Wrapping up 2017

Given the volume of news in 2017, finding a common theme to make sense of the noise has proven challenging. However, as we start 2018, there is an argument to say that 2017 was defined by the actions of the world’s Central Banks.

After years of unconventional monetary policy, the actions of the Federal Reserve, the Bank of Japan, the Bank of England, and the EBC have begun to deliver results. The spectre of deflation has been defeated and inflation appears to be increasing across the world’s major developed economies. Economic growth has picked up in the Eurozone and Japan, while emerging markets have survived the first few US interest rate hikes without causing a collapse. But just as the achievements of these policies have been recognised, so have the costs.

As central bankers discouraged saving by reducing interest rates close to zero, investors were forced into equities and real assets. This led to a surge in global property prices and record levels of investment in global start-ups, crypto-currencies, and passive indexes. Rising property prices have led to bans on second homes across developed economies from New Zealand to Western Canada, and clamouring calls for a ban in London. In many developed economies, the average property price is now well beyond the 4x annual salary against which banks will provide loans, forcing a greater proportion of people to rent than ever before.

The hunt for yield has also played an essential role in the financing of the new economic giants that dominated news headlines in 2017: the FANGS (Facebook, Amazon, Netflix, Google, and Salesforce) being the most notorious. The perfect combination of ultra-low interest rates, subdued consumer demand and a psychological willingness to believe in the new technological era has encouraged investors to support “revenue over net profit” business models. The FANGS now represent five of the world’s most valuable companies; yet in over ten years only two have recorded net profits in their annual reports. Even more dramatic has been the explosion of Uber, Lyft, and AirBnB, whose valuations now exceed $100bn but who have never generated a profit.

Many of these themes were apparent in 2016, but their significance was not fully appreciated by politicians. As a result, the continuation of these economic distortions in 2017 was essential in highlighting the driving political crisis of the year, that of public outrage over growing economic inequality. As a consequence, 2017 represented a break in the conventional political wisdom that a government which achieves economic growth can offset these incentives against social and domestic challenges.

Even with a raging equities market, record low levels of unemployment, and signs of growing wage inflation, the US welcomed 2017 with the arrival of the most populist President in living memory. Similarly, the Conservative party in the UK ushered in the New Year with one of the strongest economies in the G7, only to lose its majority in Parliament following a snap election in June.  European voters showed that immigration was frequently a more significant issue for voters than headline economic numbers. In Germany, the bed-rock and engine of the Eurozone, the governing grand coalition hit record low polling numbers in the Bundestag elections, as the AfD entered the federal government for the first time. Meanwhile, France closely avoided electing the outwardly racist Front National. Austria elected a far-right party to government for the first time since the 1930s, where the party took the cabinet posts for the Ministry of Interior, Defence and Foreign Affairs.

The marker of success for 2018 will therefore be to generate broadly spread economic growth that benefits all within society. In that vein politicians of the political right are likely to find themselves in need of an alternative narrative. The appeal of socialism across western worlds, whether in the Jeremy Corbyn style, the Bernie Sanders variety or the Mélenchon school, will never be stronger. Finding an alternative slogan to challenge, ‘for the many, not the few’ will be an important starting point.

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The cynicism is unjustified – Hydrogen is the key to a clean transport future

The world’s largest free trade deal fundamentally re-shaped the future of Transportation – and no one noticed.

In December of 2017, the EU and Japan announced that they had agreed the terms of a vast international free trade deal. The deal, still subject to final approvals in the EU and from the Japanese diet, will create a combined economic free trade area of 600mn people worth 30% of GDP. But while the focus has been on the changes to agriculture, sustainability and regulatory alignment, a key provision has slipped almost unnoticed from the public eye. A regulatory drawbridge for hydrogen vehicles has been created.

In one of the most startling changes, barely noticed by the press, the EU have been allowed to sell hydrogen cars straight into the Japanese market, bypassing stringent legislation for Japanese specialist steel and labelling standards. In addition, the EU has agreed that “Furthermore, EU manufacturers that are not yet as far advanced in the development of this technology of the future can, thanks to the specific and much lighter conditions, import hydrogen fueled cars for testing and validation purposes and use the Japanese infrastructure of hydrogen filling stations to fine-tune their cars.”

