Green Energy Day. Eventually.

Oh, what sport!  Is it to be Green Energy Day in a field somewhere?  No, it's to be Energy Security Day in industrial Aberdeen.  Oh, no wait, it's Green Energy again - in a nuclear fusion lab.

But are nukes green, as the French desperately (really desperately) want the EU to declare, or are they nasty old 20th century heavy industry?  HMG itself is out to consult on that question too: ministers are hoping a lot of ESG money will come swinging in if it's *serendipitously* concluded nukes are green.  Meanwhile, maybe nuclear fusion seemed suitably whizzy-hi-tech-future-ish and, well, green-ish, for the purpose.

Ironically, it's also a rather good metaphor for something costly that never actually arrives ... 

I haven't had a chance to read yesterday's monster documentation, so I'm afraid the usual C@W precis service is somewhat delayed.  Have a good weekend, all.

ND

Future of the UK electricity "market"

BTL on the last thread, Clive triggered some comments with: Renewables are rocking da house. And negative prices! So, while hydrocarbons will linger around for a while yet, they’re obviously not indispensable and are, arguably, definitely in run off;  followed by Anon: Interesting points being raised by @Clive on negative electricity prices due to generation imbalance. Perhaps another thread on suggestions on how to use up all the surplus power when its available e.g. pumped storage. 

So here we are.  Nobody quite knows the future evolution of the UK power fleet, seeing that the government is willing to throw really quite serious money these days - plus various threats of compulsion - into a range of energy-related options (nukes of various sorts, CCUS, hydrogen, EVs, HPs), some of which frankly look like backing several horses in case one or more turns out to be totally lame.  You can pretty much suspend the laws of physics for as long as you're willing to throw enough money at it - and certainly the laws of economics.  Also, they've allowed themselves some very prudent opt-out language in case this isn't working: for example, there's a 'security of supply' override on the 2035 'net zero carbon electricity system' deadline (which means it's just a target / aspiration).  And there's no date on ending sale of gas boilers. 

But some things we can say for sure.

1. there is absolutely no end in sight for dependency on natural gas
2. the cost of generating electricity to meet demand securely will rise
3. global anthropogenic CO2 emissions haven't peaked, and won't peak for a very long time (if at all) 

There's no point that I can see in banging on about 3, in the context of dealing with what's before us.  Anyone who thinks the global "drive to net zero carbon" (qua western-governmental policy) can be halted by blog discussions hasn't understood the force of politics behind it (as a policy).  As I first wrote in 2019, it's 100% mainstream now, including the entire banking sector, and most of industry, which expects to benefit from a whole new era of state handouts under various headings, always the source of revenue requiring the least effort.  Nothing to do with Greta, BTW, and everything to do with Business.  

So: back to 1 & 2.  It's entirely likely that the annual average amount of gas actually burned will remain on a decreasing trend, with total "renewable" electricity generated rising.  The final demise of coal will extend current levels of gas burn a while longer, simply by displacement of said coal.  But that's not the point.  Mention of pump storage - including SSE's new project - is fine and dandy but, like batteries of the present technologies, UK pump storage supplies minutes-worth, or maybe hours-worth of standby electricity capacity: important for micro-balancing of grid operations (for frequency stabilisation etc) but broadly irrelevant in terms of dealing with long periods of no wind.

But that means maintaining a lot of expensive stuff on standby, specifically, gas-fired electricity generating capacity AND the entire infrastructure, physical and commercial, to ensure gas will be available when needed.  That's easy enough** when (a) it all exists anyway; and (b) there's strong reason to believe that residential gas demand will continue for a long time at roughly the present level, even as UK industry slowly transitions towards electrification, hydrogen, or an early grave, a.k.a. further offshoring.   Keeping stuff hanging around mostly idle doesn't cost nothing.  Just like paying windfarms to stop generating; bringing ever more sophisticated batteries into the fleet; building vast new infrastructure to accommodate new windfarms; etc etc.  

