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.

Before getting started, it is useful to discuss the three issues in a bit more detail.

The first issue concerns the way the world economy will function if global emissions of greenhouse gases significantly decline – although a low emission economy may be preferable to allowing the concentration of emissions to increase. The necessary decline in global emissions may require a decline in the goods and services produced – maybe not by as much as some fear due to technological change – and lower growth will mean the global economy will be allocating fewer resources than it currently anticipates.

The second issue is the way the incomes of one or two billion people who live in poverty (or who will live in poverty, as many of these people are not yet born) can be significantly increased. By 2050 a majority of these people will live in South Asia, the Middle East and Africa, the last countries with rapidly rising populations. Lifting these people out of poverty will require more material resources and greater energy use.

The third issue is the way the economies of western countries and East Asian countries such as China, Korea, and Japan deal with a process of population ageing that is likely to see a reduction in the population of several countries. For a discussion of these issues that I’ve found particularly informative see Macroeconomic implications of population ageing and selected policy responses or Some macroeconomic aspects of global population aging.

This ageing process influences not only what goods and services are demanded by these populations, but also their willingness and capacity to work as well as the type of assets they are willing to invest in as part of their general saving for retirement.

Put this way, these three issues are clearly linked. 

The first two issues are linked because the people in the poor countries located around the Indian Ocean want to develop, but this has always taken vast quantities of capital and energy, and in the past this has always meant coal, gas, or oil – and CO₂ (see Ayres and Warr, 2009). Is it possible for half of the world’s population develop without massively increasing the amount of CO₂ in the atmosphere?  The answer is ‘Maybe’ .

Technological breakthroughs in renewable energy and storage technologies mean the lifetime costs of renewable electricity are now competitive with gas-fired electricity and cheaper than coal (Geoffrey Heal (2018) Financial & Technological Prerequisites of the Energy Transition). This means poor countries could develop and increase their energy usage without a massive increase in carbon usage. Simultaneously, these technologies will help currently rich countries reduce their reliance on carbon emitting energy sources.

One of the difficulties with this solution is that renewable electricity has much higher up-front costs than carbon-based electricity, even though it has much lower ongoing costs. It is expensive to build renewable energy plants, an expense most developing countries will struggle to meet because they are capital poor. 

But this provides an opportunity for the older people in western and east Asian countries, whose ageing populations wish to accumulate capital for their retirements. Recycling this capital from ageing countries to young countries to enable green development is possibly the greatest development and climate-change opportunity of our time. 

However, there are two major constraints. 

The first is ensuring the recipient countries have the appropriate political and institutional structures that encourage investment without expropriation. This is no small task. No one wants to invest in an undeveloped country if they believe the country is too corrupt to operate properly, or is likely to take the proceeds of their investment. But change can occur, even if it is one country at a time. 

For example, Morocco, where I am currently visiting for a year, is actively encouraging investment in green energy plants financed by Germany and other countries, and has ambitious plans to build solar and wind energy plants to reduce reliance on gas. 

The second constraint is to ensure the savings of current and future generations of middle-aged people living in rich countries are productively invested. In a follow up post I will use the example of New Zealand to explain this issue in greater detail. As we shall see, a key issue is to design savings institutions for young cohorts that will enable their savings to be used in a manner that is consistent with the environmental situation they want to live in.

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.

I 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)

…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!Outcomes like this make us instinctively want to provide some sort of expert assistance or intervention to help these people. Unfortunately, regulating to ‘fix’ problems like this one is exceptionally difficult because every household has different needs. What it might point to is the need for thoughtful default options because, when engaged consumers are this poor at selecting the best option, what hope is there for those who are not actively comparing tariffs?

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.

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.

He does say:

Rather, he would regulate the hell out of the monopoly national grid owner, Transpower, and the local electricity network monopolies. Because even though he’s a market kind of guy, Wolak is no fan of New Zealand’s “light-handed regulation”.

“Light-hand regulation is no regulation,” he says. Instead, New Zealand should “man up and regulate” in areas where no competition can occur.

