EU competitiveness and productivity have been torpedoed by the ECB and European Commission

Sometimes you think that they really could not make it and you discover that they already have.

More than 30 years after its inception, Economic and Monetary Union is widely seen as a success.

Actually the speech is about a failure so the rhetoric is a sort of smoke screen. But it does serve as a reminder that central bankers act like politicians these days as those are the words of Isabel Schnabel from Friday in Florence. In fact she really got into her vibe.

Our monetary union has become a global leader in social protection, a pioneer in fighting climate change and a guardian of free trade and democracy.

Her views matter because she is a weather vane for opinion at the ECB. Unfortunately for Dr.Isabel she immediately hits rough water.

To assert its role, the euro area needs to remain competitive; it must be capable of creating the sustainable growth that our social and economic fabric depends on.

The concept of “sustainable growth” is not a little awkward when your economy has not grown over the past year. But there is as serious a problem with another concept here as Isabel Schnabel means sustainable in terms of her climate change policies. Also she very very quickly points out that “remain competitive” is rather pushing it.

However, this capability is increasingly under threat. At the turn of the millennium, Europe was operating at the global technological frontier, but today many euro area firms are laggards. Compared with many of their global peers, they invest less in both physical capital and research and development, and they are less productive.

Indeed the beginning of the Euro era and remember the period before 2000 was one of a type of acting as if it existed seems to have torpedoed the economy!

Between 1995 and 2007, annual growth in GDP per hour surged measurably in the United States, whereas it slowed and diverged in the euro area.

“Diverged” is exactly the opposite of what the Euro area founders were promising back then. Also this hits keep coming.

The dismal trajectory of Europe’s productivity has been subject to much analysis.

The analysis targets this area.

Over the past three decades, a striking gap in the real IT-related capital stock has emerged between the euro area and the United States .

On its way it ends up confessing to this.

Despite important progress on reforms in the wake of the sovereign debt crisis, product and labour markets in the euro area often remain heavily regulated.

This reminds me of this from the European Parliament.

By the end of 2024, all mobile phones, tablets and cameras sold in the EU will have to be equipped with a USB Type-C charging port.

Welcome in itself, but I saw many replies pointing out that it would mean the EU would be left behind if something better was developed.

A Disaster for Isabel Schnabel

I pointed out on the 7th of this month that Dr.Isabel sees herself as a valiant climate change warrior. But even she cannot avoid this.

Today, electricity prices in the industrial sector in the EU are almost three times as high as in the United States and more than twice as high as in China.

There is more here.

As a result, the production of high energy-intensive goods is declining at a concerning pace, undermining the euro area’s stronghold in traditional industries .

That would be reducing the productivity she is supposedly boosting. But the German renewables push has turned into a high cost disaster. Let me remind you that people like Dr.Isabel would have been assuring everyone that it would lower costs and improve productivity. She has a go at creating a bogeyman to take the blame.

Russia’s war of aggression against Ukraine is weighing heavily on the price competitiveness of euro area firms.

Whilst the war has made things worse there were already problems from higher energy prices.

In a way the mess which is the policies of Dr. Isabel is highlighted by this.

Energy from fossil fuels is bound to become even more expensive over time as carbon prices rise. This implies that the only way to sustainably regain competitiveness is to reduce our dependency on fossil fuels by accelerating the green transition.

So more of what has crippled the economy will save it. But that rather collides with this morning’s news.

Natural gas prices plunge as US set for warmest winter on record ( Financial Times)

I realise that I am conflating time periods but it is hard not to have a wry smile at this.

Also we get to the real reason why she is talking about productivity.

However, since high carbon-intensive sectors, such as mining, refineries and air transport, have so far been on average more productive than greener ones, the reallocation of production factors across sectors during the green transition will mechanically reduce aggregate productivity over the short run

The policies she has supported have badly damaged it. Plus if we move onto her proposed solutions we see another of our themes in play which is that we always need more public spending according to these people.

Third, we need to raise public investment, both at national and European levels, in order to deal with pressing structural challenges: the green transition, territorial security, digitalisation and a growing shortage of skilled workers.

How she squares that with her previous insistence on fiscal discipline is a question that I hope somebody will ask her?

President von der Leyen

She too is in on the competitiveness game according to the Financial Time.

Ursula von der Leyen will begin her campaign for a second term as European Commission president on Monday, seeking five more years at the top of the EU’s executive with a campaign of increased defence spending, improved business competitiveness and green policies.

Of course combining it with “green policies” is a type of oxymoron. Actually if we consider her period as German defence secretary the push for defence is quite a cheek as well. In fact her competitiveness plan sums up the mess the EU is in and for those doubting it I suggest you look up what the “Draghi Laws” did to the Italian banks.

She has also commissioned former Italian prime minister and European Central Bank president Mario Draghi to write a report on the state of the EU’s competitiveness and proposals to improve it, as part of a pitch to member states that her second term would aim to improve the bloc’s stuttering economy through boosting its single market.

Comment

The problem for the Euro area authorities and the ECB is their own policies. I have already explained how their climate change policies have crippled what they considered to be some of their most productive industries. But there is more in the symbolism here.

A senior banker has alleged that Morgan Stanley manufactured his job title to dupe European regulators into believing the bank had moved top staff to Frankfurt to comply with post-Brexit rules. ( Financial Times)

Along the way the FT has depth charged its own previous claims about job moves to Frankfurt from the City of London and on that front there is more news today.

The EU’s long-running attempt to wrest the euro swap market away from London after Brexit may finally be over, after watered-down proposals from Brussels left control largely in the UK’s hands. ( Financial News)

But the important point is that the Morgan Stanley story shows that businesses will tell the central planners of the EU what they want to hear. In the meantime the US moves ahead.

“the nascent burst in productivity that the U.S. economy has experienced over the past year or so.”  ( New York Times)

Podcast

What is wrong with UK nuclear power?

Energy has become something of a topic du jour in the last few years as we have embarked on a risky plan to provide it. That hit trouble when the war in Ukraine began and via restrictions on Russian gas further raised prices. Fortunately we have been able to replace it and this winter has so far been mild and windy. But not every winter will be like that. In such a scenario one might think we would see nuclear power stepping in. It provides advantages in supplying a base load for electricity supply as in essence you turn a reactor on and run it for six months or so. That contrasts with the unreliability of wind power which was 19.5 GW yesterday morning and 11.3 GW this and thus creates balancing and replacement challenges.

But UK nuclear power is not going well and much of this is caused by the failure of successive governments to even replace reactors which reach the end of their lives. These days we have a maximum capacity of around 5.5 GW as opposed to the 13 GW we had in the peak days of the mid-1990s. Since then we have failed to plan ahead properly and this has two consequences. The first is the decline in capacity and the second is the decline in our skill base. We used to produce our own designs but now have to look abroad. For those who follow naval issues we did the same with nuclear submarines where the Astute programme was both delayed and made more expensive by the same issues. Our political class ignored that highly skilled people will be in demand elsewhere leaving us for a while up a creek without a paddle.

But over the past week or two there has been another problem as our present fleet of nuclear reactors has not been doing well. This morning is a little better at 2.7 GW but we have been producing 2.5 GW most days. According to iamkate the average over the past week has been 2.5 GW as opposed to 4.3 GW over the past year. I do not know about you but I would be planning for maximum output in January rather than something of a minimum. So something looks wrong here too.

Hinckley C

We can start with some good news in that we are building two units here which will produce some 3.2 GW which this morning would more than double our nuclear supply. Indeed as it is nuclear then this sort of analysis is more accurate than measuring wind like this.

Once Hinkley C is complete, it is expected to generate enough electricity to supply some six million homes, for the next 60 years. ( BBC)

But there is an issue with when it will start which keeps slip-sliding away as Paul Simon would say. Originally we were told this.

 In 2007, the then EDF chief executive Vincent de Rivaz said that by Christmas in 2017, turkeys would be cooked using electricity generated from atomic power at Hinkley.  ( The Guardian)

Next we were told this some years after it was supposed to be in operation.

In 2022, the cost of the UK’s first new nuclear plant since the 1990s was estimated at £26bn, with a target date for completion of June 2027. ( BBC )

Whereas now we are told.

