Sunday, May 01, 2011

Feed-In Tarriffs are the opposite of the answer

As the following article, Solar Scam Article, PV solar schemes can easily burn through hundreds of millions of dollars before anyone even notices. Not only that, they fail in the most basic of stated aims - that of more quickly getting PV systems (or rather, any renewable) to substantially contribute to our energy needs.

Most people, even experts, think that at worst, it is neutral to our efforts in replacing renewables, but due to the competing interests for a finite number of available renewable energy certificates it is considerably worse than the Government spending nothing on it(*).

An infinite number of REC's implies an infinite budget so cannot be considered - and what is plainly happening is that the REC's are being lapped up by the most generous policy (in this case PV subsidy + feed-in tarrif guarantees), crowding out significantly more efficient and cost effective (even speedily built) large scale projects, that given no tariffs, could have been built by private enterprise for profit.

There are plenty of wind farm projects, large scale PV and solar thermal, as well as Geothermal which are being starved of funds. Private money is chasing the most generous public money rather than profitable energy enterprises.

(*) By which I mean alternative policies that do not favour small, inefficient installations, that are either revenue neutral or have more tax income than expenditure (eg carbon tax)

21 comments:

Chris Fellows said...

What is the question?

Marco said...

I guess that is the point. It doesn't matter what the question is, this subsidy is not the answer.

Ok except for this one - How do we waste government money without anyone noticing?

Dr Clam said...

How about these?

"With an election coming up in Australia's most economically-subdued state, how do we simultaneously splash some stimulus funding around regional areas and shore up our environmental credibility, while avoiding the sort of widespread rorting the Commonwealth ended up with when it wanted to do the same sort of thing?"

or

"How can we add significant renewable capacity without being held up for years by environmental impact studies and rampant NIMBYism in general?"

That's all I've got so far.

Marco said...

I reject the assertion that the regional areas are getting much of the funding, or that it is stimulating anything other than a boom bust cycle for the solar suppliers/installers. The rorting level seems to be at about the leel of the roof insulation scheme, which is no better than average.

I define Ninbyism as the tragedy of the anti-commons. ie. that too many people can stop projects such that a resource gets under-utilised. I think that inertia is much more of a problem than Ninbyism in that there should be no problem with building a renewable plant on the site of a fossil fuel powered one, but that it is easier and cheaper to keep the status quo and just upgrade what is there.

I am consoled by the fact that the economics of these subsidies are so bad that formerly stalled large-scale renewable projects have been given the green light. Some, such as geothermal, have had their renewable certificates gazumped, however. Some things can't stay in business if the private money is chasing the most generous subsidies.

Dr Clam said...

In comparison to the roof insulation scheme, it is leveraging out private money, not just spending public money; and the higher bar of required technical competence means it will invole less expensive damage control afterwards.

Reject the assertion all you like.

Marco said...

The private money that it leverages out is taken away from other renewables in a highly market distorting way compared to infrastructure spending or even the insulation scheme. For instance, someone contemplating investing in Geodynamics shares would take note that investment in a rooftop solar gives a *Guaranteed* return (ie. the price obtained for electricity generated is guaranteed for around 15 years) Who pays for this guarantee if the cost of power generation drops substantially? - the electricity wholesalers. If the cost of electricity generation rises significantly, who pays? Consumers who were too cash-strapped or lazy to get roof-top installed when they had a chance. Is there enough Government and/or private money to get a significant percentage (lets say more than 1%) of our electricity needs through rooftop solar? Not even close at todays mix of technology, efficiency and cost.

There is a significant pernicious risk which the Government passes on to electricity wholesalers and the general public. Even those who do install rooftop solar have counterparty risk of the wholesalers going bankrupt if the wholesale electricity price drops suddenly. Their investment becomes non-performing in which case.

Spending public money per se is not a problem if it for long term general use investments (ie. infrastructure). Private investments require returns in a shorter window to work more efficiently than the public purse.

