Principles for the effective integration of renewable or low carbon energies into national or regional power systems.

This is the substance of a recent talk I was asked to give at a recent COP26 roundtable in Turkmenistan. It is an attempt to summarise, for policy makers, some of the general principles we have learned in the course of the Oxford Martin School Integrate project.

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First, the context. A low carbon power sector has a central role in reducing CO2 emissions and making progress towards zero carbon. This is not just because fossil-based power has high emissions and we already have numerous technologies for low carbon generation. A low or zero carbon power sector means we can progressively use electricity solutions to reduce CO2 emissions in other major categories, notably transport and heat.

The task then is developing and integrating renewable and other low carbon energy resources into power systems that deliver what we need and expect. The main factors that have to be respected and reconciled are the following:

·         Power systems require flexible responses to balance real time supply and demand.

·         Low carbon sources (mostly) lack the flexibility of traditional thermal generation plant using coal oil or gas.

·         Renewables output can be intermittent and unpredictable

Today I am going to summarise some of the general principles we have learned in the Oxford Martin School. The principles apply not just to the UK but in virtually all power systems. However, lesson one is that every country and every network is different, in terms of its available resources, its climate, weather and seasonal effects, and the needs of its consumers. So the best choices for the future will also be different.

Framing the Policy Choices

We have used this diagram to represent the task, and the large number of questions that need to be addressed. The potential resources and activities that we can manage, the options available to the power sector, are shown in the top row - generation, storage, networks and consumption. Costs are generally coming down.

The policy instruments that we have to manage these options can be categorised, in the left-hand column, in terms of technology and innovation, the wise use of markets and price signals, social engagement in the process of change, and finally the whole framework of law, organisation, policy, regulation and governance on which the sector depends.

There are 16 cells in this 4x4 matrix, and there will be important questions in almost all of them.

Starting with the resources, choices involve selection from a long menu, much of which I am showing on this slide. Virtually all the items here feature in the UK as part of our likely solutions, and they are all potentially important. I will just comment on a few highlights.

·         When we look ahead to planning the power sector, we have to look not only at the current use and applications of electricity but also at its substitution for other fuels in new applications, especially transport and the provision of heat. This implies coordination across sectors.

·         Electric vehicles especially have the potential to play a huge part in the operations of the power sector.

·         Interconnection. The recent power crisis in Texas has highlighted the importance of interconnection and the risk of isolation.

·         Solving the storage problem is one of the most challenging parts of the exercise, at least from a technical and economic perspective.

·         Consumers are also a vital part of the system, technically, economically, and politically. They merit a separate conference on their own.

Technical and technology choices

The choices have to be complementary rather than exclusive. This will involve substantial computer modelling of alternative combinations to find out what works best.

So the balance, getting the right mixture, of solar, wind, biomass and other sources is essential. For the UK, for example, meeting seasonal variations is very important, implying a higher ratio of wind to solar.

Storage is going to be important everywhere. Battery technology and pumped hydro, possibly some interconnection, combined with the ability to make use of more time-flexibility in consumer demands, will mostly be more than adequate for smoothing daily variations. But inter-seasonal storage is potentially a much bigger problem, unless the capital cost per unit of energy stored can be greatly reduced. The most promising answer appears to be conversion of renewables output into high energy forms which can be stored more cheaply. Hydrogen may be the preferred long term storage option at the present time, but there are other contenders.

In the UK, a bigger issue than seasonal storage may turn out to be risk of prolonged periods of low wind. Some modelling has simulated the effects using weather data over the last 40 years, and this has proved a useful exercise.

Markets and prices

These issues have related to technical planning, and available innovations, but there are also major implications for markets, governance, and the management and control of the sector. Turkmenistan and the UK have very different starting positions. Turkmenistan starts from a position of government ownership and control of the power sector, and supply to many consumers has been free. The UK has private ownership and some market structures but also has increasing government involvement in underwriting new low carbon investments, and in ensuring coordination within the sector. Despite these differences, I believe that there are some important common principles.

One is how to choose the most efficient plant to operate. In the UK we call this the merit order. As we progress towards low carbon economies, this will normally imply the plant with lowest CO2 emissions per kWh. In the UK and Europe this means that a price has to be attached to emissions and that must impact on the economic choices made for the sector. But it is also true that the task of managing power systems effectively with high renewables presents new challenges. In the UK we are also having to re-examine the methods that we use to get the most efficient operation of the system. The optimisation methods designed for a world of coal and gas generation are not necessarily the right ones for a low carbon system.

Consumer tariffs are very important. They are central to the ecology of the power sector as the primary means of communication between production and consumption. The priority attaching to reduced emissions is such that this should be reflected in cost reflective pricing. Tariffs are even more important if we need to promote more flexible demand. We expect to see some profound changes in the nature of the services provided by electric power in meeting consumer needs.

Finance and Governance

My last big economic issue is financing. It is widely held that collectively the world has a glut of savings waiting to be invested in useful projects. Also, the cost of capital is at historically low levels. But to access that capital, for any country or industry dependent on external or private finance, it will be essential to demonstrate that the investment is going to be well managed. The institutional structure is important for that and also for successful implementation.

This means ensuring a good and stable legal and institutional framework within which low carbon investments can be delivered, and one that banks, the World Bank and others, or other investors, can rely on. That of course depends on the commitment of governments, in the UK as much as anywhere, to low carbon objectives.

TEXAS POWER CRISIS. MARKET OR REGULATORY FAILURES?

