Kalshi billionaires & the "predictions market"

As fans of open markets, generally speaking, what do we make of the soi-disant "predictions market"? in which the firm Kalshi has made paper billionaires out of its youthful founders (one of which is the youngest ever female paper billionaire).

Well, first of all, good luck to them: I assume their investors are consenting adults, hopefully with a brain cell or two to rub together.  Investment bubbles help make the world go around: where would we be for railways if there hadn't been an "irrationally exuberant" railway-mania boom in the 19th C?  Just so long as it is private cash, hopefully not pension money, that someone can afford to lose 

But secondly, this is just a slightly exotic betting platform with good PR, right?  And will they ultimately prove correct in that it's possible to "monetise every difference of opinion"?

A story.  At the back end of the 1990s when Enron had triumphantly succeeded (against strenuous opposition) in becoming a highly profitable market maker in all manner of commodity contracts that nobody except them thought was remotely possible - indeed, some academics declared was a priori impossible - a lot of people in the energy sector and much-larger financial / insurance sector were looking for the Next Big Thing to commoditise, create derivatives on, and trade.  I could tell you an amusing but irrelevant story about the attempt to do this with water: and at the time Enron went bust (2001) it had a clever plan, never realised, for doing it with property prices.  But the one that's relevant here is weather derivatives.

It's clear enough that a great number of companies and individuals often have something of value to them that is riding on what the weather will be.  Ice cream manufacturers, energy companies, holiday concerns both buyers and sellers, brides-to-be, county fairs etc etc.  They often buy insurance, from long-established specialist insurers.  So what?

Well, in principle we can identify all the technical factors required to establish financial derivatives.  Financial issues at stake in very large measure, impacting on a huge plurality of players.  Gains and losses related directly to uncertain but measurable outcomes.  Data on said outcomes that are objective and not open to manipulation or influence by the prospective winners & losers.[1]  So the weather-related derivative products were devised and a very large number of players from several sectors piled in with traders, marketing teams, software, complex stochastic analyses etc etc - all the paraphernalia of traded markets.  All these costly resources created, they sat back and started trading - mostly with themselves.  but surely, the genuine "natural counterparties" / end-users (entities with something at stake), the 'locals', the outright punters, would come along in due course?  What's critical in any such market is transparency (easy), clearing & systems, but above all else, LIQUIDITY.  

Well, nope: despite this huge global investment the weather derivatives market market never took off on anything remotely like the predicted and expensively planned-for scale.[2]  Why?  Because no bugger has any view whatsoever on what the rain is going to do next August 13th at noon, in any regions other than the Sahara or Antarctica (where there's no end-user business to be had).  Not even inveterate gamblers of the Sky Masterson variety.  Somebody may well have a horrible exposure to rain at that precise time, but no broker or market maker will be able to find anyone willing to take the other side of the bet - when there's a perfectly good insurance-based alternative.  (For those interested in the technicalities of financial risk management, insurance is a completely different paradigm to hedging, with different applicability.)

Why is this different to, say, the price of oil on August 13 next year?  Because there are very large numbers - sufficient numbers! - of people willing to take the other side of almost any number you care to put out there.  If I say $50/bbl, there will be loads of people with theories that say it'll be less, and loads who'll say it will be more.  The proof of this is the liquidity of the forward market for oil.  And any number of other commodities, as well as financial variables altogether more abstract.  Ditto big sporting events.

But weather?  Nah - or so it turns out.  Could this have been foreseen?  Some folks did, and saved themselves a bunch of time, money and effort.  But no so many.  Meanwhile, the perfectly healthy weather insurance market continues on its merry way.

So: a market in differences of opinion?  Well, sports and political betting are well known to be ultra-fertile ground for these things[3].  But if Kalshi is to break into new territory, it seems to me it needs to think of something a bit more interesting than "Will Trump attend another UFC event this year?" - and a heap less open to, *ahem*, manipulation.   (Guess who might be taking the other side of that bet?!  I think we can fairly be blunter: that kind of thing is really, really crass.)  

Nobody can rule out Kalshi actually finding a rich new seam of prospective punting.  But (a) this is a crowded field, and (b) it won't be hard for a load of other players to pile all over it.

Did I say "paper billionaires"?  They'd better try to cash out PDQ - as regards young(ish) female billionaires, I suspect Taylor Swift is the more solvent ...

