The UK Energy Crisis

What do we need to do to solve the simultaneous energy and climate crises?


What do we mean by the energy crisis?

There are various energy crises (high prices, unstable suppliers, resource depletion?). One possibly serious energy crisis is the potential shortage of electricity generation capacity.



What are the reasons behind this ’energy gap’?


Firstly there is a closing of existing capacity: both of old nuclear power stations coming to the end of their lives and of dirty coal power stations being closed down due to EU regulations: see this report p11-13.


Secondly, there is large uncertainty in the market.

Uncertainty leads to:

a) returns need to be higher or else investment won’t take place [1]

b) investment may be delayed, especially if a delay will lead to the resolution of uncertainty [2]


The problem now is that there is severe uncertainty over the future of the energy in this country. The government has assuaged some of the regulatory uncertainty by making strategic statements about the future of nuclear, renewable and fossil fuel energy. But there remains great financial uncertainty.


Each power source has its’ own uncertainties

a) Gas: the fuel is now hugely expensive, making this source uneconomic if such prices were to be maintained

b) Nuclear: nobody has built a nuclear power station in the UK since Sizewell: there are considerable price escalation and legal risks. A power station can be built in 7 years but with all the regulatory and public opinion hurdles new power is unlikely to come on stream before 2020. The government was 5 years too late in it’s decision.

c) Renewables: the Renewables Obligation, unlike the German system of ’feed-in tarrifs’ provides a highly uncertain return

d) Carbon Capture and Storage (coal or gas): again we don’t know the exact cost until the plant has been built. Any plants built by 2015 would be ’demonstration’ plants.

e) Coal. The dirtiest energy source of them all. The price of energy in the form of coal is a lot lower than the price of energy in the form of natural gas or oil. However, is the European Emissions Trading Scheme carbon price sufficient to control the price?


In this sitution, gas is ruled out as too expensive. renewables may happen if they can get through planning, nuclear is too late for 2015 but could make a significant impact from 2020 onwards. We are stuck between the rock of our climate change ambitions and a hard place of the investment response of low-carbon electricity to current ambitions. What we need is strong incentives for investment and in particular strong incentives for low carbon electricity. My next post will explain how this can be done.



[1] uncertain cashflows will lead investors to require a higher return in order to compensate for the risk. in otherwords people will invest but only if the price is right.

In otherwords, uncertainty may lead to less investment and the prices of that investment may rise to compensate investors for the extra risk incurred.

The relevant theory of this is known as certainty equivalent. Under certain conditions, an investor’s aversion to risk can be represented by a higher or ’risky’ discount rate. For a full account of the relation between the various ways of representing risk in investment decision see Rothwell and Gomez (2003) "Electricity Economics", IEEE press, NJ, USA pages 53-74

If governments make investing more risky than it needs to be, then electricity consumers (industry and the public) are likely to have to pick up the bill in higher bills or blackouts.



[2] If investment is irreversible there is a further effect. Real options theory shows that a combination of irreversibility and uncertainty can lead to investments being delayed. See for example Dixit and Pyndyck ’Investment Under Uncertainty, Princeton.

How to contain the credit crisis - Martin Wolf (FT)

Here are 4 do's and 4 do not's of Martin Wolf in the FT. At first glance my plan appears consistent with the relevant do's and the do nots. Note that Wolf suggests to find alternative methods of financing housing including land value taxation (Do not number 3), maybe as an alternative to other property taxes.

http://www.ft.com/cms/s/0/49726416-84ca-11dd-b148-0000779fd18c.html
Here are four “dos” for a wise government.

  1. sustain the core financial system.
  2. if the government does end up bailing out banks or facilitating mergers, make sure it also contains the risks taxpayers are running.
  3. develop a contingency plan for a systemic bail-out of the financial system.
  4. develop a more credible set of independent institutional arrangements to replace the fiscal rules, which are about to be utterly discredited.

Now here are four “do nots”.

  1. do not pay too much attention to the financial sector’s self-interested bleating.
  2. do not change the monetary framework.
  3. do not bail out mortgage lending via government subsidies.(...) What it can do, instead, is facilitate the development of new systems of finance, such as covered bonds. What it can also do is consider land-value taxation as an alternative to other property taxes.
  4. do not panic. 