Why does this matter? It matters because (arguably) the world’s most technologically advanced nation has bet big that the future of transportation will be Hydrogen and it is now luring all the world’s largest automakers to build out their R&D and manufacturing within Japan.

Hydrogen cars:

In 2020, Japan will host the Olympic games and the vehicles of those games will be hydrogen fueled. The aim is to put 40,000 hydrogen fuel cell vehicles (HFCVs) onto the roads by 2020, including over 160 charging spots. However global current sales of HFCVs are low, with only 1,600 sold in H1 of 2017. In part this is because the vehicle selection remains limited and the cheapest versions…are not that cheap. As a result, there are no shortage of critics. Elon Musk is famous for deriding the chances of hydrogen vehicles, a view widely shared amongst the lithium battery bulls.  However, with its ability to re-charge a car in under 5 minutes and its exceptional long range, the battle for vehicle dominance is far from over.

In only 5 years’ the global electric vehicle fleet has risen from ~50k cars to over 2mn worldwide, driven by government subsidies and falling costs as production increased. Analysts believe those same drivers could transform the hydrogen market too. In early 2017, Honda and GM announced targets for mass production of HFCVs by 2020, while Toyota, Honda, Hyundai, BMW and Daimler have committed $10.7 billion into research and development of hydrogen-based products over the next five years. There are now even a range of apps that can show you all the planned and current Hydrogen re-fueling points, like this one.

Granted, I am a confessed Hydrogen fan and have been so for a while. So in the interests of fairness, I also leave an attached rebuttal of the case for Hydrogen cars here, though it is a little dated. But regardless of whether Hydrogen will transform the light vehicle car market, there are plenty of other sectors where Hydrogen technology is likely to transform our transportation system.

De-carbonizing transport:

Depending on the source, transportation accounts for between 14% and 23% of global greenhouse gas emissions (GHGs). This sector is also growing rapidly, as aspiring middle class citizens seek to travel more and to own their own forms of transport. Ride-sharing, urbanization and automated driving all offer potential avenues in the longer term, however poor urban planning, under-educated regulators and significant cost challenges will ensure that these solutions are unable to meaningfully reduce emissions until 2040 if not later. Moreover, they only deal with the simplest solution of all, light duty vehicles.

Using IEA estimates from the Global Tracking framework, a joint World Bank and IEA publication, global renewable transport numbers remain a significant concern for efforts to de-carbonise the global energy system. According to the IEA, Electric vehicles must reach 160mn by 2030 to meet the 2 degrees target set at Paris and over 200mn to reach the below 2 degrees target. In other words, the world has to manufacture and sell at least 158mn EVs in 13 years globally, mostly fueled by clean electricity and with sufficient grid infrastructure to handle re-charging.

Achieving the Paris commitments for light duty electric vehicles alone should put pause to the idea that we can electrify shipping, aviation, rail and heavy freight with batteries as well meeting the Paris commitments for electric light duty vehicles. The only credible alternatives are hydrogen, LNG or CNG.

Compare and contrast: the new Tesla truck with the Nikola Two. The Tesla truck will have a maximum range of 300-500 miles and will require 30 minutes of full charge to add 400miles. It will also require the equivalent demand from the grid of 3,000 – 4,000 UK homes when it is charging. That is per truck…In contrast, the Nikola Two can cover 800 – 1,200 miles with a 15 minute re-fuel time. The bigger brother of the Nikola Two, the Nikola One, has similar statistics but has received $2.3bn in pre-orders, totaling over 8k. Nikola isn’t the only company in the field either. Toyota has its own project, called “Project portal”, while Kenworth is examining HFCV options as well.

Looking at the aviation space, Hydrogen fuel cell planes have already been developed and successfully tested, including the HY4 passenger craft. The plane already has a range of 1,500 kilometers and expansions for a 19 passenger plane are underway. By contrast, experts from WIRED estimated that electric batteries will take until 2045 to have a commercially viable battery plane available. Even in the smaller plane segment, the current record distance set for an EV plane is 300 miles in a two seater plane, largely modelled on a glider technology.