Wolak is also no fan of New Zealand’s vertically integrated generator-retailers, which does put him on-side with the Labour-Greens NZ Power policy.

But he is no single-buyer fan.  His solution is more competition, and regulation where you can’t get it – not state monopolies.  This is not my area, so I’m not saying I agree with him here or not – but I do find the argument against a state monopoly and towards competition intrinsically sensible

Side point here – I’m all for the Greens and Labour talking about distributional issues, hell yes!  But just be a bit careful convoluting them with competition issues in this sense

Update:  Looks like there was a bit more detail in the business Kiwiblog is commenting on.

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.

Personally, I think nothing – the price represents scarcity, and unless we think there are asymmetric information issues regarding the stock of fuel then this is fine.  If we do believe these issues exist, then since fuel is a “non-perishable” we will see individuals/communities stockpile – again, there is no reason for government intervention.

Or so I agrue here.

My question is, if these spikes are such a concern – why don’t the businesses set up fixed price contracts with electricity retailers in the same way household do.  Also, the retailers are complaining about the wholesale price spike – but couldn’t they also set up contracts on a fixed rate?  Ultimately, knowing that the price can spike heavily in the face of a shortage of power, these businesses are CHOOSING to buy at the spot price (I guess it must be cheaper) – if that is what they choose to do then they should really face the risk of it.

Now if there was something anti-competitive about the setting of wholesale energy prices sure, go ahead and complain.  But if they spike because there is a significant shortage – and this price is just representing the underlying opportunity cost associated with providing that power – then having the spike occur is a GOOD thing.

This is because the price is saying “hey, at the current time there is a severe shortage of power, and unless you can create oodles of value from it you should think about stopping power usage for a short period of time”.  When it is placed in that context the spike seems reasonable, and all the complaining about it seems weird – so what is going on?

FYI:  Good comments from Rauparaha.

Here is the breakdown of the new policy:

Lets think about this policy a little.  What happens is that everyone is offered a set of electricity more cheaply – either because the electricity company is owned by government, or they are a private company that is being forced to sell.  For now lets assume that the government doesn’t go all out and try to regulate quantity as well … although by the sounds of things I would put this sort of “socialist calculation” past the Greens.

So how does it work.  Start without assuming any reaction by the generator.

[Note:  One way to view this assumption is that there is a “magic” voluntary agreement between industry and government, where industry does not then go out and treat consumers differently – compared the later discussed case where they limit sales to households and sell to people they can actually charge the market price too].

Well, anyone who consumes below the threshold (by the sounds of things most households) will now face a lower “marginal” price for power – as electricity consumption is a normal good and the cut in prices acts as an income boost this combination of factors tells us that electricity consumption by households WILL RISE.

Now given that we are assuming no rationing by power companies in the face of this increase in demand and lower price, we have to ask what will happen in the market overall.  Two possibilities are:

1. The marginal cost curve is flat over the relevant region, implying that consumption by electricity consumers that have to pay the full price is unchanged (the positive income impact would likely lead to more consumption, but I digress).
2. The marginal cost curve slopes upward.  This implies that total consumption still rises, but by less.  Furthermore, the cost faced by high users of power is now higher.

Either way, the Green Party policy leads to an increase in electricity consumption.

The generator
Now lets think of a couple of the issues that may come up on the generators side:

• Rationing:  If the price is below marginal cost for households, generators will limit supply to households.  Given that they can get a greater return from “high use” customers, there will also be relatively more focus on this section of the market.
• Investment:  By reducing the rate of return from new investment, there will be a reduction in investment activity in the electricity industry – quite an unintended consequence methinks.

If you have a generator, it must get serviced regularly. Failing to get your generator serviced can not only breach the manufacturer’s warranty but can be a costly mistake. A reputable services like generator hire Manchester can identify any faults with the generator. This means that the generator will remain in top-notch condition when checked by them.

But they use it in Japan and they are energy efficient

That has nothing to do with this and a fair amount to do with “top runner“.

But power is cheaper, yah!!!

