1. Introduction – Our Experience

1. Introduction – Our Experience Bruno Prior Mon, 14/12/2020 - 00:15

1.1 Context

  1. After a century of energy that was (roughly) on tap through the simple expedient of burning the fuels when we needed them, we are returning to an earlier era where balancing energy supply and demand is more challenging.
  2. We could simply internalise the climate externality through a carbon price, and leave it to the price mechanism to discover the best ways to clear the market. But governments are not generally willing to be so laissez-faire. They are determined to set out how the market should clear, not only in terms of the levels (prices and volumes) but also in terms of the technologies and the contributions that they should make.
  3. Our experience is that this is a mistake. Summerleaze has been involved in renewable energy for 40 years.

1.2 Pre-privatisation

1.2 Pre-privatisation Bruno Prior Mon, 14/12/2020 - 01:47
  1. We (Summerleaze) installed a heat pump to heat our new offices in the 70s. It minimised energy-consumption and maximised output by delivering so little heat that people wore thick jumpers and rushed to get their work done.
  2. We worked with Warwick University in the mid 80s to develop technology to purify and liquefy landfill gas to power our trucks. Unfortunately the oil-price collapsed and made the technology uneconomic just as it was reaching fruition. C’est la vie for entrepreneurs. We did not ask for nor deserve to be insulated from that risk. We just wanted to be able to profit where we got the risk right. That was not straightforward in a nationalised energy sector.
  3. We re-applied our knowledge of landfill gas to the production of electricity, and commissioned our first renewable power station in 1988. This preceded privatisation. We were only able to sell (“spill”) our electricity by the good grace of the local electricity board at a price determined by them.

1.3 The Non-Fossil Fuel Obligation (NFFO)

1.3 The Non-Fossil Fuel Obligation (NFFO) Bruno Prior Mon, 14/12/2020 - 01:56
  1. Privatisation was followed in short order by subsidy for low-carbon electricity in order to prop up nuclear energy. Although we were one of the few existing renewable power stations, we were refused a contract under the first tranche of the Non-Fossil Fuel Obligation (NFFO) because we questioned some of the government’s contract terms. We swallowed our objections for NFFO-2, and our deference was rewarded.
  2. NFFO was designed as a blind Dutch auction but modified almost immediately to give ministers the power to skew the outcome to favour certain technologies. We argued this was a mistake. The design also rewarded those who travelled most hopefully, not those who were most credible.
  3. We warned that the consequences would be that (a) ministers would not pick the balance of viable projects as effectively as the market would and (b) the incentives, “winner”-picking and depletion of the low-hanging fruit would lead to increasing proportions of non-viable projects being awarded NFFO contracts.
  4. The deployment levels fell accordingly, to negligible levels for the favoured technologies by the fifth and final tranche, despite a “will secure” test that supposedly ensured this would not happen. Ministers moved on to the next mechanism.

