UK energy policy is even more of a quagmire than the public finances

Today gives us another opportunity to see how the UK coalition government is progressing with its plan to reduce the UK budget or fiscal deficit. We will find out how far away it is from the promised land of a zero fiscal deficit heading towards a surplus. It is hard not to laugh at that now isn’t it? Except that the joke does backfire when we note that as we look forwards the same promise has been made. However governments can imposed burdens on its citizens in other ways and one has been highlighted only this morning. It comes from our troubled energy supply sector that has been so neglected by the UK political establishment over recent years and indeed decades. From the BBC.

In the government’s first capacity market auction more than 49GW of power capacity has been secured at a cost of £19.40 per KW.

That amounts to a total cost of £960m and will add around £11 to the average household energy bill.

The auction will provide power for the year 2018/19.

That is a form of pseudo or implicit taxation if you think about it. Also it makes me wonder how we end up paying more for power when the price of a barrel of Brent Crude Oil has fallen by 45% over the past year. I guess many of you are also thinking what about the years up to then as we imagine similar shady dealings happening.

In a universe far far away where our political establishment reside the response to this was as follows.

Ed Davey, Secretary of State for Energy and Climate Change, said:

‘This is fantastic news for bill-payers and businesses.

If £11 extra is fantastic news what would £22 be or £33? It also skips the implication of the fact that we had to pay to keep plants open because the plans of this government were to close them! Indeed on such grounds Ed Davey must have been close to orgasmic excitement when he promised Electricite de France double the current price of electricity to build some new nuclear reactors. That always looked a poor decision and at an oil price of US $60 (Brent Crude) looks a dreadful one. Please do not misunderstand me we needed new capacity (indeed any sensible plan would have begun a decade ago) but it was to coin a phrase part of “Rip-off Britain”. It is also contributes to our tendency to institutionalised inflation.

The UK political establishment has made a litany of errors over the past couple of decades on the issue of energy supply and left us vulnerable to both blackouts and higher prices.

What about the UK Public Finances?

This section opens with some numbers which on a headline basis do spread some seasonal cheer as shown below.

PSNB ex was £14.1 billion in November 2014, a decrease of £1.6 billion compared with November 2013.

A monthly fall is nice but we need some more perspective so let us take a look at the fiscal year so far.

Public sector net borrowing excluding public sector banks (PSNB ex) from April to November 2014 was £75.8 billion, a decrease of £0.5 billion compared with the same period in 2013/14.

That is the first time this year that we have seen this fiscal year improve on the last and is a big change on October’s £3.7 billion extra deficit. So let us dig a little deeper.

What happened in November?

Here we saw a surge in tax receipts (5.5% up on last year) compared to a year ago whilst government expenditure rose by a much smaller 2.1%. We can continue a seasonal style message with the fact that the previously troubled level of income tax receipts rose by 4.1% or £400 million in November compared to last year. But we cannot quite complete the theme tune to the television series Happy Days yet because of this bit.

other current receipts increased by £1.1 billion, or 59.3% to £2.9 billion as a result of £1.1 billion received in fines (see Recent events ; methodological changes).

Oh no! It was all looking so good. Also the phrase “methodological changes” makes us sing along with John Lennon and the Fab Four.

Help, I need somebody
Help, not just anybody
Help, you know I need someone, help

This is reinforced by the fact that we have not actually received all the money yet. Was someone keen to see an improvement recorded?

The fines amounted to £1.1 billion and although payments of the fines were spread over November and December the receipts have all been recorded in November when the fine liabilities arose.

Accordingly £1.1 billion of the £1.6 billion improvement has found itself moved to the one-off rather than the regular category. Although as we fine banks these days rather than tax them perhaps we should instead put it in the category of occasional payments.

However there is a rub as Shakespeare put it on the subject of bank fines. As they tend simply to recoup them by changing their prices and interest-rates then UK bank customers are a major loser here. Oh what a tangled web as we observe that for many this turns out to be yet another disguised form of taxation.

