In response to Daniel Lacalle…mostly wrong

The macro-trifecta of economic competitiveness, national security and environmental sustainability is all about energy. Well, some of it is about banking, tax havens, intellectual property, climate, colonialism, Lockheed Martin’s F-35s, planned obsolescence, Angela Merkel’s legacy but mainly, it’s about energy.

A betting man might ask in which order do we place these three horses but a visionary asks is there a way that we can get them to come home together. Either way it’s a punt.

horses

So, as with any bet, it’s informing to get multiple opinions but once you bet you have to stick. This is where the real value is created. Hedging or active management dissolves the potential value created by decisive long-plays. So far, Europe has neither bet nor stuck.

In this regard, China has a model that stands to be refuted – 500m lifted out of poverty in 30 years.  Not their coal-heavy energy model per se but their long term commitment once a strategy has been decided. Lay out your vision and drive it home. There are a myriad of issues with China’s single-minded drive but the sovereign debt crisis in Europe indicates one thing – you can tell someone you’re going to screw them and then screw them or you can tell them it will be fine and then screw them but in the end they get screwed. Europeans have just been practicing another form of cognitive dissonance about the balance of pain now or pain tomorrow – just look in Berlusconi’s or Bertie’s constituencies.

As traditional energy sources can, even in the best case scenario, only achieve two of our big three and renewables can provide all three, the vision is clear – bet big on big renewables.

Why big renewables? Energy generation isn’t cheaper or more efficient as you distribute it around, it’s less efficient. In Ireland and most European countries the grid can’t take it without investment so the energy is neither shared nor stored and sometimes wasted. So as the generated energy isn’t differentiated the greatest benefits come from economies of scale.

wind

Renewables at scale is the answer. Generating huge dollops of renewable energy and sharing it between countries is the purest international trade. Ireland has an abundant supply of wind while Spain has an abundant supply of Sun. If governments and incumbents could find a way to remove themselves from the interfering side of the equation it is a story that a 5 year old would understand.

Unfortunately, the European model of targets, fines, horse trading over ROCs and carbon trading has not provided the renewable solution that we expected. So how do we get there? Enter Daniel Lacalle.

daniel lacalle

The prevalent form of energy technology should establish itself by, “…competitiveness and cost rather than intervention by the government…this is the first time the government has tried to incentivise and promote more expensive ways of generating energy rather than cheaper

There are two points that I would like to address here. The first is that it is not the first time that government has attempted to subsidise initially more expensive forms of energy generation. Where do you put the brackets on that cost? Immeasurable costs were, and are, incurred in electricity transmission and distribution infrastructure not to mention geopolitical instability costs of redistributing primary fossil fuels or Operations of Enduring Freedom as they are more commonly known. In fact, most European countries ran hugely inefficient state monopolies for generations which, on the whole, continue to exist as an artificial switching cost, resisting improvement and change and risk and innovation. So perhaps he is technically correct – maybe it isn’t called a subsidy if it is a payment from government to government – but monopolies aren’t best known for their competitiveness and cost.

The second is that fossil fuels are not cheaper. Suffice to say that the world is paying some cost for burning fossil fuels which is not currently being priced in to the trade of fossil fuels This may be a more philosophical point involving the price of vague externalities (unless you live in some cities). To discuss in philosophical terms while businesses pay monthly bills is to get ahead of ourselves but equally to talk about traded price alone is to oversimplify.

It is US and German solar subsidies, via both university research grants and private business PPAs over a concerted period of time, which incentivised the initial technology and the market for more recent Chinese innovation which has brought these technologies and their supporting systems to the point where they can nearly be profitable on their own. The opportunity to finish the job is one that Daniel misses in the name of free competition. 

Germany has a pretty good example as incumbent energy utilities struggle (if €2.4bn profit is struggling) against the gains made by renewables in the last 20 years. While subsidising renewable technology, Germany can exempt those large energy consumers which it deems to be of national interest from subsidising renewables. This pragmatic solution got Germany to the point where on one day in June 60% of electricity consumed came from renewables[1]. If Germany were bold enough to introduce a more realistic carbon tax and give up its subsidies of traditional generation the rest of Europe might have the model. Balancing business competitiveness during the once-off transition is essential but business loves nothing more than certainty.

Convincing people to pay for the future is a mountainous task. The narrative is perhaps too visionary for the current political cycles. Paying for things that we have already bought is hard enough.


[1] Unfortunately the situation is always more complicated when politics and profit compete and the Green Paradox has reared its head leading to an increase in CO2 levels last year as cheap coal fills the energy bridging gap that was supposed to be powered by gas. How much longer Germans will support the 3rd highest domestic electricity prices in the EU while seeing increases in CO2 is anyone’s guess.

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