This green energy thing might be more expensive than we're being told you know

There's always a suspicion when someone has a grand plan that they've not quite thought of everything. That's one of the reasons I so like market mechanisms: they correct for such failures faster than any other method. And there might be one rather large cost that we've not been told about as yet about this green and renewable energy thing. Which is why I famously prefer the as close as we can get to a market solution of a carbon tax over letting anyone construct a grand plan.

The problem is that modern machinery needs very accurate voltage all the time. Something which a renewables heavy grid just isn't all that good at producing. Not consistently at least and that's rather the point.

The problem is that wind and solar farms just don’t deliver the same amount of continuous electricity compared with nuclear and gas-fired power plants. To match traditional energy sources, grid operators must be able to exactly predict how strong the wind will blow or the sun will shine.

But such an exact prediction is difficult. Even when grid operators are off by just a few percentage points, voltage in the grid slackens. That has no affect on normal household appliances, such as vacuum cleaners and coffee machines. But for high-performance computers, for example, outages lasting even just a millisecond can quickly trigger system failures.

What would happen to an aluminium smelter if power fell away would be too too expensive to even think about: you'd probably have to replace all of the pots. That, for the uninitiated, is the expensive part of an aluminium smelter.

Anyway, as a result some of those industries and companies are thinking of moving out of Germany. And those that aren't?

Even August Wagner, head of a textile firm with roughly 180 employees in Bavaria, is taking precautions against feared power interruptions. A stop in production would be catastrophic for him. “When we dye our materials, there are thousands of meters in the dye factory,” he said. “If the power goes out, all of the goods are lost, and we have huge losses.”

Wagner now regulates the power supply of his production himself so that it doesn’t come to that point. What’s more, for a few months, he’s had an emergency power source standing in container next to the production facilities. Since then, other businesspeople in the area have been dropping by to take a look at his setup.

Aurubis, a major copper producer and recycler in Hamburg, has also spent about €2 million to protect against unwanted power emergencies. “If grid stability doesn’t markedly improve, we’ll have to rely on emergency power supplies this and the coming winter,” the company say.

Obviously, such back up power is grossly less efficient than the proper sized kit that feeds the grid. But there's also a large capital cost there: a cost which isn't being included in the estimates of how much green energy is going to cost us. It's actually possible that it's all going to be even more grossly expensive than we already think it is.

As I say, beware of those with grand plans. They're almost certain to have forgotten some terribly important point.

A problem solved

The world's energy problem seems to have been solved, but governments do not  seem to have noticed.  A relatively clean and abundant source of energy has not been produced by wind, solar or tidal power, nor even by nuclear power.  It has certainly not come from bio-fuels that create less energy than they use.  It has been solved by human ingenuity and technology.

The world has suddenly uncovered vast reserved of natural gas, largely because advances in horizontal drilling and hydraulic fracturing (fracking) technology have enabled it to be extracted from shale deposits previous thought undrillable.  The price of gas in the US has dropped to less than a quarter of its 2008 level (down from $13 per million BTUs to about $3).

Gas is still a fossil fuel, but the reserves of it are already estimated to last for 100 years, and possibly 200 years.  Ongoing technology will by then almost certainly develop new and low-cost alternatives to replace it.  Furthermore, gas is relatively clean, putting out less pollution and carbon emissions than coal or oil.  Gas-fired power stations will give us a cheap, relatively clean supply of electricity for many years to come to power our factories, our transport and our homes.

Gas is not renewable, and does not need to be.  Renewable energy is only desirable when energy is in short supply, and the gas revolution means that it no longer is.  Governments which have succumbed to environmental lobbies to subsidize wind farms and solar power generation will find they have unnecessarily increased energy costs to their citizens and their businesses, as well as disfiguring their countrysides.

Gas has the additional advantage that its reserves are not located in politically volatile or hostile parts of the world.  It will free the developed countries from dependence on Middle Eastern or Russian energy supplies.  The US will soon be self-sufficient in energy and become a net exporter, and even Britain could be.