Admittedly some of the money "leaks" to something resembling infrastructure eventually. The idea would be for the government to invest the 10% of the amount that they are spending on subsidy directly on the infrastructure (transmission lines to/from new generators, for instance) to avoid the ineficciencies of market distortions.

Dr Clam said...

Hmm, hrm, okay, so the private money is 'taken away' from other renewables. If it made economic sense to build big renewable power plants, it would be done: it isn't done because it doesn't. If the government choses to throw our money away subsidising non-economic renewable energy, do we care what non-economic scheme they throw it at? Not me, much. At least it is building *something*, unlike an emissions trading scheme, which is only harming our competitiveness and piling transaction costs on bureaucrat salaries on a futile churning of funds from one (uncompensated) industry to another (compensated) industry to another.

Marco said...

Hate them as much as you like, at least ETS and carbon tax should not distort the market for energy. Just to make an analogy with bread - Bread wholesalers would buy bread off the large scale bakeries at 50c a loaf (also quite variable, depending on input costs), but are also required to purchase any loaves of bread left over from a multitude of private houses who bake their own bread, at the current retail price, say $2.00 per loaf. Large industrial users of bread get a concessional price of say $1 a loaf (variable), so that potentially, bread wholesaler's would get reduced income and potentially a huge hole in their profits, from something completely out of their control. As long as they can increase their prices independently of the feed in bread price, they will have to. Potentially it would increase general bread prices by much more than a simple "gluten flour tax" would. To start with, the home bakers would be recouping the cost of their investment on baking equipment. After that, they are extracting rent at a guaranteed price from the wholesalers. I am not upset that people have used tax money to install it, but that there is a time bomb setup with a price promise that extends for so long into the future. It is a recipe for disaster and something similar explains Enron's collapse and other energy market failures.

So it is the feed-in tarriff implicit or explicit promise rather than the once-off grant for installation that I am particularly against.

Dr Clam said...

The whole *point* of an ETS and/or carbon tax is to distort the market for energy, by adding costs to the most efficient forms of energy generation. This can't have any other overall effect than to decrease the efficiency of energy generation.

My understanding is that the feed-in tariff reverts to the bread wholesaler's level seven years after the commencement of the scheme, i.e., in about five years, so the effects are not locked in as long term as you are suggesting. In the meantime, if costs rise or demand falls, the electricity suppliers can just do a Telstra and increase their 'line rental' fixed charges for grid-connection infrastructure. This they will have to do anyway under any policy environment that is encouraging people to become more efficient in their power use.

Marco said...

Its funny that I know and can prove in my own head why the combination of these feed-in tarriffs and solar subsidies are far more damaging (albeit indirectly) to the overall energy economy than the various taxes and trading that is proposed, but I struggle greatly to put what I can prove to myself into terms that are meaningful to the arguments that are floating around.
I guess it may help if I started with what I think of the various energy "crises" and their root causes.
1) Private industries owning infrastructure and/or public money used to pay for or subsidise power use.(It only works the other way round)

2) Governments setting, even implicitly, the price of any energy commodity, be it petrol, food, electricity or whatever.

These factors, if even applied to a small subset of the energy industry, makes the trade in energy start to become disfunctional, and on top of that makes Government policy whatever it is at the time to also seem to be a failure.

Chris Fellows said...

I guess it may help if I started with what I think of the various energy "crises" and their root causes.

Though it would help more if you started with why you think those things are bad. Why should private ownership of some electricity infrastructure be worse than private ownership of some railroads? What is wrong with governments controlling prices of food so that unempoyed agricultural labourers don't starve in droves in bad years?

Marco said...

Clearly I believe that private ownership of some railroads is as bad as private ownership of electricity infrastructure. There are cases where either of those can be considered non-infrastructure, but I'll get to that later, as they are the rare exception.

What is wrong with governments controlling prices of food so that unempoyed agricultural labourers don't starve in droves in bad years?