But what of negative (wholesale) prices, increasingly a feature of most electricity markets?  Easy.  They are negative for just a few hours, just as they go wildly high for just a few hours (or longer ...).  It's volatility, that's all - and tells you nothing about the average price which, as I've asserted, will rise and rise.  And what do we know about volatility?  It's like a heartbeat: too low and it signifies death - but too high, and it's a Very Bad (and costly) Thing.  Or (to switch useful analogies) like friction:  too low, and you'll slide all over the place.  Too high, and you're seriously (and expensively) inconvenienced.

We hear endless chatter, mostly from the EU (though Will Hutton is egregiously stupid misinformed on this also) where ignorance about markets is a dominant strand in public life, about "decoupling" the price of electricity from the price of gas.  What do they mean?  Well, initially they "meant" nothing more than "we've heard renewable electricity is cheap, nay free - so why has the retail price gone up?" - an expression of pure ignorance.  More recently, they've been gently steered towards something meaningful, indeed, logical - i.e. thinking about a more widespread deployment of longer-term financial hedging against electricity price volatility.  There's nothing remotely new about this: any party that feels uncomfortable being exposed to price fluctuations should go for a fixed price!  If this is to be achieved via extending the market for 'renewable PPAs', i.e. fixed priced electricity sales contracts (or more likely CfDs) offered by renewables developers - compulsorily?? brokered by regulators?? - then so be it.  I'm not sure many industrial companies will enjoy the fixed prices on offer: that's another matter entirely.

But it does bring us back rather neatly to point 2 above.  Whether it's the average of volatile wholesale prices, or fixed-price PPAs, the price of electricity will carry on rising - long after Putin has been put back in his box.  That's what happens when you move to an intrinsically more complex and basically entirely new way of running an entire, very large, industry.  All at once++.  Across a very large part of the world economy.

Doesn't mean it can't be done.  Does mean it's gonna be expensive.

ND    

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** It'll be a lot more difficult without a base level of residential gas demand  

++ People who pretend otherwise  - and there are many - are like those who said Brexit would boost the UK economy.  I write as someone who voted for Brexit.  But I never thought it would be anything other than costly.  

Xi highlights Putin's pipeline predicament

Russia's massive oil, & particularly gas exports have always mostly been via pipeline: ice-bound sea ports speak to that.  There's some LNG - with liquefaction courtesy of western technology, but pipelines are the big game.  So when Europe stops buying, and Putin has only a small outlet direct to China, the income largely stops.  And if, as he's been using every opportunity to signal, he's in for the very long haul vs Ukraine, there it rests - and it's gotta hurt, economically - until a big new pipe to China, "Power of Siberia 2", can be built.  

And Li'l Volodya was hoping to confirm that deal during this week's Xi visitation.  Even then, his exports to China could only reach around half what he's been selling to Europe, by, errrr, 2030.  Maybe.

But.  In keeping with all the body language showing clearly who's boss in that rather functional and one-sided relationship, Xi wasn't playing.  The best announcement Russia felt able to make on PS2 was minimal and pitiful.  We know the score.  Xi is gonna drive a Very Hard Bargain Indeed, from which Russia won't be getting anything close to half the revenues it once enjoyed from Europe, even if they manage half the volume.  Yes, China has brutal form on this one.  Nice to know who your best friends are, eh, Vova?

So, living off scraps it'll have to be.  We all know Russians can do this, and suffer long.  They can't be 'defeated', as such.  But it's not much of a strategic argument, is it?  You can't defeat me, so you'd just better give me everything I want.  Hmmm.  Maybe even the new 'multi-polar world order' doesn't work quite like that.

ND  

Banking Crisis - again ...

Commodities down on banking stress

Here at C@W we pride ourselves on having spotted the "2008" banking crisis in the summer of 2007, when two German banks went down, followed by Northern Rock - all three being canaries in the dank, dirty coalmine of culpably fatuous and irresponsible banking strategies being practised deep underground, that turned out to be systemic.