What about the year so far?

This looks as first as if we have seen an improvement in income tax revenues but with apologies to those with seasonal hangovers it is not quite a simple as that. The UK government also pays out tax credits to those on lower incomes and it has been decided that these are now benefits and not negative tax payments. So we need to look further for a real change as we observe yet another methodological change to trap the unwary.In fact there are a considerable number of relatively small changes which lead to this.

In the period April to October 2014, PSNB ex was revised down by £2.4 billion, while in 2013/14, PSNB ex has been revised down by £0.2 billion. These revisions are a result of changes across a number of sectors of government.

A shark in the water

Next month the UK Public Finances will receive something of a shock. This starts to get political so let me simply say that the UK statisticians are recording this in a different manner to the way this has been presented by the Chancellor of the Exchequer and the Prime Minister.

This means that in next month’s bulletin (due to be published on 22 January 2015) the central government expenditure will include £2.9 billion of EU budget contributions in the December figures.

Comment

There is much to consider if we combine the two announcements today from the UK government. First we discover that we will have to pay more in 2018/19 (and presumably in the years preceding it) to pay for their and preceding governments mistakes as we add the phrase “great news” to my financial lexicon for these times. Then we see better numbers for the UK public finances which then wilt somewhat under observation. However they are an improvement overall if only a small one. This means that once we allow for the shark in the water in December’s numbers we might end up being in line with last year’s performance. Of course at a time when economic growth has been running at an annual rate of 3% per annum that is in itself a disappointment.

From time to time I point out the dreadful forecasting performance of the Office for Budget Responsibility or OBR. Just as the outlook has shown signs of maybe stabilising it has done this.

As a result, despite strong economic growth, the budget deficit is expected to fall by only £6.3 billion this year to £91.3 billion, around half the decline we expected in March.

As Fleetwood Mac put it “Oh well……”

What about UK economic growth?

I attended a meeting at the Royal Statistical Society to discuss a paper written by Dr. Mark Courtney on the Retail Price Index (RPI). Here is a thought for you from his calculations. Putting the RPI back in the national accounts would reduce recorded economic growth in the UK by around 0.5% per annum in each of the last three years.

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27 thoughts on “UK energy policy is even more of a quagmire than the public finances

  1. Shaun, regarding putting the RPI back in the UK National Accounts, was the change not made principally to put the deflator closer into line with the expenditures being deflated? The RPI expenditure weights exclude spending by low income pensioner households, upper income households and non-resident tourists in the UK. However expenditures of all of these groups would be part of the retail sales expenditures to be deflated. The CPI makes no distinctions between households based on income, and spending by non-resident tourists is included. It is obviously a more appropriate deflator. There are some categories that the National Accounts must deflate where there is no CPI series, just an RPI series. Here, it would certainly be more appropriate to use the RPIJ component, if the RPI series was estimated using the Carli formula.
    The direct Carli index is consistent with no item substitution going on within a product category as some items become relatively cheaper. However, the chain Carli index is consistent with a strong consumer reaction to relative price changes every time the series are linked, and in the UK, very much to its credit, this is every year. As a Canadian, I envy you. The direct Jevons index is consistent with the same revnue on each item month by month however its price may change, and the chain Jevons index is no different. So which index would you trust?

    • Post 1997, the CPI failed to recognise and/or allow appropriate response to a massive house price boom. This boom has made homes extremely unaffordable, to the great harm of Britain’s younger generations.

      So even if the CPI uses a very elegant statistical model, CPI failed badly on house price inflation. RPI warned on house price infaltion, but British rate setters ignored this warning.

    • Hi Andrew

      There was a discussion after Dr. Courtney’s talk at the Royal Statistical Society about the statistical issues involved between the CPI and the RPI. Phillip Turnbull made a case for disagreeing with Dr. Courtney over his view on the “formula effect” for example.