In freight, Alstrom and Hydrogenics already have tested Hydrogen on trains in Germany, while Ontario is looking at Hydrogen trains to replace the current rolling stock on the GO rail network. Aside from promoting local businesses, the trains are almost silent and emit none of the harmful particles associated with diesel or other fuel sources. There clearly will remain a role for electrification of urbanized rail, but even in a small landmass like the UK, the costs of electrifying entire train lines have forced planners to move towards mixed fuel and electrification trains. In this regard, Hydrogen is likely to compliment electrification for long distance commuter trains. The UK is already considering this option.

Then we have shipping. The maritime industry is one of the worst sources of pollution in coastal cities, with cities like Hong Kong calculating that 50% of all locally produced air pollution comes from the maritime industry. In Norway, parts of Canada and the USA, various attempts to introduce LNG bunkering have produced significant results in reducing maritime emissions, with Vice estimating 20% less CO2 emissions per ship, but hydrogen is likely to be the next major frontier. So far both Viking Cruises and Royal Caribbean have committed to procuring hydrogen powered ships, while Norway’s Fiskerstrand Holding AS is building a hydrogen ferry and the Port of San Francisco is mulling a $5mn investment in a Hydrogen fueling station. They are unlikely to be the last movers.

But perhaps the most surprising thing about Hydrogen now is its wider application in more niche services. For Amazon, hydrogen fuel cells have allowed the firm to revolutionize its warehousing forklifts, so much so that the company invested $70mn into a fuel cell company called Plug Power, while Walmart reacted with its own investment of $80mn in the same firm. Why? Well according the leading US body NREL, hydrogen fuel cell forklifts are at least 10% cheaper than alternatives over a 10 year investment. But the effect is not limited to forklifts. Amazon now uses Hydrogen powered drones in its warehouses to monitor inventory. With a flight time of two hours, compared to 30 minutes for a comparable electric powered drone, Pincs aerial drones offer savings of up to 5% of the total inventory stock.

Final comments:

On our current global trajectory there is almost zero chance of the world reaching its Paris climate commitments, let alone the wider level of agreement needed to reduce CO2 emissions below the two degrees limit by the middle of the century.

Our energy system is going through the most rapid transformation in its history. It is going to be messy, complicated and littered with failures. It is going to cost more than it may have done had we guessed everything right at the start, and for decades there will be debates around this subject. But one thing is clear. Without hydrogen in transportation, there is no clear evidence that we can save our planet.

In 2003 to 2004, the UK government overwhelmingly backed the idea that Hydrogen would be a key fuel of the future. Like most new ideas, the hype came early and failed to deliver. In product innovation this is often the case. The dot.com boom was preceded by the explosion of the internet almost a decade later, with the worlds largest companies all being tech stocks. Electric vehicles themselves were considered the car of the future….in the 1900’s!! Yet it took over 100 years to become the new focus of policymakers hopes for a clean transportation future.

Hydrogen has had a lot of bad press, some of its deserved. But if we are serious about climate change, investors need to drop the cynicism and engage with the technology.

So you work at the World Bank….what does it actually do?

The World Bank Group is one of the largest, oldest and best known international institutions today, yet few people can  tell you what it does. So what actually is it and why should non-policy members of the public care?

The World Bank is an agency headquartered in Washington DC, which was founded after World War Two. While it is frequently referred to as “The World Bank”, this also adds to the confusion around what the institution is and does. The “World Bank Group”, is a body of financial institutions whose job is to provide financial solutions and consulting services to the banks shareholders. It’s shareholders are sovereign nations who commit financial support to the bank in exchange for shares. The greater the financial commitment, the greater the shareholding and voting rights held.

It is not a “bank” in the classical sense, nor does it provide services to the “world”.