So what's happening now?  It doesn't look good.

• Silicon Valley and Signature
• Deutsche Bank (again) and Credit Suisse
• risk to economic recovery due to reduced bank lending
• likely response of the authorities: back to QE! (interest rates coming off already ...)

Thus far, the current banking woes have been accompanied by a pronounced downtick in commodity prices.  If, on the basis of economic contraction, that persists then maybe inflation doesn't just take off again with QE ... and people are forever pronouncing on the Chinese property market ... but I'm no good at predicting these macro phenomena.  (What's more, I don't know who is.)  Are you out there, CU?!

ND

Budgetting for defence & deterrence

There was a Labour Chancellor, Hugh Dalton, who took the view that his purpose at the Exchequer, like that of the treasurer of a club, was simply to come up with whatever money the committee decided it needed for its purposes.  I don't know if Ben Wallace considers what extra dosh Hunt has found for defence spending as adequate: but at least the reportedly immediate £5bn has been correctly allocated: £3bn for something-or-other "nuclear", and £1.9bn for replenishing ammunition stocks. 

Never has the wisdom of retaining a nuclear deterrent been clearer.  NATO studiously avoids anything that represents a genuine nuclear-escalatory threat to Russia; and, equally clearly, doesn't have the will to generate the scale of conventional forces required to deter Russia by the latter means alone.  (Views that Russia has no designs on anything outside the borders of the Russian Federation look a little silly now: and the fact they'd get a bloody nose is obviously nothing that worries Putin: he has been vigorously doubling down** on bloody noses for 12 months now.)  Conversely, behind its own nuclear shield NATO is doing a great deal to incommode Russia materially.  Of course the exact status of the UK's deterrent vis-à-vis independence is a vexed issue - but for another occasion.  The basic point stands.

Financing costly nuke-related stuff has long been shrouded in fog.  The diligent chaps at the SPRU at Sussex University have long maintained that the whole point of the apparently bottomless government support for the UK's "civil" nuclear industry is to subsidise the military nukes, and they may very well have a point (though personally I reckon Keynsian job creation explains quite a lot, too).  Rolls Royce probably didn't endear themselves to HMG when their initial sales pitch for SMRs said as much.

One current and rather high-profile thrust of UK defence policy is the new AUKUS thing, which is also in the news.  I can't help wondering whether this is as much as anything to come up with a rationale for the ridiculous new aircraft carriers Gordon Brown saddled us with.  What a git that man is.  A bigger waste of money is hard to envisage (would the Aussies like to buy them?) and, as we've said before, naming one of them Prince of Wales was presumably some bright spark's brutal / witty way of underlining the point.  It says much for the total lack of knowledge of history these days, that nobody put a stop to that little piece of devilment.

ND

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 ** OK, sometimes this is useful shorthand.  Sorry about that.  But no leaning in or curating, I promise you. 

Open Thread: BUDGET DAY

Any signs of an Actual Strategy that we can see?  Or is that too much to expect?

ND

Natural gas as a feature of Putin's war

At the very start of Putin's war, I asked: What plans does Little Volodya have for his [natural] gas weapon?  (day one, 24.02.22)  Well, to his utter astonishment - and mine - we in Europe have managed a whole (exceptionally warm) winter without it, and gas turned out to be not the crucial geo-political trump card he quite fairly assumed (even if this is partly down to the ignorant nonsense that we don't actually need gas, peddled by greens and swallowed by many).   We went on:

Ol' Uncle Joe Biden said something at the weekend rather bellicose about Nord Stream 2 but I kinda doubt he has in mind blowing it up, easy and rather satisfying though this would be (there's a James Bond film involving a Russian gas pipeline, as I recall) ... Which leads us to consider a Big Accident. If there's too much high-explosive shit flying about in Ukraine, well, all that infrastructure is really quite fragile (although not too difficult to repair). Quite a big chunk of Russian exports still transit Ukraine, albeit NS2 is designed to put paid to that. Who knows what any number of rogue actors might think of doing in that very large country, in the fog of war? There are plenty of people who could profit handsomely from a Big Accident...

