Saturday, July 28, 2018

HEAT RECORDS FALLING, AND WILDFIRES ACROSS THE GLOBE. AT LAST A DEMONSTRATION THAT GLOBAL WARMING IS REAL.


No! We had that long ago. It’s just that we are now starting to see the impacts “play out in real time”.


We have had heatwaves and long hot summers before, even in the UK. But record-breaking weather on its own, especially when confined to particular locations, demonstrates very little. Even so the coincidence of heatwaves across North America, Europe from the UK to Greece, and Japan, and, even more dramatically, the extraordinary temperatures observed in the Arctic.

Scientists, as opposed to much of the media, have always preferred to concentrate on careful and painstaking analysis of global average temperatures, rather than extreme events. The evidence of that is clear from temperature measurements showing a steady upward trend over many decades, and a trend that aligns closely with the predicted effect of increasing atmospheric concentrations of greenhouse gases (GHG). The serious nature of human-induced warming has been well established for at least twenty years. More on the scientific debate can be found on other pages on this site.

But the science is now starting to go further. It has long predicted that global warming would significantly increase the number and intensity of heatwaves, but improved analysis is now getting much closer to assigning the causation of particular extreme weather events specifically to the signal of climate change, at least with increasingly strong probabilities.

The heatwave currently scorching northern Europe was made more than twice as likely by climate change, according to one initial assessment. Even more extreme conditions could be occurring every other year by the 2040s. “The logic that climate change will do this is inescapable – the world is becoming warmer, and so heatwaves like this are becoming more common,”  Friederike Otto, at the University of Oxford, is reported as saying.

“We found that for the weather station in the far north, in the Arctic Circle, the current heatwave is just extraordinary – unprecedented in the historical record,” said Geert Jan van Oldenborgh, at the Royal Netherlands Meteorological Institute.

The Guardian reports that previous attribution analyses have shown very strong connections between climate change and extreme weather events. The scorching summer in New South Wales, Australia, in 2016-17 was made at least 50 times more likely by global warming, meaning it can be “linked directly to climate change”. The “Lucifer” heatwave across Europe’s Mediterranean nations in 2017 summer was made at least 10 times more likely by climate change, while the unprecedented deluge delivered in the US by Hurricane Harvey also in 2017 was made three times more likely by climate change. However, other events, such as storms Eleanor and Friederike, which hit western Europe in January, were not made more likely by climate change. Serious climate change is “unfolding before our eyes”, according to Professor Sutton, at the University of Reading.

But disputing the science, and the measurement of change, is an ideological obsession. The same team is trying to bring you Brexit.


What are the common factors linking the following?

·        The Institute for Economic Affairs.

·        Nigel Lawson. John Redwood. Jacob Rees Mogg.  (Conservatives – to name just three)

·        Graham Stringer (Labour).

·        UKIP and Nigel Farage.

·        Melanie Phillips. Christopher Booker. (Journalists)

·        Donald Trump

All have displayed strong or passionate opposition to the evidence and logic of climate science, or to any action to mitigate it.  All have also been passionate advocates of Brexit. Stringer was one of four Labour MPs voting with the government on recent crucial Brexit votes, and is also involved with Lawson’s Global Warming Policy Foundation - Lawson of course was a lead figure in the Leave campaign.

Phillips also has strong anti-science form, supporting disgraced doctor Andrew Wakefield  on the subject of MMR vaccination, a subject where the provision of flawed and inaccurate information to the public has caused huge damage. So does Booker, on the subject of evolution. To be fair, on Brexit, he has partially recanted.

I could create a much longer list (see my earlier comments on Brexit and Brexit economists), but one interesting question is simply this. Why is there such a strong correlation?  Is it the absence of any ability to deal rationally with fact and logic, or to comprehend the sophisticated nature of scientific method, or is it pure ideology?

And when are we going to hear more from some of the above on the subject of global warming?

Saturday, July 21, 2018

TRUMP, TRADE WARS AND CLIMATE POLICIES




An opportunity to introduce a rational and positive element to retaliatory measures.