 

Viewed as independent countries California and Texas would both rank among the ten largest economies in the world. One Democrat and the other Republican, the feature they now have in common is failure to prevent extensive and disruptive interruptions to power supply – California in 2001 and Texas in February 2021. In both states near-catastrophic failures raise questions as to the viability of highly market-driven power systems, which contrast with the stability of more integrated models of the East Coast of the US, and internationally. The answers matter, not just for Texas, but for developed and developing economies everywhere.

In California, the new market structures had only recently been introduced. California had copied many features of the UK 1990 model, which had worked successfully, or at least without major mishap, for ten years. With the benefit of hindsight and a lot of analysis, there seems to be a reasonable consensus that the failures resulted from a combination of factors:

·         Weaknesses in the design of the new market structures

·         State regulatory authorities’ imposition of a price cap, which prevented the market working as it should, to reduce demand and increase supply.

·         Market abuse by Enron, notoriously exploiting the rules to gain large economic rents. Enron went on to become a major corporate scandal, but California was the setting for some of its most egregious wrongdoings.

The recent failures in Texas, celebrated as an example of liberalised market reform, are harder to explain. Unusual weather conditions may be a proximate cause but are hardly an adequate excuse for one of the wealthiest advanced economies in the world, in a liberalised power sector that has appeared to operate without serious mishap since the late 1990s. The other factor cited, the intermittency of wind, can be dismissed as a credible explanation; if relevant at all, it is a known risk that should have been easily managed in a well-functioning sector. We need to look further for adequate explanations of failure to provide reserve capacity.

Creating incentives for private operators to provide the level of reliability that the public want has always been a potential weakness of market-driven systems, usually resolved by the imposition of reserve margins, and financial incentives or penalties. Peter Cramton[1]  is Vice-Chair of ERCOT, the body that has coordinated the Texas power sector over this period, and has described[2] the approach taken to this problem in Texas. It is an administered scarcity price similar to that used in the 1990 UK reforms, which operated successfully up to the introduction of further changes in 2000.

A market in reliability

The Texas model, according to Cramton, sets out the rules to determine an administered scarcity price, in periods when there may be very high or peak demand or low supply.  In theory this should incentivise sufficient capacity (Q) at all times. The administered price aims to reflect the value of lost load (VOLL), and a high VOLL should in consequence result in high reserve margins for generating capacity. Texas sets a high value for VOLL. ^[3] Simple economics suggests high rewards will bring forward more than adequate supply.

One possible explanation for the current failure is simply that this scheme lacks credibility. If we look at these incentives for investors in potential reserve capacity, then the return on investment – the future revenue stream – may depend on achieving ultra-high prices in periods with an ultra-low probability of occurrence. This probabilistic estimate may indicate good “expected value” returns, but the very high chance of zero revenue is not attractive as a basis for large scale investments. Paradoxically the higher the value of VOLL, the rarer the occurrence of periods of scarcity and the less credible the projected revenue becomes. 

Closely linked is the matter of regulatory credibility: if prices need to go that high, as they must do to validate the investment in reserve capacity, and particularly if the price spikes impact on consumers, will the regulatory or political authorities really stand aside and let them happen? The 2001 California experience, at least as suggested in many accounts of that event, suggests otherwise.

What do UK market models tell us?

The UK used its own version of an administered scarcity price from 1990 up to 2000. Fortunately, this was a period with a legacy of surplus capacity, so the method was not subject to severe stress tests. It worked well but was also criticised for potentially allowing larger generators to exploit their market power. It was replaced in 2000 by trading arrangements which had no formal mechanism for capacity. It rapidly became apparent, however, that these would not incentivise new capacity, and would pose an increasing risk to reliability of supply. The UK moved gradually towards the establishment of capacity markets to supplement the new arrangements.

In practice this means that investment in new capacity does not depend on investors responding to market price signals and guessing future prices in the “energy only” electricity market.  Virtually all new UK generating capacity results either from government choices, long term contracts (nuclear plant), from feed in tariffs, or from capacity auctions.

If fixing prices (P) doesn’t work, try fixing quantities (Q)? P or Q?

Economists will be familiar with markets where the choice is to use price or quantity as the appropriate instrument of policy. A good illustration is the energy policy choice between a carbon tax (P) and setting emissions quotas (Q) which can traded. It is possible for the price and quantity outcomes to be the same under either regime, but the choice is important and is usually made on an empirical or pragmatic basis, of what is likely to work best or be more politically and socially acceptable. The UK approach, de facto, for reliability, is to concentrate on fixing Q.

In this context, capacity markets can fix Q if a central authority – government, regulator or utility – decides on the reserve margin and the reliability standard, and invites tenders to provide that capacity. This has the advantage of much more certainty that the reserve will be provided, but it places the onus on the central authority, not just to decide how much capacity but also, in practice, to determine the right technology mix, and to monitor delivery. It represents the abandonment of most of the tenets of a market fundamentalist approach to the power sector.

Regulation and Governance for the Power Sector

It is always tempting to read too much into a single event, when there will inevitably be multiple interpretations of what has happened, and rarely one simple explanation. Another focus will no doubt be on the general governance and regulatory arrangements in Texas, and the role of ERCOT (see below). However, the “standard model” of unbundled utilities, wholesale and retail competition, independent regulation and excessive reliance on markets, however flawed, must come under more scrutiny. Pioneered in the UK, promoted by the World Bank, the European Commission and others, it looks increasingly incapable of responding to today’s policy challenges, of which the climate emergency is just one.