So now we have a new Nord Stream theory being widely bruited about: it was Ukrainians wot did it!  Let's see what evidence transpires - we've had enough quite evidence-free echo-chamber speculation for my liking already.  As you'll gather from the 24 February 2022 quote above, I'm not averse to a Rogue Actor hypothesis.  There are plenty of rogues, with plenty of money and complicated interests, in the world of Big Gas.

One thing I will tell you: there's almost no chance of anyone finding a smoking gun irrefutably in the hands of the Kyiv government.  With 100% certainty, we may be sure that Rule No.1 laid down to Zelensky by Joe Biden 12 months ago, will have been No Surprises.  And - can Zelensky get by without US aid?  I don't need to answer that.  So, let the wild speculation continue.  On the stopped clock principle, somebody's guess will turn out to have been correct (my money has switched from Soros to the military wing of Greta & the Greens). 

On the subject of Big Gas actors, they don't come much bigger than my old friends at Gazprom.  We hear that Gazprom is being encouraged to set up a 'private military company' on the Wagner model, but inevitably on much more Kremlin-friendly lines.  

Why?  Easy: Putin needs to harness all the local competence he can find; and Gazprom has plenty of competent people, well versed in mustering big efforts for big projects.  And, needless to say, they are part of the Kremlin elite (indeed, one of its paymasters).  If you're simply thinking like, perhaps a Shell or a BP - engineer-heavy companies stuffed with men-of-the-world with global experience of managing complex affairs - well, that's a fair starting point: but Gazprom has traditionally engaged in the practical world with even broader scope.  Not only do they have their own bakeries,  as I described here some years ago, they have schools and hospitals, AND an armed service, complete with AFVs.  

How come?  Because Russia is a big place (until 1990 it was even bigger) and the further you get from Moscow, the more you need to deal with local warlords of the Kadryov variety.  And Gazprom has always needed to do business far and wide.  Collecting money from a distant райо́н is often as difficult for the Big G as it was for the Tsar's tax farmers in earlier years, or the Golden Horde's tribute-gatherers before them.  The arrival of the men from Gazprom in a small armoured column is often how the matter is handled (as noted here 15 years ago). 

And would you rather be on the payroll of a Gazprom motor rifle regiment, or one of Wagner's cannon-fodder 'musicians'?

ND

Sue Gray: more trouble than she's worth

The old troublemaker

We should probably get this in quick before Kier Starmer retreats behind procedure and un-invites Sue Gray to be his chief of staff, a contingency that must be on the cards given the very weak ground they are both on.  At best, the precedent is that she'll need to wait a year before taking up the appointment, which pretty much sanitizes her usefulness for the GE.  At worst, the move will be ruled against.

What's the attraction?  Maybe her reputation as a sea-green incorruptible?  Hmmm.  She puts me in mind of Alexander Solzhenitsyn - best admired at a distance.  He was a troublemaker in Russia; and he wasn't about to change his spots when he was expelled from the same and lived in the west.  

Sue Gray will either cause trouble for Starmer now, or (if she makes it aboard his ship) when in post.  Probably seemed like a clever idea at the time: but a bad decision.

ND

To Hull in a handbasket: the perils of monopolies

A most unlikely anomaly persists in the area around Hull.  Uniquely in the UK, it evaded liberalisation of landline telecomms - a sop to John Prescott? - and its municipally-owned telephone network, Kingston Communications, persists as a local monopoly.  It's always claimed the locals are "proud" of KC and their crap cream-coloured kiosks - which, bizarrely, have now been granted Grade-II listed status.

I say 'claim' because in point of fact, the locals despise KC and its utterly useless landline services, telephone and broadband.  If it wasn't for the fact that everyone has mobile 'phones these days, somebody would have demanded it get fixed long since.  Such is the fate of local monopolies, or indeed any properly contestable service, that local authorities get involved with - see Bristol Energy, Robin Hood Energy (Notts), Together Energy (Warrington), not to mention Croydon's ridiculous essay into building and property speculation, and Thurrock's ruinous solar farm ventures.

