The Pin Factory Blog

Stephen Littlechild, Professor emeritus at the University of Birmingham, fellow of Judge Business School at the University of Cambridge and a top regulatory from 1983 to 1998, explains how politicians and regulators have, by misunderstanding how markets work, regulated to boost energy firms' profits at the expense of higher bills for consumers.

Britain’s competitive retail energy market was the first in the world, and for many years the most competitive. It had the most active suppliers, and the most active customer switching. This competition and choice brought better offers for customers. It may not seem like it because of recent energy price increases. But these reflect increases in fuel costs like gas, higher costs of renewable energy and other obligations on suppliers, not a lack of retail competition.

In fact, retail competition was sometimes too fierce, witness the problem with doorstep mis-selling. But Ofgem took action to fix that problem.
Retail profits in the domestic sector used to be minimal; Ofgem calculated that many were negative. New entrants came into the market, but until recently most found it tough to survive.

Retail competition has been enhanced by a dozen switching sites. Each seeks the best way to attract users, to offer the simplest calculations, to include the most relevant information and the clearest comparisons, to facilitate subsequent switching. No other country can boast as lively, innovative and effective market for information and assistance to energy customers as Britain.

Continue reading.

The European Commission has launched an investigation into oil prices. They suspect that prices may have been artificially inflated in order to swindle motorists out of their cash.

They are right. And they should start their investigation at the grand offices located at 1 Horse Guards Road, London SW1A 2HQ. That's not the headquarters of Shell or BP, but the home of the UK government's Treasury. After all, more than half the price that motorists pay at the pump is in fact tax. The product itself costs about 48p a litre to produce and get to the pump. The retailer gets about 5p. But on top of that, there is fuel duty of 58p for a litre. And 20% VAT on top of all that. Indeed, because VAT is added to the whole price, including the fuel duty, motorists are actually paying a tax on a tax!

VAT, of course, was raised recently in order to help balance the government's books in the wake of its bail-out of the banks. So that explains part of the increase in prices. More comes from the 'fuel escalator' – the principle that fuel duty should rise by more than inflation, in an attempt to induce us to leave the car at home and save the planet. (Politicians are remarkably adept at picking our pockets while telling us it's for our own good.) The escalator forced up UK fuel prices from below the EU average, to make them now among the very highest in Europe. And the tax on fuel is now several times what any economist can justify as a fair charge for the carbon that vehicles emit.

The bottom line is that more than tax on motor fuel is more than 80p a litre. Which makes George Osborne's offer to 'stabilise' petrol prices by shaving 1p off the tax look rather feeble. If the European Commission wants to get to the heart of the great petrol price rip-off, they should immediately call the Chancellor in for questioning.

Ministers are exploring various proposals to encourage local residents to accept fracking projects, reports the Financial Times. The ideas including offering people cheaper household energy.

This is exactly how planning should work, as the Adam Smith Institute explained in a conference and report back in the 1980s, and more recently in Planning in a Free Society. Developments such as airports, roads, quarries – and now fracking projects – may bring a wider benefit to the community but adversely impact local areas with noise, pollution, traffic congestion, and so on. The decision to give the go-ahead to such projects should not rest with some 'expert' planning bureaucrat. Instead, those proposing the development should compensate everyone affected by these 'spillover effects'  for their losses.

Although the physical spillover effects of fracking might be limited, there are psychological spillovers too. There may be a chance that fracking could disturb the underground geology in ways that could damage property or pollute water systems - though fracking supporters argue that these are very unlikely and that they will even then diminish over time as academics and the professionals understand the process better through experience. Still, people fear the possible effects – and those fears must be compensated if fracking enterprises are to proceed with the goodwill, or at least toleration, of the community.

We proposed that any new development, which produces a planning gain to its proposers, should compensate the local losers. One can imagine a supermarket, say, that leads to local traffic problems as roads become congested. Those near the congestion should be compensated, and those less affected compensated less. It is not an exact computation, but at least it is better than people whose lives are blighted by some development having no redress.

Local authorities do, of course, try to tax developers of some of their 'planning gain'. But the system is totally corrupt. Petty officials bully people who want to extend their house or build a new house in their garden, implying that they must pay thousands to the council if there is any chance of their proposals being passed. Larger developers can find themselves being invited to pay for swimming pools or other large 'community' projects. Of course, it is local councillors and officials who benefit from this corrupt system, not the residents who are actually affected.

