Shale and the Price of Gas

When push comes to shove, people really don't understand markets very well. Perusing the increasingly lively meeja coverage of putative shale gas in the UK, we find people who say shale discoveries will bring down the price of gas, and seemingly even more who say it won't - including, remarkably enough, the shale gas lobby itself. Wishing, I suppose, to be cautious in their claims, some of them say the effect will be minimal.

At a meeting for concerned residents at a potential fracking site in West Sussex, a Cuadrilla representative was asked to comment on whether shale gas could drive down customers' energy bills. “We've done an analysis and it's a very small…at the most it's a very small percentage…basically insignificant,” said Mark Linder, a public relations executive at Bell Pottinger who is also responsible for Cuadrilla's corporate development. (Inde) 

Some PR he is, eh? At least he didn't say prices would go up, though we may be sure that in due course someone will - the whole renewables policy is a massive bet on this. The argument seems to be that under EU trading laws we'll be 'forced' to sell it to the wretched continentals, (read: they'll offer to buy it, and if the price is right we'll sell it !), thus neutralising any tendency to lower UK prices. (Even Peter Lilley seems to be willing to concede this.)

Let's put some perspective on this.

• in 1994 a relatively small gas surplus in the UK brought down the price of (wholesale) gas by 60% in 8 months - and it stayed down for 5 years 

• it went up again when in 1999 the UK became connected for the first time to the gas networks of the continent, where gas prices were higher - set by oil-indexed gas contracts. The quantities of gas being exported from the UK that effected this price-shifting arbitrage were relatively small (indeed, on a net year-round basis, extremely small, as UK gas was exported in summer, but there were imports from the continent in winter) 

• European gas importers still paying oil-indexed prices (to Gazprom, Sonatrach et al) have been seriously hurt as spot prices have once more fallen, based on another relatively small surplus stemming from the 2009 industrial downturn. (In consequence they have forced Gazprom to reduce their prices.) 

• US gas prices have been absolutely trashed by substantial amounts of shale gas, and have stayed low despite warnings for several years that this can't go on. Of course, as yet they are only able to export very small amounts of the net North American surplus (the US is still a net importer, from Canada). 

So: gas prices like other prices, as any fule kno, are frequently set by marginal effects, and move in the predictable direction. Surplus => down, just to be clear ... If there is any economically recoverable shale gas lurking there, its directional impact on price is not in doubt. If and when it is produced in fair amounts (say, equivalent to 10-20% of UK demand - a lot less than some predict will flow) it will have the potential to impact on spot-gas prices not only in the UK but in Europe as a whole.

The absolute effect of this will hinge entirely on the detailed supply-demand dynamics of the time. This being a good few years into the future, we have no idea whatever what those will be. OK ?

PS: The Horizon programme on shale 'n fracking was fairly balanced and well done. It's on again this evening, and here.  


This post first appeared on the Capitalists@Work blog


All original material is copyright of its author. Fair use permitted. Contact via comment. Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog; or for unintentional error and inaccuracy. The blog author may have, or intend to change, a personal position in any stock or other kind of investment mentioned.

Small Electricity Suppliers Have No Right To An Easy Life

Ofgem, whose uselessness over the past decade is a disgrace to the excellent work done by its predecessors Ofgas and Offer in the 1990's, is at it again.

Britain's big six energy companies will face fines unless they open up the electricity market to competition from smaller rivals, under proposals by the regulator designed to "break the stranglehold" of the biggest suppliers.  (DTel)

The details of this are less dramatic than one might imagine: they intend to 'force' the biggest 8 generators (not just the 'Big 6') to become market makers in the forward market out to 2 years.  Since liquidity in the 2-year energy forwards is pretty unsatisfactory - and since that, in turn, is pretty damaging - no one can be happy with the status quo.  Ofgem have been farting around worrying aimlessly about energy liquidity for 8 years now and the only positive development has been the advent of hedge fund and PE money since around 2006 - mostly in the gas sector because electricity trading is fiendishly difficult.  On the downside, banks have been progressively scaling back their commodities trading altogether.

Of course, the real issue is that in the '00s, Ofgem and the competition authorities (against their better judgement but under instruction from Gordon Brown) allowed dumb vertical integration to take hold once more in the electricity market, after the successful efforts of 15 years to break it up.  EDF being allowed to buy BE was the final straw in the structural undermining of liquidity, a point I made at the time. The European authorities, who ought to be a back-stop against this kind of thing, were equally supine.

What I don't understand is why anyone thinks small, under-capitalised electricity suppliers have a God-given right to thrive.  This is the most capital-intensive of industries - whether or not a player intends to back ts energy positions with physical assets (power plants, gas production or storage facilities etc).  Even if they intend to operate on a 'merchant' model - just buying wholesale to meet retail demand - huge quantities of risk capital are required to back the big, long-term deals that are required for that business model.  That is the lesson of 'asset-lite' Enron:  it's a game for big boys with a credit rating of at least A, preferably higher.

What's needed is real competition between ten or so properly-capitalised players. Boutique energy marketing outfits with no credit won't be able to transact 2-year hedges anyway - unless the new 'rules' force the Big 8 to take the credit risk, the merest featherbedding.  Along with the free ride that is currently given to windfarms in terms of not being charged the full cost of their intermittency, plus a heap of social obligations as regards 'poor' retail customers, and even more nonsense contained in the Energy Bill, the burdens being heaped on the big players will one day make some of them decide it's not worth the candle.  Obvious candidates for giving up in disgust are cash-strapped RWE of Germany (nPower) and Spanish Ibderdrola (Scottish Power).  It's not too much of a stretch to see E.ON having second thoughts as well.

See how we like it when Big 6 becomes Big 3, eh?  No amount of flaky, subsidised suppliers called 'Nice Clean Energy' or 'Friendly Power' will help us then.


This post first appeared on the Capitalists@Work blog

All original material is copyright of its author. Fair use permitted. Contact via comment. Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog; or for unintentional error and inaccuracy. The blog author may have, or intend to change, a personal position in any stock or other kind of investment mentioned.

Utilities, Energy and the New Dirigisme

Once upon a time, oil was the only energy-source that enjoyed anything approximating a free market.  Gas and electricity meant monopolies or, if investor-owned, a regulated rate of return, steady but low.

Then came liberalisation, and gas and power took off as traded commodities in competitive market structures.  The sector divided into merchant (unregulated) activities and 'true utility' (wires and pipes, where so-called natural monopolies prevailed).  The trade-off for residual monopoly remained a more-or-less regulated, low-ish rate of return.  Some companies had characteristics of both merchant and utility in their portfolio; others had cleaner business models and were one or the other, with the utilities being conventionally viewed as annuity streams or 'defensive' stocks.

Endless debate ensues as to whether this can all work out as well as the open-market theorists claim: FWIIW, I am squarely in that camp, and the development of a global gas industry is its best evidence.  However, just as things were working out nicely in electricity too, along came the baleful decarbonisation agenda, and with it an avalanche of regulatory meddling.  The EU's Emissions Trading Scheme was an attempt to execute some of the new policy goals via market mechanisms, but as a result of various entirely avoidable errors it hasn't really worked.  So meddling it is.

