Government looking for a fight. Several fights.

Today we've seen two things that strongly suggest to me that Starmer & his strategists aren't just hanging tough on controversial issues, they are positively looking for a fight.  Indeed, several.

Exhibit A: the NHS. Starmer, in today's 'NHS' speech [1] -

... So hear me when I say this. No more money without reform. I am not prepared to see even more of your money spent ... That isn’t just solved by more money - it’s solved by reform.

This was reinforced pugnaciously by Wes Streeting on all channels, and of course we are absolutely meant to cop the headline aggression. 

Exhibit B: Net Zero.  Chris Stark (of whom you may never have heard, he's Ed Miliband's "mission control" for Net Zero) at an event today - 

"The government is very clear that it will cost too much" [2] to put new Grid cables underground. On meeting the Net Zero goal he was “not pissing about” [3]

More ostentatious headline aggression.  This is all of a piece with blunt pre-election announcements that Starmer & Miliband intend to steamroller planning processes that might delay their fatuous schemes for 100% decarbonisation of electricity by 2030 (and new housing, too).  In this they are taking on a vast constituency of nimbies - ably represented in many cases by their Green and Labour MPs! - who are dead set against the countryside being covered by windfarms, solar farms and swathes of new Grid pylons.  (And new houses, too.)

Now Machiavelli, as we know, strongly advocated the new Prince carrying out his unpleasant measures very early in his new regime.  This isn't just getting 'em in, it's positively relishing them; and it starts to make the Child Benefit Cap and the Winter Fuel Allowance look, not so much as avoidable early miss-steps, as part of the bar-room brawler's "Oi'll foight any t'ree of yus".  Or thirty million, it seems.

BTW, Old Nick also advised that it was better to be feared than loved ...  Hey, we can do the second part of that for you, Kier.

ND

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[1] In response to Lord Darzi - an NHS surgeon - publishing a report saying that the NHS needs, errr, a load of money.  Did someone say this is an "independent" report?   

[2] He's not wrong about the cost, of course.

[3] In that case, sunshine, why not aggressively tell us what we all know to be true, that our electricity bills will be going up?

"Affordable" as a theological concept: the Energy White Paper

As part of the usual service to t'readership I tend to offer a pre-digestion of big government reports like the Energy White Paper, published last week as part of a raft of important documents**.  This one, however, defies easy summary, except to say that the clue is in the name: Powering our Net Zero Future.  A big turn-off for some, no doubt: but that's where we're headed anyway, and I find it interesting to see how they go about discussing some of the challenges.

Actually, of course, they don't anywhere quite say this is going to be bloody difficult, if not actually impossible.  But for those able to read between the lines, there are hints enough in the veritable smogasbord (cliché ! - Ed) of interesting issues set out.  There's some intelligent work going on across a very broad front, most of which seems (on this evidence) to be fairly clear-sighted as to the difficulties involved.  

So dive in if you are interested; but I want to pick up on one overarching aspect.  The government claims to be most concerned that the costs of Net Zero to be borne by Red Wall voters the ordinary energy consumer are "affordable", a word that appears 19 times.  Sounds like an appropriate concern, right?  Well we may be glad they have it in mind, but I'm sorry to say, it's almost meaningless.

1. Electricity and gas (particularly the former; and also petrol / diesel etc) have such enormous utility value to consumers, we can - and are ultimately willing to - "afford" almost anything.  One of the clearest demonstrations is that literally no consumers - not households, not even industry - were militating against the old monopoly regimes for gas and electricity on the grounds of the prices they charged being too high.  Those monopolies were ended on wholly ideological grounds - albeit that the ideologues confidently and correctly predicted huge consequential price reductions.  Another is the amount of Duty heaped upon motor fuels.  Governments know they can stick almost anything on the price of such mass-consumed essentials, and we'll pay.  (Relatively easy to collect, too.)
   
2. Greens (and outriders such as the CCC) advance a quite different argument: "we can't afford not to" - meaning, the cost of not lowering our CO2 emissions would exceed the bill for doing so.  Some of them seem to mean this literally, i.e. to be understood in cash terms.  Others of them know that can't possibly be proved (even if it has the structure of a logical case) and mean it in some metaphysical sense, as if cost-incurring UK actions in 2021 will certainly cause the rest of the world to act so as to ... (etc).  Or perhaps in a weaker sense: if the UK doesn't take the lead in incurring such costs in 2021, it will let the rest of the world off the hook, and then ... (etc).  Who knows - it's theological stuff.
3. Lots of people of all stripes really like to believe another line of reasoning: it's "affordable" because it's an investment in another industrial revolution that will generate a surplus of wealth.  Again, this has the structure of a logical thesis.  But it's an absolute act of faith in the "WW2 US Economy" model.
4. Keynsianism, the weaker version of #3: we can "afford" to have men dig holes and fill them up again ... (as suggested here, in the context of energy, many times since at least 2014 and probably before)
   

