Government loses plot on 2050 Energy and Parliament follows

In 2020 it dawned on government that transitioning from mostly fossil fuel energy to zero carbon, i.e. electricity, by 2050 was a big deal and something should be done. What that needed, of course, was a strategic plan but we did not get one and still haven’t. Instead, we got the 2020 White Paper which became the Energy Bill originally devised by the House of Lords. On Tuesday 5th September, the Bill had its last examination in the Commons. MPs were given three hours to debate and decide the 397 page bill they received from the Lords plus the 69 MPs’ amendments and 180 from the government. And then they had 117 pages of explanatory notes prepared by the Department for Energy Security and Net Zero and its (entirely inadequate) 39 page Impact Assessment (IA). IAs are supposed to consider additional costs and whether they are value for money. It doesn’t. Whitehall is renowned for its farces and these 680 pages is the script of one of them. The great majority of the 279 clauses are exactly the type of red tape and regulation any Conservative government should be seeking to eliminate, not enact.

A sane government would work out first how to achieve the energy goals (the strategic plan) and only then add the legislation necessary to bring it about. Trying to do it the other way about pretty much guarantees the current confusion. This is Big Government interfering in what a free market should mostly do. An energy strategic plan requires just six main components: the three principle sources of post 2050 electricity (renewables, nuclear and fossil fuels with carbon capture and storage (CCS)), other energy sources where electricity is not viable, e.g. sustainable aviation fuel, transmission from generation to users, and storage of surplus renewables to help fill deficits gaps. The Energy Select Committee is running two Inquiries into exactly these matters. As the Department for Energy Security and Net Zero (DESNZ) does not seem to know the answers, perhaps it should await the findings of these Inquiries.

Government should next consider how much of the necessary action should be left with the private sector, usually better value for money, and how much requires new legislation, not just to secure the energy but to do so as cheaply as possible. Older readers will recall that electricity was supposedly privatised with that in mind. Government may wish, for example, for cornflakes be available for our breakfasts at competitive prices but it does not need to legislate, beyond ensuring that the market remains competitive.

Renewables, per se, are not mentioned in the Bill but off-shore wind is covered by clauses 245 – 269 mostly addressing environmental effects and decision devolution. No mention either of this being Great Britain’s primary source of electricity by 2050. That contrasts with no offshore contracts being sought in the latest bidding round. Capacity now is 29GW and needs to be 50GW by 2050 according to government and with total electricity requirement at the more likely 209GW, wind capacity will probably need to be closer to 100GW by 2050.

Offshore wind may or may not be the cheapest source of electricity but, round the world, those markets with the highest share of renewables also have is the highest consumer prices. This is due to government interference in the market and this Energy Bill is a classic example.

On the other hand, the Energy Bill incentivises onshore wind through community energy organisations – 89 so far- but the numbers are growing fast and would grow faster still with user discounts for accepting adjacent onshore turbines. One onshore turbine services, on average, 6,000 households. The Bill however (clauses 272 and 273) requires every participating community group to be more than 150,000 households but using less than500MW supply. The Hornsea offshore wind farm was expected to generate 1.3GW of green energy from 165 8MW wind turbines, enough to supply 1.4 million homes. Or about1,000 homes per MW or about 8,000 wind turbines for 150,000 homes or 300,000 homes for a single 300MW small modular reactor. SMRs are not even mentioned in this Bill. Onshore wind is a thoroughly good thing, especially when it is incentivised locally as government now proposes, but the same logic applies to SMRs.

Extraordinarily, though Explanatory Note 90 claims “Nuclear power has an important role to play in domestic energy security and in reducing greenhouse gas emissions to net zero in 2050” the Bill says almost nothing about it. There are a few references to sites, the constabulary, setting up Great British Nuclear and other administrative matters but nothing about the 56GW, or so, we will need to back up renewables. For example, most countries are having to finance the first of a kind (FOAK) SMRs centrally and that will require Parliamentary approval. Our need for SMRs, maybe up to 200, was announced by Prime Minister Johnson three years ago and yet it is now considering ordering just two in the next six years.