There is a school of thought that goes: bring back the CEGB ! Advocates of this include those with no memory, who have forgotten just how bloated and wasteful it was; and also those with long and fond memories, who recall exactly how bloated and wasteful it was, and they loved every minute of it.

However, governments no longer have the money for this malarkey and anyway, outright renationalisation is (currently) not allowed in the EU.  So we get dirigisme on an ever more detailed basis, as governments seek to determine exactly what new power plants (and other infrastructure) get built, and where, and by whom.

Which finally brings us round to the challenges for the likely builders of said new kit, and for those who might be considering investing in them.

The energy companies have, over a relatively few years, learned to play the game quite differently to the way they conducted themselves from the 1990s onwards.  Instead of taking a professional view on, for example, forward energy prices and spreads, and making their investment decisions accordingly, they have decided it's easier to demand subsidies, 'capacity payments' and various other featherbedding guarantees before they will invest in, well, pretty much anything these days.

Like governments, many of these companies are short of dosh, and so they demand high rates of guaranteed return.  Like monopolies, governments know exactly who is going to pay for all this in the end: it's us electricity-junkies that have nowhere else to go (until we surrender to death by hypothermia).  So they make the necessary arrangements, via a plethora of subsidies and schemes, for guaranteed high rates of return.

Guaranteed high rates of return - what's not to like ?  Shouldn't investors be flocking to join the game ?  There are several schools of thought, all wrestling with the following polar considerations:

• People will always need electricity, the energy companies have governments over a barrel, and this isn't going to change any time soon; so back up the truck and enjoy it
• This new 'system' is clearly dysfunctional, with regulatory risk abounding, not least because government is taking powers to make the 'utilities' their agents, not only of investment but also every facet of social policy which has an energy angle

It's even possible to synthesize these points and argue, (as does Liberum Capital) that in the medium term these guaranteed returns look so good for the energy companies ("at a perfectly feasible power price, SSE would be seeing 33% annual increases in EPS towards the end of this decade"), they are bound to get slammed mercilessly when the whole game comes unstuck.

I always reckon that those who live by the subsidy, die by the subsidy.  But maybe there is good money to be made in the meantime ... what do we all think ?


This post first appeared on the Capitalists@Work blog


All original material is copyright of its author. Fair use permitted. Contact via comment. Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog; or for unintentional error and inaccuracy. The blog author may have, or intend to change, a personal position in any stock or other kind of investment mentioned.

Securing Energy Supply (4) - How Is It To Be Done?

"Safety and certainty in oil lie in variety and variety alone"

The reliable delivery of oil, gas and electricity represents a set of significant engineering challenges – but they have been solved.  However, disruptive and malign political forces are in play.  We have seen that the security and reliability of our energy supply is at the mercy of factors as mundane as strikes, protests and ill-conceived energy policy, as well as the more dramatic interventions of blockade, sabotage and war. A chilling prospect in every sense.

How, then, do prudent policy-makers go about securing our energy supplies ?  There are several tiers of defence and we will conclude this series by surveying the field.

Some reliability measures are put in place primarily against ordinary contingencies such as plant failure, extreme weather etc.   They may also serve against more sinister forces.

Over-capacity:  if one power plant in 20 is statistically liable to be out of order at any one time, there is a natural argument to have 21 or 22 plants in service.  Engineers being people who like building plants anyway, this solution to unreliability is very congenial to them, and when possessed of monopoly powers as many energy utilities used to enjoy, are inclined to follow this approach to excess.  Liberalisation of energy markets is characterised by reductions in the margin of over-capacity when economic factors start being given proper consideration: some assert this can go too far, a thought which we return to at the end of this piece.

Storage:  holding a strategic inventory of a vital commodity is as old as Joseph’s advise to the Pharaoh on how to prepare for the seven years lean.  This is easily organised for oil and coal; less easily for gas; and with currently-available technology near-impossible for power on any scale (aside from pumped-storage of water for hydro-electric generation where geology and geography permit).

Diversification:  as Churchill knew (see the quotation above), ‘variety’ or, as we would say, diversification of sources, is a key measure against insecurity of supply.  A century ago he was addressing the problem for the British Fleet, newly converted from coal-burning to oil, and relying almost exclusively on supplies from distant Persia.  Whatever the reason for having concerns about the reliability of any one source, it is a good idea to have several.  

The UK is among several European nations that have achieved a good measure of diversification in energy supplies, but several instances of risky concentration can be identified.  France is hugely reliant on its vast nuclear sector for electricity, and if there were to be a systemic problem (perhaps a catastrophic design fault) that caused their reactors to be closed, they would be in significant difficulties.  Famously, a number of eastern European countries are heavily dependent on Russia for their gas.

Interconnection:  when supplies are interrupted from one source it is important to be able to access as many other sources as possible.  For this purpose it is obviously best to be connected to as many other supply-chains as economically possible (a concept we shall return to below).  For oil this is generally very easy, as ships and trucks can easily be re-routed.  For coal it can be slightly more problematic, as there are many different types of coal, and coal-burning plant are often configured for specific grades.

Gas and electricity are restricted to largely static infrastructure.  Switching to an alternative supply route can be difficult, and is rarely possible unless inter-connections for the purpose have been built in advance of problems occurring.  The EC actively promotes developing new cross-border gas and electricity connections, and uprating existing ones, and European interconnection is improving all the time.

Free trade and other regulations: closely bound up with diversification and interconnection, anyone wanting to access an emergency source of supply (other than one they already own) needs to be confident that they can buy what they want from those who have it – provided they are willing to pay, of course. 

This requires a market to exist – which shouldn’t be an issue; but in gas and electricity, it cannot be taken for granted.  Even oil and coal have at various times not been fully tradable.  Gas and electricity were historically, though erroneously, viewed as ‘natural monopolies’, and anyone needing to buy (or sell) at short notice might have had nowhere to go.  In western nations, gas and electricity ceased to be statutory monopolies well over a decade ago, but in some areas there are distinct deficiencies in the workings of the ‘market’ – generally because of blocking actions by former monopolies who have lost little of their de facto dominance, and none of their overbearing arrogance.

Even where markets are working well on a good day (e.g. most of Europe), there can be issues when problems occur.  For example:  French regulations on ensuring the security of supply of La France used to be what many would deem to be irrationally strict; so that when a perfectly ordinary practical problem arose in the UK gas grid, even at a time when supplies were ample on the other side of the Channel, French operators would declare ‘problem ahoy’, and would start paying any price to fill their already well-stocked storage, safe in the knowledge that the regulators would endorse them passing through the costs of this fatuous operation to their customers.  What should have been a simple matter of UK spot prices rising to attract surplus gas from France and elsewhere, became a more serious problem than objectively necessary. 

Resolving this issue, while at the same time respecting every nation’s right to take legitimate security measures, has required harmonising regulations.  This can work well at levels where fairly effective supra-national bodies exist – the EU being one example.  Whether entities such as the WTO are genuinely effective for such purposes remains to be seriously tested.

Of the above measures, we can say that all of them are useful in times of purposeful external threats to security of supply, as well for dealing with run-of-the-mill contingencies.  Yet further steps may be contemplated against sinister possibilities.