Trump’s USA seems to be hell-bent on destroying every element of the pre-Trump international order, the WTO, presumptions in favour of free trade, and US participation in the Paris accord on climate. But a recent piece in Nature magazine proposes a neat way of turning some of this to a climate policy advantage.

The recent tit-for-tat on punitive tariffs has been based first and foremost either on targeting industries that are the source of the grievance, notably steel in the case of Trump, or products where the retaliatory tariff will cause pain in the USA, famously Harley Davidson.

The novel suggestion however is that the prospect of a global trade war provides an opportunity for the introduction of tariffs that, unlike many forms of trade barrier, can be considered to be almost unequivocally beneficial in their effect on human welfare. The suggestion is a simple one. Place the retaliatory tax on the products with the highest carbon footprint, relative to the alternatives of domestic production. Indirectly this will also counter at least to a small degree the environmentally reckless policies Trump and the Republican party are promoting at home.

Ideally of course this should be part of a wider set of agreements on effective carbon pricing, but “border carbon adjustments”, or BCA, clearly have a lot going for them. Nor is the idea new or without political support. “In 2017, French President Emmanuel Macron called them ‘indispensable’ for European climate leadership, and Canadian environment minister Catherine McKenna recommended closer scrutiny. Mexico included them in its Paris pledge” according to the Nature article. The US House of Representatives backed a similar approach in the Waxman–Markey Bill in 2009, but the bill failed to reach a vote in the Senate.[1]

Wholesale implementation, by the EU for example, of such an approach on a global basis would have a number of technical difficulties, but its examination in the context of retaliatory tariffs could provide some interesting outcomes. It would of course tend to hit those states in the USA that are most keen to protect their coal industries. As it happens that includes a number with a strong Republican base.

The other advantage is that what starts as a rather crude device, and as part of a trade war, could also evolve over time to become a significant component of mainstream decarbonisation policy.



[1] California, it is claimed,  has  introduced a version of  BCAs but this is confined to its energy market.


Monday, July 16, 2018

THE ROLE OF TARIFFS IN A LOW CARBON FUTURE




APOLOGIES FOR THE LONG RADIO SILENCE FROM THIS BLOG. THE MAIN CAUSE HAS BEEN HEAVY INVOLVEMENT IN OMS AND OTHER PROJECTS. I'M HOPEFUL OF RETURNING TO A REASONABLY REGULAR OUTPUT, ALTHOUGH THINGS MAY STILL BE QUITE QUIET OVER THE SUMMER.

Redefining how we take our electricity supplies. The complexities of allocating fixed costs. 
And the need to recognise environmental costs through carbon pricing.

It is hard to understate the importance of retail tariffs[1] for the efficient financing and operation of public utilities, and especially in the power sector. Tariffs represent the pricing and charging structure through which most consumers are supplied. They influence how consumers use electricity. Tariffs revenues underpin the returns necessary to pay for utility investment.

To meet objectives of both equity and economic efficiency, it is generally accepted that prices should accurately reflect costs.  This provides a means to coordinate consumer choices, on how much and how they use power, with utility decisions on how they manage, operate and invest in their networks and in their sources of generation. Purchase, as opposed to sales, tariffs set the terms on which small scale producers can sell into the network and are an important influence on the development of decentralised power production in particular.  However, interpretation of how best to reflect costs is, as we shall discover, quite complex and requires careful analysis and judgement.

In the new world of low carbon energy, three important trends will change the way in which electricity is produced and delivered, the shape of future tariffs, and the nature of the service relationship between utilities and households (and business). These trends are Decarbonisation, Decentralisation and Digitalisation (the three D’s), and they impact on tariffs.

