, October 05, 2022

Liz's poisoned chalice and the hint of hope


  •   9 min reads
Liz's poisoned chalice and the hint of hope

The new British Prime Minister Liz Truss has been handed a poisoned chalice; it seems that she has a near impossible task — almost impossible, but not entirely.

As the new British Prime Minister prepares to move into Downing Street, she has few things from which to draw comfort, except perhaps that she won't have to pay for the heating for her new home.

But then again, soaring energy prices aren't just a problem for Truss and the UK; they are a problem worldwide, and that takes us to the first big potential flaw in her reported plan to save the British economy.

The new Prime Minister — or so it is reported,  by the time you read this, you may know for sure — plans to spend big. The number rattling around is £100bn plus, to subsidise the cost of energy for homes and businesses.

Let's not be too smug about this, but imagine the UK government had instead spent £100bn over the past decade, laying down a new infrastructure for renewables (including long-distance transmission lines and subsidising heat pumps) and on energy efficiency. Supposing it had made it easier to gain planning permission for onshore and offshore wind farms, we might not be in this mess.

But then again. The UK is just one country; the energy crisis is a global problem. You can cast blame, but it is easy to be wise in hindsight; maybe we can blame Angela Merkel's softly softly approach to Russia. Maybe we can blame…the list goes on.

But there is one massive flaw in the reported plan to throw money at soaring energy prices via subsidies — and that problem is everyone else.  There is a global supply crisis — caused partly by the Ukraine crisis, partly by the post-Covid recovery in consumer demand (supported by central banks and government spending), outpacing the recovery in supply.

And when there is a shortage of anything, the solution never lies in subsidising the thing we have a shortage of because it solves nothing. All that such subsidies do is effectively re-distribute supply. So if the UK and France and Germany, and indeed the US and the rest of the motley crew that make up the rich world subside energy when supply is so short, one of two things will happen — probably both. Firstly, energy consumption in the rich world will mean less energy for the rest of the world. Secondly, the price of energy will continue to rise.

The best cure for high prices is high prices

Higher prices for certain goods are not necessarily inflationary. (It depends on what you mean by inflation, of course, but let's say it refers to a sustained rise in prices). A one-off increase in prices is only inflationary if, following this increase, demand remains high. Let's take a very specific example. As part of her programme to combat inflation, Margaret Thatcher increased VAT — yes, she increased prices as a way to reduce inflation.

Of course, it took time, but when Thatcher became PM, inflation was embedded into the system in a way that is quite different from today.

The truth is, however, that higher prices are the best way to deal with a shortage and, in a funny way, the best way to deal with inflation. Because when prices go up, in theory, demand falls.  Higher prices inevitably lead to more investment either into the products for which there are shortages or into alternatives. That is why there is a business cycle — this interaction between supply and demand and high prices or, indeed, low prices leading to changes in behaviour and investment is why there is an oil cycle.

A subsidy to cushion the blow of higher prices does not solve the problem of a supply chain crisis; the shortages that caused the problem remain.

An energy subsidy is inflationary. Higher wages might be a better way to tackle the problem because they are no more inflationary, and at least higher wages mean higher tax revenue and create a permanent boost.

Potential recessions across Europe and maybe worldwide for five to ten winters ahead.

Have to do something

Of course, the government has to do something. We can't have people going cold. And we really need to avoid businesses going bust. So how do we help those in desperate need without stoking more inflation? A more sustainable approach might be a form of rationing — or even a progressive form of subsidy in which the first x amount of kilowatts of energy used per person is subsidised but no more — this is broadly the plan proposed by Stephen Fitzpatrick, the boss of Ovo Energy.

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Neither rationing nor a progressive energy subsidies are ideal, but they may be preferable to outright subsidies.

Oliver Chapman, the CEO of supply chain specialists OCI, said it well recently when he observed: "There is no short-term fix. A problem this serious with the supply chain can not be fixed overnight. Politicians may choose to try and alleviate conditions for people who might otherwise be unable to afford heating or decent food, but that is a political or even moral decision. Such interventions may be desirable in the same way painkillers are for someone in pain, but the underlying problem will not be solved."

That takes us to underlying problem. The Belgium Prime Minister, Alexander De Croo, recently warned of potential recessions across Europe and maybe worldwide for five to ten winters ahead.

Unless the underlying supply problem is fixed, we face the problem of unaffordable energy bills for many winters ahead — and no government can afford to subsidise energy to the extent that Liz Truss is purportedly planning for this winter, year on year.