EDF gave three scenarios, ranging from becoming operational is 2029, to delays pushing this back to 2031.

So far it has always been just around the corner on a straight road. This is even worse than it looks because we were supposed to be learning from the problems of a similar reactor build in Flaminville France. Whereas we may even do worse. The issue of skill set I raised earlier has been in play.

“Going first to restart the nuclear construction industry in Britain after a 20-year pause has been hard,” Mr Crooks wrote. ( BBC)

Things which are delayed also get more expensive.

In 2022, the cost of the UK’s first new nuclear plant since the 1990s was estimated at £26bn, with a target date for completion of June 2027.

Previous cost estimates have been expressed in 2015 prices for easy comparison over time.

But taking inflation into account, the previous estimate on final costs of £26bn works out at £34bn today. The updated estimate of £31-35bn, could see costs hit £46bn in today’s prices – an increase of about a third. ( BBC)

Still you can have a sigh of relief as we were reassured yesterday we would not be paying for this.

“It is important to say that British consumers or taxpayers won’t pay a penny, with the increased costs met entirely by shareholders,” Mr Crooks’ letter read. ( BBC )

What a difference a day makes

In fact the claim by Mr. Crooks was going wrong at the same time as we read it.

The French government is pressing the UK to help plug a multibillion-pound hole in the budget of nuclear power projects being built in Britain by France’s electricity operator EDF. ( Financial Times)

The deal was supposed to be they built the reactor in return for a guaranteed price for the electricity it supplies. As demand for electricity is planned to rise via Electric Vehicles and the like they effectively have a guaranteed income.

But Paris is pushing for a “global solution” that would also encompass funding issues at another planned UK plant, Sizewell C, said a French economy ministry official and another person close to the talks. “It’s a Franco-British matter,” the French economy ministry official said. “The British government cannot at the same time say EDF has to figure it out alone on Hinkley Point and at the same time ask EDF to put money into Sizewell. We’re determined to find a global solution to see these projects through.”  ( Financial Times)

A reply in the comments section updates us on the income side.

The guaranteed strike price of £92.50 per MWh (or £89.50 if Sizewell C goes ahead) is indexed by CPI from Sept 2016 (subject to verification) has already inflated by approximately 30% and it will be uplifted each year by CPI for the 35 year ‘Reactor Term’. By this mechanism, the British tax payer is already carrying the commercial operating risk in this project. ( David Chaplin)

Also the existing reactor fleet run by Edf has been doing rather well out of events it would appear.

Just for 2022 and 2023 UK wholesale electricity prices increased by over £100/MWh and EdFs UK nuclear business will have benefitted by a £6bn to £8bn windfall from these prices with no increase in their operating costs. EdF should put this money into Hinkley point cost overruns as a credit from the UK taxpayers. ( Offshore enguneering)

 

Comment

As you can see what looks like a potential solution to some of our energy issues has turned into what Taylor Swift would describe as “Trouble, Trouble, Trouble”. Cost overruns and delays are like the twins you do not want. It is hardly auspicious when this is the plan.

The UK government has said in the past it wants nuclear to provide up to 25% of the UK’s electricity needs by 2050 as part of its plans to combat climate change. ( BBC)

That frankly looks like pie in the sky at the present rate of progress. Or what has come to be called “Hopium”. We have a political class who seem unable to manage any sort of large project.They spend money yes but what do we get in return? Edf continue the theme by talking about “productivity” in relation to Hinckley Point C when so far nothing has been produced. Will Sizewell C be even running by 2050?

Let me switch now to something more hopeful.

We can learn lessons from South Korea’s fleet strategy, which will reduce nuclear construction costs. To fully implement these solutions we’ll need to update our planning system so that we can approve the construction of different reactors in the same fleet at the same time, rather than repeating many of the planning steps for each identical reactor.  ( @SAMDUMITRIU )

Maybe also we can leverage from our submarine technology

Rolls Royce estimates that each of their 470MW SMR will require roughly £2bn of capital investment, significantly less than the £32bn for Hinkley Point C. At £4.4m per MW, this is roughly in the middle of international standards. ( @SAMDUMITRIU )

We badly need something as present plans are in quite a pickle. Oh and applying a different side of economics relating to my past idea to issue century bonds when yields were low. We have also managed to set out on infrastructure spending when bond yields are the highest for some years.

 

If Electric Vehicles and Heat Pumps are so good why do they need so many subsidies?

This week seems to be ending with several energy stories and of course it is in many ways the issue of our times. The UK has just managed to raise domestic energy prices at a time of falling natural gas prices and Germany declared a much higher inflation rate only yesterday ( 3.8%) mostly due to energy prices having been affected last year by what was called “December emergency aid”. But let us move to the issue of electric vehicles or EVs where an article by the Financial Times tells us this.

Electric cars accounted for 16.5 per cent of new vehicles sold in the UK last year — marginally down from the 16.6 per cent seen during 2022, according to figures released by the Society of Motor Manufacturers and Traders on Friday.
Although the total number of EVs sold rose by 18 per cent to a record 315,000, overall UK car sales increased by the same amount, rising to 1.9mn.

So whilst the absolute number of EVs sold rise they did not gain market share and in fact had a small relative decline. The framing of the bit below is interesting to say the least.

Last year marked the first time battery cars failed to gain market share since sales began in earnest in 2018, raising concerns that private buyers remain sceptical of the new technology and concerned about higher prices.

What is it about higher prices that might put people off in a cost of living crisis?! It is like critical thought has been suspended. Also most can figure out why many are sceptical of new technology after all the lies car companies have told over the years.Over the holiday period Toyota confessed to its own issues with the truth.

Hong Kong/TokyoCNN — 

Daihatsu, the Japanese automaker owned by Toyota, has halted domestic production after admitting it forged the results of safety tests for its vehicles for more than 30 years.

Also Tesla has issues only this morning

Tesla recalls virtually every car it’s ever sold in China due to potential issues with the driver-assistance system Autopilot that could increase the risk of crashes. ( Bloomberg)

In another form we return to the higher prices issue.

EV demand is still rising globally, but carmakers across the US, Europe and the UK have warned there is slowing appetite as the market shifts from early adopters to more cautious mass-market consumers.

But we are then assured that they have cheaper costs once bought.

Although EVs have lower running costs than petrol cars, the upfront price is around 30-40 per cent higher, the SMMT said.

That gets challenged in the comments section.

Running costs cheaper? Unless you can charge at home public charging at c.80p kWh is more expensive than diesel to travel. Hence if running costs are no cheaper for some then EV cars are just more expensive and current ones are depreciating like a 90’s laptop. ( The Accountants Accountant)

As well as the running costs issue I note the poor resale value of EVs gets a mention here. That in a sense makes them even more expensive via lack of resale value if we look at costs over the life of the vehicle.

Another issue which gets a mention in the comments is the need for charging infrastructure. As someone who lives in a flat that echoes with me although Battersea is quite well supplied with pubic ones ( there are 9 around Battersea Park for example). Also I see some EVs being charged via lamp posts.

Another issue has come to the fore more recently.

Don’t forget the higher insurance costs. They have escalated in the last year as insurers realise that a small prang can require an entire new battery. ( MontaguNorman)

One might think that was worth a mention if you are claiming running costs are lower. But let us now move onto the consequence of all of this.

“Just one in 11 private consumers last year chose an EV,” said Mike Hawes, SMMT head, as he called for a VAT cut to get sales back on track and meet new government targets. “We do need to look at incentives for the private consumer.”

We seem to be skipping the issue of why EVs are apparently so unattractive and getting the begging bowl out again. This is a form of higher prices in the sense that we will be paying collectively via taxation and subsidising EVs. This brings me to my central point which is that with prices for EVs higher why do they need more subsidies? Looking at the statement below one might easily conclude that EVs are not very attractive.

Ian Plummer, commercial director at Auto Trader, warned that falling enthusiasm for EVs from mainstream buyers was “a sign of what’s to come if the government doesn’t support the industry in making the transition by incentivising consumers”. He pointed to interest in EVs among private buyers “faltering amid doubts over affordability and charging”.