ND

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[1] I am not interested in entertaining conspiracy theories about how weather data is systematically manipulated  by the Deep State or the Green Blob or whatever.  Obviously, forecasts are forecasts, and weather forecasts are substantially better than forecasts of commodity price & other financial variables forecasts which are seriously manipulated by vested interest all the time. 

[2]  Some AI disputes the notion that it never took off, suggesting it's a $25bn market.  That's derisory.

[3]  Is it unkind to laugh at Alasdair Campbell's son's sure-fire sports-betting syndicate?

Cost of Sizewell C, part 2

Part 1 was a qualitative summary of what the SZC deal looks like.  It isn't difficult to find more exact details - Mr W has provided several links & AI will yield more - though history suggests almost anything with a £ sign or a timeline will necessarily be a wild guess.  And even when apparently tied down contractually, EDF shamelessly just asks for more money / time whenever it feels like some, as the Hinkley Point experience amply demonstrates. 

We now turn to the questions posed in Pt 1.  

Why SZC's "identical design" won't cost less than HPC 

We've heard this story before: HPC would be a doddle, because Flamanville and Olkiluoto had blazed the trail for the EPR design.  But of course neither of those was remotely complete & commissioned before work started on HPC, so there was a distinct dearth of Lessons Learned from the outset.  Also, both had started development before Fukushima, so there were always going to be new considerations to contend with.  But EDF persisted with the "cookie-cutter = cost savings" promise: so now SZC will be even easier, even cheaper!  Nowadays, of course, with HPC being a complete fiasco in project management terms, they blame it on the UK regulators moving the goalposts / Covid / inflation etc etc.  Well, all those things to some degree[1]; but how about several outright, scandalous EDF failures along the way?  To give but one example: they failed to make an adequate geological survey of the HPC site, and thus missed systemic faulting in the bedrock.  Result: epic additional quantities of additional concrete being required for the foundations, and at least a year's delay.  There are several more examples of this kind which EDF - & HMG - find it convenient not to mention.  And it ain't gonna change: EDF is not remotely as competent an engineering concern as it ought to be, or as it claims, or as many would like to imagine.  

The other important factor to register is that the challenges for nuke projects on this scale are, in detail, very heavily site-specific.  It's not too much of an exaggeration to say that every big nuke is almost sui generis.  It's absolutely clear, for anyone following SZC in detail over the years as I have, that the Sizewell site poses a load of different engineering challenges that need to be addressed piecemeal.  And again, EDF has been doing this incompetently or, as many believe, deliberately skimpily so that it could keep down the early cost estimates and reveal the "unexpected problems" one by one over the years, thereby "excusing" the relentless increases in budget and timetable they'll drip-feed onto us.  To give just a few examples, of which 2 & 4 are outrageous:

1. HPC enjoys the benefit of an already-existing, conveniently close-at-hand dock for the import of very large items.  Sizewell does not.  SZB utilised a temporary jetty during construction: EDF has shilly-shallied about whether they need to do the same this time around.
2. Access to fresh water (needed in large quantities both during construction and in routine ops thereafter) hasn't been a big issue at HPC.  It's a massive issue in parched East Anglia, and the SZC plans approved by HMG (under the Tories) don't include a resolution of this issue.  (The Planning Inspectorate declined to approve the plans accordingly, but were over-ridden.)  We may be sure that whatever solution they come up with, it'll add significantly to the budget (or dumped onto general water bills!).
3. Faulted or not, there was at least bedrock close to the surface at HPC.  But just under half of the SZC footprint lies on a former marsh (a small river delta) with bedrock very far below surface level.  The piles that will need to be sunk will be very extensive and costly.
4. The coastline of Sufolk is subject to serious, constant, millennia-long erosion patterns - as eny fule kno.  Right now there is a shifting sandbar directly offshore Sizewell which has been protecting it for several years.  But it's on the move, and that protection won't last the 135 years (sic) that the site must cater for, such is the way decommissioning works for UK nukes [2].  So (a) the concrete platform on which SZC will be built, needs to be much higher than that of HPC: and likewise the sea wall.  Additionally, (b) there is a really obvious possibility of sea encroachment inland, on the north flank of the site (the marshy side - that old river inlet): the RSPB which manages that land reckons it'll happen within 50 years at most.  Experts have long told EDF they need an extension of the sea wall to the northern flank accordingly, as well as on the (east-facing) seaward side.  But only the latter is in the approved plans and the publicly-announced cost estimates.  Additionally, in the aforesaid 135-year timeframe, inundation of the whole area is inevitable, so a full operational plan is required for the contingency of the entire Sizewell site - SZA, B and C - operating in 'island' mode on its concrete plinth.  Again, this isn't in any published plan.  Diligent investigation by campaigners has recently revealed that EDF have known about this all along, and do in fact have unpublished "supplementary" plans for all of it.  But of course none of this features in any public "budgeting" or cost projections.
5. etc etc - I could go on.