Yet the claim is “In order for the UK to reach net zero by 2050 and achieve independence from imported fossil fuels the Government will fully decarbonise the electricity system by 2035, subject to security of supply.” Fat chance! Alongside this, the Government expects electricity demand to double by 2050, when increasing by seven times is more likely.

While the UK government has been asleep at the nuclear wheel, the USA and Eastern Europe have been pushing ahead.

The third of the main power sources, fossil fuels, will be essential for dunkelflaute days when the wind don’t blow and the sun don’t shine but requires CCS- the costs and feasibility of which are entirely unproven at industrial scale. Government should step away from this problem and leave it with the private sector. Those whose generate carbon, post 2050, should pick up the tab for getting rid of it and recover the costs through the pricing of their electricity.

On transmission, the Bill seeks to transfer responsibility to the Independent System Operator and Planner (ISOP), a new public corporation, but without any indication of how it will work, what it will cost and how that huge expenditure will save money, as it claims, for consumers. Why will it be shunting gas around the all-electrified country? The Bill discusses the monopolised regional transmission system, recognises that regulation has been ineffective in bringing competition about but gives up on how to deal with it.

Finally, hydrogen will indeed be useful as storage to bridge renewables surpluses to deficits but the “hydrogen grid” proposed to take the place of natural gas is nonsense. So what is to do? We have an immense Bill, the product of three year’s work, just about to receive the Royal Assent but it is mostly a heap of junk. DESNZ should put together, by end November, the long overdue Energy Strategic Plan using submissions to the Select Committee Inquiries as needs be. A new, slimline Bill, based on that and containing just the essential new legislation, should be made available by the end of January 2024.

The iniquity of regional education funding

We’re told that this is a problem and that something must be done:

Northern schools get less funding than those in London, report reveals

Analysis found that pupils in London received 9.7 per cent more funding than those in the North on average

Gosh, how dastardly. This is from the Child of the North group for an All-Party Parliamentary Group (APPG). From the report:

Schools in London received an average of £6,610 per pupil compared to £6,225, £5,956, and £5,938 in the

North East, North West, and Yorkshire & The Humber, respectively.

A thought did hit us. There’s London weighting on teacher pay isn’t there? In fact there would be on all pay, support staff and so on. Umm, London weighting runs from - measured by Mk I Eyeball, no more accurate than that - 10% in the fringe to 30% in the centre. And teacher pay is half of schooling costs and also:

Expenditure on teachers and education support staff accounts for around two-thirds of all school spending, and in a tenth of schools it accounts for over three-quarters.

So split the difference there on the London zones and pay is 20% higher, pay is 50% of costs and that explains a 10% difference overall. Which is what is being complained about, a 10% difference in funding.

We did read the report. We looked at footnotes. We found no mention at all of the London Weighting. That could be our eyesight, we don’t claim perfection. But our basic reaction here is come along now people, the APPG isn’t even trying here, is it?

So, having solved the iniquity of regional education funding what time’s the footie start?

As we've been saying - what lithium shortage?

Another in the Annals of Free Markets For The Win:

Sky-high prices for lithium carbonate, the key element for batteries that last year surged to $80,000 a tonne when fears over a supply crunch peaked, also played a role. Miners and refiners greenlit projects or maxed out capacity to cash in on the boom, pushing production up and prices down. Lithium carbonate last week traded at $21,000, a 75 per cent fall.

Was it last week or last month that politics was still mithering about the coming lithium shortage? Actually, we’re really pretty certain we could still find politicians worrying about it today and we’ll be able to do so for years yet. Because politics simply never can get its head around the power of markets.