Hardening infrastructure:  energy commodities being highly combustible and generally dependent on large, static infrastructure, they are perennially vulnerable to outright attack.  Most nations mandate at least some level of high security for these facilities, as inspection via Google Earth will readily confirm.  Since 9/11, ‘resilience’ measures have been stepped up considerably.

Diplomacy:  avoiding conflict always helps.  More positively, securing alliances designed to improve secure access to commodities is a major pre-occupation for many nations: the USA in the Middle East, and China in Africa come readily to mind.

Multi-national contingency plans:  following the AOPEC oil embargo of 1973-4, the International Energy Agency was given powers to mandate the holding of strategic oil stocks in OECD nations, and to direct the use of these stocks in emergencies.  The IEA’s direct interventions to allocate oil supplies during the embargo, coordinated in practical terms by Exxon, saved the targeted nations (in particular Holland) from even greater economic trouble than they suffered in the event.  

(Incidentally, in the mid 1990’s the IEA made a major study on how Europe would fare if ‘the single biggest source of supply’ – viz Russia – were to interrupt gas supplies for 6 months.  Even in those pre-market days, it concluded that with multinational coordination, no European nation would face complete ruin.  More than 6 months might have been a different story …)

Armed forces:  sometimes, passive and political measures are not enough, and the military may need to be deployed.  The navies of the trading world are, for example, constantly working against piracy in the Indian Ocean and elsewhere. More spectacularly, Western military interventions in Iraq have been attributed to the USA’s extended Middle Eastern oil policy – perhaps more easily asserted in the case of the first Gulf War than the second.

=   =   =   =   =   =   = 

The foregoing is a fairly pedestrian listing.  A more interesting line of enquiry stems from a simple classification of the various measures into two categories:  those which build towards self-sufficiency, and those which seek to make possible a system of mutual dependency.  In the former we would place over-capacity, storage, diversification, hardening, and armed forces:  in the latter, inter-connection, free trade, diplomacy, multi-national contingency plans and (to the extent we are part of military alliances) also armed forces.

There is a school of thought that values self-sufficiency above all other types of security.  In some spheres it may not be possible: for example, Belgium enjoys no indigenous natural gas resources whatever.  But in cases where it is possible, why would it not always be the solution of choice ?

The answer is that it might be much more expensive than mutual dependency – perhaps prohibitively so.  We hinted at an economic cost-benefit trade-off when speaking of desiring to be connected to as many other supply-chains as economically possible.

If there is an economic trade-off to be made, how might one decide an optimal degree of self-sufficiency ?  This important question is reserved for another day, concluding here with the observation that we need our politicians to make their judgements on security of energy supplies carefully: for civilisation is energy-intensive.

 

All original material is copyright of its author. Fair use permitted. Contact via comment. Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog; or for unintentional error and inaccuracy. The blog author may have, or intend to change, a personal position in any stock or other kind of investment mentioned.

Securing Energy Supply (3): Geo-political Threats in War and Peace

We have considered the interruptions to our energy supplies that can arise from the 21st century problem of intermittency of wind-produced electricity, and from the more traditional local threats of strikes, protests and other nations’ willingness to interfere with cross-border trade on protectionist grounds. But we remarked that, however disruptive these have been and can be in future, they are mere nuisances compared to the prospect of strategic geo-political actions taken with the deliberate aim of depriving us of the energy upon which our civilisation has come to depend.

At the most apocalyptic and obvious end of the spectrum is war.

By the time of WW1, oil had become essential to industry and naval warfare and, unlike the equally vital coal, was frequently obtained via lengthy supply chains with shipping often a vital link. Thus, blockading Britain’s supplies of imported oil, as much as food and metal ores, was a major strategic goal of German war policy and, as later in WW2, they came close to succeeding with their Atlantic naval actions against British shipping.  As late as the end of 1943 - even with the USA having been in the war two years - the UK almost ran out of oil.  Both nations put in huge efforts to build up oil supply networks, including innovative operational techniques such as the PLUTO system under the Channel to sustain invasion operations in Normandy.

For Germany itself in WW2, accessing oil resources became a primary early goal, and its thrusts into the oilfields of Romania, and then towards the Caucasus, were undertaken for this purpose.  When the attempts to take Baku failed, it was forced to go to extreme lengths to develop synthetic fuels and lubricants.  Both Speer and Eisenhower asserted that Germany lost the war primarily because by 1944 it was unable effectively to fuel its armour and airforce. On the opposing side Russia undertook extraordinary efforts to maintain constant supplies of oil to its fronts at Leningrad and Stalingrad, under the heroic engineer Nikolai Konstantinovich Baibakov, the Soviet Union's last living Commissar.  

Control over energy supplies – or their destruction - was a central aspect in many other theatres of 20th century warfare, and would be again in future. Oil has been and remains at least one critical factor in Western military engagements in the Middle East; and China is acutely aware of its own dependence on imported energy. Self-sufficiency in oil is a long-standing American obsession.

There is a sense in which the vulnerability of energy supplies was not very interesting during the Cold War, when both sides were able to project vast destructive power at a distance. So what if the USA was well supplied with local oil ? These supplies were still vulnerable to Russian attack, and vice-versa, with large and totally static targets such as nuclear power plants and gas pipelines still more at risk. In such a scenario, ‘self-sufficiency’ is more of a logistical detail than a strategic guarantor of continuous energy supply.

But with the advent of ‘asymmetric warfare’ which is likely to characterise future conflicts, the whole question becomes altogether more interesting. If your major foes are unlikely to mount a direct physical assault on your domestic supply lines - either because they do not have the capability [Iran], or do not choose to conduct hostile operations in that manner [China], then keeping energy supplies local may very well offer significant advantages compared to the vulnerability of more extended, external lines of logistics which can be subject to a plethora of debilitating indirect actions and pin-prick attacks.  An act of unattributable piracy here, a small distant pipeline rupture there ... much more secure if your supplies originate close to home, and travel short distances across friendly territory.  We shall return to self-sufficiency in the next post in this series.

If war seems an extreme contingency for energy planning today (and you'll struggle to find much evidence of it being taken into account in current UK government energy thinking), then we surely cannot fail to give serious consideration to the great external political threats that have actually impacted on Western energy supplies in the past few decades.  At the less critical end of the spectrum has been the collateral disruption inflicted on European customers for Russian gas whenever their disputes with the Ukraine spilled over into actual interruption of supplies.  These short-lived but uncomfortable episodes have always happened in winter, and have seen serious short-term disruption for Eastern Europe and countries such as Italy, whose winter gas comes significantly or perhaps entirely from Russia, and whose strategic gas inventories are rapidly depleted.

While few imagine this is anything more sinister than a rather casual Russian attitude to the consequences for innocent bystanders, it has caused many nations to maintain higher gas inventories than would otherwise be necessary for operational reasons alone, and has been one of the reasons why countries like Poland are working hard to diversify their sources of gas (there are other reasons at work, too.  At the same time it is fair to point out that Russia has made, and continues actively to make large investments on pipelines that outflank the Ukrainian problem, first to the North and then to the South: they have no desire to be known as a politically unreliable supplier.)