      I asked the room to consider the economics of this which is mostly to be found in how you treat the housing market and a discussion ensued. However later there was produced some research from M&G which backs my view of keeping an index which is in line with what people think inflation is. Their survey had a one year forecast for inflation of 2% which is where RPI now is.

      Of course none of these are perfect but it does give you a little of the flavour of the discussion.

      I also asked which measure would deal with zero and negative inflation the best in statistical terms and would value your thoughts on this?

  2. Ah-ha! Nice to see they are still finding ways to cook the books. I’d hate anyone to start thinking the numbers are genuine just because they haven’t tinkered with them for a month or two.
    I know I’ve asked this before but seriously, who believes these numbers anymore? Nobody in the financial world could possibly take any of it seriously? Or do they just print it all out and keep it as an arse covering exercise. Should their investments go belly up, they can just blame the numbers that someone else made up and forget any due diligence on their own part?

    I wonder if the media will pick up on the payment to the EU in January or just let it slip by quietly? We will see eh!?

  3. I’m intrigued by the way politicians and campaigners manage to conflate power (by which they always mean electricity) and energy (either gas+electricity or those +fuel for transport).
    As most of us in the UK spend rather more on gas than electricity no doubt that £11 a year increase will be more than compensated by the reduction in our gas bills due to the drop in the oil price. No ?

    • Hi arrbee

      I am waiting for news of any price changes on the domestic fuel front as all we have had so far is silence. Ironically they are likely to be an upwards push on recorded inflation because if my memory serves me correctly there were cuts this time last year. That would be an irony with circa US $60 oil would it not?

      I also remember a phase where there was a trend for all electric houses on the theme of being modern ect. I wonder what those who live in them think now?!

  4. They ought to tell us what the energy policy options are and give us relatively accurate information on the costs and the CO2 outputs from the various options.

    In short, coal & gas are cheap – but they contradict EU policy and carbon reduction commitments given at places like Kyoto.

    Nuclear is several times more expensive (according to reform – thanks for the link JW) but it does reduce CO2 output and provides grid stability.

    Wind and Solar are several times more expensive than nuclear. Their biggest drawback is unpredictability meaning an unreliable grid. Our dishonest politicians keep the lights on by idling coal & gas plants – end result, according to Der Spiegel is that Wind and solar have not reduced CO2 output.

      • Currently several problems.

        Firstly, inadequate storage capacity. Secondly poor efficiency. Thirdly, cost of storage will make wind/wave/solar even more unaffordable. Do you fancy paying 50 pence per KWh ??
        That may be a 300% increase on your electric bill ….

        • I see evidence of a warming globe. Higher average temps. European snowlines receding up mountains to the dismay of this skier. GW scientists predict extreme floods & droughts. We had a California drought, recent extreme floods in Passau, the Danube, the Elbe and the Thames. Proving CO2 causation is harder.

          I’d vote for nuclear, preferably 4th gen gas cooled VHTR.

        • “I see evidence of a warming globe.”

          Not for 17 years you don’t.

          Correlation does not prove causation.

        • Hi ExpatinBG
          I don’t suggest I ‘know’ all the reasons for various weather issues around the globe, but as a physicist I am certain it has nothing to do with CO2.
          Man obviously affects localised areas ie flooding caused by use of flood plains. Snow line changes in the Himalayas and Kilimanjaro have definitely been affected by burning fossil fuels ( wood in Africa, Coal in China/India) but its not CO2, its particulates ( soot) from power stations without scrubbers, the soot lies on white snow, absorbing heat rather than the white snow relecting it.
          Most major weather changes come from the air flow over the biggest ocean, the Pacific. California is currently going through one its regular dry periods from this effect, its more significant now because of the vast man-made agricultural concentration in that state supported by water from basically dry states further east. Every time we pour concrete to create our increasing cities/towns we increase temperatures.
          So yes, some is anthropolical, but nothing to do with a gas. But what a great scam, at last a reason has been found to tax ‘the air that I breath’ (good ‘ol Manc group, The Hollies).