As to affordability I think that they position is quite clear for many rather than their being “doubts”. As to charging let me bring in something of an elephant in the room which is can the electricity supply cope? This winter has so far been mostly mild and windy but any still cold period would put things under pressure and question how increased demand via EVs could be supplied?

Heat Pumps

There is a familiar tale here in that the use of Heat Pumps has been slow in the UK because of the cost of them and indeed doubts about the technology itself. It also seems to need ever more subsidies. From December.

A government grant scheme to support the installation of heat pumps is set to benefit from another £1.5bn in funding. ( The Independent)

The BBC recently ran an article on Heat Pumps claiming that they now are a success.

But a new breed of heat pumps is emerging. Engineers have gradually improved the technology, meaning that heat pumps are now able to supply much higher temperatures, sometimes in excess of 70C.

I am pleased that the technology has improved but those with previous systems are likely to be less than delighted.

The first heat pumps Graham Hendra sold, about 15 years ago, weren’t very hot.

“To get 50C – that was quite hard,” says the former wholesaler, referring to the temperature of the water that these devices sent to radiators, known as the flow temperature.

Also I may be more sensitive because there was recently a fire in my block but this seems a big deal to me.

She adds that there are some limitations with R290-based heat pumps, such as the fact that they cannot be located near to air bricks or windows at ground level, to eliminate the risk of the refrigerant, which is flammable, leaking into such areas.

Comment

We seem to be running round in circles. The new “Green” technology is very expensive and we see ever more calls for subsidies. But that only shifts the price from the buyer/owner to the taxpayer. Due to all the Covid expenditure the public purse is under pressure anyway. Also I have put Green in quotation marks because if you look at how batteries for EVs are produced and what is in them you have to question how Green they actually are?

Let me finish with a positive which is this from the National Grid.

Ending 2023 with our greenest month and a new wind record  In December, wind provided 41.2% of electricity. We achieved a new maximum wind record of 21.8GW on 21 December between 8 – 8:30am where wind accounted for 56% of our electricity generation.

Whilst this is welcome it was as I pointed out earlier from favourable weather which was relatively windy and mild. We also need to plan for when it is less favourable. Also let me point out that these numbers are for electricity only which is a bit over 20% of our total energy use.

Our energy policies in the UK and Europe are crippling our economies

Yesterday brought signs of economic weakness to the Euro area and the UK. That has been backed up this morning by a 5 point fall ( 101 to 96) in business confidence in France. There are obvious issues with higher interest-rates but to my mind a fair bit of the problems come from issues with energy. In the short-term there is the issue of price and as we look further ahead there is the issue of whether there will be enough supply.

If we start with the supply issue then UK Wind Power is supposed to have a maximum in terms in terms of at least 25 GW although it has only ever reached 21 GW. Over the past 24 hours it has produced 5.3 GW at the most and 1.8 GW at the least. So as you can see in addition to it mostly producing nowhere near the claims ( can power 100,000 homes etc) it is very unreliable putting a strain on the system. Next up us solar which within its obvious constraints ( even in summer it has a short-term peak) but it disappoints too as yesterday’s peak of 6.5 GW is  a bit more than 3 GW below its maximum. As I type this ( 9:25 am ) it is only producing 1.7 GW. So we are always going to need lots of electricity generation from elsewhere mostly today gas although we are burning 0.8 GW of coal. Thank you to iamkate for the numbers and let me move onto a literal cost of this.

The cost of balancing Britain’s power grid hit £4.19 billion last year according to Nuclear Industry Association analysis of National Grid Electricity Systems Operator (ESO) data. The total cost for 2022 is equivalent to every household in Britain paying an extra £150 ( Nuclear Industry Association)

Such costs are normally hidden so that we can be told renewables are cheap. In essence we get told that it is the price of gas that is the problem bit that ignores the reality that renewables need lots of gas for back up to cover their unreliability as I type this the “Saudi Arabia of Wind” is burning some 16.6 GW of gas. Remember this is summer so demand is lower.

If I now switch to supply then the Green Party have by default made my point for me. Remember when we were supposed to have loads of cheap renewable power? Now we are told this.

We could halve energy demand without harming our quality of life – it’s the cheapest way to cut our climate impact. I’ve tabled an amendment to the govt’s Energy Bill calling for a demand reduction plan – one of 3 #GreenNewDeal amendments ( @CarolineLucas)

I am pretty sure it is not a parody although the suggestion some energy could be free is of the space cadet level. I also believe I eat pretty healthily and rather suspect their enforced diet will be “healthy”. But the real issue here is that they now longer think they can supply us even at current levels. So the flip side of this is that supply will be halved under their renewable plan.

It’s a gas gas gas

The Rolling Stones lyric from Jumping Jack Flash has proved remarkably prescient as the last couple of weeks or so has shown.

Australia LNG strikes may be averted  LNG workers in Australia will meet Thursday to consider a “strong offer” from Woodside following 15-hour negotiations  Worries that strikes would disrupt LNG exports rocked global gas prices ( @SStapczynski)

What the rocketing price for gas showed was how vulnerable we now are. After all it is summer in the northern hemisphere and we would be under much more pressure of there were supply issues when demand is higher in winter. In a sense this is the biggest irony of all as the claimed energy security from renewables has made us even more exposed to moves in the gas price.

In War The Truth is the First Casualty

Here is an example from FT Partner Content

Towards net zero: Dogger Bank Wind Farm to supply 5 percent of the UK’s energy demand Partner Content by    @Equinor

They were challenged on Twitter (X) by @loftussteve

You are confusing energy with electricity. Which for a publication such as the FT is unforgivable. It’s 5% of electricity. Which is about 1% of domestic energy and around 0.3% of the “UK’s energy demand”.

If you now go to the article itself you are told something rather different.

When completed, Dogger Bank Wind Farm will supply 5 per cent of the UK’s electricity needs, equivalent to powering five million British homes.

So it looks as though he has forced a change as we wonder how such a large error was not spotted by the experts? Some argue we use relatively more electricity in our energy mix these days but the error is at best by a factor of 3 and at worst by a factor of 5. How can we have such people planning things when such a basic error is made?

Also there is the “will supply” and “five million British homes” bit. As total UK Wind Power has fallen as low as 0.3 GW this summer we do have periods when the wind does not blow. That is awkward for those who even after it clearly has happened still argue it cannot. What are our five million homes supposed to do then? Even the halving of demand wanted by Caroline Lucas would be a long way short.

A Lack of Nuclear Power

This is perhaps the biggest failing from our political class and it goes across it although the most spectacular was this.

The Liberal Democrat leader at the time, Nick Clegg, was against nuclear energy. He argued that it was pointless since it wouldn’t come online until 2021 or 2022. ( ZionLights)

But the truth is that the Blair and Cameron years did nothing and the passage of time has seen our nuclear fleet reduce to around 5 GW. Now we are apparently running round with new projects but the reality is that it takes at least a decade for new plants and often more than that. Hinckley Point C which was supposed to be online in 2025 is now definitely maybe for 2027.

As someone who worked in Japan I was influenced in my views by the damage to the Fukushima reactors. But even as someone with concerns about nuclear power I could see we needed to replace existing reactors. After all technology improves over time.

Problems with the grid

We used to have sources of electricity near to where it is used. Near me is the famous Battersea Power Station and the less famous Lots Road one which helped supply the London Underground. Now apparently it is an improvement to have the supply a long way away. Except reality and physics again intervene.

The decarbonisation of the economy is expected to double electricity consumption by 2050. Until now the problems had been largely evident on the supply side with new wind and solar farms struggling to get connections to provide the low-carbon electricity the switch to net zero depends on.But the grid constraints are increasingly becoming pinch points on the demand side where businesses are looking for upgraded or new connections and delays are mounting. ( Financial Times)

Notice how the FT skips the unreliability of supply. But the problem is that the supply is now often hundreds of miles away from the demand. Apart from the inevitable power losses there is the infrastructure. There are possible gains from solar on site but it has its issues too as some friends of mine worried about energy supply in the relative wilds of Sussex bought some solar panels. So far so good and they added a battery for obvious reasons. The next step of selling back to the grid hit a more basic problem. They had just refurbished their kitchen and were unwilling to damage it on the scale required.