By far the biggest political assault on the West's energy supplies was of course the OAPEC oil embargo, the 40th anniversary of which will be upon us soon.  Explicitly a hostile geo-political move, it was directed against selected Western countries - notably the USA and the Netherlands - in retaliation for the support given to Israel in the Yom Kippur war.  This disruption over several months (long after actual fighting had ceased) was colossal: and the economic effects damaging and long-lasting.  Of course, it also resulted in various large-scale initiatives at the global strategic level to prevent or counter such actions, which we shall consider in the next post.

So geo-political threats to security of energy supply falling short of outright war have been manifest in the past, including once on a truly strategic scale with immense consequences.  If these things have happened before - particularly when the Big One was triggered by volatility in the Middle East, which is hardly ever off the radar - then prudent politicians and planners must contemplate the possibility they could happen again.  And they do.

In part 4 we will consider the steps that can be taken to guard against threats to the security of our energy supply. 

[ Continues ]


All original material is copyright of its author. Fair use permitted. Contact via comment. Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog; or for unintentional error and inaccuracy. The blog author may have, or intend to change, a personal position in any stock or other kind of investment mentioned.

Feeding Frenzy at the Subsidy Trough

The EDF nuclear subsidy game rumbles on with another batch of orchestrated leaks. The stakes could hardly be higher.

And haven't the lobbyists and briefers been busy ! How convenient that the Telegraph can always be persuaded to publish their radioactive releases. From the EDF camp, we learn that unless HMG comes up with the readies (well, forces electricity bill-payers to come up with the readies), not only will there be no EDF nukes for the UK, the Japs will pull out too - along with every potential developer of UK infrastructure ! “'No big infrastructure investor will ever trust the Government again' if that happens, is the bleak verdict of one industry insider" - quoth the ever-helpful Telegraph. The whippers-in have indeed been out in force. Every b*****d wants a monster subsidy: who'd have guessed ?

So stick that in your pipe, David Cameron. And not just lots of readies are required, mind - it must be a 40-year deal, and government under-writing for the capital costs, and indemnity for EDF on cost over-runs. And to think all they wanted just a couple of short years ago was a carbon-price floor (already long-since delivered and banked, of course).

The government side wants it to be known that, err, they are prepared to walk away if they can't get a 'good deal' - such tough negotiators, eh ? - and will certainly keep the nameplate price lower than £100/MWh. But we all know this is fairly arbitrary when 40-year indexed-linked games are being played, and so much is on offer by way of guarantees. "The truth is likely to become much clearer in the next few weeks", opines the Telegraph. How very trusting.

Whatever we get to know about the dirty deal, it will go straight into the long grass of an EC State Aid review, and there will be no binding commitment from EDF for, oooh, 18 months minimum. So - no start-up until 2022 earliest ? Which means in turn that all the practical problems of keeping the lights on post the LCPD shut-downs will have to be solved without new nukes. Which means ...

It was not always thus.  A mere decade ago there was a parallel issue in UK natural gas: North Sea gas production was forecast to decline to the extent that new import sources would be needed from around 2005. The UK government had played a clever strategic hand several years earlier, but otherwise stood back and let the market work. Sure enough, the companies that make up the UK gas industry invested in sufficient new import pipelines and LNG import facilities to replace the declining North Sea production entirely, if needed (which it won't be for several years yet). Invested. Their own money, with no subsidies !

They did so because (a) there was a clear business case, and (b) there was no hint that subsidies might be forthcoming if they just held back a bit. Happy days.

[This post first appeared on Capitalists@Work]


All original material is copyright of its author. Fair use permitted. Contact via comment. Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog; or for unintentional error and inaccuracy. The blog author may have, or intend to change, a personal position in any stock or other kind of investment mentioned.

Securing Energy Supply (2): Politically-Driven Disruptions

In the first part of this series we noted that the provision of oil, gas and particularly electricity, reliably and continuously on demand, is a considerable, if overlooked practical achievement.  We further remarked that the days when this can be taken for granted as regards electricity may be numbered in markets where significant amounts of wind-generated capacity are to be accommodated - and that if anyone doubts this, they are invited to follow developments in Germany as it struggles to maintain feasibility.

However, physical reliability is in the gift of the engineers, market-designers and policy-makers: if the populace wants it (and they really, really do), they can vote for it, pay for it, and it will be delivered.  We know what it takes and it is in our own hands.

What is not within our collective control is the political will of some to see our supply disrupted: and it is to security of supply against political contingencies that we now turn.

This lot like coal

Internal threats to energy security are not necessarily the main focus of macro energy policy, but anyone who lived through the UK miners' strikes of 1972, 1974 and 1984-5 will recall how disruptive they can be.  On this blog, Sackerson has drawn attention to concerns being raised in this connection arising from the Government's planned sale into commercial ownership of its Pipeline and Storage System, which delivers a significant proportion of the UK's aviation fuel direct to airports and military airfields, as well as much gasoline and diesel to various depots. The GPSS is fairly invulnerable to the periodic tanker-driver strikes that have bedevilled the UK - but how secure will it be in private-sector hands?

Nor are labour disputes the end of the matter.  In the period 2008-2010, 'green' protesters laid siege to a power plant site at Kingsnorth in Kent, with the aim of stopping the development of a new high-tech coal-fired power plant, and they can fairly claim to have been a major factor, if not the only one, in the cancellation of that project.  Hostilities resumed again last year, with the week-long occupation of a site in Nottinghamshire, to the end of preventing the commissioning of another new power station - this time a nearly-completed gas-fired plant.  These UK manifestations are nothing compared to the actions of German eco-warriors who regularly wreak havoc on all manner of electricity sector operations.

This lot don't

With an eye on the future, many commentators see great potential vulnerability in the 'smart grid' and 'smart metering' systems that are being planned in the power sectors of most advanced economies.  Designed to facilitate real-time information-flow and control across entire grids down to the level of individual meters, these systems are believed to be inherently vulnerable to malicious hacking for criminal or political purposes.

The kind of political purposes envisioned are generally held to be cyber-warfare waged by hostile nations; and in the same context, countries such as the USA prevent Chinese investors from taking stakes in energy infrastructure (and other deemed 'strategic' facilities).  The UK has a long history of being open to foreign investments in its energy sector: the greater part of UK gas and power supply is in the hands of German, French and Spanish companies, and Far- and Middle-Eastern investors hold many stakes in the energy industry here.  The question of our openness to Chinese and Russian investment is yet to be confronted in a specific case; but given that the government is actively courting Chinese investment (inter alia) in putative new (French-built) nuclear plants in this country, it would seem likely that the answer will be 'welcome'.

We have found ourselves contemplating geo-political concerns under the heading of 'internal threats' to energy supplies, which leads us naturally to external political threats.  We will start at the least apocalyptic end of the spectrum and consider political factors that can disrupt the normal flow of cross-border energy trade.  The UK is a nation long wedded to free trade, and we often fail to realise how much less enthusiastic about it even our close EU neighbours are.

 In particular, when it comes to energy, most other European countries will ban exports at the drop of a hat if they deem their own supplies are 'at risk' which, in the case of France, can mean simply that gas storage facilities are not completely full.  Of course, banning exports makes a mockery of economic notions that cross-border interconnections and price-following free trade maximises the efficient allocation of a scarce resource.  But other nations just don't believe in that, when push comes to shove.  Thus, in winter 2004 when a short cold-weather snap hit and the price of UK spot gas rose to a much higher level than French prices, ordinarily one would have expected increased flows from France to the UK, until either the pipeline capacity was full, or prices equalised.  In fact, the French regulator instructed French gas companies to pay whatever price was needed to top up already almost-full French storage.  As a consequence, French prices leapfrogged those of the UK and gas was exported from short-of-gas Britain to plentifully-supplied France.

