Wednesday 2 October 2013

Energy Policy: Omnibus Post

(Catalysed by comments from Timbo, BQ and BE in last week's Climate Crisis thread here.  Several of the topics below have been covered in C@W before over the years but I don't have time just now to do all the links.  Maybe later ...)

For most of the time we are all capable of sailing serenely on in ignorance of how fundamentally our world-views differ from those of others; but once in a while the chasm is illuminated by a bolt from the blue.

One such event happened last week, when Miliband launched his 'energy price freeze' policy.  I and many others in the 'sphere and MSM alike immediately clapped our hands to our heads and proclaimed, that's it ! - he's completely lost it, and shot himself in the vitals on prime-time TV to boot.  We clearly thought the lunacy of it would be obvious to all.

But not a bit of it, because the reaction of other commentators was: a price freeze - so what ?  No big deal, even if it's not something we particularly applaud; and anyhow, the energy companies had it coming. 

In other words, there is no general consensus or shared understanding on some pretty basic energy market concepts.  So here are some responses to the interesting exchanges between Timbo, BE and BQ.  I'm going to focus on short- / medium-term, (say, out to 15 years hence) because the really long-term stuff is unknowable, thanks to technology shifts we can barely guess at.  (In which latter category I place Timbo's fascinating comments on electricity storage, the Holy Grail of energy policy which would transform the landscape.)

The paramount fundamental is that electricity has staggering high 'utility value', i.e. people (in developed economies) will pay almost any price to get it.  Second only to food, for most people.  (Water comes third because you can generally makes your own arrangements, up to a point.)  By this standard, as Timbo wrote, " cheap the grid is.  It's dirt cheap".  And when people will pay almost any price ... things can go horribly wrong.

Notwithstanding various developments in micro- and distributed-generation, and predictions of more to come, the kind of electricity and energy we all want - permanently available, in bulk, almost everywhere we go, and relatively cheap - requires centralised 'organisation' (grids, despatch and balancing systems), if not actually 20th-century style centralised generation.  And this isn't just power for domestic use, schools and hospitals: as BQ said, "you can't run a blast furnace on wood".  The saintly George Moonbat tried very hard to run a self-sufficient smallholding in Wales, and just about managed OK for a couple of years until he had a bad winter - after which he suddenly became a convert to nuclear power.

It used to be thought (and still is, in some dark quarters) that only centralised ownership, or at least centralised control, could deliver the goods: but this was comprehensively disproved in the UK and other regions with the advent of full bilateral (self-despatching) markets at the beginning of this century, which not only confounded the statists dirigistes by working at all, they worked better, and reduced electricity costs as their proponents (incl. yours truly) said they would.  Even the Labour Party still signs up for this, (see Caroline Flint on Brillo's Sunday programme: and the changes that brought it about in in the UK 2001 were put through Parliament by Mandelson) so dissenters are up against it politically.

But there are problems.  Firstly, bilateral market structures, though basically robust, are vulnerable to large-scale interference by the heavy-handed and dull-witted.  This includes many politicians and almost all civil servants.  In particular, there is a limit to how much ill-considered (indeed, sometimes actually infeasible) 'decarbonisation' policy can be loaded onto a market framework without it buckling.   Of course, in this country the rot started under Miliband lui-même when in power - oh the irony - but has been further perpetrated here by t'Coalition (and on an even more manic scale in Germany).  

(As an aside, the chronic state of our Heath-Robinson energy policy makes it very easy for any politician to score a few easy and populist points against it.  That Miliband is the first one to do so on a grand scale, is just hilarious.)

The second point is that those bilateral market structures are relatively new and by no means perfected, even before they started to be messed with.  In particular, (a) liquidity in some parts of the power markets, here and elsewhere, left quite a lot to be desired.  Liquidity, for those who don't have an instinct for it (this includes many politicians and almost all civil servants ...) is absolutely vital for markets to deliver for consumers. Ofgem, which had this forcibly brought to their attention nearly a decade ago, has been farting around ineffectually on the issue ever since.

(b) A related point: the state of competition is unsatisfactory.  There is no reason why the current UK  'supply' set-up - 6 massive players plus a host of lesser ones - shouldn't make for a competitive market.  It is, in fact, more competitive than many people give it credit for.  But there's a damaging, mutually reinforcing effect at work:  unsatisfactory wholesale liquidity makes suppliers migrate towards vertical integration (i.e., becoming generators as well), which further reduces liquidity ... etc etc.  