Lets think about this.

We have a government owned generator lowering the price of power – which in turn implies that government tax take must be higher.  Or we have a private firm being pressured by government, which in turn leads to much lower investment in electricity infrastructure.  There is no free lunch here.

If the Green Party wants to help the poor without “distorting prices at the margin” they should just admit they want higher taxes and higher transfers to people on low incomes – this is fine, this is standard redistributionist policy which does have a role in our political discourse.

However, the Greens want to act like they actually care about the environment when doing things, even though this policy will lead to an increase in power consumption.  This is a blatant form of “Greenwashing” – and even worse, they are using economic language to try and make it sound legitimate

To quote CPW:

It’s always funny how when it comes down to choosing between the environment and being socialists the “Green” party goes with socialism every time.

So is this why we need a new Green party

Yes.  The Greens seem to really just be a left wing party at heart – not a true Green party.  For me the essence of a “Green” focus must be on the environment and our scarce capital stock.  However, they are willing to sacrifice any focus on this capital stock in order to push through redistributionist or central planning style policies.

We need a Green party that actually concentrates on environmental issues.  This is my main problem with the Green party – they just use it for marketing instead of actually looking at the efficient allocation of our scarce capital stock.  This saddens me.

Issues of property rights, free rider problems, externalities, and a general willingness to discuss policy regarding these issues should be the focus of a Green party – it shouldn’t be Greenwash to sell a socialist agenda.

Tell you what, if someone actually forms a party that focuses on the issue of our scarce capital stock (instead of focusing on issues of redistribution) – which is a relevant issue for government – and if they write up a manifesto and sign up as a party, I’ll do some free economics analysis for policy (in my personal time, so not associated with Infometrics).

Note:  I sound very harsh about the Green party here, and there are people who genuinely care about the environment.  However, as long as large sections of the party abuse both environmental policy and economic analysis to sell redistribution I will be harsh to the party overall.  It is especially important to me as I do care about environmental and allocative issues a lot, and seeing a party call themselves “Green” while betraying these issues is insulting.

Update:  Here are more details.  Also I would note that of the 25 articles on their frontpage there are 4 on the environment.  Three of which are on mining, with one on UK environmental policies following the election.  And get this – there is a post saying oil prices are TOO HIGH (why I think this is a big deal here – actually, this update should go at the end of the post so that it is after the argument).

The aim of the intervention is to reduce electricity demand and hence avoid the need to build new power plants to meet this demand. In this sense, the Commission perceive the building of power plants to be a negative externality, presumably as the cost of building is reflected in the per-unit price of electricity for all users.

I take issue with this ‘externality’. For example, if a lot of consumers suddenly started demanding ‘Thierry Henry is God’ t-shirts, such that the price increased, should I feel aggrieved that the action of others is affecting the price I must pay for such a worthy product? No, that is how the market works.

Putting aside my scepticism, let’s assumes that the externality is a genuine one. What might be a superior way of discouraging consumption?

Bans are a blunt tool. From an economic efficiency perspective, you should first try and use prices to incentivise behaviour. High demand for electricity is only ever a problem over relatively short periods. For example, in New Zealand the peaks occur on weekdays in the morning as people wake up and in the evenings as people go home. In hotter climates, the peak typically occurs at the hottest part of the day as air-con works its magic. Hence one might try to charge higher prices at times of high demand to discourage consumption (and hence avoid the need to invest in new power plants). There are electricity meters that are capable of facilitating such differentiated pricing and indeed they are being rolled out in California as we blog.

Under the differentiated pricing scenario, consumers are paying the ‘true’ cost of electricity, so even if they continue to consume at high levels, one should be indifferent to building a new power station as the externality has been internalised.

The obvious perverse incentive that arises from the ban is that consumers will simply purchase their televisions out of state, knowing that they can get a better range of TVs to better suit their individual needs at more cost-effective prices.

It is far more preferable to keep consumer choice open and simply make consumers fully pay for their choice through efficient pricing (assuming that an externality exists in the first instance).