The prospects for hydrocarbon production on the British mainland seem stronger than ever. On 10 April, Professor Richard Davies of Durham University's Energy Institute published a paper stating that fracking is not a significant source of detectible seismic events. Meanwhile, over the last year, there has been a series of leaks of the forthcoming report by the British Geological Survey which is to raise the UK’s estimated reserves of shale gas by some 300 times.

This is welcome news as it paves the way for a secure, domestic, low-cost solution to the thorny problem of replacing the UK’s obsolescent capacity to generate electricity, with a low-carbon footprint feedstock. Many of the deposits are in the North, which would benefit from the investment; but they are also present in the south. In order to make the most of the opportunity, new policy is in order.

HMG is trailing plans to share revenues to incentivise local authorities to welcome oil development. This is very much on the right track, though I would go further: let programs be configured to encourage local authorities to compete for funding, so that they share (say) ten percent of incremental tax receipts; and bid against each other for a further ten percent for development or remediation.

The Petroleum Act (1934) appropriated subterranean hydrocarbon rights from the land-owner to the Crown, at odds with other mineral rights. This anomaly was theoretical until now, as no substantial deposits had been discovered. In light of new technologies we need to reverse this policy which was recapitulated in the Petroleum Act (1998). The clauses concerned should be repealed so that the interests of land-owners are aligned with the public interest in low-cost energy.

This takes us to taxation. Oil prospecting is beset by a complex of penal taxes, compensating exemptions plus a history of opportunistic impositions. All of this adds to investment uncertainty. HMG should set itself to remove fiscal risk from the investment equation, by introducing a regime of simplified tax treatment for newly-lifted deposits of land-based hydrocarbons, to which it commits itself for at least the next ten years.

The Wall Street Journal picks up on the quite fascinatingly stupid imposition by the current government of a minimum price on carbon permits. This could only have been done by people entirely ignorant of how a cap and trade system works: not a wholly desirable attribute in those supposedly running a cap and trade system.

The European Parliament's rejection this week of the Commision's proposed carbon-permit price-fixing scheme is good news for economies across Europe—except for the U.K.'s, which is likely to suffer from the lower carbon-emissions prices that result...........The carbon price floor, which came into effect April 1, was supposed to increase investment in "green" energy projects in the U.K. by ensuring that carbon-permit prices could not fall below a certain level—starting at £16 per ton of carbon this year and rising to £30 per ton in 2020............The European Commission's idea for shoring up the price of carbon permits—withholding the supply of permits from the market—was voted down this week by the Parliament, and the permit price only fell farther. As of Thursday is stood at €2.80 (£2.40) a ton—just 15% of the Cameron government's floor.

I know, I know, many of you are more sensible than I am when it comes to this climate change thing. I'm still under the delusion that it's a problem we should do something about. But at least I do understand the role of price in a cap and trade system. In a carbon tax system, the other viable alternative action, it is the tax, the price of carbon emissions, that reduces them. In a cap and trade system it is instead the number of permits issued which reduces emissions. The price for such a permit is simply telling you how tough it is to meet that cap. Thus, the lower the price of the permit the better for all. It shows that reducing emissions is actually quite simple and quite cheap.

In this case, we're seeing that eliminating the marginal emissions necessary to stay under the cap costs less than £2.40 a tonne. Quite why the British government insists that everyone should pay £16 a tonne for it is known only to the more frenzied minds within it. In a cap and trade system a low price for permits is a good idea, a welcome sign that it's all less of a problem than we had thought.

As I say I do indeed think that carbon emissions are a problem that we ought to do something about. But I do also think that we should not use this as an excuse to do fascinatingly stupid things: like artificially raising a price that we are gloriously grateful about being low. The cost of reducing emissions that is.

A continual theme of mine is the way that the various numbers we're presented with in the political arena aren't entirely, exactly and strictly, quite true. Nothing new in this of course, the lies, damned lies and statistics line is well over a century old already. The latest, how shall we put this kindly, misdirection is on the subject of energy prices. Ed Davey tells us that we're all saving money by spending vast amounts of money on renewables.

Our analysis shows that, taken together, these policies and others mean household bills are already lower – by an average of £64 – than they would have been if we’d introduced none of our policies.

This is exceedingly difficult to believe. For energy produced by renewable means is still more expensive than that produced by fossil fuels. This is why we actually have a climate change problem: if renewables were in fact cheaper then we'd all quite naturally be using them. And it's not really possible to make the system cheaper as a whole by moving from a cheaper component of it to a more expensive one.

An excellent thrashing of this contention is provided here, at The Register:

Thus we see that the consumer price of 'leccy overall stands approximately 25 per cent higher today than it would have been if Whitehall and Brussels had left the UK energy market alone.