1.4 The Renewables Obligation (RO)

1.4 The Renewables Obligation (RO) Bruno Prior Mon, 14/12/2020 - 02:01
  1. The Renewables Obligation (RO) replaced NFFO in 2002. Most of the supporting analysis assumed that governments would set the level of the obligation at roughly the level that the market would deliver, aligning the cost with the buy-out price and obligation level. We believed (and advised in consultation) that not only would ministers not be able to anticipate correctly the level of deployment, but that the incentives of the RO would discourage investment if compliance levels were expected to be high. The effect would be that the value of the RO to participants would be higher than expected, as would the cost to consumers (who funded the mechanism) per unit of energy delivered. We invested accordingly and very profitably, when the discrepancy between the levels of obligation and compliance exceeded even our expectations.
  2. Like NFFO, the RO was initially designed to be technology-neutral but was quickly modified (“banded”) to allow ministers to skew the incentives in favour of more expensive technologies and against cheaper technologies. It is obvious that such a modification increases the cost per MWh delivered, but that was evidently a secondary consideration for ministers, intent on pursuing their industrial policy through an unsuitable mechanism. (The worst way to encourage R&D is through revenue support, as that does little to mitigate the risk that is one of the primary purposes of industrial policy.) We argued against “banding”, but were a voice in the wilderness. Not for the first or last time, we collided with a coalition of interests between:
    • politicians (who want magic bullets),
    • bureaucrats (whose existence is justified by micro-managing policies),
    • academics, consultants and pressure groups (whose influence is maximised by advising governments on ways to supposedly do better than the market), and
    • rent-seekers (for whom skewed government incentives are useful insulation against competition).
  3. Landfill-gas power stations like ours converted gas to electricity at around 40% efficiency. The rest was wasted as heat through the exhaust or radiators.
  4. We looked for opportunities to utilise the waste heat. It was never economic, because the substantial investment to recover the heat was not justified by the value of the heat plus the value of the carbon displaced by substituting for fossil-fired heating. Policy did not treat the carbon benefit of this form of energy equally to electricity, and consequently low-carbon heat was treated as though it had zero carbon benefit.
  5. Indeed, the low rate of VAT on domestic energy acted as an effective subsidy for fossil-fired heating in that sector. We argued for technology-neutrality in that regard (which effectively meant a carbon price) as well as between renewable-electricity technologies, but again found no interest in government or elsewhere. The energy went to waste. The UK made almost no progress on decarbonising heat.
  6. Meanwhile, Sweden decarbonised two-thirds of its heat and half of all its energy, with a carbon tax as its main policy lever. UK governments continued to pat themselves on the back for decarbonising at great expense a few percent of the 20% of our final energy consumption that takes the form of electricity.
  7. Focusing myopically for two decades on renewable electricity through NFFO, RO and Feed-in Tariffs (FiTs) had taken UK renewables to a magnificent 4% of our energy by the early 2010s. Yet the Office for Budget Responsibility projected a cost of around £10bn/year for environmental levies (mainly costs of renewable electricity) by 2020.

1.5 Contracts for Differences (CfDs)

1.5 Contracts for Differences (CfDs) Bruno Prior Mon, 14/12/2020 - 12:46
  1. So ministers moved on again. The new scheme employed Contracts for Differences (CfDs) to try to drive down the costs of certain technology “winners” (primarily offshore wind) in a similar manner to NFFO.
  2. It is too early to say for sure how that will work out, but there is an eerie parallel between the early tranches of NFFO and CfDs, which were expensive but largely delivered, and the later tranches, where prices fell below what were widely-regarded as the thresholds for viability, and deployment consequently disappointed.
  3. Whilst CfDs may be different for reasons that are not apparent to those who have looked critically at the economics of the favoured technologies, NFFO should at least be a warning not to count the chickens (projects commissioned and run profitably for a few years) before the eggs (contract prices and volumes) have hatched.
  4. CfDs left Summerleaze in the cold, because (a) they were focused on intermittent technologies, and Summerleaze had always preferred to invest in energy that was there when it was needed, and (b) they favoured scales of investment that were mainly achievable by the government’s corporate clients, beyond the resources of most entrepreneurial SMEs.

1.6 Renewable energy entrepreneurs - quo vadis

1.6 Renewable energy entrepreneurs - quo vadis Bruno Prior Mon, 14/12/2020 - 12:48
  1. This is just one of the signals that has persuaded us that there is no longer an opportunity in the sector for businesses that want to back their idiosyncratic judgments. The only way to operate is to try to do what the government wants, whether or not you believe in it.
  2. Even then, you are likely to be side-swiped by a change of government view (for example, see what happened to the photovoltaic and biomass-heat industries when they were over-incentivised and then over-delivered). Better to tend your garden.
  3. The main investments in the sector nowadays are by people primarily spending other people’s money.

