Archive for category Energy

The lunacy of mixing a budget, an energy policy, historians and global warming.

Living where I do, I get to call myself an “Economist”.  I know that it was over 20 years ago that I got the degree – but here you are what you studied.  Scraped a Third in Psychology at Slough University?  You are a Psychologist.  Degree in Bungee Jumping?  You’re a Bungee Jumper. 

I know that studying something doesn’t necessarily make you good at it, but at least it gives people some idea that you are aware of the basic principles of the subject.  Which is why I never understood why the ‘Socialist’ and ‘Historian’, Gordon Brown (PhD on the Scottish Labour Party, 1918-1929), was ever considered remotely able to run the UK’s economy for eleven years – especially as he had never so much as run a haggis stall.  Never had to make payroll, make a profit, or find the money to pay his company’s taxes.   

I am then unclear why we would now think that ‘Historian’ George Osborne (BA Modern History, Oxford) would be the one to turn around the dogs breakfast the last one made of the economy.  Especially given that he has never so much as run a chippy.  Never had to make payroll, make a profit or find the money to pay his company’s taxes.                                                   

 One of those basic principles is that Government’s actions have consequences.   In Osborne’s ‘Business Friendly Budget’ he has gone for the popular vote, taking 1p per litre off  the fuel duty, and then paying for it by gouging the North Sea exploration companies.  Now I am all in favour of reducing taxes – but that is not what this is.  It is, as Jeremy Warner says in the Daily Telegraph, robbing Peter to pay Paul.  Now Peter, or in this case, ‘Big Oil’ may be close to the Bankers as being a popular figure of hate, especially among the eco-wing of the Lib-Cons.  However, in terms of purely economics, the policy doesn’t make sense.  The £9.4bn the treasury loses over five years from the 1p cut in fuel duty, is spread over millions of consumers and its miniscule impact on each consumer is then disguised by the natural volatility in petrol prices.  It will do very little to change consumers behaviour.  On the other hand the £10bn tax increase on the oil exploration companies is targeted on a small number of entities and so its effect will be clearly defined and felt.    

 Cityam.com reports that the tax hike on UK oil profits from 20 to 32 per cent in last week’s Budget has pushed the effective tax rate on some older oil fields to 81 per cent. Statoil has put their huge £6.4bn investment on hold and others are rethinking and re-analyzing the returns they are getting on their exploration projects.  Rowena Mason writes that:

It comes after smaller companies such as Valiant Petroleum warned that they are re-evaluating new projects, since the Chancellor increased tax by 12 percentage points to more than 62pc.

There have also been reports that oil majors have withdrawn plans to sell billions of pounds in North Sea fields nearing the end of their lives, leading to fears they will be abandoned with oil still in the ground.

 Industrial production fell unexpectedly in February, driven largely by a sharp decline in utilities output (-2.1%mom) and oil and gas extraction (-7.8%mom) and it’s going to be interesting how this develops going forward.

 All economics operates at the margin.  Raising taxes won’t shut down the North Sea over night.  But it does reduce the return obtained from the more difficult and marginal projects to the extent that investors are encouraged to put their money elsewhere.  The treasury loses out on the future tax revenue from these unrealised investments, and thousands of sub-contractors and suppliers never get to benefit from increased order books.

In politics, the argument goes, sometimes you have to hold your nose and do stupid things.  Right – but this now seems to be par for the course with the current government.  For I see that they also think it would be a great idea if the UK becomes the first country in the world to be saddled with a carbon tax.  I love that term carbon tax.  It gives the impression that Osborne is really concerned about all that nasty black stuff that comes out of chimney stacks when in reality it is PR spin for Carbon Dioxide – the invisible stuff that we all breathe out.  To Big Government Statists, a carbon tax is the mother lode of central planning.  For when a government gets to tax and regulate the air you breathe, it gets to control everything.  From a liberty point of view, it’s distinctly dubious, but as an economic policy it really sucks. 

 In the budget Osborne said that he will impose a “£16 a ton floor price for carbon”. Christopher Booker writes that:

What it means is that for every ton of CO2 emitted by British industry, and by our electricity companies in particular, we shall all indirectly have to pay what is in effect a hidden tax of £16, rising over the next nine years to £30.

………thus increasing them (electricity bills) by a total of £3 billion a year, rising to £5 billion by 2020. This will add more than 25 per cent to the price we presently pay for electricity, or £200 a year for every household.

 So not only is George Osborne consigning even more people to fuel poverty, he is also making it a lot more expensive to produce goods and services in the UK.  People’s purchasing power will shrink, demand and production will fall and economic growth will be negatively affected.  And as energy costs rise by 25%, investors will seek to locate their factories to more favourable locations elsewhere. 

The thing is, that apart from making the pound worth the same as a Weimer Republic Papiermark, there are only two ways the Government can dig us out of the debt hole we are in – slash spending or grow the economy.   The carbon tax does neither.   Over in the United States big government liberals have been trying to push a Carbon Tax for years.  Obama before the election boasted that he wanted to drastically raise the cost of carbon dioxide-producing energy production and redistribute the money to green energy.  But despite owning the Senate, the Congress and the White House, even he couldn’t find enough suicidal Democrats to back the policy.