        • JW, wouldn’t any albedo-related anthropogenic climate change be far more likely to come from the worldwide doubling of land under agriculture and irrigation than soot from power stations?

        • Hi therawbuzzin
          My point was about how localised effects can change local weather patterns and temperatures. Soot from Power Stations can blow quite a long way , but relatively they are local effects when looking at the whole Earth.
          My knowledge of albedo effects is limited to the reading of conflicting articles. It seems like a very difficult effect to measure in a meaningful way.
          I suspect its a bit like the CO2 myth, its easier to talk about computer driven estimates based on flimsy real evidence than it is to try to tackle ‘real’ issues where you have to get your ‘hands dirty’.
          As you said, correlation does not prove causation. Indeed I would add the word ‘spurious’. Factor Anaysis and its like, where correlations are made between ‘made up’ mutually orthogonal vectors leads people to believe they know what inputs drive outputs, especially when it can all be wrapped up in fancy computer programs. Science, real science, consists of postulations and theories which are tested to death in the real world before anyone gives them credence. So called ‘climatology’ driven purely by computer modelling is a fraud. Its certainly not ‘science’.

        • Hi JW,

          I studied first year uni physics. I’d have thought it’s easy to design an experiment to test heat dissipation rates from a sealed glass globe with known quantities of nitrogen,oxygen, CO2 etc. Ensuring constant energy (immitation sunlight) input and start/end temperatures to a provable tolerance for error is a bigger challenge.

          Done correctly, such an experiment could make or break the “CO2 causes global warming” theory beyond doubt. Without scientific evidence I do not express opinions on the validity of such science. I’d strongly welcome such proof or disproof – scientists should keep open minds.

          The political cure for GW (wind,solar without adequate storage) is clearly a fraud, assuming we believe Der Spiegel’s report that such technology hasn’t reduced CO2 output in electric generation.

          Electric generation is a tough dilemma, even with SO2 scrubbers, coal ash has been reported to be poisoning ground water with heavy metals etc. Coal mining also regularly kills miners – mostly due to inadequate & badly enforced safety rules. Flawed fission reactors do meltdown. There just isn’t enough hydropower,geothermal and gas.
          Solar/wind output is inadequate with current technology and we shouldn’t be subsidising failure.

        • Hi ExpatinBG
          The Earth is not a sealed glass globe, indeed that is partly the reason all this CO2 linked AGW is ‘cobblers’. Energy constantly leaks out of the Earth’s atmosphere as well as being absorbed by it. Clouds are ‘pesky’ things for AGW, they both reflect outward and contain inwards heat energy.
          Any day now we will read reports that 2014 was the hottest year on record. Its rubbish. Even many ‘believers’ think that the stats do not show this, indeed its funny reading them attack each other over the use of statistically insignificant data.
          Coal produced in the USA, South Africa and Australia can be burnt in UK Power Station boilers. The records at these mines is good and the UK generators are good at dealing with waste materials. I excluded Columbian coal which is also good for UK boilers , because their safety records are not so good.
          Without coal we have to invest massively in gas-fired generation. The idea espoused by the DECC that the electricity grid can operate on nuclear and wind is just plain wrong. Excluding the dreadful cost implications, these generators cannot ‘load follow’. And to believe we will have massive amounts of CO2 storage on tap for new coal/gas plant is ludicrous.
          Unless this CO2 rubbish is overcome the UK is currently heading literally into the ‘dark ages’.