Don't mention windmills and the good news from Orsted

And yet there has been good news — something for which there has been precious little media attention. It is good news that will be followed by more good news providing we… well, let's come back to that in a moment.

Orsted, the one-time oil and gas company and now the world's largest offshore wind farm company — proving a leopard can change its spots — has announced that the Hornsea 2 wind farm is now operational. Hornsea 2, which sits 89km off the Yorkshire Coast, will provide energy for 1.4 million UK homes.

There is an interesting phrase Orsted used to describe the energy it will generate — "low-cost, clean and secure renewable energy." So that is clean, (box ticked), secure (box ticked) and low cost (extra big tick in that box.)

Currently, Orsted has "13 operational offshore wind farms in the UK," which it says provide 6.2GW of renewable electricity, which is "enough to power more than 7 million homes."

With other farms, including Hornsea 3, it projects that by 2030 it will have installed 30 GW of wind — which would theoretically be enough for half the UK population.

Now at this point, a chorus of voices is no doubt saying, 'but the energy is intermittent.

But the problem of intermittency is overstated. As this Tweet points out, the issue of storage is not as serious as generally supposed.

Truth is, ample studies show that renewables can provide close to 100 per cent of our needs with only modest storage. And if the worse comes to the worse, and fossil fuels are required to provide, say, five per cent of our energy to kick in when all else fails; that is not so bad.

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The wind farm bias

The idea of baseload power is already outdated

But there is a problem, and the problem is one of bias. For some reason, wind power has a lot of haters, and for some reason that eludes me, the haters come from the right. It is especially odd as the right says it likes to draw fact-based solutions, however uncomfortable the facts are. This wind hatred makes Liz's chalice all the more poisonous.

But the facts say that wind and solar are the solution to:

  • energy security
  • low-cost energy
  • rapid scale-up in energy supply.

Here are three examples of anti-wind bias.

  • The prefix. The first is obvious and may be less common now — when politicians feel the need to prefix the word windfarm with a word like 'awful' or 'dreadful.' It is like they have a speech impediment.
  • Calling wind turbines windmills — a sure sign of anti-wind bias, implicit in the description is that modern wind turbines with their huge blades that are feats of modern engineering are somehow medieval solutions to 21st-century challenges.
  • Baseload. Repeatedly we hear that you need nuclear/fracking/or something else to provide base load. Setting aside that it takes many more years to scale nuclear or fracking than renewables baseload itself is an outdated concept. As Steve Holliday, then CEO of National Grid, said in 2015: "The idea of baseload power is already outdated. I think you should look at this the other way around. From a consumer's point of view, baseload is what I am producing myself. The solar on my rooftop, my heat pump – that's the baseload. Those are the electrons that are free at the margin. The point is: this is an industry that was based on meeting demand. An extraordinary amount of capital was tied up for an unusual set of circumstances: to ensure supply at any moment. This is now turned on its head. The future will be much more driven by the availability of supply: by demand side response and management, which will enable the market to balance the price of supply and demand. It's how we balance these things that will determine the future shape of our business."

What we can say that by 2030, the XLinks project is due to provide the UK with 3.6GW of reliable energy for an average of 20+ hours a day from a wind and solar farm in Morocco.

Morocco to UK power project to transmit power from the Sahara to Britain
The Xlinks Morocco-UK Power Project will generate electricity in the Sahara and transmit it to the UK.

XLinks says the project will provide "low-cost, clean power to over 7 million British homes." Note that word again — low-cost.

That's what we need, more projects like that.

We are where we are

We should have begun much sooner; decisions by the government in the past to hold back on renewables, especially wind, are the underlying reason why the UK faces an energy crisis. Similar mistakes abroad explain the global crisis.

Those who argued against wind, who protested every planned wind farm, should hang their heads in shame.

In the UK, onshore wind represents by far the quickest and most cost-effective way to generate energy.

In the meantime, we have a crisis to deal with. And it must be dealt with, or families will go cold and otherwise, healthy businesses will go bust. But it is essential that for every penny or cent spent on subsidies to alleviate short-term problems, a similar amount is spent on supporting the energy transition to wind and solar.

Liz has been handed a poisoned chalice. The solutions are not easy, but they do exist. The biggest long-term threat is bias against wind and solar.

PS

And all that without mentioning an impending food crisis, which may yet prove even more serious.

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