This is confusing me a little because controlling food prices (or the attempt to using rules rather than purchasing the food itself) is a primary cause of unemployed agricultural labourers starving in droves in bad years.

Controlling prices helps well off people as much as those less well off. It is way more efficient to target the destitute with emergency funds directly. That goes for suppliers as well as consumers of a commodity. Controlling prices also dangerously separates the profit motive from the needs and desires of the customer. Thus the quality, stock quantity, etc. becomes optimised to meet the price setting rather than competing to meeet customers needs most efficiently.

Marco said...

Now for the bit that I said I'd get to. Railroads are almost always infrastructure because they are a long term investment and it tends to benefit the general population that is part of the grid.

Thus alarm bells were ringing in my head when Anna Bligh announced the Government was planning to sell off some rail assets. However the rail lines and stations concerned only carry coal for at most a handful of large mining companies. Thus because the general population gets no general benefit from this part of the "grid", private control makes more sense.

Dr Clam said...

This is confusing me a little because controlling food prices (or the attempt to using rules rather than purchasing the food itself) is a primary cause of unemployed agricultural labourers starving in droves in bad years.

Yes, but controlling food prices implicitly by buying the food and giving it away to poor folks is why there hasn't been famine in India since independence.

In a similar way, wherever the government is a large chunk of GDP it will have a distorting effect on the market, so whether it sets out to 'control' prices of a commodity or just does so without meaning to by virtue of being the biggest customer and the only one that can just print or extort funds to pay its bill is immaterial.

Marco said...

Do you really believe that about India? I certainly don't. It appears to be the conventional wisdom, but the Government buying food, per se is neither necessary nor sufficient to ensure lack of famine. Government money would be much better spent on food storage infrastructure (grain silos and the like) such that private companies would have the profit motive to store a lot in good seasons and draw from these stores in poor seasons.

Marco said...

Since the Government doesn't itself consume the commodities we are talking about, it has a severe conflict of interest. The government must still consider its own solvency, as well as the desires of the populace to have a "reasonable" price, variety and service standards.

As far as I know, RMP don't involve themselves in the food market, but are a huge purchaser of commodities used to build *infrastructure*. Famines in China appear to be a thing of the past, and were anyway somewhat engineered by the non-democratic government for political ends.

Dr Clam said...

Curses, my big comment was just eaten. :(

Restating in dot points.

*Ability of private enterprise to provide food is not the problem, problem is people concerned about food scarcity prepared to pay more to ensure supplies for themselves, pushing up the price so that unemployed labourers cannot afford to eat.

*Exact mechanism of government interference in food market not important, whatever it is has to be an example of government interfering in market with good outcome, so you can't issue a blanket condemnation.

*Gratuitous Amartya Sen reference.

***9/10 of market-distorting effect of governments is invisible and comes about from fact that they are so large and immune from things that affect other entities in the market. Have decided this is my main point.**

*Example of government ability to arbitrarily manipulate contracts not available to other entities, decision of NSW government to drop feed-in tarrif from 60 to 40 cents.

*Example of government ability to access other funding mechanisms, pushes up public-sector salaries, inflationary pressure, sucks talent out of private sector.

*Did you ever see "Lost"?

Marco said...

Curses, my big comment was just eaten. :(

Have taken to saving my blog comments.

Restating in dot points.

*Ability of private enterprise to provide food is not the problem, problem is people concerned about food scarcity prepared to pay more to ensure supplies for themselves, pushing up the price so that unemployed labourers cannot afford to eat.


Rationing in a time of crisis is a much better strategy to combat this problem. Outside of crisis times there is a considerable "surplus to requirements" necessary of around 40% extra food that generally gets thrown out. Better for the irrational consumer to pay for that than the Government.

*Exact mechanism of government interference in food market not important, whatever it is has to be an example of government interfering in market with good outcome, so you can't issue a blanket condemnation.