Comment

My purpose here is not to rubbish renewable power as it has both strengths and weaknesses like anything. The issue is the way it is being promoted which means it will fail to deliver as promised. I know that this is an emotional issue so for any new readers I would like to point out that on here we have been discussing the risks to our energy supply for some years. We did not know Ukraine would be invaded although after Crimea it was a risk but we did know that we were ever more vulnerable to problems.

Switching back to the economy we see much higher energy prices which will have already stopped some economic activity. Frankly why would you produce steel in the UK at all?

British Steel, which is owned by China’s Jingye, is looking at replacing one of its two coke blast furnaces at its steel plant in Scunthorpe with a less carbon-intensive electric arc furnace. ( Financial Times)

For defence reasons we do need some as another subsidy junket starts. Then there is this.

CF FERTILISERS UK (CF) has proposed the permanent closure of the ammonia plant at its Billingham complex, the largest in the UK, as it says production is uneconomic and faced with dwindling demand. The decision follows a halt in operations, announced for similar reasons last August. ( thechemicalengineer)

We are destroying parts of our economy……

What is the latest on the UK energy situation?

As 2023 has progressed we have got used to our energy situation improving. However we also need to recall where we started from which was a particularly grim situation. If the worst had persisted it would have pretty much collapsed the economy via an even more savage burst of inflation. However in the last couple of weeks or so we have found ourself in another wind drought. This is the state of play this morning according to @UK_WindEnergy.

GB Grid: #Wind is generating 2.41GW (8.50%) out of 28.34GW

These numbers have become typical as the breakdown for Saturday shows.

GB Grid: Yesterday’s #Wind generation. Wind generation: 61.29GWh (10.92%) GB total: 561.24GWh

The peak on Saturday was 3.73 GW. The immediate outlook is for more of the same.

Today’s forecasted metered #Wind peak is 3,414MW between 21:00 and 22:00 GMT Tomorrow’s is 3,207MW between 20:00 and 21:00 GMT

At least the peaks will coincide with demand peaks as it gets dark. But these are hardly in line with past claims.

Prime Minister Boris Johnson says he wants to make a “big bet” on renewables, turning the UK into the “Saudi Arabia” of wind power.

Talking via video link to a roundtable discussion at the UN in New York, he said the country held “extraordinary potential” for wind energy.

That was from the BBC on the 24th of September 2020. Indeed Boris Johnson went further.

As regards wind power, Mr Johnson said: “We’ve got huge, huge gusts of wind going around the north of our country – Scotland. Quite extraordinary potential we have for wind.”

Perhaps he meant his own capacity for hot air. As to the actual capacity there is this.

RenewableUK is highlighting a major clean energy milestone as the UK’s combined onshore and offshore wind capacity now stands at 25.5 gigawatts – enough to power 19 million households a year, which is two-thirds of all UK homes.

Their later update ( those numbers are from last August) critiques this however.

RenewableUK is highlighting another wind energy generation record, set yesterday evening (Tuesday 10th January) and confirmed today by National Grid ESO.

Wind generated 21.6 gigawatts (GW) of electricity in the half-hour period between 6-6.30pm, providing 50.4% of Britain’s power.

So capacity is not really capacity as most would consider it to be. Or the implication that 19 million homes could be powered becomes more like a peak of 16 million with the situation otherwise being lower and sometimes much lower. For example right now is of the order of 1.8 million. Oh and “power” is something of a weasel word because if they mean electricity that is only around a fifth of our energy needs. Less of an issue in summer but a very large one in winter when domestic gas boilers fire up.

What about solar?

That is not going so well today either.

GB Grid: #Solar is generating 1.64GW (5.78%) out of 28.34GW  ( @UK_SolarEnergy)

It too has bad times even in summer with the issue this morning being cloud over quite a few parts of the UK. It does have new highs as it reaches 9.1 GW at its peak now ( Saturday for example) but is less reliable than claimed. I do not wish to go into the weaknesses of the claims about batteries, but will simply point out after a night of zero solar output they are unlikely to be of much use.

So the tactical position has disappointed over the past fortnight or so. There is an irony here as it has been quite windy in Battersea and the trees are looking quite blustery as I type this.

Better News

Fortunately the disappointments above are against an improving backdrop.

From 1 July, the energy price cap will be set at an annual level of £2,074 for a dual fuel household paying by direct debit based on typical consumption, which reflects recent falls in wholesale energy prices. ( Ofgem)

That is quite an improvement on this.

At its peak, the price cap reached £4,279 ( Ofgem)

For the domestic consumer the initial difference is not so great because the government capped the average bill at £2450. So the main improvement at this point is for projections for the UK government budget deficit ( yes another strong day for the first rule of OBR Club). But the Financial Times today also adds in some hopes from October as previously we were seeing forecasts of more like £2000 for the average bill.

analysts at Investec predict it could fall below £1,900 in October

If we look at the natural gas futures prices on the ICE exchange we see a price of just under 60 for the July 23 contract. It backs up my point about our recent wind performance being disappointing as it is up 8% today. But the broad picture has been one of falls since the panic peak of 717 in late August last year and more recently the 134 of the 10th of March.

To that we need to add this.

Energy suppliers buy gas months and years in advance and forward gas prices remain above 110 pence per therm for the next three winters, before falling back to 92 pence in 2026, according to commodity analytics company ICIS.  ( Financial Times)

Actually there is a little bit more hope for this winter as these contracts always have the highest volumes in the front month. For example July has traded 1210 at the time of typing whereas winter 23 has only traded 30. So the basis for the quote above is rather illiquid and open to manipulation. That is a regular feature of most futures contracts by the way.

More problems for renewable supply

The mantra amongst its supporters is that it is cheap. But we are seeing that it is a rather expensive version of cheap. Here is the Financial Times and the emphasis is mine.

Wholesale costs are the biggest component of energy bills, accounting for about 50 per cent of July’s price cap. The rest of the bill breaks down into elements such as suppliers’ operating costs and profit margin, subsidies for renewable generationand vulnerable households, and the cost of operating the gas and electricity grids.

The latter point is reinforced by the FT here.

The latter so-called network costs, which account for almost 20 per cent of July’s price cap, have risen by more than half since 2018. Although inflation has played a part, a big driver has been the higher costs for balancing electricity supply and demand, which has become more complicated due to the growing proportion of intermittent renewable power in the UK’s energy mix.

Again according to the FT that is only the start of the extra costs.

The electricity grid will also require significant investment in the years ahead to connect the growing number of wind farms that are being built and handle the anticipated increase in demand as households switch to electric cars and heat pumps, often referred to as the “electrification” of the economy.

I can see that “cheap” is going to require not only its own entry in my financial lexicon for these times but a large one.

Comment

This is a highly charged and emotive issue. Whilst wanting to save the planet is a worthy desire it is in itself at best hard to quantify. Indeed the lithium mines requited for battery technology seem to head in the reverse direction. Also emotions have clouded the issue. Regular readers may recall that my doubts on this issue got a fair number of replies on social media suggesting that car batteries were the answer. Since the crisis hit they have shrunk to zero and its is the many examples of what can be called “Hopium” that are much of the problem.Another example of “Hopium” is the use of capacity for renewables rather than a number more comparable with nuclear or gas capacity.

The world is to add some 440 gigawatts (GW) of new renewable capacity this year, according to the @IEA

,@Reuters reports, adding that this would be one third more than the growth seen last year. ( @CarbonBrief )

A more realistic number is a likely output of 80 GW.

In terms of our immediate position whilst things have improved the last fortnight has provided a warning shot. A cold still period this winter would put the cat amongst the pigeons because our actual improvements in supply have been much smaller than claimed. In terms of the weather last winter we were listening to Tom Petty and the Heartbreakers and may not be so fortunate this time around.

You got lucky, babe
You got lucky, babe

Podcast

https://soundcloud.com/shaun-richards-53550081/notayesmanspodcast228?si=cb148cdffdaa426fa18b98c3e6373512&utm_source=clipboard&utm_medium=text&utm_campaign=social_sharing

The UK energy situation has improved considerably as we start 2023

Good economic news was rather thin on the ground in 2022 but this year has at least started with some better news. It comes from the area of energy and we can look at something else unusual as the weather has helped. It’s role is to take the blame so it may not get much credit as I am sure there are plenty jostling for that role. There are consequences from this which start with inflation and hence the cost of living crisis. This rolls into economic prospects partly via the likely paths for bond yields and interest-rates. Let me give you an example from this morning.