[To illustrate: Centrica set out in 1996 intending to be a capital-S Specialised Supplier (of gas and power), with no power generation at all and limited gas production of its own (the 'merchant', or 'Enron' model).  But over the years, they found liquidity in the wholesale markets less than satisfactory.  So they have slowly become more and more vertically integrated, to the point where now they have about 75% cover for their supply obligations from their own 'upstream' assets (power plants, gas fields and some large long-term purchases).  This means that, where once they were trading in the wholesale markets for almost all their needs, they are now only trading for 25% (net) of their needs, plus some spec trading etc.]

Two dreadful policy decisions have gravely exacerbated this situation.  The first was to allow large-scale vertical integration by acquisition.  This was of course re-integration, because throughout the whole of the 1990's, Ofgas and Offer (the worthy predecessors of Ofgem) had been preoccupied with breaking up the old verticals (themselves the products of the two big privatisations of the 1980s).  The worst examples of vertical integration by acquisition were (1) Powergen's purchase of Eastern Electricity and other UK assets, followed by E.on's subsequent purchases of both Powergen here and Ruhrgas in Germany; (2) EDF's purchase of British Energy.  These should have been stopped by UK and EC regulators - not because vertical integration is intrinsically wicked, but because the markets weren't sufficiently liquid at the time.  (In fact, truly liquid markets make vertical integration a very dubious commercial proposition - which is the virtuous-circle side of the liquidity picture.  We are stuck with the vicious circle.) 

The second disaster for the liquidity/competition downward spiral is the manner in which decarbonisation is being pursued.  In the UK this means the ridiculous 'Electricity Market Reforms', which - take it from me - undermine liquidity still further, even as ministers and Ofgem continue to pay lip-service to the need for better liquidity.  It's hugely perverse, because several critical aspects of EMR are wholly dependent on there being deeply liquid markets in existence.  They will fail miserably, and piecemeal government interventions of the most grotesque kind will result - the civil servants can hardly contain their excitement at the prospect.  And they will probably keep the lights on, because we can and will pay (see above) - almost any price.

Which brings us back to Miliband's 'price freeze'.  I've banged on too long already to dissect this in detail.  Suffice to repeat: it's bonkers, it's a cheap populist shot, and will have negative consequences far outweighing any limited relief it may deliver to consumers.  Interestingly, in answer to Brillo's questions Caroline Flint (who, it must be said, was quite well briefed) quickly mentioned the really significant new Labour policy, which is to re-introduce something akin to the 'Pool market' (i.e. an end to the bilateral / self-despatch system) which was how things were run here in the 1990's.  It wasn't a disaster, but it was definitely very inefficient.  And - oh, how these things go full circle - it was dreamed up by Oliver sh*t-for-brains Letwin ! (Who still hankers after it, I can tell you, as do civil servants and all the old CEGB dinosaurs.)

Is that enough to be going on with ?   (Too much ! - Ed)



Blue Eyes said...

Thanks for the namecheck :-))

I find all this fascinating. I am not entirely sure why - I have never actually worked in the energy industry. I think it may have been because I was born into a strongly Thatcherite home and invested some pocketmoney in the National Power/PowerGen privatisation. I must have been about 12...

Anyway then I followed things in the business sections and remember the discussions about whether vertical integration should be allowed.

I think in retrospect not, and one of MiliE's points was that he would row back on it which I found ironic for the reasons you mention and vaguely encouraging. Vertical integration should not be a problem for competition in a market where a newcomer can enter relatively easily. Can someone quickly build a new power station if returns get perky? If bloody only!

I want to ask a deeper question. Why do administrations end up with so few members who understand the very basics of business and competition?

Timbo614 said...

Hi ND, Well I've read it 3 times and think I am getting the gist of marketeers who need a liquid market, generators likewise and the vertically integrated who don't because they generate their own or 75% of it and so visit the market less often... and decrease the liquidity because they withhold their capacity for their own obligations. Something that I now understand better - thank you:)

As for Ed Millivolt well yes it just a putting off of the inevitable rises that would come later and in a surge that would probably blow a few fuses! As an aside I'm wondering what happened to Camerohms "cheapest tariff for all". Seems to have lost its power source somewhere.

But I think BQ and I were discussing, or differing, on the fundamentals of the oil-energy age and if not its end, then the obvious effects on food of say $200 and above oil. We all know what happened last time it was $140. So maybe we are too reliant on it. We should be thinking and planning now for ways of growing, travelling etc without it or with a good deal less of it. That's where localism comes in.