Yet our Conservative Government seems to think it’s a great idea. If this was all about just using the green brand to sell an old fashioned tax raid, then I could understand it.  Want to widen the tax base by gouging the poor and middle classes because there aren’t enough rich people to tax to oblivion?  Call it “Green” and the BBC will love you for it.  I may not agree with it, but I get the concept.  However, it really does appear that the government actually believes that these green policies do work, and are therefore a good thing for the country, despite real world evidence to the contrary.

A fine example of this was in 2010 when the last great UK steelworks, Corus, was closed by its owner, Tata.  Cashing in on £100’s of millions of EU-Carbon-Credits, they closed down the UK plant and then used the proceeds to build a bigger one in India.  Effect on the UK economy?  2000 jobs and hundreds of millions in lost tax revenues and economic growth.  Effect on CO2 emisions? Zero. 

And that’s not all – more from Christopher Booker:

This is on top of the price we will have to pay for all the Government’s other “green” dreams, such as the £100 billion it wants spent on 10,000 giant wind turbines, plus another £40 billion to hook them up to the grid. The 100 per cent subsidies for onshore wind power and 200 per cent subsidies for offshore will add further billions to our bills, in return for what will still be only a fraction of the electricity we need.

Already we have seen one estimate, from analysts at Matrix Group, that Mr Osborne’s new “carbon tax” will so skew the economics of coal-fired electricity that four of our larger French- and Spanish-owned power stations at Kingsnorth, Didcot, Tilbury and Cockenzie will have to shut down by 2013, even earlier than their forced closure under the EU’s Large Combustion Plants Directive. This will knock such a hole in our generating capacity that we can look forward to the first of those long-predicted power cuts and blackouts.

So hey, we will have no coal power stations, but we will have lots of eco-friendly windmills right?  Well yes, but as a recent report shows, they don’t work.  They either don’t produce electricity when the wind doesn’t blow, or they produce too much when it does.  Lewis Page in The Register writes:

It gets worse too, as wind power frequently drops to almost nothing. It tends to do this quite often just when demand is at its early-evening peak:

At each of the four highest peak demands of 2010 wind output was low being respectively 4.72%, 5.51%, 2.59% and 2.51% of capacity at peak demand.

And unfortunately the average capacity over time is pulled up significantly by brief windy periods. Wind output is actually below 20 per cent of maximum most of the time; it is below 10 per cent fully one-third of the time. Wind power needs a lot of thermal backup running most of the time to keep the lights on, but it also needs that backup to go away rapidly whenever the wind blows hard, or it won’t deliver even 25 per cent of capacity.

That means that you need to have a carbon belching power station on hand to take the slack from wind power.  As you can’t keep firing up and turning off a power station, you need to keep it going whilst it waits to help out when the windmills stop turning.   Utter lunacy.  He goes on to write:

Quite often windy periods come when demand is low, as in the middle of the night. Wind power nonetheless forces its way onto the grid, as wind-farm operators make most of their money not from selling electricity but from selling the renewables obligation certificates (ROCs) which they obtain for putting power onto the grid. Companies supplying power to end users in the UK must obtain a certain amount of ROCs by law or pay a “buy-out” fine: as a result ROCs can be sold for money to end-use suppliers.

Thus when wind farmers have a lot of power they will actually pay to get it onto the grid if necessary in order to obtain the lucrative ROCs which provide most of their revenue, forcing all non-renewable providers out of the market. If the wind is blowing hard and demand is low, there may nonetheless be just too much wind electricity for the grid to use, and this may happen quite often:

The incidence of high wind and low demand can occur at any time of year. As connected wind capacity increases there will come a point when no more thermal plant can be constrained off to accommodate wind power. In the illustrated 30GW connected wind capacity model [as planned for by the UK government at the moment] this scenario occurs 78 times, or three times a month on average. This indicates the requirement for a major reassessment of how much wind capacity can be tolerated by the Grid.

Or in other words, it will blow the grid.

So here we have a government whose stated aim is to massively raise the cost of energy in the UK, force a large section of our fossil fuel burning electricity generators to close down and then transfer our nation’s reliance for its energy needs onto a technology which only works when the wind blows. 

I think the economic illiteracy of the Government is neatly illustrated by James Dellingpole, who notes how pleased they are with themselves for having set up a ‘Green Investment Bank’.  They intend to bung £3bn of tax payers money (£2bn from the sale of publicly-assets and £1bn from taxes) into the bank, which will then be run by a bunch of Government cronies whose job it will be to waste invest the money in green projects.  I’m sure that it will do swimmingly given how good government is at looking after other people’s money (the taxpayers) and what a great investment opportunity the alternative energy market has been.

My proposal to the Green Investment Bank would be the Bank of England sending bank notes off to be used as fuel in the generators.  It may help to cure inflation and it would perfectly illustrate what the government’s energy policies are effectively doing.  I’ve included a video clip below that they might also be interested in and in the meantime, I might send my CV off to No.10.  I am an ‘Economist’ after all and surely I couldn’t do much worse than Osborne.

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