Bishop Hill The lights may stay on, but the economy may go out
May 1, 2013 Energy: grid Peter Atherton, the head of utilities research at UK broker Liberum Capital has issued an extraordinarily damning assessment of UK energy policy. The good news is that he reckons the lights may not go out. The bad news is that he thinks that this will be because of a "huge spike" in energy prices. This will of course extinguish much of the UK economy.
Here are a few of the highlights in the report.
UK energy policy is not plausible...
The Energy Bill ...effectively re-nationalises the investment-making decision process in the power sector. But it is not clear that policy makers yet appreciate that this also means that the risks and costs associated with these decisions must also transfer to the public.
...we identify a number of possible triggers [for a crisis]; a generation capacity crunch in the 2014-17 period leading to a sharp spike in power prices, a lack of dispatchable generation by the end of this decade onwards, and spiralling consumer costs/developer profits that a future government will find untenable.
...political risk looks certain to rise sharply in the UK energy space in the coming years as the implausibility and contradictory nature of policy is exposed by events. We welcome recent moves by both Centrica and SSE to take a more cautious approach to allocating capital to UK renewables. UK utility stocks have benefited in recent years by being viewed as having relatively low political risk, this may well change in coming years. Most exposed will be Drax, SSE and Centrica.
UK energy policy is effectively a massive long position on the oil price i.e. if the world does indeed face sky high oil prices in coming years then the policy will be seen to have worked. But even if this bet proves correct will we see much benefit? The answer is probably not unless the rest of the world follows the UK’s lead.
The idea that the Energy Bill transfers risk from the private sector to the taxpayer is a new one on me. The explanation is in the body of the report:
The government will replace the existing regime with a Contract for Difference (Cfd) mechanism. This new mechanism will very largely transfer the price risk from the developer to the consumer by guaranteeing an achieved power sale price for each power station covered.
As every banker knows, transferring risk from the private sector to the taxpayer is good for business but bad for the country and the taxpayer. For the government to go down this road again could therefore be seen as criminal.
Reader Comments (54)
May 2, 2013 at 9:08 AM | Don Keiller
Childish, I know, but highly satisfying:-)
Don - I have done the same in the past - you are a man after my own heart
According to Mr. Entropic:
And if they are not, in fact, on a long-term rising trend. Then the consumption of oil and gas will have to be suppressed, won't it?
Didn't warmism take over from depletionism when some in the environmental movement began to fear that depletion might not be happening—at least not on a pace that would suit them?
Deprivation has been the goal all along.
I do not want to return to a 1930s standard of living. I missed it myself. but got graphic descriptions from my parents.
Unfortunately I see it as an inevitable consequence of our short-term approach to energy and resource management. A 21st century western lifestyle cannot be kept up for long on what we have available, especially if 7-10 billion people all want to live like us.
Energy is available. Look at the US fracking revolution. The only thing that will require us to return to a '30's standard of living is stupidity. Unfortunately, there is no shortage of that in the US, the UK, Europe or Asia. Building a mixture of the most efficient coal, nuclear, and gas plants would allow all of us to have adequate, reliable supplies of energy at reasonable (not cheap) prices. Over the last 40 years, the cost of energy has necessarily increased a small amount to cover the hidden cost of pollution that was ignored or not appreciated early on in the industrial revolution. However, even once necessary pollution abatement and reasonable safety requirements are included, energy does not have to be so costly that it is unaffordable.
However, every penny spent on wind or solar energy production is a penny that must be added (for no rational reason) to the cost of the goods or energy we consume. The only return our societies will see from the entire enormous investment made in so-called 'green' energy is a repeat of the lesson that a 'fool and his money is soon parted.'
Because of the profligacy in other areas of our governments we cannot afford the waste of our dwindling capital on technologies (i.e. wind, solar, biofuels) that were obviously not going to do the job of providing reliable energy at a reasonable cost. The one thing that is not sustainable is "sustainable" energy. In a decade, or less, wind and solar power will only be remembered as another object lesson of the folly of central planning.
I fear that we will return to a standard of living of the '30's (or worse). It will not be due to the lack of potential sources of energy but of a lack of common sense among our ruling elite. Foolish energy policies based on corrupt science are only one of the idiocies threatening our society but it is one of the most obvious.
It will matter little to our descendants living among the ruins and telling stories of how good life used to be what the cause of the collapse was. I will paraphrase Heinlein and say that the natural state of man is abject poverty, suffering and want. Occasionally, a small group of men create a society where better conditions prevail. The mass of mankind attack their benefactors and return humanity to their more common situation of misery. This was, he said, called 'bad luck.' It will not be bad luck, a shortage of resources, natural laws or population growth that will condemn future men to a return to suffering and savagery.
It will be our own stupidity that will do it. Our stupid refusal to teach our masters, the mob, enough science to understand how the world really works and the self control to match their desires to our possibilities. Our stupid willingness to allow the worse among us to control our government in return for little more than trinkets and promises. Our stupid desire to find simplistic solutions to complex problems. Our stupid attempt to always get something for nothing by stealing our neighbors labor rather than laboring ourselves, The list of 'stupid' goes on but the results are already apparent if you look around you. I commend the Bishop for attempting to stem, in one area at least, the flood of stupid that is overwhelming our society. I don't think it will change the outcome however.