1.7 Anaerobic Digestion (AD)

1.7 Anaerobic Digestion (AD) Bruno Prior Mon, 14/12/2020 - 12:49
  1. In 2005, Summerleaze bought one of the UK’s first, large anaerobic digestion (AD) plants out of administration. It had gone bust because it suffered a number of disadvantages, most of which were inflicted or exacerbated by state incentives:
    1. Its NFFO contract obliged it to take 80% animal slurry. Animal slurry produces little gas compared to most AD feedstocks, and pays no gate fee (the price paid to dispose of waste). It was irredeemably uneconomic, and yet a condition of the government’s contract. The project became economic when we broke the NFFO contract and switched the plant to take primarily food waste.
    2. It had been situated in a remote rural location (sub-optimally for sources of viable feedstock such as food waste) in order to please the government’s rural development agenda (in pursuit of grants). This also meant (significant to later government policy) that it was not viable to connect it to the gas grid.
    3. Its economic model was predicated partly on a report by a large engineering consultancy that advised that it would be able to pipe its heat to sell in the neighbouring town, Holsworthy. This was also hopelessly uneconomic, particularly in the absence of any mechanism to value low-carbon heat.
  2. Holsworthy’s economics changed rapidly after we bought it, as government efforts to stimulate the technology delivered more AD capacity than there was viable feedstock to fill it.
  3. The gate fee went from nearly half of income to a negligible contribution. That raises the energy price required to break even, which increases the cost of the subsidy required. Effectively, over-stimulation increased the cost to consumers of supporting the technology without significantly increasing the amount of energy, which was largely bounded by an inelastic resource.
  4. Governments were persuaded that this was not the case by “research” commissioned by interest groups. Particularly influential was a 2009 report by Ernst & Young for National Grid, which predicted that by 2020, biogas would make up between 5% and 18% of our gas supplies (nearly half of domestic gas).[1] In the event, it constitutes around 0.7% of our gas, and the industry is running well below the installed capacity for wont of viable feedstock even at that level.
  5. So of course, the interest groups (such as NG’s successor, Cadent) commission more “research”. Governments are persuaded that straw can yet be turned into gold, and announce plans for more alchemical policy to stimulate biogas.[2]
  6. For as long as all AD projects received similar levels of support, this was as much a public inefficiency as a commercial threat. But governments decided that they needed to skew the resource-allocation decisions in the directions they judged best, and introduced new or modified support mechanisms (FiTs and RHI) that awarded significantly different levels of support for AD depending on scale, feedstock and technology (e.g. generating electricity or feeding the gas grid).
  7. This introduced the risk that a new AD plant could setup in competition to our plants (we subsequently opened in Bishops Cleeve a second large AD plant, this time producing biomethane for injection into the gas grid) and out-compete us for the feedstock, not by being more efficient, but simply by gaming the rules invented by government after we had made our investment.
  8. Government has traditionally been careful about “grandfathering” their support promises, but governments found it impossible or undesirable to understand that these policy decisions were effectively “un-grandfathering” existing investments.
  9. A succession of governments have made the regime uncertainty so great in renewable energy that the only people who are sanguine about investment in the sector are either (a) those who do not understand the risks (amongst whom it is likely are many of the institutional investors lending on incredibly low coupons to large projects of technologies that are favoured by government but otherwise fundamentally uneconomic), or (b) those who believe they have a strong enough connection with government that they are insulated from the risk.