*TRADERS BET BANK OF ENGLAND INTEREST RATES WILL PEAK BELOW 4.5% ( @MrMBrown)

They are catching up with us on here but this is rather different to the 5%+  that has been around and even more so from the frenzied 6% of last September/October.

UK Energy Prices

Earlier this week the Financial Times reported this.

British household energy bills are forecast to be lower than previously anticipated in 2023, dropping below the level of the government’s price guarantee in the second half of the year.

Analysts have sharply reduced their estimates for domestic energy bills after unseasonably warm weather across Europe in recent weeks has led to lower gas usage on the continent.

The latter part of the first sentence rather echoes and let me add another area it will affect favourably which is the public finances should the energy price guarantee  be above market prices. The present forecasts are below.

Martin Young of Investec bank, who has a record of accurately predicting the level of the price cap that dictates energy bills for the majority of British households, said he anticipates the cap to reduce to about £3,460 a year in April based on typical usage, dropping to £2,640 a year in July and hitting just over £2,700 in October.

These ch-ch-changes have left Ofgem behind.

The price cap, which is revised every three months by energy regulator Ofgem, is currently at £4,279 a year on average.

Just as a reminder here is the government support level.

The government scheme is aimed at restricting a typical household bill at about £2,500 a year until the end of March. From April 1, Jeremy Hunt, chancellor, had committed to continue support but at a lower level so a typical bill would have been around £3,000 a year.

So as you can see things will be expensive for the public finances until April but less so than feared. But the real gains come from then and in the summer it may be paying out very little or indeed nothing at all. My first rule of OBR Club that the OBR is always wrong works again! There is also something which trips the Office for Budget Responsibility up.

Young estimated that the government’s energy bill support could reduce to £3bn in the 2023-24 fiscal year, versus £25bn in the 12 months to April 5, although he warned the forecasts were subject to revision if there were further upswings in wholesale energy prices.

What has been happening?

One element has been renewable power.

Wow, wasn’t it windy  yesterday! So much so that we saw a new max #Wind generation record of over 21.6GW We are still waiting for all the data to come through for yesterday – so this might be adjusted slightly. Great news for #ZeroCarbon #Electricity operation.

That was from the UK National Grid on Monday and it even worked in terms of timing as it was during the evening peak ( 6:30 to 7 pm). Here is their most recent daily breakdown.

Yesterday #wind produced 53.7% of GB electricity followed by nuclear 15.3%, gas 11.2%, imports 9.8%, biomass 5.2%, hydro 2.9%, coal 1.8%, solar 0.2%, other 0.0% *excl. non-renewable distributed generation.

You may note that we are importing a larger amount which is at least partly due to the fact that Edf in France has got more of its nuclear reactors online. Also we seem to have fixed at least part of the interconnector that was damaged by fire as the UK and France can now exchange up to 3.5 GW rather than 3. So there is a little more security in that nukes provide a reliable consistent supply. In fact this was the old plan where we would import in winter from France and export in summer. Overall there has been a shift in that the UK has become an electricity exporter as according to iamkate the net export rate gas been 0.5 GW over the past year.

We are in the period where there was a risk of blackouts although care is needed as the weather pattern is expected to change soon.

The weather in North-West Europe is looking like will turn to “normal” around Jan 16 after a very prolonged period of spring-like temperatures that have crushed gas and electricity demand. NWE mean temperature has been above the 30-year average since Dec 22nd. ( @JavierBlas)

Another area has helped out as we have moved into winter.

A Nottinghamshire coal-burning power plant will stay open for two years beyond its planned closure date after a call from ministers prompted by the UK’s energy crisis.

Ratcliffe-on-Soar had initially been pencilled in to shut in 2022, but last year said it would have an initial extension until 31 March 2023. ( The Guardian)

Coal is providing some 0.7 GW and we seem to have retained a peak above 1.5 GW for when times get tough. In fact if the Guardian is right we may have some more in reserve.

So far none of the coal-fire powered stations asked to stay online this winter as a precaution have been asked to supply power, the Daily Telegraph reports.

Oh and it is way beyond even irony for the Guardian to be reporting this about coal

But in another, it’s really simple: we need to leave fossil fuels in the ground. George Monbiot (November 2021)

There was more.

 We have the technology required to replace fossil fuels. There’s plenty of money, which is currently being squandered on the destruction of life on Earth

How is that going George?

Arise Sir Alok Sharma

It seems appropriate at this point to note this. From my twitter feed on November 2nd.

Alok Sharma wants someone else to dig the coal and for us to ship it to the UK. 1. Making environmental issues worse 2. Weakening our economy via higher imports Somebody please stop this fool before he does even more damage.

He also wanted to end the use of coal altogether so he is one of those responsible for higher energy prices and some going cold and hungry this winter. In a reward for failure he got a Knighthood which is one of the ways the establishment tries to cover things up.

Comment

Next week will be tougher but we go into it in about as strong a position as presently possible. This has quite a few implications for our economic prospects. I have already noted the likely improvement in the UK public finances which could be substantial. This is being reflected in our 50 year yield which was 3.7% earlier this week and is now 3.35%.

Added to this is weaker prospects for inflation. Should prices fall from now for domestic energy then there will be an extra effect on the official numbers from likely higher weights being used. But the overall principle will be of much lower inflation pressure and maybe a fall from domestic energy. This will add to the already lower prices at the pump as I noted 144.8 pence for a litre of petrol at the Applegreen garage at The Oval the other day. Over time this will feed into other prices such as food for example.

The above has several implications for economic growth. With the cost of living crisis not as bad as feared then economic growth looks more hopeful. Added to that the government has just got a lot more flexibility on the public finances so with an election not so far away it is likely to spend it.

The risk remains of a succession of cold still days but so far we have been singing along with Kylie.

I should be so lucky
Lucky, lucky, lucky
I should be so lucky in love
I should be so lucky
Lucky, lucky, lucky
I should be so lucky in love

 

 

 

 

 

 

Europe’s promises of wind power are being replaced by a reality of gas and coal

This week has brought us to a situation we had long been concerned about which is a lack of wind. This matters because we depend so much on it for electricity generation these days. Indeed there is even a German word for this situation which is dunkelflaute. We can start with my home country the UK because it went literally from feast to famine and did so in short order. From Javier Blas on Monday.

Over the last 40 hours, the UK wind power industry has swung from producing 16.4 GW to generating 0.4 GW The drop in electricity production is equal to, give or take, switching off 14 nuclear power stations. That’s the reason why UK power markets are tight today.

This posed quite a challenge for obvious reasons and of course had been made worse by the rush to close coal power stations with Alok Sharma pretty much partying as one was destroyed. Also the mention of nuclear makes me wonder if we could have at least managed another winter from this.

The nuclear power station that has generated more electricity than any other has been switched off.Hinkley Point B in Somerset has been making power since 1976 and currently contributes about 3% of the UK’s total power needs. ( BBC in August)

Actually even keeping it running a bit longer shows the failure here which is the reality that we have let our nuclear capacity wither on the vine in a display of gross mismanagement. As I type this we are producing only 4.12 GW from nuclear power and as Hinkley C seemingly gets ever mote delayed (2027 is the latest) there is no hope for some time yet.

The stretched situation meant that the recent more favourable price structure got blown up at least temporarily.

No wind again today. Day-ahead electricity prices for the evening peak are hitting £1200/MWh, perhaps 25 times where they would be if the country wasn’t run by insane people. ( @Dissentient )

Any sustained period like that and we would be bankrupt. Also it seemed to make some lose their minds. From Caroline Lucas of the Greem party.

This Tory Govt has had an absurd mental block over onshore wind for a decade. It’s cheap, hugely popular, can strengthen our energy security & help tackle #climateemergency. Pitting onshore against offshore is nonsensical & dangerous – we need both.

When the wind is not blowing we can plant as many windmills as we like but it does not help. I think that the issue here is that our establishment has got obsessed with wind a bit like they have with Europe and have not looked beyond it. They somehow believed that a Dunkerflaute could be wished away. Even Javier Blas is at it a bit below.