Decarbonisation of the energy sector is widely perceived as requiring much greater use of non-fossil electricity to substitute for current fuels in heating and transport. But it also changes the cost structure and operational characteristics of generation technology. It substantially reduces the importance of variable (fuel) costs, which are what largely underpin the design and operation of today’s markets, and raises the importance of capital costs. Low carbon technologies (both nuclear and renewables) are inherently less flexible in adjusting to fluctuations in consumer demand. This raises the importance of managing consumption patterns, and hence of tariffs and price signals, within a coordinating price mechanism for balancing supply and demand in real time.

Decentralisation is implied by the growing significance of small scale producers (also sometimes known as prosumers), by the smaller scale of many renewable technologies, and the increasing importance attaching to management of local network constraints, as electricity plays a large and increasing role in overall decarbonisation strategies. Tariffs, especially those on which small consumers can sell to a public network, should be designed to make an efficient connection between small operators and larger local or national grids.

Finally, digital technologies permit much more complex and sophisticated information and control systems. These can help maintain stable and balanced power systems, enable more sophisticated tariffs and consumer choices, and permit more efficient management of consumer requirements. They are therefore part of the solution.

We need to review many questions on retail tariffs, and establish general principles for development of retail tariffs and retail supply in a low carbon future. These proposals provide a new paradigm within which sector policies can evolve, and a benchmark against which options should be judged.  

The Long Run Marginal Cost (LRMC) Approach

It is widely understood that for both renewable energy (and nuclear power) the marginal cost of generation, defined as the cost of an additional unit of production from existing generation assets, production or from low carbon technologies is close to zero. Setting retail prices at this zero short run marginal cost (SRMC) is clearly not a viable basis for pricing, and making the consumer’s marginal electricity consumption free at the point of use has the potential to create an unlimited demand that cannot be satisfied.

There is however a well-established cost reflective benchmark for approaches to electricity tariffs based on long run marginal cost (LRMC) principles. This is intended to ensure that consumers pay the full incremental costs (at least of generation), including capital costs, that they impose on the power system “Marginal cost (as LRMC) is an engineering estimate of the effect upon the future time stream of outlays of a postulated change in the future time stream of output.”[2]

This implies that the real costs of meeting very different types of load can be very different. High load factor (eg continuous or baseload) loads or those that are well matched to patterns of production will require lower capacity requirements per unit of energy supplied. Low load factor loads, or loads concentrated in winter when generation is cheaper in summer, will be more expensive solar power. This makes the calculation of LRMC, and hence what different kinds of consumption might pay, subject to careful analysis and calculation.  “There are as many marginal costs as there are conceivable postulated changes.” [3]

The importance of digital technologies is that they allow us to think about this kind of cost reflectivity in a much more granular way, and reflect the very different costs implied by different kinds of consumption such as the traditional household applications, electricity for heat pumps, or the charging of electric vehicles. Each of these can have a very distinct load profile, with a very different servicing requirement for the consumer.

Reliability requirements, the differentiated nature of consumer needs, and supplier managed load

The importance of capacity costs also brings into sharp relief the fact that the standard of supply reliability is itself a very important driver of costs. A high standard of reliability, defined as a very low probability of failure to meet the maximum, unconstrained, instantaneous, aggregate demand of all consumers, implies a need for very substantial spare capacity margins. These may be needed to cater for daily and seasonal peak loads, for generator downtime (eg breakdowns) and for weather related fluctuations in renewables output.

However not all consumption requirements need the same level of instant access and reliability. We quite reasonably expect our power need for lighting, or for a television programme, to be met instantaneously. We are likely to have a very different approach to, for example, overnight charging of an electric vehicle battery with perhaps 50 kWh of energy, and be largely indifferent to when it is delivered, eg overnight or even over two or more days. It makes sense to permit the supplier to choose the timing of delivery, within clearly defined parameters, in order to match generation availability and any network constraints. Other loads, such as laundry, or domestic water heating, will also have their own requirements, which the consumer can choose, in relaxing the requirement for instantaneous delivery of power.

What we expect to see in a low carbon future, therefore, is consumers being able to make a selection from a menu of tariffs, with different supply arrangements and prices in each case:

·        Some supplies, eg for lighting circuits, taken at a premium price, with the highest level of guaranteed reliability.