1.8 Renewable heat

1.8 Renewable heat Bruno Prior Mon, 14/12/2020 - 12:54
  1. From 2007, Summerleaze invested significantly in renewable heat (specifically, the supply of wood pellets for heating), in the belief that even the British government would not be able to ignore for much longer the obvious constraint that they would only be able to decarbonise so far by focusing on the 20% of our energy that is electricity.
  2. We selected wood pellets because it was the only technology that appeared suitable to supply the quality of heat required by the insulation and plumbing in the average, draughty British building, at the scale required to make material progress in decarbonising heat. One advantage of the UK lagging so far behind was that it was not difficult to see what had worked in other countries that had made progress in this sector. Academics and interest groups promoted all sorts of magic bullets as usual, but in the real world, biomass heat dominated because it was the least challenging substitute for the existing fossil-fired heating systems.
  3. When the Renewable Heat Incentive (RHI) was introduced, this reality asserted itself again, turbocharged by bad decisions in the design of the scheme (not only in Northern Ireland, but also in Great Britain to only a slightly lesser extent).
  4. Biomass heat would have dominated anyway without these mistakes, because the suitable applications for the other technologies were more limited than the government’s ivory-tower advisers recognised.
  5. But the government believed, as usual, that when the market did not behave in the way that their advisers had predicted, it was the market that must be wrong. The incentives must be adjusted until the “right” outcome was adequately incentivised.
  6. Within a limited budget, getting more of what they wanted also meant getting less of what they didn’t want. So support for biomass heat was “degressed” (i.e. cut) rapidly, while support for the “right” technologies was increased to many times the cost of biomass heat. Biomass went from growing at 70% a year (not difficult from a minimal base that had waited two decades for an opportunity) to grinding to a halt three years later, long before achieving the critical mass to sustain an industry.
  7. This was predictably not compensated by an offsetting increase in the contributions of the “right” technologies, because the reality was that the costs were higher and the opportunities were scarcer than the government’s “experts” and the industry lobbyists claimed.
  8. The RHI was flawed in too many ways to count. We advised DECC of the flaws before and after the RHI’s introduction, but as usual, predictions of unintended consequences and perverse incentives were unwelcome and ignored during implementation, and then greeted with great surprise when they materialised (“20:20 hindsight…” “who could have predicted…”). Amongst the flaws were:
  9. The overall budget: heat is twice the size of the electricity sector, and yet the government judged £1bn to be excessively generous to make rapid progress to catch up in this massive component of our energy, whilst happily signing up to £10bn/year to decarbonise 1/3 of our electricity.
  10. Given a tight budget, it was important to get the best value possible. But that meant the technology they didn’t particularly want (biomass). So they divvied up the budget as though they would get significant contributions from multiple technologies, despite the fact that some were much more expensive than others, and with widely-varying potential. This effectively ring-fenced a fraction of an inadequate budget for the only technology that could deliver a material contribution for the limited funds, and sterilised other parts of the budget by ring-fencing them for technologies that would not materialise.
  11. There are substantial economies of scale in most energy technologies. The government once again resorted to “banding” to reflect this, despite its illogicality and counterproductive history in earlier mechanisms.
    • In the RHI’s case, this meant classifying projects as “small”, “medium” or “large” and paying significantly higher tariffs for “small” than for “large”. But each band encompassed a wide range with big differences in scale economies. For example, “small biomass” covered anything from a 10kW to a 199 kW boiler, even though the latter was an order of magnitude more cost effective than the former. Support was set at the estimated level required for the average. This was exceedingly generous for the largest sizes within the band, which could consequently enjoy a payback period of 4 years on a scheme that ran for 15. Delivery was therefore heavily skewed to 199 kW boilers, not because they were the prevalent size required (heat demand is generally diffuse and smaller than that) nor the most economic if it were not for the mechanism, but because it was the size that gamed the RHI best.
    • The tariff for units over 199 kW was much lower, but the sort of application that needs that much heat is often not difficult to sub-divide. So even where the most efficient solution (barring the RHI) would have been a large boiler, this was often sub-divided into multiple smaller, more expensive boilers serving portions of the heat demand each, because this maximised the RHI. Unfortunately, the flip side was that it minimised the value achieved by the RHI.
    • The small-biomass tariff was eventually degressed to lower than the medium-biomass tariff, because of the over-deployment that the structure had stimulated. Medium biomass projects at the top end of their band (999 kW) became the new sweetspot, and took off accordingly. Ironically, many of the best opportunities (e.g. keeping chickens warm) had already been developed as multiple smaller (199 kW) boilers. So rent-seekers had to create heat loads to suit the necessary scale. They realised they could dry their own wood, and get paid to do it. In fact, the support was worth more than the fuel cost to do the drying, so the more they could dry, the more money they could make. They could dry the fuel to feed the boilers to dry the fuel to feed the boilers… The medium biomass band was quickly swamped with such applications, and equally quickly degressed to a non-viable level for new projects. Most of the RHI biomass-heat budget was used up on projects that would never have been designed that way, and many that would not have existed at all, if it were not for the stupidities of the mechanism design. Only a fraction of the money went to genuinely displacing fossil fuels. The main renewable-heat technology with the potential to deliver cost-effectively at scale was wasted and discredited thanks to the terrible design of the RHI.
    • This effect could easily have been avoided. In consultation, before and after the RHI’s introduction, we set out how to achieve that. It was eventually recognised in a revision to the RHI’s biomethane tariffs. It could have been implemented across the board from the start if policymakers had the humility to consider that their initial policy designs and knowledge might be imperfect, and that experience of earlier mechanisms might count for something.