A Possible Solution to the Financial Crisis

A Possible Solution to the Financial Crisis

Here is a suggestion after reading Anatole Kaletsky's Article today http://www.timesonline.co.uk/tol/comment/columnists/anatole_kaletsky/article4776149.ece?Submitted=true

Two new organisations need to be created to formalise and eventually commercialise the government's role as 'lender of last resort' and 'insurer of last resort' to financial institutions. I'll call these 'Bigbank' and 'Biginsure'

Bigbank's role is to lend other banks so long as the other bank is solvent.
Bigbank's lending should be to other creditworthy institutions. It should it insure the loans it makes against the risk of default where possible, by buying credit default protection in the open market.
Bigbank's role is to provide 'bridging loans' to other banks who might have temporary liquidity problems due to speculative attack.
Bigbank could (say) have around £100bn of capital. The government providing the initial capitalisation, by buying shares, or by guarantee. So long as the risks on the loans that it makes can be adequately insured, Bigbank can lend many times its' capital.

Biginsure's role is to be an 'insurer of last resort'. Biginsure will insure bigbank against it's counterparty going bust, if no other insurers can be found. Big insure could also insure against other major risks where at present. the government provides a guarantee (e.g. terrorism, natural disasters). Biginsure would be well capitalised, in order to cover quite large potential risks. Biginsure could grow (e.g from an initial size of £100bn of government-owned shares to a size of £1tr) by selling shares to the public, so spreading risk broadly.

Both institutions can act commercially, by providing loans at rates that account for the inherent (although not the speculation-induced) riskiness of lending (because now-solvent institutions might become insolvent in the future). The main role of bigbank is to offer liquidity and thus defend solvent institutions against speculative attack.

You can comment: http://climatephilosopher.blogspot.com/2008/09/my-solution-to-financial-crisis.html

Investment Banks Should Not Hold Systemic Credit Risk

Comments Welcome.

The Triple Crisis

It has been suggested on my website and elsewhere [1] that we face three fundamental strategic crises:
  • "Firstly, there is a short term economic crisis in modern economies. Our quality of life could be better than it currently is, and we need to ensure we save enough for the retirement of an ageing population. Our tax systems hold back the economy
  • Secondly, there is a particular crisis in energy and food sectors, with soaring prices and political instability in suppliers of energy.
  • Thirdly, there is a global crisis over the future of life on earth, associated with climate change, pollution and the burning of fossul fuels."
I hope to address these fundamental issues in this blog and on my website in my "Short Guide to a Secure Future".

"These crises need a robust, global and integrated response. This website will describe a set of credible and realistic solutions to these crises."

[1] e.g by others such as NEF
Also see presidential nominees: McCain's views and plans Obama's views and plans

In The Beginning

It is funny that I see my future writing essays. At school I was never so good with words. Age 11, the mere thought of an essay sent me in to a paroxysm of anxiety. Once I started writing, words might flow... but how difficult it felt to put the first word on paper! 

Today, I still have the same difficulty with starting things. What is the main task to be done in a day; where should I start? I find one very useful piece of advise is to write down one word. This reminds me of the beginning of St John's gospel: "In the beginning was the Word...". Why not start every day with a word? And what a beautiful and profound piece of writing this is!

1 In the beginning was the Word, and the Word was with God, and the Word was God. 2 The same was in the beginning with God. 3 All things were made by him; and without him was not any thing made that was made. 4 In him was life; and the life was the light of men. 5 And the light shineth in darkness; and the darkness comprehended it not.

Thinking and Our Future

One of the purposes of this blog is to apply some of the ideas of some of the great thinkers to the great problems of our age, in particular, our energy supply and it's implications for the future of the Earth's climate. I think the particular combination of political philosophy and our energy future is severely neglected.

The limiting factor in tackling the danger of climate change is not our understanding of the physical climate. We know already that there is at the very least a credible risk of an average warming of 2 - 6 degrees Celsius above the long-term average, with a risk of severe impacts such as the melting of ice, the destruction of ecosystems and the desertification of fertile farmland. This in itself might motivate a concern to mitigate those risks.

We know the basic policies for tackling climate change; namely a price for carbon or carbon tax. However, these policies have not been implemented. This could be a communication problem or it could be something even more serious. If we accept there is a danger, we need to think about whether it is a problem which can be solved socially and politically. If not, what needs to change? More fundamentally, is there any agent or idea which can actually affect our trajectory? If we are on a road to hell, can we get off or take a different path? What are the boundaries to the emotiveness of our thoughts? Can science speak truth unto power and if so when? What is power and what language does he speak? How can you or I speak with him or her?

The economics of climate change is now a little less neglected, after the Stern review and the subsequent outburst of academic activity. But the political theory of climate change still seems to exist at a very basic level. Hopefully this blog will find those thinkers who are talking in the wilderness and to bring them in touch with this thread at least. If they cannot be found this blog aims to start to redress their absence.

Welcome

Welcome to my blog! 

This will be my personal blog. I guess I would describe myself as a climate philosopher, where philosophy is considered in the older sense! Hope you enjoy the blog!