Needless to say, there are two strongly-held sides to the doctrinal argument here, and for now we simply record the issue.  France is not the only country that has behaved in this way: for many years Germany has imported almost as much gas from the Netherlands and Norway as from Russia.  Traditionally, if you were to ask a German gas company which of their main supplier-nations was the least reliable, they would say the Dutch who, when they have production problems, prioritise their local customer-base at the expense of exports.  (The Russians, of course, with perennial needs for hard currency, would cheerfully cut off their local customers to maintain exports - at least until the spring of 2012 when Putin was facing an election, and for the first time cut exports to maintain local supplies.)   

The politically-based disruptions to energy supplies we have considered here - strikes, green protests, protectionism in times of shortage - can be bad enough.  But they are a mere inconvenience as compared to the prospect of large-scale, systematic withholding or blockading of energy deliveries for strategic geopolitical ends.  We have seen it before; and we fear it happening again.  It is to this we turn next.

[ Continues to Part 3 ]


All original material is copyright of its author. Fair use permitted. Contact via comment. Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog; or for unintentional error and inaccuracy. The blog author may have, or intend to change, a personal position in any stock or other kind of investment mentioned.

Securing Energy Supply (1)

When it comes to energy policy-making in the 21st Century, for most developed economies it is built around a 'triad' comprising these elements:

• environmental - reducing the detrimental impact of obtaining usable energy
• economic - delivering 'affordable' energy
• security of supply - delivering energy reliably
  

To state them as briefly as this is to skate lightly over huge complexities, but let us accept that we broadly know what is intended.

Attempts are constantly made to reconcile the three strands, since it is hard to see they can all be delivered at the same time - an issue sometimes referred to as the 'Energy Trilemma'.  We can have cheap, secure energy, but living near a 1970's vintage lignite-fuelled power station degrades and shortens your life.  We can have secure, low-carbon energy, but at tremendous cost.  We can have cheap, low-carbon energy but it may very well not be there when we need it.  The EU's official energy policy claims to square the circle (if a triad can do such a thing) - "fully balanced, integrated and mutually reinforced", claims the EC: but its reasoning is akin to that of the medieval schoolmen and the results not convincing at all.

(Charmingly, they have official nicknames for each leg of the policy triad - see the diagram: the environmental is called 'Kyoto' for obvious reasons; the economic is tagged 'Lisbon', after the conference and treaty of the same name that were intended to deliver competitiveness to the EU in every sphere; and the security moniker is 'Moscow' ... I wonder why ...)

Source:  European Commission

In this and following posts we focus on security, and consider mainly gas and electricity with some comments on oil.  There are two primary aspects: strategic security, against politically-motivated shortages; and day-to-day reliability.

Reliability was until recently not a matter that greatly exercised policy-makers in advanced economies.  Indeed, the enormous fundamental difficulties of continuously (and safely) supplying electricity, gas and oil had been so comprehensively solved, many had forgotten what an achievement it was.  Permanent access on demand to these three commodities - electricity in particular - has become essential to everyday existence, to the point where we cannot really countenance its interruption beyond the shortest of periods.

And permanent access is what we had become accustomed to, often forgetting that continuous supply of a commodity that is subject to all manner of complex contingencies, is a major practical challenge.  This challenge becomes all the greater when the commodity cannot readily be stored.  Compared to the relatively straightforward storage of (e.g.) coal or oil, the difficulty of storing natural gas is great; and of storing electricity very great indeed, almost to the point where we might say it cannot be stored (except in trivial quantities) unless one has access to large-scale hydro-electricity with pumped-water reservoirs - a privilege enjoyed by rather few of world's population.  But the engineers and markets are equal to the task, and the lights stay on.

If these problems have been so impressively solved, how then do we come to talk of reliability in the past tense ?  The new factor is wind-generated power, imposed on electricity systems by politicians responding (as they would see it) to lobbying by 'greens' for 'decarbonisation' of electricity in general, and by turbine manufacturers for wind turbines in particular.  We can fairly say 'imposed' because in almost every instance wind turbines cannot be justified economically per se (without recourse to a highly disputable case based on 'future avoided costs of CO2 emissions'), and thus only exist when installed by fiat and/or developers in receipt of large subsidies.

The characteristic feature of wind-power is 'intermittency', illustrated by the dismal long-term average output from windfarms which in most installations struggles to achieve 25% of its rated (notional) capacity.  If this 25% came in a predictable pattern - as, for example, does the equally low-performing solar power, which always peaks at midday - it could be accommodated fairly readily in a large electricity system.  However, in practice the pattern is near-random, with forward predictability of a few hours at best.

Yet electricity systems must be balanced continuously, and intermittent input in more than de minimis quantities is a challenge, growing ever greater as the amount of wind-power to be accommodated expands.  We considered the consequences of this in the two specific cases of Denmark and Germany in an earlier series of posts.  Summarising: through a combination of good engineering, access to hydro-electricity (in the case of Denmark), and throwing large amounts of money at the problem, to date these two countries have succeeded in accommodating large wind-generation sectors - but, in the case of Germany, only just.  Indeed, it is possible that Germany may be about to demonstrate dramatically the boundaries of what is feasible as regards wind-power: and it will be at levels of wind capacity a lot lower than many greens have hoped and promoted.

In any country or grid-region which must accommodate wind-power without having ready access to hydro, this serious challenge to reliability will persist until cheap and efficient power storage becomes a reality.  Such storage is as eagerly sought as any Holy Grail, but as yet is beyond us.  Thus, as the wind fetish shows little sign of abating in the corridors of power, reliability will become an ever-greater problem in electricity supply.  In some regional systems this might have knock-on consequences for gas reliability, if gas-fired power plant is called upon to meet ever more extreme wind-driven electricity-system balancing duties; but, by and large, gas grid operators (having at least some storage capability) have proven a match for this challenge and as yet, fears over gas security predominantly stem from strategic considerations.

It is to the strategic issues of energy security threatened by political factors that we turn next. 

[Continue to Part 2]

All original material is copyright of its author. Fair use permitted. Contact via comment. Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog; or for unintentional error and inaccuracy. The blog author may have, or intend to change, a personal position in any stock or other kind of investment mentioned.

Bamboozling Britain on Energy Bills

I don't know if anyone's noticed but the government has recently overhauled its many websites into a fairly uniform GOV.UK set-up. They were pretty anarchic before, it must be said. Now, the gov-site I go to most often (DECC) is more difficult to navigate - but it does look a bit cleaner.

At the same time, I detect they have seriously decided to get their presentational act together. In the case of DECC (and, I've no doubt, lots of others too that I am unable to judge) this means systematically dissembling on the impacts of its ridiculous policies. Perhaps, following Galbraith's famous 'bezzle' coinage, we should call it the 'boozle'. And it's a biggie.