Policies that distort in a "linear" way I don't have a problem with (compare alcohol taxes vs. alcopop bans). Non-linear interference will cause an incalculable mis-allocation of resources. Because it is incalculable, people don't take it into account until the results become really bad. Sometimes the cause and effect is hard to spot due to a long time before the bad effect, but non-linear interference always has bad effects worse than the problem trying to be solved.

*Gratuitous Amartya Sen reference.
I'll look it up

***9/10 of market-distorting effect of governments is invisible and comes about from fact that they are so large and immune from things that affect other entities in the market. Have decided this is my main point.**


Well that's probably a fair call, but I think that is a case for trying to keep Government policy to the other 1/10. One must see any Government policy piecewise in investment terms (Is this a good investment?). If Government policy results in private investments that would otherwise be bad investments (like electricity from rooftop solar panels), it should be seen as a bad government investment in the policy.

*Example of government ability to arbitrarily manipulate contracts not available to other entities, decision of NSW government to drop feed-in tarrif from 60 to 40 cents.

This demonstrates the extreme non-linear nature of the distortion it has caused. It also breaks an implicit promise to the people concerned, harming their re-election chances. The hole it was burning must be huge for a turnaround like that.

*Example of government ability to access other funding mechanisms, pushes up public-sector salaries, inflationary pressure, sucks talent out of private sector.

You have "lost" me in keeping it brief. Perhaps you could expand on this before I reply

*Did you ever see "Lost"?

Not a single episode, unfortunately.

Chris Fellows said...

(Is this a good investment?)

Sorry to pick just this line out of your reply. But my point here is the crux of assessing government policy. The government has a mandate to do things that the market would not do, like provide essential goods to people who can't pay for them. So the questions should be, "Does this policy achieve what the government wants it to achieve?" and "Is it worth achieving?" (I expect from the furious back-pedalling that for this particular policy the government has answered these questions to its satisfaction "no" and "no".)

The question "Does this policy achieve what it set out to do?", is in theory susceptible to experimental measurement, but of course first we need to have a clear conception of what it was in fact intended to do. As for whether it is worth achieving, our current system is set up so that the electorate at large decides. If we were governed by robots programmed with Marconomic principles or a troika of swashbuckling Clam-thought masters, then we would have some agreed-upon standard of what goals were worth achieving and could pursue the matter further.

Marco said...

So the questions should be, "Does this policy achieve what the government wants it to achieve?" and "Is it worth achieving?"

Ok. In this case the policy is putatively to accelerate the process towards grid parity for renewables (specifically PV, but it shouldn't matter which renewables). To Australia's credit, we have got onto this bandwagon quite late, now that PV manufacturing has ramped up considerably to get *some* economies of scale going compared to where it was when Germany started this charade 10 or so years ago.

My point is that it *may* be worth achieving this goal if the most basic Marconomic theory was being followed - ie. concentrating government expenditure on the infrastructure required, and letting the market work its magic on finding the most cost efficient renewables. Even changing the rules to get around rampant Nimbyism is an entirely plausible strategy.

"picking winners" in terms of best renewables to choose from is something that cannot be done by fiat(Governments keep trying, though). The market working on a reasonably level (say linear) playing field is the only way to move towards "grid parity".

I think the Governments (state and federal) went in this direction because of the perception that the overseas experience was that it was "succeeding", where we were failing even though we have more sun.

On a footnote, I was talking to my father about solar (he has an excellent 12V system in operation at West Point) and his father (35 years ago) explained to him then the various reasons why rooftop solar power would never amount to anything. It appears that it is still true now.

Marco said...

Oh yeah. My fathers father was an electrical engineer and a considerable expert on transformers etc. The main reason rooftop solar as a source of grid power is a "fail" is that there are considerable losses in the DC/AC transform - up to 240V AC then to 11KV AC at the local transformer box and back again. I am not quite sure but I think the utility pays for the power before these losses, to boot, and only charges customers for electricity after losses. The percentage losses are much lower on larger scale PV operations, but these are not subsidised and cannot compete. I have a great deal of trouble stomaching the reward of the least efficient, even if they are nice people.