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[1] Cramton is an academic economist, who has described and indeed promoted market-driven models for the power sector. He described the role of ERCOT and the power sector in Texas in a paper - Electricity Market Design - in the Oxford Review of Economic Policy.

[2] Oxford Review of Economic Policy, Volume 33, Issue 4, Winter 2017, Pages 589–612

[3] In Texas VOLL was set administratively at $9,000/MWh—367 times higher than the average energy price of $24.62/MWh in 2016.

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Additional Notes.

A regulatory issue. There is another feature of the power sector in Texas which is at odds with the “standard model” of liberalised markets and independent regulation. The Electric Reliability Council of Texas (ERCOT) effectively controls the functioning, in operational terms, of the Texas power system. It is an umbrella organisation, whose membership includes the utilities, generators and other stakeholders in the sector. It implicitly assumes responsibility for reliability and by its nature provides scope for formal or informal coordination within the sector. This might be interpreted as a quasi-regulatory role, violating one of the conventional principles of sound regulation, namely that the regulator should be independent of ownership and management.  There is an additional oversight from a Texas Public Utilities Commission, but it is unlikely this will have had the knowledge or expertise to probe ERCOT too closely, especially on technical issues

It is possible to argue that ERCOT also provides a vehicle for informal planning or informal guarantees for future investment, and that coordination and more rigorous planning disciplines, plus technical monitoring of capacity, should have been applied.  I would argue in this instance that it was reliance on a “market” mechanism that is the more likely prime cause of the failure.

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California. See for example Weare, Christopher (2003) The California Electricity Crisis: Causes and Policy Options  ISBN 1-58213-064-7;

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There is another important alternative to administered scarcity prices. It is to allow scarcity prices to be set in a market by consumer choices and consumer valuation of reliability, but that is generally seen as currently impractical, because consumers lack the technical capability to respond quickly to price or crisis signals. However increasing digitalisation, and concepts like differential reliability and supplier managed loads- see my tariffs paper - will take us in that direction in the future. 

 

ELECTRIC VEHICLES FOR AFRICA. PIPE DREAM OR NECESSITY?

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A recent FT article argued the importance of electric vehicles in Africa, as an essential component of a global strategy to limit emissions and combat climate change. A predictable response from readers was that this was wholly impractical on the grounds of both affordability and the current inadequacy of African power systems. Healthy scepticism is fine but it should not obscure the fact that it is in an African and global interest to leapfrog to an electricity based transport technology. Electric vehicles can be part of the solution for Africa’s power systems, not just another problem.

Vome Aghoghovbia-Gafaar writes[1] on “Why Sub-Saharan Africa’s teeming cities need electric vehicles.” The response from FT readers was sceptical, making the seemingly obvious points that Africans will not be able to afford expensive Teslas, that even developed countries are struggling with the infrastructure electric vehicles (EVs) require, that Africa largely lacks adequate power supplies, and that better mass transit systems are perhaps a more immediate transport priority for Africa’s mega-cities like Lagos or Dar-es-Salaam.

Healthy scepticism is fine, but there is a wider case for EVs in Africa, and it builds on the almost universal imperative to move rapidly towards low carbon sources of electricity as a substitute for fossil fuel use. The big issues for this target in Africa are first the absence of affordable electricity, and second the unsustainability of clean economic development without it.

The global imperative is that unless we can achieve a transformation of the power sector in Africa, which enables both economic development and a switch to low carbon fuel sources, then the chances of meeting global emissions and climate targets are very low indeed. That reality should condition our judgements on the realism of prospects for overcoming the undoubted obstacles

From my experience the biggest single barrier to resolve the first issue – affordability – is likely to be the very high component of fixed cost, which especially in poor communities has to be spread over a small number of kWh. The only way to get the unit cost down is by much higher volumes, but these are often hard to achieve.

Africa has some of the highest unit costs and prices for power in the world, as well as many of the poorest people. This combination makes it particularly difficult to build the volumes, and the economies of scale, which are ultimately the only ways of bringing these costs down.

For rural electrification, involving some of the poorest communities, the World Bank has estimated kWh costs could be brought down to about 22c per kWh with the achievement of reasonable load volumes and a 40% load factor. Neither of these conditions is easily met, however. Moreover much of Africa is well endowed with solar power, but the management, even of small systems with intermittent energy, is problematic in the absence of storage or back-up. And similar issues can be expected in urban systems.

Electric vehicles help with both problems. It is intrinsically a large load, and with a high percentage of EV batteries connected to the grid when the vehicle is not in use, eg in the evening, this creates significant opportunities to improve load factor, substantially reducing the unit costs to other productive uses of electricity, and to cooking. The latter in particular offers a big environmental benefit. Electricity can substitute for firewood or charcoal, whose continued use has disastrous consequences for deforestation as well as a large carbon footprint. The scale of emissions from these unsustainable sources is comparable to that of diesel used as a transport fuel.

As an idealised solution, therefore, promotion of electric vehicles in Africa can provide a classic synergy in terms of reducing emissions, providing clean energy and assisting economic development. In itself it reduces harmful emissions, a global CO₂ benefit, as well as localised city pollution. The key to the economics is that if the vehicles and their batteries are already there, some of the essential but very expensive storage requirement of renewable power systems is already in place.