    • The way to avoid that disaster would have been to pay a high tariff for the first X MWh and then a low tariff for all subsequent MWh. X does not vary by scale. For small projects, X constitutes a high proportion of their output, and the weighted average tariff is therefore high. For large projects, X constitutes a small proportion of their output and the weighted average tariff is therefore low. Mid-sized projects get mid-sized tariffs. There are no thresholds, just a sliding scale, and therefore minimal perverse incentives to target certain sizes. It is not complicated maths, but it seemed to be beyond the comprehension of the RHI’s architects.
    • Or alternatively, just pay a flat rate (e.g. 4p/kWh) on the basis that projects should get what they are worth, not what they need. Challenge installers of small projects and expensive technologies to find ways to reduce costs, or accept that they do not represent good value for taxpayers and the environment if they cannot. Encourage the large projects and cheap technologies that offer the best bang for the buck.
    • Either approach would be more rational than what we got. That is not hindsight; it was predictable and predicted.
  12. The best value in renewable heat is from large biomass projects. Because heat is usually fragmented, the opportunities are limited. They require a substantial investment and take a considerable period of time to deliver. They need (a) some value for their carbon because the capital cost is not usually justified otherwise, and (b) policy stability so that investors will commit to the long timescale to deliver the project.
  13. Unfortunately, practically the day before the RHI was due to launch, the government announced that they had to revise the large biomass tariff, supposedly because they had realised at the last minute that it would fail an EU state-aid test. When the revised tariff was eventually announced, it was half the original level, and inadequate to justify almost any investment under any conditions, let alone with the heightened political risk from the abrupt policy change. Consquently, almost no large biomass heat was delivered until this policy was reversed. Deployment focused on the smaller, more-expensive scales. If a government had set out to sabotage its own policy, it could scarcely have done better.
  14. Most heat is used in buildings, and most of that is in homes. But in another late announcement, the government delayed the introduction of the Domestic RHI from 2011 to 2014.
    • When it launched, the budget for the scheme to cover the largest heat sector (domestic) was a small fraction of the overall budget, which was itself inadequate by comparison to the resources devoted to electricity.
    • Successful technologies quickly hit the budget limit and were “degressed” to a tariff level that would deliver little, whilst their contribution was barely large enough to be discernible in the national energy statistics.
    • Unsuccessful technologies sterilised part of a budget that was already inadequate to achieve anything significant.
    • As fast as the RHI (domestic and non-domestic) encouraged the establishment of businesses to support the nascent demand, it shot them down again when degression pulled the plug on further deployment.
  15. It quickly became apparent that the design and budget of the RHI would limit its contribution. But the government still had to achieve by 2020 a level of renewables across the economy, not just in electricity, under the Renewable Energy Directive. And inadequate delivery would expose a flank for opponents to attack the government’s green credentials. What should a government do, if it needs to claim good progress but is unwilling to fund it?
  16. Conveniently, government statisticians “discovered” (twice) that they had been under-estimating the amount of domestic wood-burning that was occurring. By changing the model used to estimate this element (reasonably on the first occasion, and then ludicrously on the second), they could not only radically increase the amount of renewable heat that they could claim, but also keep increasing it every year in proportion to the estimated level of stove sales, without spending a penny.
  17. There were a few problems with this “model”.
    • It required us to believe that four times as much wood-fuel was available as was estimated by the Forestry Commission and the industry.
    • It relied on a survey that asked us to believe that approximately 40% of the wood-burning occurred in the summer months, contradicting an earlier part of the survey, in which the respondents had been asked to specify the summer months when they did not much use their fires and stoves.
    • It also asked us to believe that almost none of the new stoves replaced old stoves or fires (which would otherwise have had a negative effect on the estimates because renewable heat is measured in terms of the fuel inputs not the heat output and the higher efficiency of new appliances would have implied lower fuel consumption). The source of this assumption was supposedly communication from HETAS and the REA, both of whom confirmed that they had been referring to RHI-type biomass boilers, for which it would be true, not wood stoves, for which it is palpably not true.
    • Moreover, if it were true, we would have expected continued increases in the levels of air pollution traceable to domestic wood burning, but such an increase was not occurring according to the careful (and scarcely favourable to wood burning) measurements being carried out by researchers from Kings College London.
  18. Frankly, it is an obvious, convenient fiction to cover the government’s embarrassment at the inadequacies of its renewable-heat policies. It is so excessive that the hypothetical contribution from this source dwarfs the contribution of the RHI across all technologies.
  19. But it was not enough. One problem with statistical rather than real delivery is that it does not provide for organic growth. The amount of growth that could be assumed by the most optimistic interpretation was not sufficient to achieve the necessary growth rates in renewable heat.
  20. So government statisticians miraculously “discovered” another overlooked source of renewable heat: commercial air-conditioners. They suddenly realised that these were sometimes run in reverse to provide heat, and carried out some studies to conclude that (a) the scale was substantial (again, more than the contribution of the RHI), and (b) the efficiency of these units in heating mode was higher than previously thought and conveniently just over the threshold required to qualify as renewable heat.
  21. The units were re-classified as “Renewable Air-to-Air Heat Pumps” (RAAHPs) and a generous contribution was estimated from them. In a stroke of the pen, they added another 10 TWh of renewable heat to the statistics without delivering a single extra kWh in real life.
  22. Unfortunately, this statistical adjustment contains no logic to ratchet the figures upwards in subsequent years, so the contribution of heat pumps to renewable heat has actually slid backwards a touch since this adjustment was made. Delivering renewable heat through statistical adjustments is not the best way of encouraging an industry to deliver real projects.

