Monday, 10 August 2009

Is the UK running out of electricity?

This week's Economist front page leader states that “thanks to its posturing politicians, Britain will soon start to run out of electricity”. It appears the first week of August was just too boring and the newspaper’s staff had to make up a story (the news that the Bank of England was expanding its Quantitative Easing programme by an additional £50 billion came too late on Thursday to turn it into a proper story).

The full article in the Britain section cites industry sources, to say that by the end of 2015 there will be a 26GW (E.ON) to 32 GW (EDF estimates) hole in the UK’s generation capacity. The article also provides a chart illustrating how existing generation capacity disappears and compares that with a gently upward sloping estimate of peak demand. I can identify at least three problems with the evidence presented.

Firstly, the chart provided (courtesy of E.ON) does not show (1) additional generation capacity already under construction and (2) capacity for which building consent has already been granted. Once these two categories are considered we find that generation capacity at the end of 2015 and into the early 2020s is expected to remain steady. On top of this there are other potential investments in generation that might take place and for which apparently transmission has already been contracted. So the chart below, from the Low Carbon Transition Plan (page 73) published by the UK Government’s Department of Energy and Climate Change, would appear to be much more appropriate than the one presented in The Economist’s article.

A second problem is the ever increasing peak demand that industry expects. The reality is that electricity supplied in 2008 was virtually the same as in 2002 – 367,000 GWh. And with the recession still with us don’t be surprised if 2009 supply falls to the levels of 2000. Even without the crisis, electricity demand didn’t grow in the 5-year period between 2003-2007. In these circumstances it seems a bit of a stretch to forecast an electricity demand increase of 10% between 2008 and 2015 as the E.ON chart implies.

Finally, you will have noticed that in the previous paragraph I have written about total electricity supply and demand for the year rather than peak demand, which the chart in the Economist article refers to. The peak demand data show a similar picture to aggregate annual demand (see chart below). However, with the anticipated £8 billion investment in smart meters we should see a more efficient use of available generation and transmission capacity. The meters should allow more discriminatory pricing, providing incentives to consume less electricity at peak times and more off-peak. This should in turn lead to lower rates of increase in peak demand relative to aggregate demand - so even if total electricity demand grew by 10% between 2008 and 2015 peak demand could remain stagnant.

So what was this piece of reporting all about then? Advocating the cause of companies wanting more public support for additional generation investments? Adding to the sense of failure of a Government on its way out? Or simple scaremongering to liven up a quiet August weekend?

Friday, 7 August 2009

Agricultural subsidies in poor countries ...

… are making a comeback.

After years of timid liberalisation efforts in the agricultural sector the momentum appears to have been lost. Part of this has to do with the hypocrisy of our own rich countries, which has been all too evident throughout the Doha round of trade negotiations. The persuasiveness of the technical advice provided by the World Bank is clearly eroded when the political leaders of the bank’s main shareholders (i.e. us, the rich OECD countries) appear incapable or unwilling to reduce their own agricultural subsidies.

The spike in food prices during the first half of 2008 has also led to a renewed focus on agricultural development and public investment in poor countries, including new multi-billion-dollar commitments from the G8 leaders at their latest meeting last month. Despite the well-meaning intentions of the donors and the bureaucrats that will eventually manage these funds, the reality is that a large proportion of these funds will likely be channelled towards unproductive subsidies.

I do not think agricultural subsidies in poor countries are necessarily a bad thing – there are informational asymmetries and credit market failures that provide an economic rationale for them sometimes. I even had a fleeting moment of fame two years ago being quoted in defence of the economics of the Malawi fertilizer subsidy in a front page New York Times article. I also believe subsidies can be designed in ways that support market development, which is what we tried to support the Government of Malawi with.

But in practice these nuances become too complicated for the politicians in charge, for whom the heart of the matter always appears to be to increase (or maintain) the size of the subsidies, rather than increase their efficiency and impact. Delivering the subsidies through Government structures rather than market ones also seems too difficult to resist for politicians. Thus we get the massive write-offs of agricultural debts in India or the delivery of fertilizer through government shops in Malawi, without a thought being given to the question of who will provide credit or who will invest in the fertilizer supply chain in future.

I got thinking about these issues again as I was reading “The Wealth and Poverty of Nations” by David Landes. Explaining why the Industrial Revolution and the era of capitalism took off in Britain of all places in chapter 15, he states “one can hardly exaggerate the contribution of agricultural improvement to Britain’s industrialization”. The tone of those few paragraphs appears to suggest that industrialisation was possible because first Britain was able to feed itself from its own production.

As much as I like Landes’ book (a highly recommended read), I am a little disappointed at the way this issue is addressed. Dan Morgan’s “Merchants of Grain” (an obscure source, I know) discusses Britain’s grain imports during the 19th century. As early as 1815 there were trade laws regulating cereal imports. Albeit these had very protectionist elements, e.g. forbidding imports when domestic prices fell below a certain floor to protect domestic farmers, they show the increasing importance of imports early on in the century. Grain prices in the Polish port of Danzing often set the wheat price in England and the protectionist Corn Laws were finally repelled in 1846, leading to complete liberalisation of cereal imports. These imports, as much as any improvements in British agriculture, made it possible to feed an increasingly urban and industrialised workforce.

Both the G8 leaders discussing poor countries today and David Landes discussing 19th century Britain focus exclusively on domestic agricultural production missing a factor at least of equal importance in achieving food security: liberalisation of agricultural trade, including getting rid of protectionist subsidies to rich-country farmers.

[Apologies for posting without including a single chart - that is a habit I don't want to get into]