The additional load permits more effective management of renewable systems and much higher load factors. Both these gains would have a big impact in reducing unit costs, and this in itself could create a virtuous circle of more affordable power, more productive use of that power, higher incomes and improved affordability, feeding back into further economies of scale, cheaper power, and less polluted cities.

Measuring the benefits

In an earlier post[2], I discussed the benefits of eliminating traditional and unsustainable use of firewood or charcoal for domestic cooking. The potential reduction in CO2 emissions is huge. Charcoal use is widespread in the developing world and its elimination for a billion people (a conservative estimate of potential) could reduce global emissions by as much as 700 million tonnes or about 3 % of the total. The nature of the emissions externality is that the benefit accrues to the global community as a whole, not just to Africa. But the scale, with any reasonable valuation of carbon, is huge

The contribution from eliminating oil dependent road transport in Africa could be of a similar order of magnitude, with a similar global benefit.

How realistic is all this?

As electric vehicles take an increasing market share, some of the barriers are likely to fade away. Scale economies will bring down manufacturing costs and prices to consumers, along with a new generation of vehicles made in China or India, probably with more basic specifications but significantly lower costs. Electric vehicles combined with electric cooking could, as suggested above, mitigate the technical and economic problems in developing the power sector

The biggest barrier remains the quantum leap required of African power sectors, partly in terms of governance but even more in terms of the sheer amount of capital required. Help from development aid budgets will be a necessity. But, as I have suggested above, failure in this task should not be considered an option. The global economic cost of climate catastrophe, or the cost of expensive carbon extraction from the atmosphere (which we shall almost certainly be forced to adopt) could make African electrification a bargain form of carbon reduction for wealthier nations.

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References

Is sub-Saharan Africa ready for the electric vehicle revolution? | World Economic Forum (weforum.org)

John Rhys on Energy, Climate and Carbon: FINANCIAL SUPPORT FOR ENVIRONMENTALLY SOUND POLICIES IN POORER COUNTRIES MAKES SENSE FOR EVERYONE. THE CASE OF FIREWOOD, CHARCOAL AND DEFORESTATION. (co2economics.blogspot.com)

Energy and Transport in Africa and South Asia. Katherine A. Collett, Maximus Byamukama, Constance Crozier, Malcolm McCulloch February 2020

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[1] FT.  1 February 2021

[2] Reference and link at bottom of post.

ENDING RELIANCE ON THE MARKET ALONE TO DELIVER FOR THE POWER SECTOR

In recent years we have witnessed the central role, everywhere, of governments dealing with massive market failures, or potential failures, in critical parts of the economy and society. The most obvious crises and interventions have been in the financial sector, and in public health. But attention is also now turning to the biggest crisis of all, the looming threat of climate change. As with the pandemic and with finance, this makes the risk of systemic failure in the energy sector something that governments, of whatever ideological complexion, can no longer ignore. This may be the end for the road for market fundamentalism in the energy sector.

National Grid faces being stripped of its role … after the energy regulator concluded an independent body would better oversee the changes required to meet the UK’s 2050 net zero emissions target. It would also avoid potential conflicts of interest and allow for the “greater strategic planning and management” of the electricity system. (FT, January 2021)

The wheel turns full circle. We are now a million miles from the “liberalised” structure of markets and governance, with all investment choice driven by market signals, and celebrated as such an achievement after the complex and innovative restructuring of the UK power sector in 1990.  The government has already resumed its role as the prime decision maker on new generation investment, and nothing substantial is built without a long-term contractual commitment on off-take that only government or a regulated monopoly can provide. Government has become the de facto "central buyer". The new proposal simply follows the logic of a return to a more planned and coordinated power sector by explicitly extending this role to transmission. Since transmission investment is frequently an alternative to additional generation capacity (most obviously with international interconnection), this seems entirely logical.

While it is still not clear what changes will result from the OFGEM proposal, one obvious deduction is that we are moving towards the creation of a new body with a strategic responsibility for planning and coordinating all significant future investment in the power sector. It would be hard to avoid linking this with the existing functions of government in securing new capacity, through auctions or other means. In its fundamentals this represents the re-establishment of the planning functions of the old Central Electricity Generating Board (CEGB), but without the CEGB’s functions of ownership and operation of generation and transmission. If this interpretation is correct, and the proposals are implemented, then this represents an essential development for which I have been arguing on this site[1] and in other media for many years.

To understand how and why, even with successive governments as the most enthusiastic promoters of theoretical “free market” philosophies, we have got to this position, we need to look at some of the basics of power sector and infrastructure economics, and also at the climate policy imperatives.

The Infrastructure Investment Problem

Investors in high capital cost and immobile assets typically require long term contractual or similar assurance. Their assets are almost always specific to one purpose, and depend on a secure long term revenue stream. Reliance on a spot market or short term contracts, the core components of electricity market structures and both dominated by short term factors, are just not good enough to satisfy private investors. This is particularly so for key investors like pension or sovereign wealth funds who are seeking secure but modest returns. And the low cost of capital these investors can provide is exactly what is necessary to keep electricity prices affordable.

Along with construction risks, the biggest risk to infrastructure investors is that, having sunk the costs of their capital investment, future revenues are exposed to opportunistic actions by other parties. These include government, regulators and customer utilities, all with political or economic incentives to attack their future revenue stream. The owner cannot transfer the asset to an alternative use or jurisdiction, and faces expropriation of expected revenues in the interest of lower prices to consumers.