1.9 Renewable hydrogen

1.9 Renewable hydrogen Bruno Prior Mon, 14/12/2020 - 17:47
  1. Another of our investments was in renewable hydrogen, from 2004, before it became trendy and recognised in policy circles. We identified a landfill site near Cambridge with substantial gas production but an impossibly-expensive electricity connection cost (at the time, it was later to change). We developed a hydrogen electrolysis plant powered by renewable electricity from the landfill site as an alternative way of using the energy and to learn about a potentially-promising technology.
  2. Our experience was that it was much more challenging, technically and economically, than is portrayed by its many current advocates. It was eventually (in 2010) broken up and sold abroad.
  3. Of course, technology advances and the challenges may be less now, but it is noticeable that many hydrogen proponents are not people who have built and run a hydrogen production plant for long enough to learn about its strengths and weaknesses, but rather equipment sellers, hopeful developers, academics or lobbyists.

1.10 Lessons

1.10 Lessons Bruno Prior Mon, 14/12/2020 - 17:48
  1. This is typical of the development process in an interventionist environment.
    • In a healthy economy, entrepreneurs identify opportunities and risk their capital to invest in commercial research and development to test if their judgment was right and identify ways to reduce costs in implementation. If they made a good judgment, they use their knowledge to replicate and profit from their investment, linking the means to make further investments to the track record of making good judgments. If not, they learn and move on.
    • In an unhealthy economy, the risk of investing ahead of policy is too great (“regime uncertainty”), and businesses focus on persuading the government to back their favoured solutions before investing in them. The investments are then insulated from competition from alternative solutions because their profitability leans heavily on the subsidy that is available only to the government’s “winners” (“de-risked” to use the popular current euphemism). This reduces the competitive pressure to reduce costs. Indeed, cost reductions can be unwise because governments may see them as a reason to remove support. Best to promise lower costs in the future subject to sufficient support now, for as long as governments believe it. This is unattractive to entrepreneurs, who like to back their own judgment, and hostile to them because (a) government is typically seduced by big promises, and targets solutions that require investment beyond enterpreneurs’ capital resources, and (b) lobbying and influence lean heavily on corporate heft. We may term this the “corporatist”, “crony capitalist”, “anti-entrepreneurial” or “Mazzucato” model.[1]
  2. The way to avoid the corporatist siren is for governments to recognise the knowledge problem, forsake the winner-picking course that reflects interventionists’ delusions of adequacy, and tie themselves to the mast of a policy to “internalise the carbon externality” that is blind to technology, scale or sector, aka: a carbon tax.
  3. This has been the recommended option of most economists over the years. In the form of the Carbon Dividend proposal, it is backed by over 3,500 current economists including 28 Nobel Laureates.[2] But it has never in three decades of privatised energy been a contender in a UK government consultation on low-carbon energy policy.
  4. Each time we have been faced with another proposal for a winner-picking mechanism, we have prefaced our consultation response with a proviso that a carbon tax would be preferable (before addressing the minutiae on which the government is pretending to seek opinions before implementing what it always intended to do), but it is whistling in the wind.
  5. Some people believe that the UK does enjoy a carbon price, in the form of the EU Emissions Trading Scheme (EU-ETS). In reality, this only covers around half of energy, which roughly coincides with the sectors in which the UK government intervenes through other measures as well, and excludes those sectors in which the UK has historically done very little. It has also been serially undermined by gaming by national governments, resulting in very low prices that reflect the design of the scheme rather than the cost of the externality.
