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Is it time to use the N-word again?

Here’s some “great news:” California now generates so much solar energy that electricity prices have gone negative.  According to Ian Johnston at the Independent:

“In March, during the hours of 8am to 2pm, system average hourly prices were frequently at or below $0 per megawatt-hour.”

Similar stories regularly hit the headlines on this side of the Atlantic too.  In the UK, renewable energy, primarily from wind, accounts for a quarter of our electricity generation – overtaking coal by some distance.  And similarly, there are days when the wind blows and the sun shines, when wholesale electricity prices drop to zero.  Indeed, National Grid has a scheme to encourage industry to use more electricity when renewables over-produce.

Typically, news like this is endorsed and spread around social media by the lobotomised part of the green-leaning public as proof positive that we are on our way to ditching fossil fuels and reversing global warming.  However, these stories have a nasty sting in the tail.  As any business manager will tell you, if you cannot get a price for selling something then you are going to stop selling it.  That is the looming catastrophe that renewable energy is contributing to.  Because while the energy itself is free, the cost of maintaining the infrastructure that supplies it to households and businesses is not.

As Fereidoon Sionshansi in Energy Post reports:

“The renewable flood is creating havoc in wholesale electricity markets. And this will only get worse, as storage and zero net energy buildings expand…”

According to Sionshansi wholesale energy markets cannot function in an era where industries and households can use renewables not only to opt-out of the Grid system, but to actually get paid for the privilege:

“The story gets progressively worse for incumbent utilities and/or distribution companies who have traditionally relied on selling lots of kWhs to hapless customers who, until now, had virtually no other options.”

For the moment, the key impact of increased renewables is on customer bills.  This is because energy companies now have to factor in the cost of demand-balancing schemes on top of the various feed-in tariffs, and the cost of maintaining the infrastructure.  However, even their ability to pass the costs onto consumers may be constrained in the near future.

In an article in the Telegraph Jillian Ambrose reports that:

“The energy sector is braced for a political blow as the Government mulls stepping in to cap prices after a flurry of energy tariff increases from some of the largest suppliers raised prices for millions of households.”

In the event of government following through with this threat, we may finally find out just how much profit the energy companies have really been making.  If, as many in the media claim, the energy companies are the epitome of ‘rip-off Britain’ then they will be able to withstand a price cap.  If, on the other hand, the energy company CEOs are correct, then we could see widespread investor-flight.  According to Ambrose:

“Equity analysts at brokerage Jefferies has estimated that by 2019 the supply profits of the Big Six will drop by 22pc from last year as independent suppliers increase their share of the market from around 11pc to 28pc before the end of the decade.”

The problem with this is that the UK’s energy infrastructure is aging… and it doesn’t maintain itself.  If the industry is unable to profit from energy generation, and cannot pass its costs on to an increasingly squeezed customer base, then it will have just one option open – stop maintaining the grid!

For what it is worth, electricity outages are already rising in the UK.  Further cuts to maintenance can only result in a far less reliable electricity supply.  The full impact of this on one of the world’s most digital economies can only be guessed at; but it is unlikely to be pleasant.  Just imagine operating a bank, a datacentre or a supermarket without being able to count on a steady supply of electricity.  Then imagine how chaotic life would become for consumers of such enterprises.

The paradox of this, of course, is that unreliable supply will serve to drive even more households and businesses to make their own arrangements, thereby adding to the problem.  As Sionshansi points out:

“For example, if increasing numbers of large commercial and industrial customers invest in energy efficiency, distributed self-generation, storage and sophisticated energy management systems, their hitherto exclusive reliance on the grid diminishes – as illustrated by Apple’s new headquarters, which can virtually manage its own demand.”

The underlying problem is that however we do energy in future, someone has to pay.  In the recent past, cheap fossil fuels enabled quasi-competitive markets within closed national grid systems.  The result was that while consumers paid the costs, competition drove prices down.  That era has now passed.  Fossil fuels are no longer cheap, and renewables are too accessible to maintain the closed system.  Current demand-management and capacity management schemes are keeping the lights on by adding painful hikes to customer bills.  But these threaten to drive even more businesses and households off grid.  Moreover, high energy prices are becoming a political problem that might well result in a knee-jerk price cap that makes the market even less viable.

If the market can no longer operate competitively, and if energy customers can no longer bear the costs, ultimately there is only one other group of people who could be called upon to cover the cost – Taxpayers!  Sooner or later, our political leaders will have to face the fact that our energy infrastructure is simply too important to be left to a failing market.  If private investors are no longer prepared to fund the cost of keeping the infrastructure running (because customers cannot afford the bill) then the state will have to step in as the investor of last resort.  This being the case, we should be wary of ending up in the same position as we did with the banks; where the risks have been socialised even as the profits remain in private hands.

When it comes to energy, then, it is time to mention the N-word that we all but stopped using back in the 1980s.  Has the time come to seriously consider nationalising energy?

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