Also WHY do we expect continuous always available electricity? probably for TVs, computers and phones. Lights are nice too! But the power requirements of all the foregoing are reducing quite quickly (Flat screen TVs, LED lights, processor/circuitry miniaturisation), leaving us really with the heavy lifting of space heating, hot water, washing machines, cooking, hoovers etc. These things are not being made more efficient very quickly. But one thing they do have is a choice of when to use them. Storing hot water for instance is pretty much the same as storing the power to heat it, hence the attraction of solar (flat plate) hot water rather than PV. If every one had just that, around 30% of water heating power (gas or lecky) would be saved.

People will have to become more efficient in their use of power. It sounds like my parents from the 60s I know, but leaving 60 watt light bulbs on in empty rooms and similar waste must become a thing of the past.

Nick Drew said...

BE - it doesn't matter so much when they made sure the few qualified ones get the jobs (see my old story about Eggar)

but the modern career politico is generally useless (there was a wonderful cartoon in the Graun a while ago starring Gove, who was begging to be allowed to fly a fighter-plane to save the nation against extra-terrestrials, based on the fact that he had strong opinions on aliens and once wrote leader-articles on defence)

the only careerist I've met who was really good was, as the blog suggests, *ahem*, Mandy

(but that in no way redeems his manifold sins and wickedness ...)

Timbo - glad you got something from it !

the subject of the extent to which localism / self-sufficiency is the right answer, is one that I used to debate endlessly here with our old friend Sackerson (we now do it over a pint ...)

I am 100% with you on encouraging efficiency & eliminating needless waste: but remember Loverlock's wise words - civilisation is energy-intensive, and some of what can be described as waste by a swampy-green who doesn't mind living in a cave, could also be described as 21st century civilisation by others

accurate (and spiky !) price signals have an important role to play in squaring this circle via market mechanisms

and I really believe in free trade, which 99% of the time is definitely the most efficient way of allocating scarce resources (despite what Budgie says about johhny foreigner being untrustworthy when it comes to trade at critical moments)

[old story: the USA is short oil and has a surplus of food, so it very wastefully turns corn into fuel; the Saudis are long oil and short food, so they very wastefully turn oil into food (via desalination); and the better answer is ...]

but I still don't have an answer on 'what is the optimal degree of self-sufficiency'

it's a bit like 'what is the optimal height for a dyke in Holland' - do you build for the 50-year wave, or the 100-year wave ? because the extra cost of the bigger dyke is very great indeed

andrew said...

One small issue:

"In other words, there is no general consensus or shared understanding on some pretty basic energy market concepts. "


"In other words, there is no general consensus or shared understanding on some pretty basic market concepts. "

There. Fixed it for you.

Demetrius said...

Have just blogged today, Wednesday, about Miliband's dad, it's where he gets his bonkers from.

Sebastian Weetabix said...

Hmm. Personally I hanker for the CEGB days, when we had an excellent robust grid with plenty of reserve capacity. Nowadays I am not at all sure we will be able to cope with a truly difficult 1947 or 1963 winter; there isn't enough slack in the system.

Of course back then it was all run by engineers, not fuckwits with PPE degrees who weave yurts out of their own pubic hair.

DJK said...

> civilisation is energy-intensive

Indeed. For my own amusement I calculated the per capita energy usage of GB in 1900 (based on domestic coal consumption) and compared it to the most recent figure I could Google. 1900 and 2006 energy usage was virtually identical, cause that's just what it takes to live a civilised existence in these damp, crowded islands.

Nick Drew said...

Thanks, Andrew !

Demetrius - and I have dropped by chez vous with a comment

SW - you are not alone in your hankering, but I am not with you ! robust, yes - but I think it still is: and it was definitely gold-plated, to a grotesque degree

most of my first-hand detailed stories of outrageous gold-plating relate to British Gas (as was, in monopoly days) but I have no doubt whatever the CEGB was just as bad

what engineers get up to, armed with a monopoly over something for which everyone will pay any price, is disgraceful (actually, what anyone gets up to in that position is bad...)

that is a truly fascinating exercise you've conducted, DJK - would you care to elaborate for us ?

Sebastian Weetabix said...

@ND -we don't have a free maket in energy anyway, it is just a govt (mis)directed shambles. I merely suggest we do it properly if that is the route this country wants to take.

Demetrius said...

Nick, ta, replied to comment to the effect that we had gone from Liverpool by '38 and glad of it.

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