·        Some consumers choosing a lower reliability standard, at least for some of their needs, with a lower price.

·        Some large loads, such as vehicle battery charging or heating, provided on the basis that the supplier manages the timing of energy delivery.

Future systems will place a high premium on pro-active and effective management, based on innovative tariffs and a redefined approach to retail supply, of the use of electricity for electric vehicle charging and domestic heating applications.

Allocation of fixed costs

Generation costs are however only a part of the story. A substantial proportion of total power sector costs reside in high voltage transmission, and even more in the local distribution networks. As with many networks (including road and rail) the marginal cost of accommodating extra throughput (the extra car or train) is, at least in uncongested networks, very low. But the fixed cost still needs to be recovered. How best to do it poses some very difficult questions in terms of reconciling considerations of equity and income distribution, on the one hand, and the efficient allocation of economic resources on the other.

Current UK practice for smaller retail consumers, for example, is simply to average most fixed costs over all units of energy sold. This seems fair, and prima facie results in those who consume most (and might broadly also be those with higher incomes) paying the most towards the fixed costs. However this distorts the economic message, that the actual marginal cost is much lower. When policies for a low carbon economy include persuading consumers to use large amounts of extra  electricity for heating (eg with heat pumps), this becomes a very serious obstacle. For a household consumer, a higher fixed charge in the tariff, and a lower unit energy charge, transforms the choice between using the low carbon solution (electric heat pumps) and traditional fossil fuels (gas or oil). 

Another problem arises with purchase tariffs. These provide an incentive to small scale producers that should, in ideal world, result in consumers installing their own generation when this is “efficient” and results in a reduction in total societal costs. However, if the kWh rate in the purchase tariff is overstated by including an allocation of fixed cost, it will result in too much own generation. There will be no saving in fixed cost and, while the individual consumer with own generation may benefit, a larger share of fixed network costs will be picked up by others.

There are potential answers to this question that not argued in detail here, since they take us deeper into complex policy, political and administrative questions than is appropriate for a short article. Possibilities include the recovery of fixed  costs through property taxes, and approaches in which fixed costs are recovered with differentiation according to the use to which power is put, for example with a higher fixed cost levy on EV charging (a premium use of electricity) than for heating which is in competition with gas.  

Reflecting the substantial environmental and climate costs of CO2 emissions

In the transition to a low carbon economy the case for more realistic levels of carbon taxation, as an incentive to invest in low carbon generation assets, and to minimise the share of fossil fuel in both consumption and production, is overwhelming. However this is not current policy in many countries. The UK currently has a particularly perverse approach in that the burden of renewables innovation policy is loaded on to electricity but not on to other fuels, notably gas. A major plank of low carbon policy is to encourage the use of electricity for heating, through the medium of heat pumps, and to substitute for gas. But the impact of current policies imposes a discriminatory tax on electricity, raising prices and reducing any incentive for consumers to switch from gas. A well constructed carbon tax, by contrast, would increase the cost of gas, restore a level playing field, and tilt the balance of running cost comparisons towards the electric technology of heat pumps. Perversely, recovering the cost of innovation support through the power sector hampers progress towards a low carbon economy.





[1] What we usually mean by a tariff is a set of prices that are published in advance, are open to all buyers (or for purchase tariffs, sellers) complying with a given set of conditions. They contrast with bilateral trading arrangements, and with “market” structures involving multiple buyers and sellers. They provide the standard route through which most consumers, and certainly smaller consumers, obtain their supplies of energy, water, and many communications services. It is quite normal for a supplier to offer a number of alternative tariff structures, between which consumers can choose an option that most closely reflects their needs. They can follow either simple one-part or two-part formats, or have more complex structures.
[2] Ralph Turvey, one of the pioneers, with Boiteux, of LRMC theory in electricity. Turvey, R., What are marginal costs and how to estimate them? University of Bath, 2000.
[3] Turvey, again.