Yes, when it comes to lying about the future policy-driven costs of electricity, the government has long ago decided to Tell A Big One, summarised briefly as "OK, your bills will go up a little bit in the early years, but later they will fall (relative to what we say they would have been without our policies, fingers crossed)". It's worth unpicking exactly how they get to the numbers in this jolly chart, which greenies everywhere have really taken to, but which contains several questionable numbers and one massive, entirely fraudulent sleight of hand.

DECC's Boozle

As DECC have admitted in the past, this argument completely falls if gas prices fall. But let's look at some of the detailed components of their asserted 'saving' of £93.

Costs they acknowledge: as a first pass, we can probably assume most of the elements of the '+£280' are tolerably good estimates, but there are some important points to add: (1) 'EMR support' is planned to rise significantly after 2020, as the supposed new nukes start claiming whatever is to be their grotesque subsidy, and the capacity mechanism bites. So +41 is only the start. (2) Personally I don't envisage doing a 'Green Deal' at Schloss Drew, so I can ignore the +20 of loan repayment. (3) Just look at the transfer payment represented by the biggest single number, +70 for ECO support (a scheme "to subsidise energy efficiency measures for low income households") - this is you and me paying for social policy in a way the government hopes we won't notice. (4) Some estimates of the cost of smart metering etc are a lot higher than +3

Savings they claim: this is where the boozle really gets motoring. I don't know enough to challenge the -158 'Products Policy' and -89 'previous efficiency policies', but boy, those are big numbers. And - they are also in the bag already ! Sunk costs, so to speak. Nothing to do with avoidable policy-costs going forward. We could stop now, and these gains (whatever the numbers should be) would still be ours.

Additionally: (1) the Drew family won't qualify for -53 'ECO / Green Deal' or -16 'Warm Home Discount'. (2) -37 'smart meters' sounds pretty optimistic. (3) -20 'wholesale price impact of EMR' etc is flaky to the point of being an outright punt, it could easily be a net cost.

So: I could re-frame these same numbers for my own circumstances and the -93 diminishes to -49. I could - indeed, I do - diskard utterly the -20 as the flake-job it is. I could add 20 (or more) to EMR support for the years after 2020. I could inject another 30 of modest skepticism on smart meters, etc etc. And then I rightfully ignore the already-captured policy-gains of 158+89, because that's in the past. You can do the mournful maths for yourself.

So - going forward, The Current Policies Are Going To Cost Me Much, Much More! You too, I'm guessing. And the government itself acknowledges I'll have been paying more between now and 2020 anyway ...

Damn them and their wretched boozle !


This post first appeared on Capitalists@Work

All original material is copyright of its author. Fair use permitted. Contact via comment. Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog; or for unintentional error and inaccuracy. The blog author may have, or intend to change, a personal position in any stock or other kind of investment mentioned.

What Lessons From Germany and Denmark? Conclusion

Denmark has demonstrated to the world that a substantial amount of wind generation capacity can be supported in an electricity grid operating feasibly  -  provided there is ready access to large quantities of hydro-electricity.  Germany has yet to demonstrate the feasibility of its own unique mix of wind power and solar generation with the damaging impact these have in combination on the operation of the electricity marklet, and of grid.  To date, it has narrowly avoided disaster - but only by dint of massive imports from sources that make a mockery of its own 'green', anti-nuclear policies; and by redoubling its efforts to build new coal and lignite-fuelled capacity.

In this concluding post we consider the costs of operating in the Danish and German ways.  Did anyone say it was going to be cheap ?

Denmark doesn't have to answer charges of outright infeasibility.  It should, however, be called to account (if only by its electricity consumers) for the cost of operating as it does.  Advocates of wind-power are inclined to state that every unit of wind-based energy generated is a (largely) carbon-free and (almost) marginal-cost-free contribution to the total amount required, even if they acknowledge that something needs to be on standby for when the wind doesn't blow satisfactorily (roughly 75% of the time).  Those claims are highly misleading.  When considering an entire grid-system as a whole, factors must be taken into account such as the material downgrading of efficiency suffered by gas and coal plants when placed on standby for intermittent deployment; and increased power losses arising from decentralised generation.  These factors erode the magnitude of the benefits claimed, sometimes very significantly (though rarely nullify them altogether, as some ill-judged armchair criticism of windpower asserts).

The other main source of whole-system cost derives from the import-export dynamics required to balance the Danish grid.  When imports are required, Denmark pays full price for hydro-sourced electricity from Norway.  By contrast, when Denmark has a wind-powered net surplus, it must effectively dump this into the Nordic market at close-to-zero prices.  Thus, the balance of trade by value goes heavily against the Danes.

Proponents of wind should be made to recalibrate the benefits they assert: but the full data required to make a comprehensive empirical assessment - even in as small a market as Denmark's - are not made available by the grid operators. One is inclined to assume there are political influences at work: but whatever, we know beyond a doubt that the facts tell negatively against the economics of wind.  The Danes have decided - hopefully in a democratic, if not transparent or quantified manner - to pay for the privilege of their chosen generation mix.  With enough money given to good engineers (and Norwegian hydro-generators), most things are possible.  Having met the engineers, however, I may tell you they tear their hair.

The German situation has all of the opaque Danish issues and much more besides.  We have noted before how solar and wind generation distort price-formation in the German wholesale market - solar in a predictable way, wind in a random manner.  Specifically, and much to the (ignorant) joy of green advocates, they trash the wholesale price (the 'day-ahead' spot market for electricity), being bid into the market at very low prices reflective of their marginal cost, the owners being paid anyway at guaranteed high rates.

But the resultant low (sometimes negative!) market price in no way benefits the average consumer.  What happens next is instructive.  As soon as the day-ahead market closes, perhaps at very low prices, the grid operators must then quickly come up with a supply plan for the day in question that is actually going to satisfy demand.  As a starting-point for this exercise, what the day-ahead market generally gives them to work with is a supply-demand match that is more-or-less balanced in terms of global amounts, but can be horribly out of balance in detailed terms; (a) geographically - there is frequently far more generation committed from windfarms in northern Germany than can be accommodated (the centre of gravity of demand is south of a median line); and (b) in terms of reliability - wind cannot be predicted with sufficient certainty 24 hours ahead.

So the grid operators must revise the despatch schedules, and call on imports and various costly sources of short-notice balancing, in order to keep the show on the road.  Of course, they mostly succeed (good engineers, enough money, etc) - but at a cost.  The key is this: they are entitled to charge the extra costs - and they will always be extra, there is never a cheaper way of doing it - across their customer base.  It doesn't appear in the record of wholesale market prices, but it shows up tangibly enough on the bill.  In consequence, Germans pay the second-highest electricity prices in the EC.

So much for direct cash costs.  As mentioned several times, the elephant in the room that threatens to roll over and crush the other occupants is that, unlike the Danish situation, this costly and dishonest state of German affairs is not stable.  Already, voltage in the grids is unreliable to a degree that many high(ish)-tech manufacturing processes cannot tolerate.  They are having to fend for themselves, either by generating their own electricity, or installing costly modulation equipment - quite a commentary on Europe's greatest economy.