The two main options are inclusion in a regulated utility framework (traditionally vertically integrated monopoly) in which reasonably incurred costs are passed to consumers, or long term contracts with or commitment from a reliable counterparty, usually the only plausible party being the government.   In the UK, network investments have in recent decades typically depended on the former, and generation on the latter (via CfDs, feed in tariffs etc).

Either remedy can work but both draw a monopoly utility, or government, into strategic investment choices. Both are a long way from the paradigm of the fully liberalised market.

The Coordination Problem

Recent complaints have focused on failure to coordinate offshore wind development with the transmission investment necessary to bring it ashore. But there are plenty of other examples of the need for coordination with low carbon systems, mostly reflecting the fact that these sources are less controllable than conventional thermal fossil plant.  Factors include the advantages of planning for diversity in the siting of wind facilities, the need to get the right seasonal balance of solar and wind, issues around storage and whether to treat it as supply or demand. It looks improbable that any of these issues can be resolved either through short term price signals from power markets, or by “technology neutral” invitations to bid new capacity.

The remedies are either informal coordination within the sector, which risks running foul of competition law or anti-cartel legislation, or a central direction of what types of generation are required.

I have previously argued that the National Grid already plays such a central role that one solution might have been an extension to include a more formal planning or even a central buyer role. But this may well not have been acceptable to a private sector management, and the OFGEM proposals may lead us to an equally satisfactory outcome.

The Carbon Emissions Externality

Climate change is the “biggest economic externality of all time”[2], to date addressed only to a very limited degree by carbon taxes or emissions pricing.  Low carbon prices, only partial in coverage, may be due to insufficient ambition or vested interest capture, but are grossly inadequate to match any serious estimate of the cost of the externality.

So failure to price emissions adequately means that market solutions cannot work on their own. Moreover the “Theory of the Second Best” implies that once we have one major failure in the market, like the failure to price carbon, we cannot assume that other policies, eg competition policy or a merit order[3], normally thought of as good, will actually improve welfare rather than reduce it. In our context even the best designed markets will produce the wrong seriously sub-optimal outcomes, for both operations and investment, if the damages of unconstrained emissions are not included in economic calculations.

Recent examples include the huge coal for gas substitution in 2013/14, driven by a temporary change in fuel price relativities, Dutch competition authorities prohibition of collusion between utilities to reduce coal use, and the UK exclusion of domestic gas, but not the power sector, from emissions trading.

But difficulty in allowing the market to “price” emissions is another prime reason why governments cannot and will not “leave it to the market” to meet its climate objectives. Societies can no more afford systemic failure in relation to energy and climate issues than in health or the financial sector.

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Suggested reading.

ETI publishes industry perspectives on how to deliver efficient networks for a low carbon future energy system.  19 September 2016

Markets, Policy and Regulation in a Low Carbon Future. John Rhys. January 2016

 

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[1] Use the button LOW CARBON POWER at the top of this page for a more wide ranging discussion.

[2] Stern

[3] The merit order, in any power system, is simply a ranking of generating facilities in ascending order of cost, so that the cheapest are always used first to minimise total cost. If key elements of cost, in this case the damage from CO2 emissions, are not included, then there will be poor outcomes.

ASTRAZENECA AND THE VACCINE CONTRACT. VON DER LEYEN’S INEXCUSABLE BLUNDER

To revert to the main page with all recent blogs press HOME AND BLOG button at top of page. SITE NAVIGATION has an almost up-to-date full list of past posts. The side bar allows you to access most recent blogs in particular subjects. 

Prima facie the contract, now published in redacted form, is pretty clear and appears to support the  Astrazeneca position. Meanwhile the Commission’s threats to intervene across a range of vaccine export arrangements not only represent the worst kind of vaccine nationalism, but also threaten the wider credibility of governments (not just in the EU) across a range of vital public policy concerns, from public health to energy and climate.

The basics are well known. Astrazeneca has hit production problems at its European plants, a common problem with new pharma products, and has had to reduce its estimated deliveries in the next few months. Most such contracts, with a new product and new facilities, necessarily include best endeavours clauses to protect the producer, and this is no exception. Interpretation of such clauses can give rise to legal disputes, but the main issue between the parties in this case appears to be whether those best endeavours can be deemed to include the diversion of supplies promised to other parties under earlier contractual obligations. Since this at the centre of the dispute, it is worth understanding the detail.

If AstraZeneca had made multiple promises which were in conflict with one another, there might be a cause for a major contractual dispute. But in this case, at least on first inspection and according to the EU, the question seems to be the slightly simpler one of whether best endeavours under the contract should oblige AstraZeneca to divert supplies already under production to satisfy its UK client, including those produced in UK plants. If AstraZeneca’s claims are correct then the EU Commission is guilty of the worst kinds of vaccine nationalism and government bullying.

Read the contract! It tells you exactly what AstraZeneca promised!

The specific obligation that is set out in the contract appears under the heading Manufacturing and Supply. It reads as follows:

5.1. Initial Europe Doses. AstraZeneca shall use its Best Reasonable Efforts (BRE) to manufacture the initial Europe doses within the EU for distribution, and to deliver to the Distribution Hubs .... following authorisation ….  [my italics]

Prima facie this is an obligation of BRE in respect of EU manufacturing plants (which do not include those of the UK). This does not appear to confer a right to access supplies ordered much earlier by the UK.

Game over. Or is it?  Two other claims have been made: first that the UK should be deemed to be part of the EU, and second that UK manufacturing plant is mentioned in the contract. Unfortunately for Von der Leyen and Kyriakides, both claims are demolished by a careful reading of a later section.