Against all these cost-boosting special features of SZC, what are the much-vaunted cost savings we may expect from EDF?  Well, they sure ain't going into mass production for EPR reactor castings: they've vowed never to build another one after SZC.  Recently, EDF proudly announced - and the government proudly re-announced it - that they'd be re-using some rubble from a grubbed-up part of the SZA site, in the foundations of SZC.  Well pardon me if I'm less than bowled over by this astonishing feat of saving tax-payers' money.  

What else does all this leave us with?  Several things:

• As mentioned before, the government is clearly desperate (they know wind + solar + batteries won't suffice) which, coupled with the endless willingness to be bullied by the French[3], is a recipe for bad deals at the start of the piece and non-stop piss-taking by the French thereafter.  It's exactly what's happened with HPC, is still continuing with HPC, and has been happening thus far with SZC.  Why would it stop?
• Even if we reckon the SZC deals are struck and definitive now, think of the scope this cost-plus arrangement gives France to pass through, well, anything they think they can get away with onto the "Sizewell C" account!  Accountants are good at providing "alternatives" when it comes to cost allocation ...   Sizewell B costs;  general EDF engineering charges; "management fees" (much beloved of all "related-party" arrangements when one player pulls all the strings). etc etc.  Now EDF retains just 12.5% equity in SZC, so on any cost that would otherwise be for EDF's own account, but that its accountants reckon can be passed through the SZC books, EDF sees at least a seven-eighths reduction, or more: and that's if it's borne by the equity.  To the extent it's passed through on the cost base or the appalling overrun indemnity scheme, it could be anywhere up to a 100% reduction.   Moral hazard, or what?  
• One last thing: surely, you may say, there are audit rights for HMG to stop any such hanky-panky taking place?  Doubtless, this is true, in that the contracts presumably say so.  But here's the thing: when the astronomically-subsidised Drax was caught (by the BBC!) playing silly buggers with its fuels reporting, and was forced to admit to Ofgem and DESNZ that it didn't have adequate data to account for everything it was self-certifying, it got a rap over the knuckles (£25m penalty) but nothing more.  MPs clamoured for full audits to be conducted of everything before a penny more in subsidy was paid to Drax - we are talking billions, after all.  But at the Select Committee hearing, both DESNZ and Ofgem stated clearly that they had no resources to check everything Drax tells them in its self-certified reporting on its complex fuel-sourcing operation. 

Why do we imagine that with this new, multi-billion subsidy arrangement for another operation of enormous complexity, EDF won't be able to rely on the same shameless, shoulder-shrugging insouciance from DESNZ and Ofgem that Drax seems to enjoy.  Too big to fail - and too big to audit!  

What other reasons might there be for the charade?

There's a longstanding thesis, much peddled by the SPRU team at the U. of Sussex, that the unspoken motive for UK 'civil' nuclear policy is cross-subsidy for our military nuclear programmes.  This once seemed more of a conspiracy theory than it does now: read this, from Kier Starmer just last week - his "strategic steer to the nuclear industry".  

... Nuclear technology is vital to our country’s economic growth, energy security, and national defence. It delivers reliable, low-carbon electricity and supports our nuclear deterrent ... We are building on this legacy with clear commitments on the future of our nuclear deterrent, our submarine programmes, Sizewell C and the SMR programme. 

Surely, the only intended readership for this bellicose Starmerite "strategic steer" is one V.V. Putin.  I rather doubt L'il Volodya is quaking in his boots.

ND 

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[1] As blanket excuses go, Covid is particularly open to challenge.  Building works were never subject to lockdown, the reasoning being they are outdoors.  I know a great deal about another large construction project which was comfortably able to speed up its project schedule and reduce its costs during Covid, when (a) various restrictions arising from the need to work around nearby sites of regular employment were lifted, because these other sites were now shut down; and (b) labour costs came down because many construction-related trades found that much of their regular work dried up.  OK, maybe (a) doesn't apply so much in the middle of Somerset: I'm just saying "Covid" isn't a free pass on costs and schedules.   