To this second category of unwanted (and unforeseen?) costs we may in future need to add the catastrophic consequences should part of the German grid fail, as is widely anticipated.  The prime candidate for the epicentre of a rolling blackout is the region between Karlsruhe and Munich, from where it would cascade outwards to the whole of southern Germany, eastern France, Switzerland, Austria and the Czech Republic.  A week of this in winter will cost lives - many lives - and if the cash cost even matters against that backdrop it will be very large, too.  In case this is thought to be scare-mongering, the reader should be aware that the German Networks Regulator (Bundesnetzagentur) has spoken out on the subject from the moment the nuclear power-plant closures were announced; and the grid operators have contingency plans in place for outright disaster scenarios.

Thankfully, so far, the good engineers and the money have prevailed.

*  *  *  *  *  *  * 

Civilisation is energy-intensive (Lovelock).  What, then, are the lessons for (e.g.) the UK ?  Beware large-scale unintended consequences:  the renewables lobby will leave us to find out the hard way.

No-one has gone as far down this road as Germany, and we may be destined to learn vicariously from them - at their cost.  In terms of basic physical feasibility (never mind the cost) there is a practical maximum proportion of power that can ever be sustainably had from wind until electricity storage can be made cheap and very efficient: and this is not yet a prospect that may be relied upon.  The precise maximum proportion that wind can (physically) contribute will vary from market to market - hydro is critical - but we cannot all tap into Norway as Denmark has done.

If politicians insist on going for wind-power (and solar power) in as blind and grand a fashion as has Germany, (a) the direct cash costs will greatly exceed what we have been led to believe; (b) indirect costs will mount in parallel; and (c) eventually it becomes positively dangerous to life and limb.

I haven't even touched on whether there are any actual benefits accruing to anyone other than investors and manufacturers in the wind and solar industries.  They would need to be very big, and certain ... 

READ THE EARLIER PARTS OF THIS SERIES:
PART ONE
PART TWO
PART THREE


All original material is copyright of its author. Fair use permitted. Contact via comment. Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog; or for unintentional error and inaccuracy. The blog author may have, or intend to change, a personal position in any stock or other kind of investment mentioned.

Nuclear Endgame - and a Rogue We Will Miss

Looks as though the nuclear strike-price endgame is in prospect.  EDF had softened us up with mention of £140/MWh for their Hinkley output; I had predicted £119.95: DECC seems to be trying to keep it under the hundred, "whatever that means", as the Inde's writer justly puts it.

Because whatever the notional outcome, bear in mind that (a) it will be index-linked, and the electrons will not be in action until 2021; and more significantly  (b) there are so many valuable concessions EDF can be given under the table by way of capped liabilities etc, the headline figure needs to be very heavily qualified - except we probably won't find out in our lifetimes.  (I remember selling diesel fuel to the old GLC / LTE: they would do anything to keep down the nameplate price - the only thing that was reported to the politicians at County Hall - including offering 12 months' interest-free pre-payment !  Easy when you know how.)

Anyhow, we may be sure it will be trumpeted from the rooftops as a great triumph for all concerned - double (prices) all round !

Marchant: Rogue CEO

With impeccable timing, the industry figure who has done most to highlight the outrageousness of all this has jacked his hand in, and we will miss him greatly.  Ian Marchant, the unlikely CEO of Scottish and Southern - only SSE and Centrica of the Big 6 remain as independent British companies - is calling it quits.  I'm guessing not many readers will have met Fat-boy Marchant, but suffice to say he is not a typical FTSE100 boss. His irreverent, flamboyant speeches, and more importantly his plain-speaking comments on the electricity market 'reforms' in general, and the nuclear nonsense in particular, have been a delight over the years.

Hopefully he will still be around in some capacity or other, and we hope for even more uninhibited outbursts from that ample quarter.  

This post first appeared on Capitalists@Work

All original material is copyright of its author. Fair use permitted. Contact via comment. Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog; or for unintentional error and inaccuracy. The blog author may have, or intend to change, a personal position in any stock or other kind of investment mentioned.

Nuclear Stand-off Hotting Up

(c) N Drew 2013

The business pages of the Telegraph are a favourite platform for commercial vested interests. De Rivaz of EDF has used them before to 'frame' the context of the farcical bluffing contest being conducted over what outrageous guaranteed price (and other ultra-valuable concessions) he can screw out of HMG for getting started on just the first of his 4 'promised' new UK nukes. And here he is again, the little Gallic tease - 'framing' for all he is worth. We must assume the 'negotiations' are at a critical juncture.

 "Almost all of the necessary pieces are in place. Our new build project at Hinkley Point is 'shovel ready' and only a few crucial milestones remain to be passed. ... Yet I am still asked – should the UK do it? And if so, do we have the industrial capacity and expertise to pull [it] off?" 

Careful with the 'we', monsieur.

"Just two more pieces need to be put in place. First, we await a final planning decision." 

I think you'll find that's a given, matey: this lot have long since bent over for the shafting. Or do you perhaps want some sort of new environmental indemnity thrown in for good measure ...?

"Secondly, and, most crucially, there must be a balanced, stable and durable agreement on the price of the electricity generated. To be durable, this price needs to be fair and balanced for both our company and the Government." 

'The Government': how sweet. What about the people ?! 

"I believe we can reach an agreement with the Government which will transparently display the economic viability of new nuclear, and which can underpin a robust business case for investors. EDF is now closer than ever to being able to make a decision." 

Ah yes, economic viability. And while we are at it, tell us again will you, about the security of supply for all that uranium you get from, errrr, Niger. Surely, a great age of eco-satire is upon us.


This piece first appeared on Capitalists@Work 


Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog; or for unintentional error and inaccuracy. The blog author may have, or intend to change, a personal position in any stock or other kind of investment mentioned.

What Lessons From Germany and Denmark? [3]

German energy policy has evolved scrappily, with unintended consequences aplenty.  In particular it was (presumably) not foreseen that the very large amount of subsidised solar electricity-generation capacity would seriously distort the wholesale electricity market.  This is greatly to the detriment of unsubsidised gas-fired power stations which would expect to make their money providing peak power during the middle part of the day, at prices commanding a premium over baseload (24/7) prices - a premium that has been substantially eroded by solar.

This situation could probably be sustainable if it were the end of the story.  In logistical terms, after all, it is not fundamentally problematic to introduce a source of electricity that peaks at roughly the same time as demand (midday, in Germany's case).  Unfortunately for German electricity consumers it is only the start of the tale.  For on top of the solar capacity is another large new tranche of renewables - wind power.  This is similarly subsidised and has a marginal cost close to zero.  But far from having the predictable output of solar, it is of course subject to the vagaries of the wind.  It has a similar distorting impact on the wholesale market as solar, but at essentially random times, creating a radically unstable market dynamic.

The purely physical aspects of the system problems caused by intermittent wind generation can generally be resolved with a combination of good engineering and operational practices, and enough money - provided the challenge is on a sufficiently limited scale.  However, in Germany these problems are on a large and growing scale, and the patchwork of solutions available to grid operators is not robust.

It is fairly self-evident that a situation like this requires, inter alia, a lot of flexible power sources.   The best solution is generally to access hydro-electricity.  With sufficient quantities of water stored at the top of a hydro facility, it can respond literally in seconds when called upon to back up some deficiency in supply at short notice - the Danish solution (using Norwegian hydro).