Mr. Davey then goes on to tell us that government action will really save us all money in hte medium term, you just wait and see:

In 2020, bills will on average be around 11 per cent lower, than they would be if we were doing nothing. Let’s be clear - bills will still be higher. But they will be £166 lower than if we sat on our hands.

The problem here is that they've made an assumption: that natural gas prices will rise by 70% in the next few years. The only reason they've made this assumption is because they've not bothered to talk to anyone at all who knows what they are talking about as the FT makes clear:

The UK’s Department of Energy and Climate Change is about to publish forecasts suggesting that gas prices could rise by up to 70 per cent over the next five years. This is scaremongering nonsense, and shows just how out of touch the Department is with the realities of the international energy market. Officials appear not to have consulted the industry or the traders. In reality the odds are that prices are just as likely to fall as to rise for three distinct reasons.

Those three reasons are shale (even if we don't produce much ourselves, there's still going to be US exports), demand has fallen because of all the renewables that everyone is being forced to use and the pricing structure of the material is about to fall over. Traditionally gas prices were linked to oil prices and it's increasingly becoming true that they are not: gas prices are linked to gas prices now.

Regular readers will know that I'm generally onboard with the idea of climate change, think it's happening, we're doing it and that something must be done about it. However, this doesn't mean that we all have to wander off into LaLa Land in our discussions of what to do about it.

I agree that a certain amount of smoke and mirrors is inevitable in politics: but what worries me is that DECC has been repeating this guff to itself so often that they actually believe it.

They really are not saving us all money on our energy bills by making energy more expensive. And it would be very nice indeed if they stopped misleading us about their doing so.

George Kirby had a suggestion here on this blog last week. That we ought to copy the practise of Allemannsrett in Britain. This Nordic idea that access to the land is for all and that as long as you're just walking through you should be able to go anywhere you please. And I agree that there are attractions to such an idea. However, the real problem is that we've tried this in this country and it doesn't work here. The hint is in this that George says:

A final objection is the claim that it would be pointless to introduce the Allemannsrett in Britain as it is in Scandinavia, since here we have a much higher population density. But the vast majority of the British population lives in urban areas, and the country has many places of natural beauty and sparse population where greater rights of access could allow much greater appreciation of them.

You see, we did in fact try this. There was the Mass Trespass movement and they went off and demanded that the urban proletariat must be allowed to walk the moors. Instead of the Duke's grouse having exclusive rights to those areas of great natural beauty. The end result of which was, in the words of the National Trust:

“Kinder Scout is one of the most iconic landscapes in the Peak District because of its vast open moorland, the wildlife that it is home to and because it was the setting for the Mass Trespass. However, it is also one of the most damaged areas of moorland in the UK and its future is in jeopardy as a result of catastrophic wildlfires, a long history of overgrazing, air pollution and the routes that thousands of visitors have taken. We’ve decided to take action with our partners to save Kinder for future generations.” Mike Innerdale — General Manager for the National Trust in the Peak District

I'm afraid we're back to the basic point that Garrett Hardin made about the Tragedy of the Commons. No, it isn't and never was that assets held in common cannot be preserved. It's that when demand for a resource is greater than the regenerative capacity of that resource then access must be limited. In some manner. It could be, as with the Grand Canyon, the Park Rangers only allowing so many people down there at one time. Or it could be private property. But there does have to be some method of limiting access. Elinor Ostrom went on to show that communal restriction of access, just people working it out among themselves, can also work. But this breaks down when we've more than a couple of thousand people doing the communalling.

In most parts of the Nordic nations there are perhaps three people and a dog named Colin (Haakon is that in the local lingo?) who want to go tramping over the outside scenery. Here in the UK it's rather different. In fact, there's some 25 million Nordics looking to roam over 470,000 square miles and the UK has 63 million on 94,000 square miles. Now quite where Hardin's limit is I'm not sure but I would imagine it's something to do with the UK having 2.5 times the population on one fifth of the land.

Which brings us back to there having to be a limit. We could have the entire countryside limited by men with clipboards, counting us in and out of the meadows and moors. Or we can have our current system of private property. And even if only on the grounds of the crime rate I think that the second of those two is preferable. For I'd hate to have to calculate the murder rate, as those clipboard wielders swung from the trees, as they tried to stop people going for a walk in the woods on the grounds that 5 other people had already done so that day. "Get Orff Moi Land!" is preferable to that.