So, yes, moving the world to EVs will need lots of lithium. Which is why the price rose, lots of people wanted lots of lithium. So, what then happens? Well, as that chart on pages two and three of every economics book ever says an increase in demand, having driven up the price, encourages an increase in supply. Assuming that there’s no hard, physical, shortage - the number of atoms on the planet sort of limit - then supply will increase, price will fall again. This is the sort of economic idea that we insist children grasp before we allow them to do the difficult parts of the subject at GCSE level.

So, what did happen? Iran found mountains of lithium. China Clay pits seem to be teeming with the stuff. We don’t need that much and as we pointed out at book length we don’t face that hard physical limit.

There’s a list out there of some 300 would be lithium mining companies. For that’s what the market response has been - the lithium price rises, men with hammers go out to tap the world. And, amazingly, given that lithium is not in short supply, only in currently short extraction, they find it. The value of lithium in the ground falls further and faster than this 75% fall in the purified stuff too. The share prices of those would be lithium miners are falling - globally and near in unison. Because we’ve found enough and it only took a couple of years. It was also done without politics or even subsidy.

Oh, sure, there were both of those, both politics and subsidy. But the shortage was solved without either.

We’re entirely willing to agree that there is a reason to have government for there are some things that have to be done and which can only be done by governments. We are not, after all, anarcho - capitalists. We do also insist that there are things which markets entirely unadorned can achieve and even a class of things which markets will achieve better than any government will manage.

Like, umm, sourcing sufficient lithium to power the global car market?

The point to note here being that it has happened that way too. We’re done here. And all before government managed to burn too much of our money in failing to do it.

News just in - building houses reduces rents

One of the glories of the market system - even if here we are talking about across countries - is that different people try different things and thus we get to see the outcome of different actions and policies. The economy is a complex thing, it’s not always obviously possible to work out the final effect from first principles. Actual experimentation is often necessary.

So, an interesting result from the United States. Building more apartments lowers the rent of apartments. Something we can generalise out to building more houses lowers rents:

Rents in August were just 0.28% higher than August 2022, according to real estate tech platform RealPage. Compare that to a year ago, when rents were posting 11% annual growth. With the exception of a very brief drop during the Covid lockdowns, rents have not shown negative annual growth in well over a decade. When they did, it was due to a recession hitting demand.

That is not the case now. Apartment occupancies nationally are at a pretty healthy 94%, which is right along historical norms. High mortgage rates combined with high home prices and tight supply have kept more would-be buyers in the rental market. The issue instead is just a massive amount of apartment supply.

This is not the result of building apartments for poor people, building apartments that are rent controled, affordable or even social. It’s purely the effect of building more apartments:

The number of new units being built is at a 50-year high, with more than 460,000 being completed this year alone. Over a million new units have been built in the past three years. That’s a record, and much of that supply is on the higher end. Renters have more options, so landlords have less pricing power as turnover increases.

While rents nationally haven’t gone negative yet, they have in several local markets. Austin, Texas (-4.9%), Phoenix (-4.9%), Las Vegas (4.7%), Atlanta (-3.7%) and Jacksonville, Florida (-3.4%) are seeing the biggest drops.

Build new apartments at the top end, this increases supply and all rents come down. This is now one of those things which is not arguable - we have experimental evidence. Increasing supply works at moderating prices. Who knew?

This also tells us something about policy here in Britain. We can forget about affordable housing, council, social landlord, Section 106 and so on. All we need do in order to lower rents is build more houses. That’s it, tout court, Le Fin, the end.

So, you know, kill off all those varied constraints on who can build what and where and get on with it. Blow up the Town and Country Planning Act 1947 and successors, proper blow up, Kablooie. When Britain builds more houses Britons want to live in where Britons wish to live then the price of desirable housing in Britain will come down.

That supply and demand chart on pages two and three of every economics book ever works. Howsabout that then children?

Just Say No to steel subsidies

We’ve mentioned this before. The correct amount of subsidy to Jingye and Tata over their steel plants and plans is nothing. Zero, zip, nada.

