 million less people than a do-nothing scenario.

Let us be clear what this table is saying. If the world gets together and successfully implements a set of policies to contain CO2 levels at 440ppm, the global output in 2050 will be 40% lower. There is a downside risk here as well – that this cost will not contain the growth in CO2, or that the alternative power supplies will mean power outages, or that large-scale, long-term government projects tend to massively overrun on costs and under perform on benefits.

Let us hark back to the Stern Review, published in 2006. From the Summary of Conclusions

“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.”

Stern looked at the costs, but not at the impact on economic growth. So even if you accept his alarmist prediction costs of 5% or more of GDP, would you bequeath that to your great grandchildren, or a 40% or more reduction lowering of their living standards along with the risk of the policies being ineffective? Add into the mix that The Stern Review took the more alarming estimates, rather a balanced perspective(1) then the IPCC case for reducing CO2 by more solar panels and wind farms is looking highly irresponsible.

From my own perspective, I would not have thought that the impact of climate mitigation policies could be so harmful to economic growth. If the models are correct that the wrong policies are hugely harmful to economic growth, then due diligence should be applied to any policy proposals. If the economic models from the IPCC are too sensitive to minor changes, then we must ask if their climate models suffer from the same failings.

  1. See for instance Tol & Yohe (WORLD ECONOMICS • Vol. 7 • No. 4• October–December 2006)

Update 27th July.

Have just read through Steve McIntyre’s posting on the report. Unusually for him, he concentrates on the provenance of the report and not on analysing the data.