Intermittency is a well known downside of renewable energy. Per se, it isn’t bad (as critics claim), but needs to be understood and addressed. Storage can help (currently, only via pumped hydro as everything else is too small). But demand response as critical.

The truth is that the intermittency issue has been ignored and our ability to cope with it is very minor. Also per se it is bad unless we can do something about it. Frankly demand response sounds rather chilling and not a little dystopian.

Also even pointing that out got this response from Dave Jones of Ember Climate

Thanks Javier.. will you post a wind tweet one day without negative subtext, you always sounds so cynical;) For example, you could mention that wind provided 33% of all the UK’s electricity last week?

Actually he had mentioned wind had been strong but we are back to the issue that just because it was good last week it is somehow okay this when it is not.

Interconnectors and the UK as an exporter

One actual improvement in the situation has been the spread of interconnectors whoch allow countries to balance their grids by taking from those with a surplus. This has benefited the UK in two ways. Firstly in times of need we have been able to draw on this as for example we importing 3 GW as I type this and on Monday night at the peak we were importing around 6 GW. But the overall situation over the past year is that we have been a net exporter with iamkate recording it averaging 0.5 GW.

A gain here is that we do get a sort of ersatz storage as the a.1.4 GW interconnector with Norway effectively comes from their hydropower. The risk is that Europe hits trouble at once and everywhere has a cold still day.

France

France has been the country that has seen the most swing in situation and more recently a rally. It appeared that its nuclear fleet would have in in food shape both in relative and outright terms. But then it turned out that Edf had problems with maintenance and that the fleet was suffering from ageing,

The utility, which is in the process of being fully nationalised, is racing against time to ensure its nuclear fleet can run at full capacity for the depths of winter. It has already seen its electricity output this year drop to a 30-year low due to a record number of outages. ( Reuters)

According to Reuters it lacks the skilled staff.

French power giant EDF (EDF.PA) is looking to recruit a new generation of welders, pipe-fitters and boiler makers to fix its ageing nuclear reactors……..The problem is that in France such skilled workers are in short supply. So much so that EDF, which has a reputation for delays and cost overruns in building nuclear plants, has had to fly in around 100 of them from the United States and Canada, it said this month.

Perhaps I should write a piece on that as everywhere we look we seem to have skill shortgages! That is another modern day reality which does echo some ominous science-fiction writing as at the moment it looks to be a fact.

Forecasts for French nuclear power keep being reduced and 2022 so far has been much worse than previous years. But this week France has jelped keep both its and our lights on via this. From Javier Blas on Monday

France is leaning hard on gas- and coal-fired plants, running currently at >10 GW (one of the highest daily generations days for gas-and-coal over the last 5 years) to offset weak nuclear generation.

Germany

This is the case of the biggest example of what in the financial world would be called a miss selling scandal. The promised wind of energiewende backed by gas from Russia has turned into this. From last night

Germany is burning a lot of coal (~45% of all electricity generation) as wind stops blowing. It’s electricity carbon intensity jumped to a crazy 745 grams (CO2 gr per KWh) this evening — higher than in South Africa and India ( Javier Blas)

It gets even more extraordinary when you note this.

Last year, Germany paid South Africa $800 million to stop using coal. Since then, German imports of South African coal increased eight-fold. ( @ShellenbergerMD )

Also I thought we were supposed to be unhappy about Qatar?

QatarEnergy and ConocoPhillips have signed two sales and purchase agreements to export liquefied natural gas to Germany for at least 15 years starting 2026 – the first such supply deal to Europe from Qatar’s North Field expansion project.

The agreement will provide Germany with two million tonnes of LNG annually, arriving from Ras Laffan in Qatar to Germany’s northern LNG terminal at Brunsbuettel, QatarEnergy’s chief executive said. ( Al Jazeera )

So the future for Germany is coal and LNG whenever the wind does not blow?

Comment

This is perhaps the greatest example of incompetence we have seen but it hides in a something of a smokescreen because it is the establishment which is guilty. A wind farm or a solar one have their uses just not the one they have been sold as providing. Last week the UK pretty much lived up to the soubriquet of the “Saudi Arabia of Wind” but this week we have a drought. The issue is the ability to store power which we only have in a limited way and the interconnector with Norway is a sort of implicit version. The media does not help with articles like this.

But what happens when the wind doesn’t blow and the sun doesn’t shine blah blah bl – oh right, we now have industrial-scale batteries:

That is from David Shukman of the BBC and it would last for maybe 20 seconds although actually it is for balancing wind power so not for that at all which he ignores. I also note there is no mention of the cost.

Along the way we have willfully let nuclear power wither on the vine and closed coal power stations. Of course we are now re-opening the latter as fast as we can. But will we see ever more deindustrialisation as it moves to cheaper sources of power?

 

 

What to do about the energyprice crisis of 2022?

As 2022 has developed one topic has dwarfed all the others in the economics world as we struggle to come to terms with the oncoming energy crisis. Some of it is already here due to the energy price rises we have seen and the UK will learn more about the rest of the year and early 2023 on Friday. Bills which are already very high are about to sing along with David Bowie and Queen as they impact on budgets.

Pressure pushin’ down on me
Pressin’ down on you, no man ask for
Under pressure that brings a building down
Splits a family in two, puts people on streets

It is hard for the ordinary person to come to terms with this as we exist like a cartoon character hanging in the air after racing over a cliff. But our political class have not only failed us with the decisions they have made they still live in a type of la-la land. For example the Shadow Secretary of Justice Steve Reed told us in Sky News this morning that renewables are reliable just as “the Saudi Arabia of wind” was producing a mere 5 GW. Solar at 9:30 has barely struggled about 1 GW.

Scottish Power

They have highlighted the scale of the crisis with this suggestion.

One of the UK’s largest energy groups has told ministers that a rescue plan to protect households from rising bills will need funding of more than £100bn over two years, underlining the scale of the crisis engulfing Britain as gas prices surge.

Keith Anderson, chief executive of Scottish Power — one of the “Big Six” energy suppliers — last week met business secretary Kwasi Kwarteng and proposed capping household energy bills at around £2,000 a year, according to people with knowledge of the talks. ( Financial Times)

Under such a plan bills would be held at the current level so more expensive than we have been used to but missing the expected 75% or so rise on Friday. Or as the FT puts it.

Under Anderson’s proposal, household bills would be frozen for two years near the current £1,971 price cap, which is already close to double the typical bill of 18 months ago.

Which would avoid this.

Households face another jump in the “cap” on energy bills on Friday when energy regulator Ofgem is due to announce a new limit, which analysts expect to exceed £3,000. Banks and consultancies are projecting that the cap will be lifted above £5,000 by April.

Actually it is being rather mealy-mouthed when £3500 is expected to be announced later this week. Anyway the reason for such a suggestion is below.

Philippe Commaret, managing director of customers at energy supplier EDF, warned on Tuesday that the UK was facing a “catastrophic winter”, telling the BBC that half of all households could fall into fuel poverty without intervention.

As ever poverty depends so much on the definition but it is clear that households will at best be under quite a squeeze and will presumably cut back elsewhere sending the economy downwards as inflation soars in a mixture described by Britney.

You’re toxic, I’m slippin’ under

What is the plan?

Here it is via the FT.

Under the Scottish Power proposal, suppliers would cover the gap between the cap and the wholesale price of gas and electricity by borrowing from a “deficit fund”, arranged by the government through commercial banks.
The cost would be gradually paid off by the public either through government borrowing funded by general taxation, spread over bills for the next 10-15 years, or split between a combination of the two.

So it is a classic kicking of the energy can into the future. This is a little awkward because it is supposed to be into a better future and each time we have done it in the credit crunch era the gains have been marginal.

I see no reason at all why we should provide free profits for the banks as it would be much simpler for the government to borrow the £100 billion as well as being considerably cheaper. I would imagine we would be charged 6/7% interest or so when the UK government can borrow at 2.75% for 50 years as I type this.

Government is in paralysis at the moment for a couple of reasons. One is the Conservative party leadership contest and the other is that our political class has yet to come to terms with the fact that it has caused this with policy errors. When bills were lower we could add Green Levies without too much complaint, but the dash for unreliable renewables left us exposed and as it happens we are in a wind drought at the moment. Meanwhile from as Star Wars puts it from a land far far away is Energy Minister Greg Hands.