Now of course we would say that, wouldn’t we?

But this is not based on our general abhorrence of spraying taxpayers’ money up the wall. There’s a specific technical reason why. One that does not depend upon our or anyone else’s opinions about anything. It’s one of those simple facts.

The argument in favour of subsidy is that without it Britain will have no primary steel making capacity. Primary steel is when we use iron ore to get to iron and then steel. The old method, with coke and blast furnaces and the like, is not very green. There are greener alternatives possible, direct reduction say. Moving from BF-BOF to DRI could indeed be very expensive. OK. But the argument for government to be picking up part of that cost is that there’s a strategic interest in Britain having primary steel making capacity.

Now, we don’t think that’s a compelling interest. But note that that’s our opinion on this. As an opinion it’s obviously arguable, disagreeable with. That’s fine. We don’t think there should be subsidy largely on the grounds that we’re complete tightwads with other peoples’ money.

But, note that the only justification for the subsidy is that preservation of the primary steel making capacity. If that’s not preserved - either some updating of BF-BOF, or subsidy of the move to DRI or the like - then there is no argument for, justification of, subsidy. Because not having primary steel capacity would obviate the argument that we should subsidise so as to have primary steel making capacity.

At which point:

Both companies want subsidies to help them to pay for a switch from the traditional carbon-intensive method of steel making — firing iron ore with coking coal in blast furnaces — to something greener. British Steel wants to go for an electric-arc furnace, where scrap steel is melted using electricity. Tata is also tipped to go down that route…

This is the other way of making steel, EAF. Scrap steel is melted. More details here. EAF is not a perfect solution to the production of all sorts of steel. It’s useless for nuclear applications, as one example, because you never do use scrap in making something nuclear. There are other constraints too.

A move to EAF could indeed make sense. We’re not claiming detailed knowledge of the costs and benefits - we’re happy to leave that to the industry professionals. But we do absolutely insist that EAF is a method of producing secondary steel, not primary. Therefore there is no strategic justification - dependent as that is upon the preservation of primary steel making capacity - for a subsidy to EAF steel making.

The claim for subsidy is to preserve primary steel making. The proposal is to abandon primary steel making. Therefore no subsidy.

This really is simple.

As we say, we don’t think that the preservation of primary capacity is worth £1 billion and more of your and our money. But that’s an opinion. Claiming £1 billion to preserve primary while actually not preserving primary is, well, it’s one of those requests that should be met with a volley of the riper Anglo Saxonisms.

No Matey, you don’t get the cash to not do what we’re giving you the cash to do.

Just Say No to steel subsidies. You know it makes sense. Or, at least, you do now.

If wind is more expensive then we want to have less wind

Yet another example of fallacious argumentation in the energy industry:

The UK’s net zero ambitions are expected to be dealt a blow as offshore wind farm developers halt new projects because of a shortfall in government funding.

On Thursday night, no major new offshore wind projects were expected to be included in the latest annual round of renewable contracts to be announced on Friday, The Telegraph understands.

There were five major projects, with a total capacity of 5GW, that were eligible to bid for contracts to boost the country’s current 14GW of offshore wind.

But industry sources said it was “likely” that none had chosen to bid into the process, because the Government failed to offer sufficient prices for their energy.

The outcome will deal a blow to the Government’s ambitions to install 50GW of offshore capacity by 2030, and remove fossil fuels from the electricity grid by 2035.

The fallacy is that as wind has become more expensive therefore subsidies must rise so that we gain the same amount of future wind power. Which is indeed a fallacy - if wind is now more expensive then we desire to have less wind in our energy mix. As relative prices change so do the things we want to buy, of course.

And this is what is wrong with the general plan people are trying to work to. They’ve decided there should be this much production of this sort of energy, so much of that and so on. But what is the desired mix changes as prices do. And this then feeds through, up a level, to the basic idea of net zero by one or another date. How much climate change mitigation we do depends upon the prices of doing climate mitigation.