Where, as in Germany, there is inadequate availability of hydro power, gas-fired plant is the obvious second-choice.  It is not as flexible as hydro, but can nevertheless provide a useful contribution to flexibility requirements, albeit at sub-optimal efficiencies.

However, a market-based approach to bringing on flexible resources requires appropriate price-signals.  As we have seen, for much of the time solar power undermines the key price signal, namely the premium of peak price over baseload price, by dint of which it is exactly gas-fired plant that has been rendered uneconomic.  At the time of writing most German gas-fired plant lies idle; and no-one is building any more.

Imports from neighbouring countries therefore feature significantly in balancing the German grid - including hydro from Norway and Switzerland, when available, but predominantly nuclear (France), hard coal and lignite (Poland and the Czech Republic).  We have noted the ironies before.

(Confusingly, Germany also sometimes exports power; and inevitably this is at times of wind and solar surges.  Greens make great play of this, sometimes asserting it proves German energy policy is a roaring success.   But total capacity was never the issue: it is achieving an efficient and reliable balance in the system at all times between naturally variable demand, and increasingly unpredictable supply.)

So if gas is uneconomic, and nuclear is being phased out, where will Germany source its reliable power ? Another key component in the mix (and another irony) is the large-scale building of new coal and lignite (brown coal) power plants within Germany itself.  The ever-growing policy-driven renewables capacity seemingly cannot be halted: but at least the large German coal- and lignite-mining industries can support a new generation of highly efficient fossil-fuel plant.  The cost of CO2-burning permits is at rock-bottom; coal is cheaper than gas and is still economic to burn; and a new plant operates at much greater efficiency and significantly lower emissions than the old coal-fired plant it replaces.  Unfortunately it offers less flexibility than gas, but can make a contribution to this requirement also.

How much pleasure is derived by greens from the large programme of newbuild coal plants is anyone's guess; but it is how practical German power engineers are attempting to square the circle.

There is no guarantee they will succeed.  The final piece in this series will consider the effects and the costs of dysfunctional German energy policy - and a warning to the rest of us.    

READ ON:
PART FOUR (CONCLUSION)

PREVIOUS:
PART ONE
PART TWO


Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog; or for unintentional error and inaccuracy. The blog author may have, or intend to change, a personal position in any stock or other kind of investment mentioned.

The Only Solution Is My Solution

The following Grauniad headline gets my prize for best of 2013 so far:

Rogue geoengineering could 'hijack' world's climate

"The deployment of independent, large-scale "geoengineering" techniques aimed at averting dangerous warming warrants more research because it could lead to an international crisis with unpredictable costs to agriculture, infrastructure and global stability, said the Geneva-based WEF in its annual Global Risks report"

Haha ! They don't like it up 'em, Captain Mainwaring. But aside from 'independent' not fitting with 'dictated by the green lobby', what exactly is the problem ? Let's turn to the report:

"A long series of ethical, legal and scientific questions quickly arises about countless knock-on effects that might be much more difficult to assess ... Almost any change in weather and climate patterns is likely to create winners and losers, but determining causation and quantifying impacts on any given region or country would be a massive challenge."

What, unintended consequences ? Well, b****r me ! That would be like, err, when you subsidise biofuels and discover that entire forests are being felled, and food-stocks diverted, for use as fuel ? Or when you subsidise solar power and find that your electricity grid can't cope ? Or when you implement 'green' policies and find that your CO2 emissions are rising ?

"Determining causation and quantifying impacts would be a massive challenge" !!   Are they reading what they are writing ?  


This piece first appeared on Capitalists@Work

Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog; or for unintentional error and inaccuracy. The blog author may have, or intend to change, a personal position in any stock or other kind of investment mentioned.

What Lessons From Germany and Denmark? [2]

If the Danish electricity sector is an unrepresentative model for most other nations to follow, by dint of its hard-to-replicate access to ultra-flexible hydro electricity from Norway, the Danes do at least seem to have a feasible (if expensive) structure in place.  The same cannot be said of Germany, that other favourite exemplar of red/green advocates of renewable energy, which upon examination is a very odd model for them to be eulogising.

To summarise: Germany barely got through 2012 without serious blackouts; voltage has become highly unreliable in many parts of their complex grid system; heavily subsidised renewables have trashed the German wholesale power market; neighbouring markets are also suffering as a result of unpredictable surges of German wind-power exports; Germany is building a large number of big new coal- and lignite-fired power stations to cope; in the interim, they have become dependent on large-scale imports from some very dirty old lignite plants in Eastern Europe; and to crown it all, their CO2 emissions are increasing!

How has this come to pass?

On major issues like energy, German policy is generally framed by big, set-piece legislation that lays down what is in effect a national plan.  The last coherent German energy plan dates back to the 1980s, and more recent policies have been layered on top in an ad hoc fashion.  That's how it's often done in the UK and other countries, but for methodical Germany it is anomalous: and intelligent Germans view the resultant mess as inevitable.

The most recent nonsense was the sequence of on-off-on-off nuclear decisions, culminating in a post-Fukushima bombshell: the summary closure of a large part of the nuclear fleet.  This was always going to leave a big gap to fill in a hurry - hence the immediate increase in imports, which naturally come from neighbours with surplus capacity:  France (nuclear, of course), Poland and the Czech Republic (coal, some of it dreadfully polluting lignite).  The ironies are obvious, and one hopes the anti-nuke greens are proud of themselves.

But the subtler and even less tractable issue is the unforeseen impact of large amounts of 'must take' wind- and solar-power, financed by whopping subsidies.  (The electricity doesn't even need to be generated - the producer merely needs to install the plant.  There are many windfarms in northern Germany that are completed but not connected to the grid - the system cannot accommodate them, and they lie idle - getting paid anyway.)

Key to the situation is that the marginal cost of wind- and solar-power is close to zero. Unsurprisingly, at times of the day when large quantities of zero-cost power are being fed into the grid (foisted on utilities who must take it, irrespective of its market value), the impact on the wholesale market price is to reduce it substantially - not just to zero, it sometimes actually goes negative, so that people are being paid to take power off the system

The timing of wind generation is notoriously unpredictable, but solar is straightforward: it peaks around noon.  In Germany (though not in all countries) this at least coincides with peak demand.  The impact on wholesale prices is clear.

Source: EPEX

One cannot fail to notice (a) demand rising to maximum at midday ('Volume' on the chart) which would 'normally' coincide with the highest hourly prices: but (b) a midday collapse in hourly price, which at 1pm is lower than at midnight !  The market price for 'peak' electricity as defined in the German/Austrian market (9 am to 8 pm) is now barely greater than for baseload (24-hour), meaning inter alia that no-one will see any incentive to build or run a plant designed to offer flexibility.  In particular, it fundamentally undermines the economics of flexible gas-fired plant, which - since no subsidies are on offer to fossil fuels - needs a 'normal', undistorted day-time price to pay its way.  And yet that is the very plant needed to balance the vagaries of wind generation !  

Why this was not foreseen is a matter for conjecture.  (Personally, I reckon - and have offered evidence elsewhere - that many Germans who should know better genuinely do not understand how markets work.)  But of this we may be sure: its impact is highly destabilising.

READ ON:
PART THREE
PART FOUR (CONCLUSION)

PREVIOUS: PART ONE
 
 
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