Thanks to a huge £90 billion investment in homegrown, clean energy in the last decade, we have one of the most diverse energy systems in the world. Britain’s installed renewables capacity grew from 9 GW in 2010 to 50 GW in 2021 We’re generating more power here in the UK.

Oh and his definition of “capacity” is about as useful as “Transitory” has been with inflation. According to iamkate we have nudged about 16 GW for wind which means wind plus solar on a windy day in summer could make around 25 GW. Of course we need power most in winter! Oh and right now they are producing 7 GW between them as solar picks up towards lunch-time.

It is hard to know what to say about the idiot below.

Alok Sharma (@AlokSharma_RDG) was Energy Secretary in UK for a year under EcoFanatic Johnson.

What did he do to improve our energy security? In ‘symbolic gestures’, he blew up power stations!

Nice one, Alok. We’ll recall your gesture when the power cuts come in winter. ( @latimeralder )

Returning to the issue something is likely to be on its way I think as a simple matter of politics.

Keir Starmer, leader of the opposition Labour party, has said that as prime minister he would cap prices at their current level for six months at the cost of about £30bn. ( FT)

Prices Now

From Northern Gas and Power this morning.

Day Ahead power contracts are trading higher today and are valued at £533/MWh. Wind generation is currently forecast at 5.2GW and provides the grid with 18% of electricity supply.

Front month gas contracts are trading below settlement and are valued above 490p/th (16.72p/kWh) this morning.

These are extraordinary numbers and yesterday’s rise was more than what we had previously got used to as the total cost.

Comment

For a crisis on this scale to happen there have to be mistakes on a grand scale. The closure of reliable sources ( around 14 coal fired power stations) and their replacement by unreliable sources such as wind and solar is clearly a monumental error. The sanctions then applied to a major energy supplier Russia are working in an area of its strength and our weakness. As Javier Blas out it earlier this month.

No matter what indicator you use, Russian President Vladimir Putin is winning in the energy markets.

Remember we were supposed to be collapsing the Russian economy, not ours!

I have pointed out many times that the very expensive Smart Meter programme was for price rises and rationing and I am glad I refused to have one. Oh and quite a few of them don’t work.

In addition the problem is spreading. For a while lower oil prices brought hope for some areas but the rise of Brent Crude Oil to US $100 makes me wonder what happens when there is no more US Strategic Petroleum Reserve or SPR left? Also even US gas prices are rising.

January Henry Hub natural gas futures just crossed the symbolic $10/MMbtu threshold. ( @bcshaffer )

In conclusion I think that a large government programme will have to happen not because it is an outright good idea, but simply because the alternative is worse. If prices stay high for some time then we are back to Elvis again.

We’re caught in a trap
I can’t walk out
Because I love you too much, baby
Why can’t you see
What you’re doing to me

 

 

The energy crisis of 2022 sees coal suddenly back in fashion

A major story and event of 2022 has been the energy crisis which has been one if the main factors in the ongoing cost of living crisis. It is easy to forget ( partly because government’s and central banks are directing us away from it) that there were issues even before the war in Ukraine which has made things even worse. Last week Russia decided to turn the screw a little further.

Gazprom said it had to halt ANOTHER turbine at a compressor station connected to the Nord Stream pipeline, curbing natural gas supply to Europe even more Siemens is performing maintenance on them, but sanctions interrupted delivery ( @SStapczynski )

The situation continued to worsen as the week developed leading the Financial Times to report this.

Russia cut capacity on the main gas export pipeline to Germany this week by 60 per cent, sending ripples across the continent as western officials became convinced that Moscow is weaponising its gas exports in response to EU sanctions following the full-scale invasion of Ukraine.

We can look at the consequences via a country which has had an energy policy regularly praised by the FT which is Germany as we are seeing developments which are extraordinary even for these times.

The Crisis in Germany

The shortage of gas became so acute that the Climate Protection Minister has put out an official statement.

“The situation on the gas market has deteriorated in recent days. The missing quantities can still be replaced, and the gas storage tanks are still being filled, albeit at high prices. Security of supply is currently guaranteed. But the situation is serious. We are therefore further strengthening precautions and taking additional measures to reduce gas consumption.”

There are obvious contradictions because if the gas can be replaced and supply is secure why do we need the statement? In essence the need to reduce gas consumption is the significant part as opposed to his rhetoric. Perhaps it is the translation but the use of “tools” is something central bankers so when things are going badly wrong like they have with inflation.

For months we have been in the process of sharpening tools, creating new ones and removing existing obstacles.

Along the way there is something that we have been worried about since late last year that this will lead to companies and businesses being forced to shut. This is a big deal in a country which is a large manufacturer.

We will reduce gas consumption in the electricity sector and in industry and force storage tanks to be filled. Depending on the situation, we will take further measures.”

The official response has him so embarrassed he sort of tries to slide by without spelling it out.

To this end, power plants that are already available to the electricity system as a reserve are being upgraded in order to be able to return to the market in the short term.

But he is unable to fully do so.

That means, to be honest, more coal-fired power plants for a transitional period.

Some of you may be thinking that there is a more logical alternative.

Germany’s three remaining active nuclear power plants have a capacity of 4 gigawatts and are scheduled to go off the grid by the end of this year. Their lifespan will not be extended as the government has concluded the technical and safety hurdles are too high. ( Financial Times)

Presumably that claim also covers the nukes that were closed at the end of 2021. Whether that is true is entirely another matter as Germany’s Green Party of which Minister Halbeck is a member is anti-nuclear. So it would appear that this option is being willfully ignored.

The six nuclear power plants generated 12 percent of German electricity last year; the final three produce about 5 percent.  ( Politico)

This mornings producer prices release shows the impact on both businesses and households in May.

Energy prices in May 2022 were on average 87.1% higher than in the same month last year . Compared to April 2022, these prices increased by 2.5%. The highest impact on the year-on-year rate of change in energy was natural gas in distribution, up 148.1% from May 2021. Power plants paid for natural gas 241.2% more than a year earlier. Natural gas was 210.7% more expensive for industrial customers and 168.3% for retailers.

So extraordinarily higher than last year and another 2.5% on the month.

The UK

Whilst the situation here is different in that Russian gas pipelines do not flow to the UK and it has turned out we got something right by the switch towards LNG we see that politicians are pack animals just like central bankers.

In May, I asked National Grid to explore keeping 3 coal power stations open this winter, if needed. With uncertainty in Europe following the invasion, it’s right we explore all options to bolster supply. I’m pleased EDF has today confirmed West Burton will remain online. ( Kwasi Kwarteng last Tuesday )

So we are in the midst of something of a dash for coal and contrary to the rhetoric about new nuclear plants I believe that the UK will close one this summer. So we will also turn down the opportunity to maximise what we have during this crisis.

There is another issue where there are copy-cat policies going on if we return to Germany and Minister Halbeck.

We are accelerating the expansion of renewable energies in an unprecedented way,

In the UK Kwasi Kwarteng announced this last week.

Latest data: 10GW of renewable power currently being built; 12GW extra on its way

But you see these things are effectively innumerate. The UK has about 25 GW of wind power capacity but that is producing only 4.5 GW as I type this and it is forecast to decline as the day progresses and be even lower tomorrow. So assuming all the hype above is true then we would be getting 4 GW from it rather than the 22 GW stated. The fact that it ebbs and flows gets ignored.

The UK has a relatively stronger position in that it does produce some of its own gas and oil and energy minister Greg Hands is apparently keen to point that out.

Operational since 2001, @TotalEnergiesUK‘s Elgin Platform in the Central North Sea produces 5% of the UK’s gas demand. Fantastic to visit today and understand its key role in UK energy security now and in the future.

The US

The US is in one of the strongest positions of all in terms of overall energy resources but as Javier Blas points out this is breathtaking.

White House Press Secretary calls on US oil refiners to lower gasoline prices: “We see it as a patriotic duty […] We are calling on them to do the right thing”

The Biden administration started in office bu blocking fossil fuel plans but seems to expect the oil industry to invest it in. This from former head of the US Federal Reserve Janet Yellen is just as bad.