The relevant section in this case is 5.4 – Manufacturing Sites. In summary it is dealing with the question of where AstraZeneca is permitted to produce under the contract, reflecting the obvious concern that any such facilities should meet European standards. In summary it obliges AstraZeneca to make BRE to use EU or UK sites as far as possible. They may use other non-EU non-UK sites, but only after obtaining EU permission. It also states another remedy for the EU, if production is delayed. This is that the EU may present to AstraZeneca a list of firms (CMOs) with whom they can contract.  AZ is to use BRE to contract with these CMOs to boost production capacity within the EU.

This clause also defines the UK as part of the EU, but only for the purpose of this clause, 5.4. In other words the EU in 5.1 cannot be considered to include the UK. Clause 5.4 does not refer to any obligation on the delivery of the initial dose. It is solely concerned with permissions for where AstraZeneca should be allowed to manufacture, and possible steps if production is delayed.

Personally, therefore, I have found it very hard to find an interpretation of the contract that supports the Commission’s position, although no doubt other legal challenges and arguments may be made.  This contract is of course only one element in the pandemic crisis, and we all know that ultimately solutions depend on international cooperation. As it happens, the UK vaccine bets have paid off and it should soon be in a position to share some of its good fortune, whether with its EU neighbours or through the offices of the WHO, with others.

The Political Fallout is Bad News

I have long been an enthusiastic supporter of the European project, but the Commission’s inept management of the EU vaccine programme, followed by its abysmal tantrum over a not-for-profit contract with a firm that has developed one of the world’s leading vaccines, is utterly inexcusable. To assert an unsustainable interpretation of a contract makes it worse. With its clumsy and hastily reversed Article 16 intervention on the Irish border issue, it has undermined the Northern Ireland Protocol, with potentially disastrous ramifications for the Irish peace process and its own single market. It has damaged the credibility of Western democracies just at a time when they should be recovering from the twin disasters of Trump and Brexit. Fury at the Commission’s performance will not be confined to the UK, is widespread in the member states, and we need to see some high-level resignations, preferably soon.

Falling Credibility in Government and international Bodies is also a Disaster for Climate Policies

The damage cannot be confined to the immediate issue. International agreements depend on good faith, and investment in climate measures depends on the ability of governments to commit to and honour contracts. The Commission has managed to damage both these fundamental building bricks at the same time. This is bad news for the COP 26 climate conference later this year, and its longer term effects may well play out in higher than necessary costs of capital for the climate-related investments we all need to make. A climate coalition with Europe should have been the UK’s best policy. That now looks increasingly problematic.

GLOBAL BRITAIN. IS COP 26 THE GREAT OPPORTUNITY?

 

It ought to be, but our government is hamstrung by its own ideologies, its recent history, and our decision to cut adrift from Europe.

The next climate summit COP 26 is so important for our collective future that we should all hope for  a resounding success. The question will be whether the UK is up to the task of delivering on the promise, and achieving worthwhile agreements and commitments. A lot depends on the ability of the summit host to persuade and cajole. Alok Sharma, the Business Secretary has been charged to work full time on preparations for COP 26, and, encouragingly, is quoted as recognising that “the biggest challenge of our time is climate change and we need to work together to deliver a cleaner, greener world”.

On the positive side, the UK does bring some strengths. Tony Blair gave the UK a genuine world first in the 2008 Climate Change Act, targeting an 80% reduction (from 1990 levels) in emissions, the first time such a national target had been introduced into law. The UK is able to claim significant reductions in its own emissions, even if these largely reflect the special circumstances of its gas for coal transformation of the power sector and the off-shoring of emissions that resulted from the Thatcherite de-industrialisation of the 1980s and 1990s. And it has important strengths both in policy formation and in science, both vital for the future.

And growing environmental awareness provides an auspicious international backdrop for climate action. 2020 saw some of the highest global temperatures on record, alarming heat and record wildfires in the Arctic, and record tropical storms in the Atlantic. Even if these and the Australian bush fires are not all directly attributable to global warming, and other factors are indeed often at work, the impact on the public consciousness has been huge.

Even the covid pandemic plays into the wider Green agenda that our failure to protect our global environment has been a huge mistake, with the indications of connections between declining wildlife habitat and the probability of viruses jumping the species barrier.

Finally 2020 has seen the stunning electoral defeat of arch science denier and fossil fuel promoter Donald Trump. Covid-19 has proved not to be a hoax, and so has climate science. The biggest single obstacle to international progress, the intransigence of the USA on climate issues, has softened even if not wholly removed, at least for now.

But this is also where the credibility problems of the current UK government begin. It is not helped by its poor and embarrassing record in appeasing the disgraced Trump, partly in its desperation to find international, and particularly US, support for Brexit.  “… this opportunity is dependent upon Mr Trump’s presidency. Without him the US would be offering no support for Brexit and would be seeking to frustrate it.” (Rees-Mogg, 2018)

The bigger problem is that the Tory party has over a long period been the home of the most vocal climate sceptics – Lawson, Redwood and many others. Moreover “climate hoax” claims,  and more muted efforts to reject or ignore the implications of climate science, are strongly associated with the tendency to theological belief in Brexit (with Lawson fronting the Brexit campaign), an observation I made in this blog in 2016, and which many others, including The Economist, have made subsequently.