[2] The way we decommission nukes in the UK involves taking away some of the radioactive stuff upon cessation of ops, then sheathing and just turning the keys on the rest of the site, walking away, waiting for cooling down & the half-life effect (venting into the atmosphere, BTW) to reduce the radiation enough for final clearance.  SZA is in that state right now; also HPA.  2160 is accepted by EDF as the relevant date for SZC.  There's no chance the Suffolk coastline stays as it is for that long: and some extreme scenarios suggest 2190 would be the date.

[3]  I mean, what else can they do to us?  Take even more of our money and do even more nothing about the small boats - check.  Be even more beastly to us over any attempt to engage in ordinary trade & diplomacy with the EU - check.  What favours are we buying when we give them everything they ask for on HPC and SZC, with fat cheques included? 

Sizewell C - what'll it cost us? (part 1)

Spoiler alert: nobody knows; and it's not clear anyone cares who has agency in the matter[1].  We've written about aspects of this any number of times - see the tabs below if you're interested.

Recap on Hinkley Point C:  granted a long and very flexible CfD (there's an extraordinarily lax backstop date for start-up, which the government glibly extended when EDF requested, so it can't be reliably built into system planning - which negates the supposedly vital aspect of "reliable baseload power" which is nukes' raison d'être) with a handsome, index-linked strike price.  It doesn't even compel EDF to build the thing at all ! The one aspect that might have been seen as in our favour is that EDF bears 100% of any hypothetical the absolutely inevitable monstrous cost overrun.  But even that is irrelevant because again, when asked, HMG just gives them more money.

SZC:  EDF nonetheless vowed never again to do another nuke on HPC terms (wonder why..?), requiring instead that they be shielded from almost all construction cost risk[2], but again with no meaningful timetable for completion; and that they be funded throughout construction, even if over-running[3].  They also demanded their ongoing costs be met via the electricity price after they (hypothetically) commission the damned thing - it'll be something like a CfD with a rolling cost assessment setting the strike price: though for some reason HMG et al are loathe to use the CfD / strike price nomenclature.  Oh, and EDF have successfully demanded hard cash - billions - upfront from HMG to fund "development work" prior to taking the decision to go ahead, even after having said it'll be the same design as HPC AND they'd been working on it for 10 years already.

This subsidy approach is being delivered via a variant on the Ratable Asset Base (RAB) approach, beloved of US utilities for decades, the Thames Tideway Tunnel, LHR T5 etc etc.  Bottom line, we all get to pay in installments, starting right now.  Remind me again, when will it start up?  Say after me: Nobody Knows and Nobody Cares. 

Why was this agreed?  The ostensible reasons are:  (a) the nuclear lobby has persuaded successive governments we must have more nukes;  and (b) "it's much cheaper this way" - a material portion of the total HPC cost is financing charges.  [Why can't French-government-owned EDF finance more cheaply than the UK government?  Very good question.  Always bear in mind, though, that for the French the Whole Point of HPC and SZC is as part of their grand strategy to get other nations to contribute to their humungous nuclear liabilities - see this post from 18 years ago.]  

Oh, and over & above this notional cost saving via lower financing costs (real enough, if you accept the premise), they also promise cost savings via the cookie-cutter effect, because SZC will be the same design as HPC.  We return later to this delightfully simple notion confected for simpleton politicians.

You can readily research for yourself that when the damn' thing inevitably overruns its "budget" (hah!) the taxpayer + billpayer combo picks up most of the tab.  So what, then, are the incentives on EDF to keep costs down?  Errr ...   Seriously, this is a massive and excellent question we'll return to next time.

Here's the thing: in having thus devised featherbedding that's comfortable enough for feeble, state-owned EDF to be willing to go ahead and build the thing, it's equally attractive for other investors, who are joining the fun and taking equity.  Centrica et al are anticipating low-risk, double-digit returns in return for stumping up their own capital.  [HMG is taking some equity: but why not all of it, HMG with its even-lower cost of capital and endless ability to dump costs on bill payers?  Another good question - to which the answer is presumably: they don't like it appearing on the Treasury's books.] 

Yes, folks, it all smacks of desperation.  And there's nothing you can't (/ won't) do when you're desperate and you can write cheques on other people's accounts.

Coming next:  

• why SZC's "identical design" won't cost less than HPC
• what else does all this teach us?
• what other reasons might there be for the charade?