Refinery capacity is declined in the United States and oil production has declined. I think that producers were partly caught unaware by the strength of the recovery in the economy and weren’t ready to meet the needs of the economy.

This was until recently US government policy….

Comment

Before this recent phase the world was already having energy issues. We have been told that crude oil is about ti run out many times in my life. But that has developed into an issue created by the fact that the easier and cheaper supplies either have been or are presently being used. To that we have seen a push for sources of power which are unreliable and then to claim it as a triumph.

 Professor John Mathews of Macquarie University in Australia, looks back on what Germany has achieved so far with its unique energy policy and concludes that it has been a spectacular success, whatever its detractors may say.

That was from October 2017 and we can now file “spectacular success” in my financial lexicon for these times. Also the COP26 agreement to end coal has morphed into this.

we know now that coal demand will hit a record high in 2022, and likely another one in 2023 ( Javier Blas)

As it happens the UK is burning coal today to produce some 0.5 GW of electricity which it looks like we are exporting to France.

Energy policy is an utter mess where our political class have utterly failed us but keep doing this.

I’ve been getting away with it all my life (getting away) ( Electronic )

Podcast

https://soundcloud.com/shaun-richards-53550081/notayesmanspodcast180?utm_source=clipboard&utm_medium=text&utm_campaign=social_sharing

What has gone wrong for the economy of Spain?

Back on the second of September I wrote about my fears for the economy of Spain as shown below.

We seem to be seeing a swing lower in growth with a rise in inflation.

This rather contrasted me with the likes of ING who looked to be using the PMI business survey to suggest things were up,up and away.

All in all, the Spanish economy is on its way to record another strong growth figure in the third quarter. We currently estimate it at 3% quarter on quarter. For 2021 as a whole we expect the economy to grow by 6.5% and in 2022 by 5.5%.

Indeed on the 21st of this month the Bank of Spain joined that particular party.

MADRID, Sept 21 (Reuters) – Spain’s economy grew at a similar pace in the third quarter than in the previous one thanks to a solid domestic demand and looser COVID-19 restrictions, the Bank of Spain said on Tuesday, raising its forecasts for 2021 and the next two years…….In the third quarter, it expects Spanish gross domestic product to grow 2.7% after rising 2.8% in the April to June period.

A marginal rise for the year but a rise none the less.

After a record 10.8% slump last year, the central bank expects gross domestic product to expand 6.3% in 2021, up from a 6.2% forecast in June.

Soon Spain will be right back where it started from.

The central bank forecasts came just after Economy Minister Nadia Calvino said that GDP was likely to recover to pre-pandemic levels by the end of this year, as she maintained previous growth forecasts for this year and the next.

It seems that neither bothered to speak to the statistical agency which was on a Dune style road where the future can be known and it is the past that is uncertain, well the latter bit anyway.

Spanish GDP registered a variation of 1.1% in the second quarter of 2021 with respect to the previous quarter in volume terms. This rate is 1.7 points higher than that recorded in the first quarter and 1.7 lower than that advanced in 30th July.

So 1.1% is the new 2.8% and let me say credit to the statistical office which must have come under pressure not to do this. But the latest three quarters now go 0.2%, -0.6% and 1.1% which is a very different pattern to the surges predicted officially and elsewhere. Indeed the annual numbers were some 2.3% lower as for example the first quarter was revised some 0.2% lower as well.

The driving forces were lower private consumption and lower sales for businesses.

For those of you looking for an overall yardstick.

The Gross Domestic Product (GDP) at current prices stood at 1,121,948 million euros in 2020.

Retail Sales

These added to the gloom yesterday.

The monthly variation of the seasonally and calendar adjusted general Retail Trade Index (RTI) at constant prices between the months of August and July, stood at −0.2%. This rate was two tenths lower than the previous month.

So no growth in July and a fall in August. Indeed since April the numbers have been weak as its monthly fall of -0.5% has been followed by only one month of growth and that was the minimum of 0.1%. Thus the annual figure is now -0.9% and if we look back the adjusted index is 104.1 where 2015 is the base of 100. So the Euro Boom in that period has faded away now which is a shame as Spain did well back then.

Looking Ahead

There are issues here although this morning’s Markit manufacturing PMI misses them.

Spain’s manufacturing sector continues to expand
strongly, registering another month of historically
marked gains in output and new orders as demand
strength in domestic and international markets is
maintained.

The problem with that comes from them telling us that we have had 8 months of strong growth whereas if we look at the official series.

After adjusting for seasonal and calendar effects, the monthly variation of the Industrial Production Index (IPI) between June and July stood at -1.1%. This rate is the same as that observed in June.

Maybe they are missing this.

Spain is the second largest car manufacturer in the European Union after Germany. ( Reuters)

They go on to tell us.

Car sales fell 32% to 851,000 in 2020 and ANFAC Chairman Jose Vicente de los Mozos told reporters ahead of Barcelona’s auto show that he only expected sales to be about 900,000 this year, still some 25% below pre-pandemic levels.

euroweeklynews has been on the case.

Around 1,414,240 units have been manufactured so far this year in Spain, an increase of 11 per cent on 2020, when the pandemic was at its height, but a figure that is 25.3 per cent less compared to 2019, simply because without the chips, the vehicles can not be completed when they reach the end of the assembly lines.

The 2020 figures, of course, include the two and a half months during which the factories were on standstill, but this worldwide shortage of microchips has led to Spanish factories having to paralyse production lines, and make adjustments in shifts, depending on the supply of microchips.

Here is valenciaplaza.com

09/30/2021 – 

VALENCIA. (EFE) Ford has raised another temporary employment regulation file (ERTE) at the Almussafes plant (Valencia) due to the lack of semiconductors to continue producing vehicles, and this Friday it will present its proposal with the intention of applying it from the next week.

Inflation Inflation Inflation

This is another part of the present story as this emerged yesterday.

In September, the estimated annual variation rate of the IPCA stood at 4.0%, seven tenths more than the one registered in the previous month. For its part, the estimated monthly variation of the HICP is 1.1%.

So hits on two fronts as the annual rate reaches double the ECB inflation target and in psychological terms gets a new big figure. Also the monthly rise is 1.1% and I guess no-one is going to be falling off their chairs as they read the cause.

In this behaviour, the increase in electricity prices stands out, higher this month than in September of last year.

What happens next? Well this gives us a clue and on its way pulls the rug from under the Markit PMI report.

MAP OF THE DAY: The folks at EnergyLive are running out of colors for their European wholesale electricity prices map. They have to add a deep blue as Spain and Italy have moved above €200 per MWh. The continent's industrial companies are in great pain | #EuropeanEnergyCrunch pic.twitter.com/Kz69y024KN

— Javier Blas (@JavierBlas) September 30, 2021

 

The government is intervening via price caps and transfers from energy companies. But with their being disputes between Algeria, Morocco and the EU right now then this is the state of play.

How dependant on Spain on Algerian gas? It’s hardly a new question, but more acute than ever. ( @weayl )

Comment

As you can see the official forecasts are now in the economics version of Comical Ali. There are consequences of this.

(Reuters) – Spain’s public debt rose to the equivalent of 122.8% of gross domestic product (GDP) in the second quarter of 2021, the Bank of Spain said on Thursday, as a result of the increase in spending due to the coronavirus pandemic.

That raises a wry smile as back in the day the EU established 120% as a threshold in the Greek crisis. Oh how they must wish they could redact that. These days the bond costs argument is much weaker because of the interventions of the ECB meaning that the ten-year yield is a mere 0.42%. But those interventions to raise inflation have left Spain more vulnerable in that regard. Monetary policy can do little explicitly about gas prices but by pushing as hard as they could for more inflation they have left Spanish workers and consumers more vulnerable. Now their “expansionary” monetary policy is contractionary because of that although I may be alone in pointing that out.

Still there is some good news. If you do not need food, lights or heating then there is very little inflation.

For its part, the estimated annual variation rate of underlying inflation (general index excluding
non-processed food and energy products) increases three tenths to 1.0%, which is three points
below to that of the general CPI. This is the highest difference between the two rates since the
beginning of the series in August 1986.