Nor is the Tory ideological commitment to low public spending and a small state easy to sustain in the face of the kind of crisis provoked by climate change (or by covid-19 for that matter). Action to reduce emissions, to promote electric vehicles and alternative heat provision, and to mitigate the effects of climate change, are all going to require huge infrastructure spending, policy interventions, and financial commitment by governments everywhere.

But the more interesting challenges for British commitment to climate goals will come in relation to its ambitions for international trade, and its fragile trading relationship with Europe. In July 2020, the EU launched a consultation on proposals for a border carbon adjustment mechanism, effectively a carbon tax imposed on imports from countries deemed to have less rigorous emissions policies than the EU. This provoked predictable outrage from Trump and much of corporate America, but the concept will also have longer lasting and more subtle effects on trade. There are powerful arguments for this kind of tax, to allow a “level playing field” in trade, and to prevent carbon and jobs “leakage” to countries that refuse to cooperate with low carbon goals.

It is very likely that a such a carbon tax, applied at borders, would impact initially only on highly energy intensive sectors such as steel, aluminium and cement. My own view is that pushing it down to other sectors may prove much more difficult in terms of measuring carbon content, with complexities that may make current issues with “rules of origin” look comparatively simple. But the effect on trade negotiations is likely to be more subtle, with pressures to imitate and endorse EU climate targets.

The consequence is that for the UK to operate successfully as the host of COP 26, this initiative is likely to push it closer to the EU position on convergence of trade policy and climate objectives. This is almost certainly in the UK’s short, medium and long term interest anyway, but may be a hard pill to swallow in the aftermath of the bitter divisions, internal and external, of the last four years. Even if the USA, under Biden, adopts a much more progressive position, major players, such as India, Brazil and others, will be much more resistant. The Brexiter reliance, at least in terms of political rhetoric, on new friends and trading partners, will make effective international  influence more difficult. But that of course is just one more negative consequence of leaving the world’s largest free trading block in the first place. A climate coalition with Europe remains the UK’s best policy.

THE ELECTRIC CAR EXPERIENCE

 

For once I can describe myself as an early adopter. I recently acquired an electric car. We are, partly from necessity, a two car family and our twenty year old petrol-driven motor finally gave up the ghost this year. We realised that the cost of keeping it roadworthy exceeded its value by a considerable multiple. It had been mainly an urban run-around, used for short journeys, and the final straw was the realisation that it would shortly cease to meet emissions standards within the M25, significantly limiting its utility.

However replacement was not the only or even the primary motive. I have long argued for electric vehicles as an important route to decarbonising the economy, so I had a strong professional interest in experiencing for myself the joys and pitfalls of ownership, and understanding what the barriers might be to their widespread acceptance as an alternative means of personal travel. Driving an electric car is a delightful experience, but purchase prices are significantly higher than conventional petrol driven vehicles, and there is currently less choice, particularly in relation to larger models.

But prices are likely to come down, choice to improve, and the other barriers are probably more important. The key questions are the connected matters of range and the adequacy of charging infrastructure. These may determine whether most motorists will be willing to have an EV as their only car. Will it actually meet their needs if they are travelling on holiday or to visit distant family?

So this is what I set out to test with a recent 240 mile journey to West Wales. This is just beyond the nominal range of my car, as claimed by the manufacturer, so after allowing for the effects of cold weather (which slightly reduces battery performance) and the need for a safety margin, it was clear that I would need a significant recharge at some point in the journey.

This is where understanding the options becomes important. Stopping on a four hour plus journey makes sense anyway, but that means that ideally one wants to be able to do a significant recharge in an hour. This where understanding the units of battery energy becomes important. My car has a total energy capacity of 52 kWh.  I can recharge it from an ordinary 3-pin plug in my drive at home at a rate of 2 kW. That means a full recharge would take about 26 hours, although I would usually be thinking of recharging when it falls to about 50%. For much of the time 2 kW on an overnight charge might be quite adequate. However that’s not good enough for recharging on a long journey, or even if I’m doing a lot of local driving with longer daily journeys.

Fortunately it is possible to get much faster charging points. I have a home charger, paid for by government grant, which charges at 7 kW. There are plenty of publicly available charging points at 7 kW, and quite a few at 22 kW. Motorway service stations typically offer 46 kW or higher, depending on the type of EV. Remarkably, at the ancestral family home in West Wales we have access to four charging points, each offering 22 kW within 300 metres of our house, in the local village car park.

So the infrastructure is starting to grow. Long journeys still require a bit of extra planning, but ranges in excess of 200 miles mean that an EV will meet the needs of virtually all the UK journeys that we ever contemplate. Long journeys though will demand a good distribution of charging points at 22 kW or above. For people who are not fortunate enough to be able to do home charging, there will need to be a large network of local points, and many of these will be at 2 kW or 3 kW, although local supermarkets are increasingly a source for recharging at higher kW levels.

The current networks of lower power “lamp post” charging points will be adequate if not ideal for EV owners provided there is a reasonable density of these in their area. The main drawback of reliance solely on public charging points will arise  if there are incentives to maintain a semi-permanent connection to the grid, as EVs could provide a valuable source of storage for the power system as a whole.

So what are the remaining issues. The first is the extent to which drivers can rely on a planned recharge. A number of charging locations, especially on motorways, provide only a single charge point for my type of vehicle. This will be a problem as EVs become more popular, and if a queue develops. The second is reliability. Too often some of the charging stations are out of order. Whether this is a simple technical fault, which ought to improve with experience and better maintenance, or whether there are local network constraints, is not clear.

