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Sinister “reassurances” in banking and energy

Imagine you are making your way home on late night public transport, when the shifty looking character behind you leans over and says, “I’m not stalking you”.

I expect that you would find this somewhat disconcerting.  I imagine that for the rest of your journey home (and possibly for some weeks later) you would be looking over your shoulder to check that you weren’t being followed.  Why?  Because – aside from the British convention that we don’t talk to each other when using public transport – people who aren’t stalkers do not generally feel a need to announce this fact.  Nor, indeed, do muggers, rapists or murderers.  Anyone professing not to be one of these – or a host of other – dangerous characters would automatically attract the suspicion that that is indeed what they actually are.

When, in February this year, John Cryan, co-CEO of troubled Deutsche Bank made the unprompted announcement that the ‘too big to save’ bank “remains absolutely rock-sold”, those who keep an eye on the working of the banking sector experienced similar concerns.  Since we all know that banks – and, indeed, private companies in general – do not make a habit of telling us that everything is fine when everything really is fine; the oddity of a bank CEO breaking this convention sent ripples of alarm through the financial sector.

In fact, Deutsche Bank is now thought to be a catastrophe waiting to happen.  The bank sits at the centre of an unsustainable web of debt that, once it begins to unravel, will prove unstoppable.  As Tyler Durden at Zero Hedge explains:

“Over three years ago we wrote: At $72.8 Trillion, Presenting The Bank With The Biggest Derivative Exposure In The World, in which we introduced a bank few until then had imagined was the riskiest in the world.

“As we explained then, the bank with the single largest derivative exposure is not located in the US at all, but in the heart of Europe, and its name, as some may have guessed by now, is Deutsche Bank. The amount in question? €55,605,039,000,000. Which, converted into USD at the current EURUSD exchange rate amounts to $72,842,601,090,000….  Or roughly $2 trillion more than JPMorgan’s.

“So here we are three years later, when not only did Deutsche Bank just flunk the Fed’s stress test for the second year in a row, but moments ago in a far more damning analysis, none other than the IMF disclosed that Deutsche Bank poses the greatest systemic risk to the global financial system, explicitly stating that the German bank ‘appears to be the most important net contributor to systemic risks’.”

As it becomes increasingly obvious that low interest rates and quantitative easing have not saved the banks, but merely put off the day of reckoning, even mainstream media (who are loath to be the first to burst the bubble) are drawing attention to the perilous state of the world’s largest banks in general, and to Deutsche Bank in particular.  It is no longer a question of whether we are going to witness another 2008-style banking crash, but only when it will happen and just how big it will be.

It is in a similar vein that energy commentators read last week’s comments from Nicola Shaw, National Grid’s new CEO that there is no danger of Britain’s lights going out and that the magic of the ‘Internet of Energy’ will save the day.

Ms Shaw’s comments were all the more troubling precisely because for the past five years National Grid has been warning anyone who chose to listen that the margins between Britain’s demand for energy and its capacity to supply it have been narrowing dangerously.  Indeed, earlier this year, National Grid was indeed warning that the lights could go out during the winter of 2016/17 unless the government acted to improve supply.

In practice, as Ms Shaw pointed out, several safeguards would have to fail for the lights to go out in ordinary UK households.  First, the government’s capacity auction process – in which generators are paid to install excess generation capacity (often diesel generators) that can be powered-up to meet spikes in demand – would have to fail; most likely by a supplier not being able to deliver the extra capacity they had been paid for.  Second, large commercial users are paid to reduce consumption when demand spikes (as happened in May 2016).

But there is more than one way for the lights to go out – as anyone poor enough to be on a pre-payment meter will tell you.  The payments for additional back-up generating capacity and the compensation to big businesses to cut usage are loaded onto our energy bills.  The closure of the UK’s ageing coal and nuclear power stations and increasing exposure to intermittent renewables mean that for the remainder of the decade (at best) these costs are going to increase… and that means higher bills and more households forced to choose between food and energy.

Ms Shaw’s answer to the problem is the hi-tech fantasy of the Internet of Things coupled to smart meters. However, even the part of this “revolution” that is happening – the roll out of smart meters – is already well behind schedule. As for the Internet of Things, pop down to your local Curry’s and try buying an internet-connected fridge-freezer.  Without the smart-grid infrastructure, there is no reason to buy such a device.  And until enough of us can see a reason to buy them, manufacturers have no incentive to produce them.  As Justin Bowden, national secretary of the GMB put it:

“Avoiding winter blackouts with a ‘smart energy’ revolution is fanciful nonsense. The smart grid is years away.  What’s needed to guarantee the lights stay on over the coming winters are new power stations…”

But new power stations are the one thing that is not happening.  The controversial Hinkley Point C development is on hold.  Not least because the new government is just beginning to understand the economic damage that Hinkley Point C is likely to inflict on the UK.  As former Tory energy minister, David Howell in the Japan Times points out:

“The U.K. policy thinking was that a revived civil nuclear power sector, starting with one giant new plant, would combine security of a base-load supply with an unending output of low carbon electricity. A decision was reached to allow the French, with Chinese financial support, to build a brand new two-reactor plant on an already established site at Hinkley Point in Somerset.

“This sounded a splendid idea, but someone forgot about the costs — costs to the consumer, costs to industry and jobs in high energy prices, costs of reducing a ton of carbon emissions, as opposed to alternative methods. All these have turned out to be gargantuan, demanding immense extra payments from both the government and the electricity consumer, both to construct such a huge plant and to purchase its costly electricity for decades ahead.”

Again – there is more than one way for the lights to go out.  If the government decides to plough ahead with Hinkley Point C, even more low-income households will be forced to disconnect themselves.  Many of the UK’s SMEs will face spiralling energy costs that eat into their profit margins and effectively destroy the prospects for growth and employment creation.  And if the cost of energy rises too high, the UK’s most affluent households and biggest businesses will be incentivised to go off grid altogether.

This is the energy death spiral.  Without a serious energy policy based on evidence rather than wishful thinking, it is our most likely future.  And no amount of – frankly sinister – Public Relations hot air and magic thinking is going to change anything.

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