Our whole idea here is to maximise human utility over time. As the Stern Review went on (at 1200 page length) this does not mean “no climate change”. It means the right amount of climate change. Something which is determined by how expensive it is to mitigate, how expensive to adapt and the expense - all of these are the real expense, not mere money but the cost to human lifestyles - of just putting up with it.

As the various prices change therefore the right amount of mitigation, adaptation and just putting up with change. Which is the one thing that a plan for net zero by a certain date dosn’t take account of. Which is why it is a bad plan of course - because it’s violating the very aim of doing anything at all, that maximisation of human utility.

Because wind prices have changed we therefore desire a different amount of wind power. Further, because mitigation costs have changed we therefore desire a different amount of mitigation. Wind costs are up - OK, the correct answer is to have more climate change then.

The aim of all economic advance is to kill jobs

Jeremy Warner could be a little stronger here:

And we all remember the famous Robert Solow observation about the computer: “You can see the computer age everywhere, except in the productivity statistics.”

The long, but persistent, decline in Western productivity growth can be dated almost exactly to the advent of the desktop computer and accompanying surge in corporate and household IT spending. As far as living standards are concerned, the computer appears to have been ineffectual.

Four primary reasons tend to be put forward for why this might be the case.

One is that the data simply doesn’t capture the gains being made because of the plethora of free stuff that is made available over the internet, and their failure to measure intangible benefits not before encountered.

A case in point would be access to virtually the entire body of human music ever recorded where once you would have had to go to an expensively priced live concert to hear just a tiny fraction of it.

It’s not just a possible explanation, it is that explanation. WhatsApp is where some 1 billion people get free telecoms. It appears in the GP accounts as a fall - yes, fall - in productivity and so something that makes us poorer. We have a measurement problem here.

On the other hand this is spot on:

But just because a technology becomes available, doesn’t mean it will be used.

Taking radiography by way of example, doctors first have to be convinced and apply their skills elsewhere. Resistance from vested interest among medical professionals is one thing. Introducing AI more widely into the public sector, where it is perhaps most urgently required, will encounter all kinds of Luddite-style opposition.

Quite so. It’s also fairly obvious. Few want to see their own comfortable little perch sawn off the branching tree of the economy. But that is indeed what all economic advance is about. Getting the machine to do the work and thereby destroying a human job.

No, the same technology does not then create more jobs. What actually happens is that that rare and scarce economic resource, human labour, can be applied to solving another desire or want. But first we’ve got to destroy the old jobs with the new technology so we can then experiment with what the labour then does.

All economic advance is predicated on destroying jobs.

Plans of mice and men - taxing inflation edition

One of those ideas. We should tax inflation.

We did in fact do that. Through the 70s, companies were taxed on nominal profits not real ones adjusted for inflation. The return to capital fell to near 10% of GDP, not even covering depreciation and the entire productive base of the country was going bust. So, let’s not try that one again perhaps.

The specific proposal here is that government should set a wage rise it thinks is consistent with its desired inflation rate. Say, 3%. Anyone who then increases wages by 5% would have to pay a tax. The 2% that is over the target would be that level of that tax. So, a 5% pay raise would cost the employer 7% in the 5% wage rise and the 2% tax. A 6% raise would cost 9% - 6% wages, 3% tax and so on.

Sigh.

Firstly this is gargantuanly stupid because we are not in an economy static in form. Things change all the time. The demand for buggy whip makers falls, that for AI engineers rises. We therefore not just desire, hope for, but need wages to be flexible. It has to be possible to raise AI engineer wages to tempt them away from the joys of buggy whip making.

That is, the idea of government control of wages - even if indirectly through taxes - kills off the very point of having a market economy in employment in the first place.