One of the things that is so difficult to get over to the "Arrrgh! We're running out of everything!" crowd is that we humans actually create resources by inventing the technology that does that creation. I've blathered about this with respect to minerals here often enough. Today's example is fresh water. Of course, we all know that there's a water cycle, that we don't destroy water by using it, we just dirty it. But it is true that there are areas of the world that are becoming short of potable water. We would obviously like there to be a solution for this and it looks like there is:

The process, officials and engineers at Lockheed Martin Corp say, would enable filter manufacturers to produce thin carbon membranes with regular holes about a nanometer in size that are large enough to allow water to pass through but small enough to block the molecules of salt in seawater. A nanometer is a billionth of a meter. Because the sheets of pure carbon known as graphene are so thin - just one atom in thickness - it takes much less energy to push the seawater through the filter with the force required to separate the salt from the water, they said.

This is reverse osmosis which is nothing very new. But here's what the new part is:

"The energy that's required and the pressure that's required to filter salt is approximately 100 times less."

100 x less?

"If you can design a membrane that's completely different than what we use today, then there's a chance for more than two orders of magnitude (100 times) increase in the permeability of the membrane," Grossman said.

Well, yes, because the cost in reverse osmosis is indeed the cost of maintaining the pressure differential on either side of the membrane.

Just to put this into actual numbers. The average UK household uses some 100 cubic metres of water a year. (100,000 litres). At current desalination costs this is $50 a year for a rough guide is 50 cents per cubic metre. Reduce that cost by 100 and we're talking about a cost per household of 50 cents, or 25 pence. At which price it really doesn't matter whether we're putting rainwater, rivers, reservoirs or desalinated water into the pipes now, does it?

This also applies everywhere else too of course. Lagos, Lima, LA...potable water simply becomes a non-problem. Agreed, you'd probably still not use it to irrigate wheat but at these sorts of prices water for industrial or human consumption simply becomes something that isn't a problem.

This is entirely apart from the fact that such a water filter fine enough to seive out the sodium and chlorine ions is obviously going to be fine enough to dispose of all microbes and viri, all heavy metals and so on, any oestrogen or other molecule, thus making cleaning up polluted water vastly cheaper. Factory run off, heck, if you really wanted to, fertiliser run off from farming.

There is good news for the worrying crowd though. You can still worry about the fact that we're running out of scarce resources to worry about running out of.

Shale gas seems to be sparking an energy revolution in the United States, but has made little traction in the UK. In his column for The Scotsman yesterday, Peter Jones discussed the main problem with shale in the UK compared with the US:

The big reason was succinctly put by Charles Hendry MP, when he was energy minister: “The situation here is very different from that in the United States, where, for example, landowners own the mineral rights beneath their homes. That is not the case in this country, so there is not the same economic driver.”

Discussing this recently with two Scottish economists, Gavin McCrone and Donald MacRae, the answer suddenly occurred to me. Why don’t we create the economic driver?

Simply put, we could do that by changing the law so that the rights to minerals in the ground under our feet belong, not to the Crown (ie, the government) but to the landowner.

...in Scotland, why have onshore wind turbines multiplied? Partly, it is because the owners of the land on which they sit, mostly moorland with otherwise little economic value, get an annual rent with payments also often going to nearby communities. Without that income, I doubt that the onshore wind industry would be half the size it is.

By changing the law, the same could be done to popularise shale oil and gas.

It's an interesting idea. Of course (as Peter admits), it would be over-optimistic to hope that such a move would yield as much gas as it has in parts of the US, but it would give people more of a reason to look.

Madsen says the news that we waste up to half the food we produce is a big reason to be cheerful:

Much is wasted in developing countries between farm and consumer because it is stored or transported badly, with some of it consumed by pests or allowed to rot.  In the developed world there are over-zealous sell-by dates and a reluctance by retailers to take misshapen vegetables, or a tendency to promote over-buying by generous two-for-one offers.

All of this is much more easily redressed than trying to increase the output of food.  If we attend to the wastage we can double the world’s supply of food without planting an extra acre.  So there is no incentive to cut down rainforests or to engage in more intensive farming, no need for extra pesticides and fertilizers.  All we have to do is stop wasting what we already produce.

He's right. I buy value-range produce because it is the same as the more expensive stuff, just a bit less attractive. Some companies have even made a virtue of imperfect-looking foods, like the promoters of the 'ugli fruit'. At farmer's markets, mud-encrusted fruit and vegetables are sold at a premium (they're more 'authentic', after all). Even if that doesn't really catch on, as Madsen says we're eating more pre-prepared food than ever. We might have found a very simple solution to a persistent problem.