Environmentalist organizations will lobby hard against it, citing all kinds of reasons for opposing it, but the main reason is the political one that it does not require changes in our behaviour, or the requirement to live more simply.  We can instead continue to develop new opportunities, and the lower cost of energy will free resources to make its use cleaner still.

The energy problem has been solved, and someone should at some stage tell this to governments so that their behaviour might change.

Behold the Dartford Olympics

Hopefully, David Cameron’s summer vacation takes him over the Dartford Crossing over the Thames River downstream from London. With luck, the toll queue on the Queen Elizabeth II Bridge will let the Prime Minister take in the stunning views in all directions - the panorama will instil more pride in the nation and inspiration for new policies than the opening ceremony of the Olympic Games.

That ceremony might have encouraged Mr Cameron to return us to a rural idyll that never was, to imprison all wealth-generating industrialists, to beatify the NHS as the country’s official religion and to ban all culture except pop. The Dartford Crossing, though, is the real-world antidote to that view of Britain and suggests some good ideas to restore the economic growth needed to pay for the flights of fancy on show at the Olympic Stadium.

Start with the sheer volume of traffic that is utterly breath-taking – thousands upon thousands of cars, vans and trucks streaming across in both directions heading to all points of the compass. Mr Cameron should take pride in the fact that the majority of the world’s major carmakers – Ford, General Motors, Toyota, Honda, Nissan, BMW, Tata - continue to  make their cars in this land and that those cars are good enough to export anywhere. And he should be proud that so many of the lorries are registered in lands as far away as Turkey, hauling goods to and from every nook and cranny of the nation.

However, Mr Cameron should also recognize that Britain’s roads are far more critical to the economy’s health than any prestige rail projects like the high speed link from London to Birmingham and Manchester. A crowded Britain will live or die by an efficient road network where the vast majority of economic traffic isn’t between the centres of big cities. Road infrastructure offers many opportunities for creative thinking - privatisation of major trunk routes, tolls and road pricing where the money stays within the industry for consistent upkeep, modernisation, expansion and even dismantling as required by a dynamically changing economy. Handle this right and little taxpayer funding will be required.

Mr Cameron should also recognize that Britain’s historic economic success is so clearly underscored by those foreign-registered lorries – foreign trade. At every summit, at every meeting with every foreign dignitary, at every trade show on every continent, Mr Cameron must shout out the virtues of trade, starting with the EU’s own reluctance to implement the directive on free trade in services. Conveniently, such evangelism doesn’t need any additional taxpayer funding.

Just upstream from the Dartford Crossing is the sprawling Littlebrook Power Station and another testament to Britain’s strengths and weaknesses. The nation has a proud history of energy innovation and development with its skills in the field exported around the world. Littlebrook is oil-fired, though, and incessant dithering about long-term energy supply is bordering on the criminal. So let’s cut through the crap and dash for gas to exploit the nation’s skills, significantly reduce if not eliminate carbon emissions and secure energy supplies for the foreseeable future. It’s another opportunity to enhance growth prospects without hitting up taxpayers.

Downstream from the Dartford Crossing is the Thames Estuary, the proposed dream site of a new futuristic airport for London and there’s no escaping the need for more airport capacity in the southeast if Britain has any intention of sustaining economic growth in the decades ahead. An airport in the Estuary would be a huge challenge but Britain’s engineering industry is second to none in the world. The country’s problem isn’t building things – it’s being unable to decide to build anything. So, Mr Cameron, push the button for this airport if you want a real legacy, especially if you can finally get Whitehall to negotiate proper public-private financing initiatives.

Let’s hope the Olympics opening ceremony was the last hurrah of New Labour’s delusions and that Mr Cameron can recognise it as such. For a sense of the real world, he should spend £1.50 for the adrenalin rush of the Dartford Crossing.

What on Earth is Sir David King talking about?

Regular readers will know that I'm perfectly happy to take what the climate scientists tell me about climate science. Where I start to stray from the path of green orthodoxy is those same scientists then tell us the economics of what we ought to do about it all. Something they are not competent to comment upon as they really don't understand the economics. I do accept the economics of climate change as laid out by the economists who have studied the economics of climate change. William Nordhaus, Nick Stern and so on, tell us that if the climate science is right then a simple revenue neutral carbon tax will be the solution.