  6. Our Chairman travelled to Brussels for an early discussion on the EU-ETS. After they had set out how it would work, he said to the room “But they’ll cheat”, meaning national governments would find ways to exaggerate existing emissions and allocate existing rights generously, particularly to “national champions”, so that modest, easily-achievable savings would be sufficient to ensure compliance, thereby undermining the price signal. This has, of course, proved to be the case, but the comment was treated with a combination of horror and ridicule at the time. How could anyone think that policy would work in any way other than that intended?
  7. That is not a phenomenon exclusively confined to meetings in Brussels. We have been greeted by the same attitude repeatedly in the UK, when we have tried to warn of the likely ways that policy would be gamed, or of the perverse incentives and unintended consequences.
  8. It shouldn’t be a difficult judgment for politicians to make:
    • If I say, “scrap the winner picking and implement a carbon price across all uses, technologies and scales”, I am saying “I believe I can reduce carbon at a lower cost than my competitors”. You don’t have to believe I am altruistic or more expert; just notice that my self-interest is aligned with the interests of taxpayers.
    • If my competitor says “my technology may be expensive now, but will be plentiful and cheap in the future, so long as you subsidise me disproportionately for now”, they may believe it, but they don’t have much confidence in it or they would back their long-term cost-effectiveness under a carbon-pricing regime. Governments have no idea if the claims are true, but can apply the judgment of Solomon – if you really believed it, you would be aiming to profit from your special knowledge in a competitive market, not asking for special treatment.
  9. The proposal is effectively to move risk away from corporations and on to taxpayers, but allow corporations to retain the profits should the cost-savings materialise. Politicians should be wise to “privatised profits, socialised risks” by now. But “de-risking” is all the rage again in corporatist circles of whatever political colour.
  10. The lesson for Net Zero of energy policy since privatisation (and of our experience as one of the last renewable-energy entrepreneurs surviving from the days of privatisation) is: DON’T DO IT. It assumes even more omniscience than was assumed in earlier, failed energy policies. We know enough about energy to know that it is too complex to plan and manage in this way. But in over 30 years of involvement in renewable energy, we have never been able to overcome the Dunning-Kruger effect in energy policy-making. Those who need to recognise their ignorance are too ignorant to realise it. They continue to implement or recommend policy as though they know enough to pick winners, ignoring not only the limitations of their position but also the evidence of every preceding failed policy.

1.11 A model to end all models

1.11 A model to end all models Bruno Prior Mon, 14/12/2020 - 18:17
  1. We offer below an analysis of the type that ought to be ignored by policymakers, but on which they place most faith: a model of our energy systems.
  2. The objective of the model is to illustrate where many of the assumptions underlying dirigiste energy policy ignore the devilish details. It is not intended to provide a better guide to dirigisme than the basis of current policy. It is to illustrate that:
    1. Taking some factors into account that are minimised in the analysis underpinning policy raises serious questions about the conclusions of that analysis, and
    2. This is still sufficiently imperfect that policy-making should be conducted on a different basis. We should assume that policy-makers cannot overcome the knowledge problem, and harness the tools (decentralisation and discovery, coordinated through the price mechanism) that humanity has evolved over millennia to cope with such complexity and uncertainty.
  3. What follows is a description of that model. If you know a bit about energy, you should spot many places where the assumptions either conceal significant detail or are subject to a significant amount of uncertainty.
  4. One problem with uncertainty and complexity is that they are multiplicative. Each assumption may be reasonable and not too uncertain. Each element of the model may be the most reasonable simplification of reality available. But when there are hundreds of assumptions or model-elements, as there inevitably are in a subject as complex as energy, the product of all of them is such uncertainty, imprecision and path-dependency that only a charlatan would portray the outcome as sufficiently certain to provide a useful basis to pick winners. And only a fool would not see through that charlatan’s claims, however many letters they have after their name and however lofty their seat of learning or corporate influence.