It reminds me of a conversation I had, many years ago, with a bright junior member of my staff who was (is) of Indian heritage, and who would periodically return to the subcontinent to see relatives etc.  After one such trip she said to me: "You need to take an internal flight to see some of my family.  There's only one airline that flies there, and the tickets are very expensive.  It's odd, because with no competition and high prices, you'd think they would put on a really good service - but it's rubbish!"

I was able to enlighten her on, *ahem*, the Ways of the World.   She went on to become a well-known TV personality, and I imagine that by now she'll have amassed plenty of personal experience to ratify the truth of what I told her.

How many times do these simple lessons of practical capitalism need to be learned and re-learned the hard way?  

ND

UPDATE: Jim (BTL) gives additional detail: KC no longer owned by council

A simple truth

The other day I was reading something (which annoyingly I can't find now) that quoted the heroic JK Rowling as saying that the whole point about the Harry Potter books was that, whatever you think you know, you should be careful - because a lot of what passes for true, including commonly held 'truths', is nothing of the kind.

This brought me in mind of Hillary Mantel's epic Cromwell trilogy: I have always thought her major point is very much the same.  Cromwell frequently finds the public account is not to be trusted.  There's a classic, if trivial instance of this - I suspect injected into the narrative mainly to make the point in isolation - when Cromwell has to overnight somewhere as part of a mission to treat with (IIRC) the ailing Catherine of Aragon; and he sleeps with the landlady of the inn or whatever establishment he stays at.  By the time he returns to Austin Friars, the very next day, a largely untrue account of this is already currency.  Which makes the point fairly forcibly.

We have an example of this at home right now.  For several months last year, someone I know was on a selective diet for various reasons, which caused him to make requests of hosts and hostelries etc at mealtime.  It has now firmly become part of "what his friends know", that he has a gluten-intolerance.  But it never was!  And he wasn't avoiding gluten during the period of the diet, and never needed to avoid gluten, either - it was quite different ingredients being steered clear of.  It's just that (I suppose) most people have only one way of filling out "special dietary needs", and that's gluten-intolerance.  And that's with the best will in the world!  No harm or thoughtlessness or anything else intended.

There must be a dozen ways in which mere mortals are systematically prone to getting the wrong end of the stick.  How much of what is recorded in history is only vaguely right, or even just plain false?  And how did it get that way?  Obviously, sometimes it will have been the result of a purposeful effort to re-write and falsify history: George Orwell writes about that kind of thing at length.  But just as often, if not more, I suspect it will be because of something far less malign.

One last example:  a few years ago there was a little local project to bring to the surface a Spitfire that in WW2 crashed in a local public open space.  It had attempted a forced landing and hit the deck relatively gently, upright, on the flat.  And there it lay, slowly sinking beneath the grass as undisturbed things do - for 60 years!  It turned out, some of the oldest local residents - when prompted - remembered all about it.  Well you would ... wouldn't you?!

Aside from the frankly unexpected aspect that neither the RAF nor any enterprising scrap merchant had thought to take it away when it was still squarely on the surface** (it wasn't a war grave or anything like that - and this is the Home Counties, not the Cairngorms); it neatly illustrates how very straightforward facts, even apparently quite striking ones that you'd think would be accurately lodged, can simply slip from view.  Be careful what you think you know ...

ND

(PS: I have a little bet with myself now as to what might happen BTL ...)

** This practice (or non-practice) of leaving stuff lying where it fell was endemic for years, and not just in wartime when sheer numbers of crashed aircraft might account for it.  In the 1970s I visited an active RAF station where, in a remote part of the estate (i.e. NOT the fire dump) like the skeleton of a beast in the desert lay the remains of a crashed De Haviland Vampire, left to disintegrate and sink into the grass where it had come down.  It had been there for 20 years.