Finance and greenhouse gas emissions

The world faces three particularly awkward economic issues over the next fifty years:  how global living standards can be maintained with lower greenhouse gas emissions; how poor people in countries that still have high population growth rates can be brought out of poverty; and how the impact of population ageing in higher income nations can be managed. For more financial oriented post and other news, pop over to this site.

In this post I will discuss how the solution to these three issues can be linked. In a follow up I’ll use the example of New Zealand to show how policy settings may be making the third issue worse than it needs to be.

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Graph of the Day: How home batteries might benefit houses without solar

I’m pretty excited about the Tesla Powerwall, the home battery that was announced recently. People mostly think about home batteries as being important for solar.  For residential solar,  most of your generation is during the day when you aren’t home, so it gets sold back into the grid and therefore relies on the whatever the buy back rate set by your retailer is.  If you are looking for practical tips for solar installation, check out These rates are lower than the retail price of electricity so the real benefit is if you can store the “free” electricity you generate in a battery and then use it during peak hours instead of paying for electricity, thus avoiding your variable electricity charge of 20-30 c/kwh.

So the economics of solar depend on whether your savings (avoided retail prices + electricity sold back into the grid) justify the cost of installing solar panels and a battery (typically well over 10k, but costs are falling).

But if you don’t have solar, home batteries could have another use: storing cheaper power generated during off-peak and using it during peak when prices are high.  This of course only works if you have variable electricity pricing, which isn’t super common in New Zealand.  But if you are have day/night rates, or are on Flick Electric like me, then you might be able to exploit the difference between peak and off-peak prices and save some money.   See, for example, the below graph of my electricity use and prices from last Tuesday.

power graphI have drawn some lines indicating the “overnight price”, the “morning peak” and the “evening peak”.  Note that I didn’t use a lot of power that evening (we usually do so this is non-representative), but did use a fair amount in the morning, which is unavoidable.  I also ran my dishwasher on delay that night to take advantage of lower prices later in the evening. If I could store power at the “overnight rate” of 10 c/kwh, there are times when I could halve my variable cost of electricity (i.e. those times during peak when I can’t change my behavior).

Whether or not buying a battery to take advantage of variable pricing stacks up financially depends on:

  • how much the battery costs
  • how much it can store
  • how much power you use that you can’t shift  to off-peak (i.e. by setting the dishwasher on delay); and
  • what the price is at those times.

Hopefully someone does proper modelling of it, or maybe Flick will team up with Vector who have a “special” relationship with Tesla.  You could get some pretty complicated/cool software if you integrated this type of logic with Solar. I.e. buying power over night when the forecast is for rain the next day.

(Related: Visit here to find the most efficient home generator reviews)

This is why paternalism exists

The gulf between theoretical, efficient markets and real markets never ceases to surprise me. This paper from 2005 evaluates the saving consumers were able to make on their power bill by switching plans:

…we find that the subsets of consumers who claimed to be switching exclusively for price reasons appropriated only between 26-39% of the maximum gains available through their choice of new supplier. While such behaviour can be explained by the existence of high search costs, the observation that 27-38% of the consumers actually reduced their surplus as a result of switching cannot.

Yes, among people who switched to save money they only saved a third of what was available to them. A third of the people who switched actually increased their bill.  The authors rule out a number of explanations to conclude that these people just got it wrong because figuring out optimal tariffs is quite tricky. And these are the people who are actively switching and evaluating tariffs, so this is what market success looks like! Read more

Bleg on solar loans

I’m not an energy economist, and am currently a bit short on time, so I thought I’d outsource discussing the new Greens policy on solar.  As a matter of principle I see it as saying “consumers are credit constrained, the energy sector has issues of competition, and the installation capacity exists, given that government loans at a market interest rate (which we can quibble over) may help”.  I have no real problem with that, although I’d like to spend time with the details.

A few questions though:

  1. Why does the government think this will reduce competition?  I’m not quite sure what is being said?
  2. Paying it back through rates, when it is a central government scheme, seems inelegant.  Wouldn’t a more direct scheme where the government installs and then charges make sense.
  3. Given that, if solar is actually effective (hopefully it is getting there), why don’t we have someone in the market trying to lease panels – is the installation cost (given the capital) that much of a pain?
  4. The question of feed in tariff prices, and how that actually works with the grid, is a damned hard one.  Remember, people will be generating “excess power” at times of the day with low demand – the real big problem is storage!

In some ways this feels like a policy trying to “tick a lot of boxes” at once – perhaps the best option would be to deal with perceived competition issues directly, if they exist.  Credit constraints are an interesting one on a number of dimensions – I have some sympathy for the idea that lack of access to credit reduces opportunity, however how much of this is due to the fact that the type of lending is risky?

I’ll leave my mind open to be persuaded either way on this, but when Meridian says there are problems with it (when they are one of the key players trying to get solar power working in NZ at the household level), I am uncertain about the scheme itself.

Clint Smith discusses on Twitter.

Wolak strikes back

Remember the energy policy disucssion (here and here on TVHE) – where the Labour and Greens took a number from the Wolak report to try to justify a single buyer model.  Via a reader here is Frank Wolak himself:  (More details here)

The Labour-Greens’ single buyer electricity policy has a problem.

While it remains politically resonant with voters who perceive power companies as rapacious and inescapable, the American academic whose analysis is a key plank of the Labour-Greens NZ Power proposal says the Opposition parties have got it wrong.

Not only that, but Stanford University’s Professor Frank Wolak – a top US electricity markets academic and one-time regulator – says that despite repeated assertions to the contrary, he never concluded that power companies here had ripped off consumers to the tune of $4.3 billion over the mid-2000’s.

Unfortunately, that $4.3 b figure has been the smoking gun fact around which the political argument for the policy has been built.

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The Economist on ‘job creation’ in the energy sector

A very timely opinion piece in The Economist here on how energy policy should not be confused as with job creation.

Too often investment in the energy sector, especially around low-carbon energy, is held up as a way to ‘create’ jobs for the economy. This article dispels the myth:

At the risk of being obvious: energy policy is not a jobs programme. Here are three reasons why politicians shouldn’t try to create jobs through energy policy: it’s ambiguous, it’s inefficient, and, most importantly, it’s undesirable.

In summary the author’s critiques are as follows:

1. What counts as a ‘green’ job, for example? Would that job have occurred anyway? Did the ‘creation’ of that job crowd-out another job?
2. The energy sector is typically capital intensive rather than labour intensive and hence efforts to ‘create’ jobs may be better directed elsewhere.
3. More important issues exist in energy, such as accessing cheap, sustainable energy and the security of energy supply – adding a further goal of ‘job-creation’ muddles this.

Given job-creation via energy seems such a hot topic throughout much of the world right now due to weak economic activity, elections forthcoming in the US and NZ and ongoing concern with carbon emissions and a need to ‘green’ the energy sector, it’s worth keeping in mind these criticisms.