      • The problem with wind is nicely summarised in the National Grid Merit Order right now. If you look at the link below and click on the Generation by Fuel Type ( Graph) you will see the current generation merit order by fuel type.
        Wind is having a good output day, about 13% of the total requirements. However what is important is both its position in the merit order ( above nuclear) which signifies its cost to the system and the fact that its output does not vary with changing demand.
        You will see that coal and gas provide the cheapest generation and they also provide the vast majority of the flexibility of supply. Indeed without coal generation or a vast new build of gas-fired generation the system will fail.
        Anyone who thinks otherwise is ‘away with the fairies’.
        Shaun, if you read this, your remarks about falling oil price on the system can be answered by the amount of oil generation today…zero. Eventually some gas prices will be affected by virtue of some oil elements in the contract escalators, but not too much. By far the greatest impact should be felt by the falling world coal prices with especially eastern seeboard US coal going for a ‘song’. But of course UK policy is to burn less and less coal and close the stations down , so we will not see much of these lower costs. Its all so absurd it literally makes me weep.

        • Hi JW

          So in essence our domestic energy supply (coal excepted) has decoupled itself from falling oil prices?! Sometimes you really could not make it up……..

          Oh and the particulates issue chimes with me as I was one of those who bought one of the supposed new high-tech diesels in the latter part of the last decade only to discover that it is has been spewing unhealthy particulates. The bureaucracy missed those out or something like that.

        • Hi Shaun
          The coal prices are not linked to oil prices, but have been falling like a stone ever since China took the foot off the ‘gas’. For instance Glencore is closing its coal mines in Oz for Xmas, due to lack of demand.
          Eastern US coal, which is good for burning in UK power stations ( all coal varies and boilers are designed for certain types) is currently stranded looking for a home. US demand has declined sharply because of the new gas glut which is also using spare rail transport. So the only market is export. My guess is that Germany will take some to feed its new coal plant which it desperately needs to overcome problems caused by its ‘dash for wind’, although their boilers are predominantly designed for ‘brown’ coal from Poland.
          It doesn’t take meddling politicians long to completely mess up anything!

  5. Following my moan about energy prices I decided to write to Ofgem pointing out that by now I would have expected a substantial fall in domestic energy tariffs. No reply so far. I suspect they are the watchdog that barks but does not bite.

    • Hi Pavlaki

      If you read JW’s comments above it would appear that Ofgem are in this up to their necks. The energy policy of the UK has apparently insulated us from the falling oil price. Apart from coal which it is official policy to get rid of!

      Oh and this bit is either embarrassing in the light of falling oil prices or unusually truthful…

      “What is the future for energy prices?

      We face a combination of factors which are likely to increase energy prices. These include increasing dependence on gas imports, ambitious environmental targets and the need to replace ageing power stations.”

  6. Hi Shaun
    £19.40 is hopeless. Its far too little. This is supposed to be a capacity charge that encourages new plant to be built to keep the lights on when the completely useless windmills stop turning or there is cloud cover that stops the almost equally useless ( in the UK) solar. It is far too low to do this. All it will do is try to encourage older plant from closing.
    This seperately identified cost is there because the basic wholesale pricing mechanism for electricity is poor , ever since the ‘Pool’ was abandoned. And its been made almost redundant by governments of every hue imposing their ‘green’ energy subsidies and requirements on top of the awful EU Large Coal emission regulations over the last 15 years.
    There is no price signal for the buiding of truely economic plant.
    The more the government meddle ( this capacity charge tries to replicate the similar charge in the old Bulk Supply Tariff of the CEGB going back decades) the worse it gets.
    In the end everyone ends up paying much more for a lousy service.
    As an ex-colleague said to me the other day, they seem hell-bent on turning it back to the 1960s when the system just about surviving as they waited for the next brown-out.
    They all need firing, and anyone espousing so-called ‘green energy’ needs treatment for serious delusions.

    • psychiatric treatment for the responsible politicians would be a let off. They need prosecution for a massive fraud, because they make bernie madoff look like a small time crook.

  7. It seems to me that the only thing which is very well organised on a national scale is the robbing of the 99% by the 1%.

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