How will the UK keep the lights on this winter?

Today will see a policy speech by the Prime Minister on the subject of wind power and the offshore version in particular. Compared to our nuclear plans it seems extraordinarily cheap to say the least.

Every home in the UK will be powered by electricity from offshore wind farms within a decade, Boris Johnson will say in his conference speech on Tuesday morning.

Promising to “build back greener”, the prime minister will pledge £160m to upgrade ports and factories for building turbines.

The plan aims to create 2,000 jobs in construction and support 60,000 more. ( BBC News)

These sort of statements are revealing for what they do not say. For example “Every home” sounds all encompassing but what about industry? Also we are turning out eyes away from days when the wind does not blow.  Then we note the £160 million is just to have the ability to build the wind turbines. Finally we see that these jobs have an extraordinary multiplier of 30! Or Alice has gone through the Looking Glass yet again.

Actually the going through the Looking Glass theme continues.

He will say the UK is to become “the world leader in clean wind energy”.

“Your kettle, your washing machine, your cooker, your heating, your plug-in electric vehicle – the whole lot of them will get their juice cleanly and without guilt from the breezes that blow around these islands,” he will say.

We get some more details here.

The scheme will see the money invested into manufacturing in Teesside and Humber in northern England, as well as sites in Scotland and Wales.

Mr Johnson said the government was raising its target for offshore wind power capacity by 2030 from 30 gigawatts to 40 gigawatts.

The rhetoric becomes ever more extraordinary.

“Far out in the deepest waters we will harvest the gusts, and by upgrading infrastructure in places like Teesside and Humber and Scotland and Wales, we will increase an offshore wind capacity that is already the biggest in the world.”

The PM will also repeat his pledge for the UK to become the “Saudi Arabia of wind power”, adding: “As Saudi Arabia is to oil, the UK is to wind – a place of almost limitless resource, but in the case of wind without the carbon emissions and without the damage to the environment.”

Where are we now?

According to UK_WindEnergy this is the state of play as I type this.

GB Grid: #Wind is generating 4.50GW (13.53%) out of 33.26GW

In itself that is an achievement as there was a time we would not have believed it to be possible. There are times over the next day or so when it is expected to be much better.

Today’s forecasted metered #Wind peak is 10,180MW between 23:00 and 24:00 GMT Tomorrow’s is 12,105MW between 10:00 and 11:00 GMT

We get several perspectives from this. The first is that in theory some 40 GW of wind power would cover current UK electrical power needs. But as we move to practice we have the issue when we have less wind as we have as I type this or even worse a still day.

Also the numbers are even on the best days quite a bit below the maximum. As we stand according to RenewablesUK the maximum operational capacity is 24 GW yet we at best struggle to actually get much above half of that. They do a calculation to try to allow for that.

The load factor is the actual output of a turbine benchmarked against its theoretical maximum output in a year. The load factor is calculated by RenewableUK as a rolling average of the past five years.

What is it?

  • onshore wind: 26.62%
  • offshore wind: 38.86%
  • BEIS “all wind”: (onshore + offshore): 31.14%

As you can see for wind power in total we get about 31% of the maximum on average. Intriguingly the new plans suggest we will do much better?

BEIS also states that the load factor for new build offshore wind (2023/24/25) is 58.4%

Have we built the existing ones ( providing 38%) in the wrong place or has there been some new advance?

A Confession

Although they would not put it like this The Guardian has published a tacit admittal of my points today. Take a look at this by the author Chris Goodall.

We should go much further because we’ll need to generate far more electricity to meet demand from electric cars and from heat pumps for heating homes. If we increase generation by about 20 times from today’s levels, it will give us sufficient electricity almost all the time, significantly reducing the problems arising from the unpredictability and intermittency of most renewable sources.

There are two refreshing elements of honesty here. The first is the acknowledgement of the unreliability of renewable energy sources and the second is that we are going to need a much higher level of electricity generation in future. I am reminded of the electric car issue regularly as there are nine charging points around Battersea Park and for now there is plenty of excess capacity there. But we see that more electric cars are being purchased.

Demand for battery electric vehicles (BEVs) increased by 184.3% compared with September last year, with the month accounting for a third of all 2020’s BEV registrations. ( SMMT)

The requirements for such a plan are really rather extraordinary though.

Is such as massive expansion actually possible? I have calculated that the UK would achieve this target by devoting about 5% of its maritime zone to offshore wind, 2% of the land area to solar panels and about 12% to onshore wind.

Storage

There is a plan for that too.