ND

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[1] Curiously enough, some of the people who care are (a) several of the rather diligent French authorities, and (b) the French unions.  They are ignored by the French government.

[2]  The HPC contract already substantially shields EDF from the risk of costs rising because of changing safety regs etc.  Obviously, the cost increases EDF wants to be protected against are those resulting from their own bad decisions, flawed engineering, poor project management etc - which have been legion at HPC. 

[3]  Most householders know you don't pay your builders up-front without stern performance conditions.  Of all the companies not to trust with this, EDF is up there with the dodgiest cowboys in the construction market, as all experience shows.  Never will the government be able to say "how could we have known..?"

Budget chaos - open thread

First things first: Jim wins the compo for most correct guesses at Budget content - by a decent margin, too.  Well done that man.  A (very temporary) job awaits you in Whitehall as official Reeves-whisperer.

The OBR-induced chaos is all very odd.  FFS, Reeves leaked half the Budget, in detail, yesterday - the 'final final' leaks, which once would have been anathema to Parliament and MPs' privileges on being first to learn these things, once jealously defended, not least by successive Speakers.  Hugh Dalton felt obliged to resign in 1947 for less (though some suggest the skids were under him already, and he was glad of the pretext to go).

Anyhow: obviously in the circs, Reeves / Starmer felt they couldn't do anything other than play to their own back-bench gallery.  Feeble politics though it is, I think we all understand.  How much time does it buy them?  Maybe enough, actually:  it might be nicely judged for that specific audience.

On the energy front, the EV levy was inevitable and we may expect it to rise over the years, to replace fuel duty.  (Did any EV user ever imagine otherwise?)  I'm interested in 'pay per mile' - does this mean they are tracking vehicle movements (like Musk and the Chinese do), or is it a self-declared matter on the income tax form?  I would have thought 'pay as metered' would be better - seeing as how smart meters can supposedly detect and discriminate different types of load.  But maybe home charging would represent an easy dodge, even with an SM.

I haven't yet seen the trailed shift of 'green levies' from electricity bills onto general taxation: and I believe they've ditched the idea of scrapping VAT on energy.  Will update when I find out.  Anyhow, it's pretty clear they've completely given up on the £300 bill reductions that were to be achieved via "cheaper renewables".  Not before time: Miliband really does have to ditch that crass rhetoric once and for all, and stop making his DESNZ officials parrot it every time they are asked about bills.

UPDATE:  here's at least part of the energy thing which, I reckon, needs more detail to make total sense of: 

She told the Commons: “The Conservatives’ ECO (energy company obligation) scheme was presented as a plan to tackle fuel poverty. It costs households £1.7 billion a year on their bills and for 97% of families in fuel poverty, the scheme has cost them more than it has saved. It is a failed scheme. “So, I am scrapping that scheme along with taking other legacy costs off bills. And as a result, I can tell you today that, for every family we are keeping our promise to get energy bills down and cut the cost of living with £150 cut from the average household energy bill from April. “Money off bills, and in the pockets of working people. That is my choice ... Not to leave working families to bear the brunt of high prices, like the Tories did. But to get energy costs down now and in the years to come.

So, yeah: no contribution from "cheaper renewables" (- how could there be?)  And on a quick calc (£1.7bn across approx 20m households), that's only £85.  So the remaining £65 must come from some other levy-tweaking.  We need yet another update.

UPDATE 2:  yes, it's a direct transfer of subsidies from bills to general taxation: easy when you know how. 

Energy costs will be reduced by the ending of the Energy Company Obligation, which is currently funded through bills, and through the government funding 75% of the domestic cost of the legacy Renewables Obligation for three years. This is on top of extending the £150 Warm Home Discount to a further 3 million of the poorest households.

So: 150 + 150 = 300 & they'll say they've delivered the £300 reduction promise - for "the poorest households", that is.  BUT, as I keep saying, Mili's manifesto claim was that it would be delivered by cheaper renewables!

UPDATE 3:  the EV tax - eVED - is indeed on a self-certify basis.  It is assumed that the 'honesty' rate will be 98.5%, based on the 1.5% default rate on VED.  Hmm.  That surely has to be optimistic: people pretty much expect to have their number-plate checked by ANPR these days, but who imagimes HMRC will check their milometer?

Have at it all in the comments.

ND 

Sizewell C post ... coming soon

As we await the Budget: our learned visitor Mr Wendland asked for a post on SZC and its subsidy regime.

I've done the reading, sir, and it's a-comin' soon ...

ND