That's fine by me. But it does still puzzle me as to why the not economists feel competent to pronounce on the economics of climate change. Are they intellectual supermen who can master two widely different subjects? Simply succumbing to politics: something must be done, this is something, do this? I think I've found a little clue actually, something that might guide us to a conclusion. It's in this interview with Sir David King, lately the chief scientific advisor to HMG.

He also believes it is imperative to fund other major infrastructure projects, such as the Severn Barrage, which would provide three gigawatts of electricity and still run in 200 years with minimum maintenance.

"The problem is that the longest time an economist will work on investment returns is 25 years. We need to look at taking a much longer view. What is missing is clear direction from number 10 and 11."

I wonder if someone would like to tug very gently on Sir David's sleeve and ask him what on Earth he thinks he's burbling about?

Here is the cost benefit analysis for the Severn Barrage. In its various different forms. Beginning on page two you can see that the costs and the benefits are calculated out for 120 years: the expected lifetime of the asset if it is built. That is, the economists looking at the Severn Barrage did not limit themselves to a 25 year investment return. They, quite properly, looked at the whole lifetime costs and benefits.

Which leads us to our conclusion. The reason the scientists are so in conflict with what the economists of climate change are saying about the economics of climate change is simply that the scientists are entirely ignorant of what the economists are saying. And I'm afraid that, despite the popularity of the stance among politicians, ignorance is not a notably successful form of governance.

More green jobs nonsense

As I've said here and elsewhere often enough those who preen upon how many green jobs they are creating simply do not understand the most basic point: jobs are a cost of a scheme, not a benefit. Thus the pointing at how many green jobhs are being created is really the squeals of the innumerate telling us all how expensive their schemes are. However, I've just found out that it could be considered worse than this. For here is what the US's Bureau of Labor Statistics defines as a green job:

Green jobs are either:
A. Jobs in businesses that produce goods or provide services that benefit the environment or conserve natural resources.
B. Jobs in which workers’ duties involve making their establishment’s production processes more environmentally friendly or use fewer natural resources.

What this means is that absolutely everyone who works at an oil refinery has a green job. For everyone who does work at an oil refinery is trying to "use fewer natural resources". In fact, everyone who works in anything at all of a capitalist or market nature now has a green job. For all of us are, always, attempting to reduce the resources we use in order to produce our output.

So we might in fact simply claim that the entire concept of a green job is so nonsensical that we should just abandon it. Or perhaps we shoud be cleverer about it than this?

It is indeed true that all of the 24 million private sector workers in the UK are at least attempting to reduce the inputs into whatever it is that they do. So therefore all 24 million private sector workers are in green jobs. It's the 6 million in the state sector who do not so concern themselves: which gives us the optimal path to maximal greenery. Move state workers into the private sector, where they will naturally concern themselves with economy of resources, of inputs, and we will have entirely greened the economy.

It's the sort of plan I could get behind you know.

The new Limits to Growth report for the Club of Rome

I was able to snag a copy of the new Limits to Growth report to the Club of Rome. The 40 year update of that one that said we'd all be dead already, our skeletons rocking gently in the winds that whip a shattered planet.

This new report does have its pluses, They manage to get the metals thing right for example. We'll recycle more as prices rise and we're most unlikely to run out of any. It's also amusing to have Jonathan Porritt giving his "nuclear is bad, M'Kay" speech instead of the full body condoms for all one. There are some very questionable assumptions to: the population forecast is based on a fall in fertility levels to one per woman per lifetime. Something extraordinarily hard to imagine.

But I'm afraid that I do have my doubts:

Capitalism has done wonders for global wealth creation over the last centuries,
and this system for allocation of human activity dominates the current
world economy. Capitalism has successfully focused attention and capital on
organizations that are able to provide goods and services to customers who
are willing and able to pay. Whenever demand shifts, the capitalistic system
reallocates, again and again, thereby contributing to a continuing restructuring
and growth of the societal pie.