Under the scenario described above, we will have far too much electricity almost all the time. Batteries can cope with some of this surplus but most of the power should be converted to hydrogen. Today, hydrogen is created from fossil fuels but it can be easily made from water using electrolysis. The gas can be stored to make electricity on the rare occasions when the available renewable power is insufficient. Hydrogen is hugely versatile; it can also be deployed to power vehicles, to provide the energy for steel-making and other industrial processes, and to act as the critical raw material for the chemicals industry.

With battery technology as it is I am struggling not to laugh at the mention of it. But let me hand you over to How Stuff Works on Hydrogen.

It’s expensive to pull hydrogen from water………..here are other problems as well: Scientists are still struggling with the challenge of how to store hydrogen. Because it has such a low energy density, hydrogen needs to be stored and transported under high pressure — which makes it bulky and impractical. The pressure issue compounds another issue with hydrogen energy; like gasoline, hydrogen is highly flammable, but unlike gas, it has no smell.

The latter was highlighted many years ago by the Hindenburg disaster.

Comment

There have been considerable achievements here over time. I have just checked on the UK government website and as of the end of August we have some 13.5 GW of solar capacity as well. In theory we are covered but of course practice is very different to that.

GB Grid: #Solar is generating 2.26GW (6.56%) out of 34.43GW ( @UK_SolarEnergy )

The solar problem is that it works for fewer hours and at weaker power at the time we most need it. On the upside it has been getting cheaper as according to the official figures the cost of small scale production fell by 12.3% between 2014 and 2018.

Added to the availability of supply when we need it is the cost issue. The price falls for solar are especially welcome as we have seen electricity prices rise by so much. Although price and cost issues get hidden behind a barrage of rhetoric like this from Chris Goodhall.

Author Chris Goodall says tackling the climate crisis is neither difficult nor expensive and can help boost the economy……..

It is hard not to laugh at the idea that his plan is ” relatively cheap “. Also later we get this.

Many other countries, such as the US, have publicly controlled energy companies that can act to meet local needs and minimise the cost of gas and electricity.

I am not sure that is going so well and given the quality of local government in the UK I fear the worst from this.

 The UK should follow the example of Germany and offer the chance to local governments to run all the utility networks in their areas.

After all isn’t the German system a bit of a mess?

Returning to my title here is Ofgem on the subject which for some reason they seem to be rather out of date on.

Electricity capacity margins (the average amount of extra electricity available compared to peak winter demand) are tightening in Britain. This is because older and less profitable power stations are closing. However, if needed, National Grid can use extra tools to balance the system in winter 2016/17.

Are those the same “extra tools” available to the Bank of England?

Here is Imperial College on last year.

When output from wind power fell sharply on cold, calm days the stress to the system increased and in one incident created a higher chance of blackouts, with just 0.2GW of spare capacity available, compared to over 4GW the following day.

Also some had to reduce usage.

An evening peak in demand was also managed with factories and supermarkets reducing their electricity usage, helping to maintain normal day-ahead power prices.

The balancing ability we have is pretty much supplied by gas with biomass also helping to some extent.

 

 

Russia has similar inflation to the UK but interest-rates are ~8% higher

As a contrast to the Bank of England move or not at midday which I analysed yesterday let us look at developments at another point of the interest-rate cycle. To do this we need merely to look at Russia where this was announced this last Friday.

On 27 October 2017, the Bank of Russia Board of Directors decided to reduce the key rate by 25 bp to 8.25% per annum.

We learn various things here. Firstly even in this time of Zero Interest Rate Policy ( ZIRP) and indeed NIRP where N = Negative we see that there are countries where the trend has bypassed. Much of Africa has been too. I also note that 0.25% moves seem to be en vogue for which we in the UK should be grateful as I recall the Bank of England hinting at a 0.15% cut this time last year as its Forward Guidance shot itself in the foot. Returning to the Russian situation on the face of it the move looks a bit weak in the circumstances as frankly what is moving from 8.5% to 8.25% really going to achieve? Especially if we note this about inflation.

Annual inflation holds close to 4%. Estimates as of 23 October 2017 indicate that annual inflation is 2.7%. Its downward deviation against the forecast is driven mainly by temporary factors. In September, food prices showed stronger-than-expected annual price decline, on the back of larger supply of farm produce. This extra supply owes its origin to growing crop productivity and the shortage of warehouse facilities for long-term storage. The slowdown of inflation was also triggered by exchange rate movements.