The other irritation is the sheer number of different networks, each of which may demand use of their own mobile phone app, and each of which may have a slightly different tariff. This imposes a substantial cost on users in terms of time, setting up of accounts and passwords, and so on. One urgent need, therefore, is for a much simpler payment by contactless card that can operate across different networks.

But my overall positive is simply the experience of driving an electric vehicle, in terms of low noise, responsiveness (amazing acceleration), energy saving and reduced pollution. Once converted I can’t envisage returning to diesel or petrol power.

STATUES, THE IMPERSONAL TRENDS OF HISTORY, AND CHAOS.

Two world views reconciled through chaos, but where does climate change fit into all this?

“It is now 180 years since Thomas Carlyle, to some groans, advanced his “great man” theory of history. It is the exceptional human who determines the course of events, he said, and not the impersonal trends of economics, ideas and technology.” With these words, Janan Ganesh, in last week’s Financial Times[1], contrasted these two world views without coming down firmly on one side or the other. The question has revived because of the way we look at the great, or not so great, men or women in our history, not least in the role of commemorative statuary and how far we should re-interpret our own past.

There is, however, another way of looking at the great man theory. It is that human affairs are truly chaotic[2] in the mathematical sense of the term, which is in no sense the same as random or completely unpredictable, or without logic or direction. Chaotic means that small differences in the boundary conditions, such as a handful of votes in an election, or a particular individual, can, though only at certain junctures and with the right opportunities[3], massively alter the future, for better or for worse. But that in no way diminishes the importance of the "impersonal trends" or the realities of geography, economics, technology or the Marxist “class struggle”.[4]

The famous (and widely misinterpreted) butterfly effect is, of course, not confined to great men or women.[5] One plausible story ascribes the UK’s 2016 Brexit vote to a 2013 bar-room brawl in the House of Commons, leading through a convoluted route to a Falkirk bye-election, changes in Labour party rules, and the election of Jeremy Corbyn as party leader. The Corbyn leadership election was in itself a demonstration of accidental and unintended consequences, and there are plenty of credible arguments that his ambivalence contributed massively to the unfolding Brexit debacle. 

Ganesh cites Napoleon as an example and asks whether anyone else could or would have restored order in France after the chaos of the revolution. I have no doubt someone would eventually have succeeded. But the question is a good one. Suppose France had had a Lenin rather than a Napoleon, for example, or Russia had had a Napoleon after its own revolution. The outcomes might have been better or worse in either case, though we shall never know.

Ganesh also defends Mrs Thatcher as the saviour of the UK economy at the end of the 1970s. Personally I am more inclined to blame her for the de-industrialisation of Britain, the financial deregulation that led us eventually to the 2008 financial crisis, and the sell-off of social housing  that underpins a number of today’s most intractable social and welfare issues. More important to the “recovery” of the UK economy was North Sea oil, adding percentage points to GDP year on year, though that too now looks quite small in the grand scheme of things.

In terms of commemoration I'm more inclined to assign importance to the individuals in science who have totally transformed our world (quantum theory, electronics, DNA etc), although even there it has usually been true that others were already treading the same path (Darwin and Wallace for example) and we would have got there anyway. A statue or sculpture that could capture the reality of Schrodinger’s cat really would be worth keeping.

Of course, the biggest impersonal trend now confronting humanity is the rapidly approaching crisis of climate change. That has its own critical limits to particular parameters, or “tipping points”[6]. The combination of these, which have their own analogues in chaos theory, with the entrusting of the world’s largest energy economies to individual authoritarian leaders such as Trump, Bolsonaro or Xi Jinping, is potentially a fine example of chaos in human behaviour interacting with the inexorable consequences of the laws of physics.

We may or may not succeed in containing climate change, but if we hit the critical tipping points because a few leaders, in the next few years, refuse to confront the known challenges, then it will indeed be a frightening collision. The “great men or women” of today will carry huge individual responsibilities, as their actions collide with the massive impersonal trend in radiative forcing. Given that the UK is in 2021 hosting the critical COP 26 meeting[7], it would be nice to be able to assume that this was being approached with both commitment and sound judgement. The handling of the Covid-19 crisis by some of the above does not, unfortunately inspire confidence.

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[1] FT, 12^th June 2020

[2] An earlier explanation of chaos theory, and what it actually means can be found in an earlier posting: CHAOS AND CLIMATE. And a physical illustration at https://www.math24.net/double-pendulum/

[3] But for the Civil War Ulysses S Grant would have remained as an undistinguished ex-Army officer working in his father's leather goods business.

[4] AJP Taylor, in his history of the First World War, gets part way towards this point, arguing that we can distinguish between the general causes of war, eg national rivalries, and the specific provoking incident, an assassination. His analogy is that widespread use of motor cars

[5] https://www.scotsman.com/news/opinion/columnists/grangemouth-how-downfall-began-bar-room-brawl-1557020

[6] The existence of these is sometimes disputed by sceptics who have failed to grasp the science. Climate science suggests there may be several, but the most intuitively obvious relate to the fact that ice melts at a particular temperature. One tipping point in consequence is the polar temperature at which polar ice starts to melt. This effect commits both to eventual sea level rise and the accelerant effect of reduced ice cover which reduces reflection of the sun’s rays at the pole.

[7] COP 26 is the 26th session of the Conference of the Parties (COP 26) to the UNFCCC