That's not capitalism. That's the market system. Capitalism is a description of how productive assets are owned, not a description of how capital is allocated among different potential uses.

And, if we're going to be frank about it, if someone trying to predict the global economy for the next 40 years gets this sort of thing wrong, well, there's not all that much hope for the rest of his predictions, is there?

My verdict: not as bad as the last report but still not very good.

A free market solution to pollution

The chart above shows the number of deaths per watt of energy produced by various different energy sources. (Data from the World Health Organization, image from Seth Godin, original graphic here.) Coal is by far the worst offender, causing 161 deaths per terawatt hour (TWh). Nuclear power is remarkably safe by comparison, with just 0.04 deaths per TWh. Shale gas also does well compared to coal and oil, with 4 deaths per TWh.

Clearly, there are significant, unfactored external costs to the use of fuels like coal and oil compared to fuels like nuclear power. This does not mean that coal and oil should be banned, though many environmentalists would like it, because they both produce significant real benefits as well – cheap energy is one of the cornerstones of modern civilization. The optimal outcome is not a total ban or a total free-for-all. As with motoring, where some deaths are an inevitable outcome of socially beneficial activity, the optimal number of deaths is greater than zero.

This is a classic case of conflicting property rights: what we need is a situation that can balance the property rights of polluters with those people whose air is being polluted against.

The standard pseudo-market solution is to assign an arbitrary value to each life and tax polluters by a fraction of that, to “price in the cost to society”. But this is a poor approach, because the cost is borne by the individuals who get sick and die — not by society in general or the government, which gets the money.

A free market solution to pollution would, through courts or voluntary agreement, force polluters to compensate the people they pollute against. If the property rights of the polluted-against were upheld, this would lead to a situation where both parties would agree a pollution premium: a middle-point where the polluter is compensating local people enough to continue polluting.

This would have the happy outcome of incentivizing polluters to move away from urban areas. It might also incentivize people who care less about their lungs, like smokers, to move to areas of higher pollution. The big obstacle to this is that the technology for measuring air quality is quite primitive, and probably wouldn’t allow us to find this balance. But this isn’t as significant a problem as it seems: the very fact of these property rights being upheld (even crudely) would incentivise innovation in demarcating property rights, and so on.

Best of all, it would rebalance the relative price of dangerous fuels, like coal, against safer fuels, like shale gas and nuclear power. Currently, nuclear power isn’t really viable as a free market fuel source – it requires massive government subsidies for the initial investment. With a "free market environmentalist" mechanism that puts respect for property rights at its core, this could change — relative to coal and oil, nuclear may become quite competitive. Shale gas, cheap and relatively clean, would probably become even more invested-in than it is now. And the real costs of pollution would be mitigated to an acceptable level. There's no need for complex regulation and arbitrary "social" taxation. For an energy industry that bears the costs of its pollution, all we need to do is recognise property rights.

The glory of cooperative economics

This is just glorious from Red Ken:

Livingstone is confident he can offer cheaper energy to Londoners by exploiting a Transport for London contract which allows it to buy energy at "half the price" of a domestic consumer.

"So we will be just buying more energy and then selling it on at a much cheaper rate than the energy companies do it," he said.

He insisted there was no restriction in the contract over how much the energy companies could sell to the transport body, which falls under the Greater London Authority and is the city's biggest purchaser of energy.

"TfL has got a contract to purchase this energy at half the price a domestic consumer does," he said.

Isn't it wonderful how people who have never run a business seem to think that running a business comes with no costs? Leave aside the details of the specific contracts, whether the energy companies would complain or not. Here's what's going to happen then.

The electricity will arrive at a substation somewhere on the Tube network. Ken's new cooperative now has to get it from there, back onto the distribution system of the grid (for which yes, you do have to pay access fees). They've got to market this new system to electricity consumers (coming soon, Ken's 'leccie chuggers outside every Tube Station, why not?), check that they've got the money to pay for it, monitor how much of it they use and then collect the money from them for having done so. Then chase the bad debts.