Inflation is projected to be close to 3% by late 2017; going forward, as the temporary factors run their course, it will approach 4%.

So we see that the inflation situation currently has quite a few similarities with the UK as our inflation will also be close to 3% late this year and our inflation has a strong exchange rate influence as well. Yet interest-rates are around 8% different! Central bankers eh?

Let us look deeper.

Oil and Gas

This is a powerful player in the Russian economy and the recent rise in the oil price will put a smile on economic developments. In July an economic paper from the University of St. Petersburg put it like this.

In the first phase of the shock, the government’s income suddenly increases. In other words, the price rise enhances the real national income through the increase in the petroleum exports revenues. This might lead to the reinforcement of the national currency value (or foreign currency depreciation) in the exchange rate systems (fixed or managed floating systems). In the floating exchange rate system, the foreign exchange coming from the increase in the world oil prices would lead to the appreciation of the real exchange rate.

Actually the value of the Rouble and the oil price are correlated over time. If we look back to a nadir for oil prices back in early 2016 when the Brent Crude benchmark fell into the mid-30s in US Dollar terms then it took 75 Roubles to buy one US Dollar. If we skip forwards to today when Brent Crude is around US $60 we see that it takes only 58 Roubles to buy one US Dollar. They do not always move in lock step but over time there is usually a similar trend.

Thus we get to the conclusion that a higher oil price reduces Russian inflation. This does not mean that it does not raise domestic inflation as of course there will be familiar price rises from fuel costs which will trigger other price rises. But that there will be an offsetting move from a higher currency that usually is larger. Accordingly I find this from the Bank of Russia a little strange.

Inflation expectations remain elevated. Their decline has yet to become sustainable and consistent.

We are back to a timing issue as in you need to move ahead of events rather than waiting for them to happen and chasing them.

Impact on the Russian economy

The US Energy Information Authority published this on Tuesday.

Russia was the world’s largest producer of crude oil including lease condensate and the third-largest producer of petroleum and other liquids (after Saudi Arabia and the United States) in 2016, with average liquids production of 11.2 million barrels per day (b/d). Russia was the second-largest producer of dry natural gas in 2016 (second to the United States), producing an estimated 21 trillion cubic feet.

So a big deal which has this impact domestically.

 Russia’s economic growth is driven by energy exports, given its high oil and natural gas production. Oil and natural gas revenues accounted for 36% of Russia’s federal budget revenues in 2016.

Also it is the major export.

In 2016, Russia exported more than 5 million b/d of crude oil and condensate……..Russia also exports fairly sizeable volumes of oil products. According to Eastern Bloc Research, Russia exported about 1.3 million b/d of fuel oil and an additional 990,000 b/d of diesel in 2016. It exported smaller volumes of gasoline (120,000 b/d)[50] and liquefied petroleum gas (75,000 b/d) during the same year.

As to the impact on the overall economy it is not easy to be precise as Factosphere points out.

Experts estimate the share of Oil&Gas sector in the Russian GDP to vary from 15% to 20%, but that does not take into consideration effect of a number of related and supporting industries that depend on O&G sector performance (equipment producers, transportation, etc.). Therefore, the overall influence of the sector on the Russian economy and GDP shall be much higher.

Comment

There is a fair bit to consider here but if we stick with the inflation issue then with Brent Crude Oil around US $60 per barrel it seems unlikely that Russia will see much imported inflation generated. Quite possibly the reverse. We know that the Urals production is cheaper but the principle remains. Thus the difference between it and the UK in terms of inflation prospects hardly seems to justify an around 8% interest-rate gap.

There is one clear difference though which ironically would be seen as a success in the UK. From Trading Economics.

Real wages in Russia rose 2.6 percent year-on-year in September 2017, following a downwardly revised 2.4 percent gain in August and missing market expectations of 3.9 percent. Average nominal wages jumped 5.6 percent to RUB 37,520 while annual inflation rate slowed to 3 percent, the lowest since at least 1991.

So higher interest-rates yes but nothing like that much higher. The fun comes in figuring out how much the Bank of Russia and the Bank of England are wrong!

Meanwhile it seems set to be a relatively good year for the Russian economy and a nod from it to OPEC for its efforts in raising the crude oil price. Looking ahead there are of course issues as we mull the impact of having large resources on the wider economy or what became called the Dutch Disease. One of them is the transfer of resources and wealth or if you prefer the oligarch issue.

Currently there is also the issue of economic sanctions on Russia.

Me on Core Finance TV

http://www.corelondon.tv/bank-of-england-timing-mess/