Anyhow, the government has *affordability* on its agenda: and in practical terms we may hope this means they will - as the White Paper avers - ensure that contracts are awarded as competitvely as possible, a continuity / extension of the extremely successful CfD auctions of recent years; and hold Ofgem to their mission of beating up on the natural monopolies and suppliers.  Sadly, one can easily find some cases where the WP indicates they'll just be doling out largesse to chosen "(pick-the-)winners" - rarely a good idea.  Then again, these are mostly R&D-type efforts, one of the few areas where government intervention can sometimes genuinely pay dividends (for someone).

The really egregious stuff comes in the vexed area of nuclear power, which must demonstrate "clear value for money" (= "affordable", obviously), and that the industry can prove it is able to "reduce costs & deliver on time and budget".  Given all of recent history in the matter, will EDF be put off by these strictures?  Don't make me laugh - we already know the evidence-free, jesuitical arguments they will deploy on this one, when the time comes. 

ND

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** one of them details their modelling methodology which, they claim, generates 700,000 separate scenarios for 2050.  Call me lazy but I ain't reviewing that one ...

"Zero Carbon" and Finance

Anything as big as the "zero carbon" thing is going to have impacts on all fronts - which is rather the point, of course.  And while some firms and banks are revelling in the Keynsian decarbonisation / adaptation bonanza (as we've discussed here several times) there are plenty of negatives to be considered - and not just for German diesel manufacturers.  If we take the underlying phenomenon at face value, this rather odd article reckons climate change itself will bring about a major recession, or maybe even "the next financial meltdown".  Its reasoning isn't too subtle however ("natural disasters pose a threat to businesses"): and being RT it may well have misunderstood the publication it is summarising.  

I would, however, be interested to hear from the insurance industry - or maybe I've missed it (anyone got a good link?) - about how 2019-2020 weather etc ranks in their scale of problematic pay-outs, and how many more such years they can handle before rates really start to rise.  That could be an effective brake on business development, and once again will cause governments to be leaned upon to socialise the risks, which is becoming a habit - often a lazy habit - across several sectors of late.

My main interest in this area is rather different, however.  When engaging with financiers on big projects, I've always been struck by how much weight they put on the tail-end of a projected cashflow stream.  In my industry, 15-year finance is pretty much the norm for many classes of big asset, with payback targetted anywhere between 5-10 years.  When I first became involved, I was gobsmacked to find the banks demanding projections of project revenues out 40 years!  which only makes sense at all for a few assets - most will be finished at around the 25-year mark.  OK, a very long-lived asset might be seeking the very cheapest finance, and hence the discount rates being used will be very low ... but 40 years?!

And now, most western governments are positively targetting, and usually "legislating" (FWIW) for epic structural transformations a mere 10-15 years into the future, with further disruptions all the way to 2050.  Safe to say, there's virtually no asset, even a nuke or a pipeline with a putative 60 year life, for which serious projections could be made even as far as the magical year 2050.  And we don't even need to opine on whether this makes sense, or will succeeed.  They're doing it: that's all we need to know.

There are only so may ways this can go.

(1) the banks can admit their prior interest in the tail-years' cashflow was primarily academic, or just for icing the cake, either of which they can forgo if push comes to shove.

(2) with bugger-all visibility of business dynamics beyond 2035, a whole heap of potential projects (particularly "conventional energy") will find their cost of capital rising noticeably, all the way up to prohibitive; and a raft of these projects will simply not fly any more (just as many existing assets will become stranded by related phenomena).

(3) everyone will gang up on governments, demanding (yes, you guessed) the problem be socialised, probably with governments standing directly behind the debt servicing (as the nuke boys have been demanding for years).  Everyone will be wanting this privilege for everything that moves, most particularly the ever-widening category of what counts as "green" investment which, as we've pointed out several times in recent months, now encompasses "adaptation" projects (and for leftists, of course, includes projects that are part of the "just transition", = anything they fancy with plenty of unionised jobs involved, see the Labour 2019 manifesto passim).

This whole thing is of course entirely a self-fulfilling problem.  Doesn't make it any the less real.  You can see why the leftists and nationalisers have their tails up, just as do the putative "war profiteers" among the banks and the engineering companies for slightly different reasons.  (And the NGOs, the con artists, the kleptocrats, and doubtless organised criminals too.)  They can't all be right.  Indeed, as we've said before, they will be fighting it out in the trenches for the rightness of their own, very partial vision of this future.  And their hands on the pension funds ...

ND