It’s also ludicrous in that we all know how to get around such a limitation. We change the name of the job (AI engineer to AI senior engineer) and thus rerate the payscale. The NHS has been doing this with nurses’ pay for decades now. There’s the basic pay rise, yes, but then on top there’s the rise coming from years in post and then there’s the progression in posts and…..you get the idea.

But this is the bit that made us shriek with laughter:

Of course, one would need to deal with the administrative difficulties that come with any new tax and the inevitable problems of implementing such a scheme. But a government that delivered the much more complex furlough scheme during a lockdown should not allow itself to be deterred by teething difficulties.

The Morris Marina minds - OK, we’ll accept that some of them manage to rise to Austin Allegro - of the British civil service are to administer a complex scheme like this?

‘Ee’s ‘avin’ a giraffe.

We hire our senior civil servants from those who do classics, history and English. You know, the people who cannot count?

Just to remind everyone. Plans for running the country have to be simple because the people who run the country are simple. Nothing complicated like numbers or discretion can be allowed.

Here's an idea - why not just not do so?

The FT makes a statement and then asks a question:

Big government is back. How will we pay for it?

How about we don’t? Pay for it that is?

No, not an argument for just printing the money, we’ve been through that one just recently, thank you. How about let’s not have Big Government so that it’s not necessary to pay for it?

We would refer, in more normal times, to O’Rourke’s Principle of Circumcision, you can take 10% off the top of anything. Times now are different, we need to take 20% off the British state by our more fervid dreams. Actually, likely more than that. A perfectly good nightwatchman state - yes, including a social safety net - can be run on 20% or so of GDP. We’re well over double that as the government’s portion these days. Rasetsu of the state appeals that is.

But we can retreat from such joys and be a little more reasonable. We all know that the British people do not actually want this big government. Because absolutely no one at all is suggesting that the British people be asked to pay for it. No one is saying that income tax, NI, VAT (the three big revenue raisers) be increased to pay for more bureaucrats in comfy offices. The reason this isn’t being suggested is because everyone knows the answer will be no. All the suggestions are that them, over there, they, should be made to pay. Wealth taxes are a current favourite. But that’s them, they.

We, Brits, aren’t prepared to pay for the Man in Whitehall to know best. Therefore we don’t believe it. So, let’s not have it then. The answer to how we pay for Big Government is not to have Big Government.

Some things are just easy with a little logic.

If only Will Hutton used even a smidge of logic and knowledge

We think this is both true and absolutely fascinating:

Between 1949 and 1978, according to an important paper by Jagjit Chadha and Issam Samiri for the Productivity Institute, net public sector investment averaged 4.5% of GDP. It then fell precipitately in the Thatcher years to zero, before climbing under New Labour from those depths to nearly 3% of GDP in 2010. Austerity prompted another steep fall, since when it has bumped along at about 2% of GDP. Overall, the rate of public sector investment from 1979 to 2021 has run at less than half the rate of the previous 30 postwar years. Cumulatively (even allowing for privatisation), that means the evisceration of our public services – from schools that are unusable to weak backup systems at Nats.

So, umm, what actually is public sector investment? Well, if the national grid and the power stations and the drains and the reservoirs and the gas pipes and so on are all government owned then it’s the government spending upon the building and maintenance of the national grid, power stations, drains, reservoirs and gas pipes then, isn’t it?

If all of those things are in the private sector then that same investment is no longer part of public sector investment it’s private sector. And as those with decent memories will recall part of the privatisation process was to liberate the private sector to invest in these very areas. Government always had some union or other to pay off rather than fixing the drains. Yes, we know Will Hutton says “even allowing for privatisation” but we’ve read his own source paper and it doesn’t do so. Not as an error, it’s simply not the thing being analysed therefore isn’t worried about.

Government gets out of the investment business, government investment falls. Will Hutton thinks this is terrible, a disaster, we think it’s obvious. We really do think that both logic and knowledge are on our side here - not unusual in a battle of wits with Willy.