Presumably there will have to be in there some people to make sure that they're, minute by minute, buying enough wholesale power to supply their retail customers as well.

Oh, and they're going to do all of this with civil servants and bureaucrats and do it cheaper than all the other companies already in the market. Yes Siree Bob.

You see, here's the thing. All those other companies are already buying electricity at wholesale prices then paying the costs of delivering it and getting paid for it retail. That's what they do, that's the business model. And Ken's lot, with no experience, no capital, are going to do it better and cheaper than the participants in an already cut throat marketplace?

No, of course they're not and not even Ken believes they will. This is just a rabbit pulled out of a hat a couple of weeks before an election by the likely to lose candidate.

At least I hope it is: God Forbid that Ken himself actually believes any of this rot.

What are we to do with our ignorant governors?

We face something of a dilemma here. For it's certainly true that we need government but it's also true that we need those doing the governing to understand the governing they're doing. And we have evidence that those we have at present do not.

This week ministers from across Europe are meeting to tackle a threat to our shared prosperity: the crashing price of carbon. The EU has the world's largest international emissions trading scheme (ETS). The amount of carbon that companies can emit is capped, and each firm has its own allocation of carbon permits, which they trade freely. Ultimately, cutting carbon can yield financial rewards.

But the price of carbon has plummeted. In 2006 a tonne would fetch around £28. Now – thanks to the downturn, and a glut of permits – it's barely £6. That's bad for the environment: when it's cheap to pump out carbon there's less incentive for firms to go green. But it's also bad for the economy, because it makes Europe less attractive to low-carbon investment.

This is entirely, gargantually, completely, the wrong way around.

Now let's not start with whether climate change is happening or whether we ought to do anything about it. Assume both for the moment. The EU has plumped for cap and trade as the solution: leave aside whether this is better than a carbon tax for the moment (it isn't but leave that aside).

Concentrate instead purely on the role of the price of the permit in a cap and trade system.

A high permit price is a bad thing, a low permit price is a good thing. Because the permit price is not the thing that is limiting emissions: we're already limiting emissions by the cap we have put in place. The permit price is instead the information of how expensive it is to limit those emissions. A high permit price tells us that it's very expensive to limit them, that we've got to give up much more of our wealth in order to save Gaia. A low price tells us that it's actually easier than we thought to lower emissions, that we've got to expend less geld in order to stop the oceans boiling.

So, what do our two rulers do when presented with the evidence that dealing with climate change might be cheaper than we thought? Insist that it must be made more expensive, that if it isn't painful it isn't working.

Err, no lads, sorry, you need to go back to the Janet and John book on cap and trade systems. Let Spot the Dog explain to you that low prices are good. And it'll have to be J&J for obviously Ladybird is too advanced for you.

Why we need to kill solar power subsidies right now

I've never been very taken with the arguments in favour of subsidising various forms of renewable energy. I've qlways far preferred the idea that if we really do have an externality in the form of CO2 emissions then the answer is a Pigou Tax on that externality and that will sort everything out over time. However, given the joy with which governments like to pick losers that wasn't an argument that was really going to work.

So, we've had subsidies for solar power. The argument being that they need a boost to get the prices down and then, eventually, solar will be cost competitive with other forms of power generation and we can abolish the subsidies. Which allows me to bring you tidings of great joy. The day to abolish those subsidies is today. Right now, immediately:

Two German solar energy developers are planning to build photovoltaic plants in southern Spain that will earn a return without government subsidies.

There we go, solar is now cost comparable with other forms of energy generation. Thus we could and should stop the subsidies immediately. For even if you do buy the arguments of the greenies, that a boost was needed to get the bandwagon rolling, well, it is rolling now and thus we can stop wasting money on those subsidies.

However, as Milton Friedman said there's nothing so permanent as a temporary government programme, so I seriopusly doubt whether anyone is going to take the success of the technology as a reason to stop subsidising the technology. Despite the point that we've already managed what the subsidy set out to achieve.