The World Bank was originally created as one entity, the International Bank for Reconstruction and Development (IBRD). This remains the core entity when people talk about “The World Bank”. When the IBRD was created, its aim was to help rebuild nations (largely European) who had been devastated by World War Two, whilst also providing financing for the worlds poorest countries to support economic development. To achieve these roles, the bank tried to solve a single issue for these two categories of nations: the lack of international finance available.

While most of the original financing was from the American government, the banks day-to-day lending is actually financed by institutional investors such as pension funds, insurance companies, endowments and central banks. The bank provides loans to its country members, by raising debt itself in the form of loan notes (aka bonds). As all the country members of the World Bank provide a guarantee to investors that any bond issued by the bank will always be repaid, the World Bank notes are consistently AAA rated (which indicates that default is theoretically close to 0%). This allows the bank to borrow money at the same rate as the US federal government.

The IBRD uses the money that it raises in financial markets to provide “concessionary loans” to the banks members. These loans are concessionary because they are at a lower interest rate than the country would be able to secure for itself in the global market (assuming it could even raise the money). But in order to access this much cheaper source of financing, the country which receives the financing must agree to a series of conditions about how the money can be used. In recent years, the World Bank has been criticized heavily for these “conditions” which it sets on borrowers, especially given that most countries that currently borrow from the Bank are seen as developing, post-colonial nations. But this has not always been so. In fact, one of the earliest and largest bank loans actually went to France, shortly followed by Belgium and other European nations who desperately needed US dollars in order to import food and basic goods from the USA after WWII. The Banks first ever loan went to Chile.

The second entity referred to as the “World Bank” is called IDA, the International Development Agency. Founded after the IBRD, the aim of IDA is to provide loans on an even more generous set of financing terms than the IBRD can. Understandably this makes IDA a very attractive option for impoverished governments and so its financing is restricted to only the world’s poorest countries.

As a further contrast between the work of IDA and the IBRD, the loans made by IDA can be considered “loss making”. This is because the interest paid is so low, and the duration of the bond is so long, that when counting for inflation the loan is effectively a grant (i.e. free money). The IBRD is totally different. The loans from the IBRD will all generate a profit for the Bank (i.e. the return exceeds the cost of the IBRD’s own borrowing, plus staffing costs for the project). Therefore, the IBRD provides a subsidy to IDA, so that all the money made by the bank is re-invested in providing either grants to the poorest nations in the world or more low-cost financing for other developing nations.

While the IBRD and IDA represent the core of what we call “The World Bank” today, there are three other entities that are also “World Bank Group” and which deserve a brief explanation.

The first is the International Finance Corporation (IFC). This entity provides direct investment into companies, not to governments. Its sole purpose is to promote the creation of a dynamic private sector inside developing world economies. It does this by issuing loans to companies in emerging markets, sometimes making direct equity investments in funds and even providing what is called “anchor financing” for private equity/venture capital funds, who solely invest in these markets.

The second is the Multilateral Investment Guarantee Agency (MIGA). MIGA’s job is not to make investments of any kind. Rather, its job is to provide guarantees to banks and investors who are looking at projects and businesses in developing markets. The most famous of MIGA’s products is its political risk insurance. This is where MIGA will guarantee that a company’s asset or investment, will not be taken (“appropriated”) once it has been made/brought to the developing country. As an example, if Rio Tinto builds a mine in the Democratic Republic of Congo for $1bn, MIGA will ensure that if the Congolese government nationalises the mine, Rio Tinto will get all of its investment back.

The last is the International Centre for Settlement of Investment. This body acts as a negotiation tool between developing countries and large multinationals, where there may be a disagreement over the implementation of a pre-agreed contract or a concern that either party is not acting in good faith.

While these descriptions are probably too long already, they provide only a snapshot of what the bank itself does.

In sum, the Banks various entities ensure that over $60bn a year is directly invested in developing countries. But that is only the Banks direct contribution. Given that the Bank usually co-invests with the private sector and host governments, the true figure is likely to be between $100-$200bn, depending on which assumptions one makes. All together Multilateral Development Banks, including the EBRD, IDB, ADB, AfRD and the World Bank, provide over $300bn of financial assistance to help countries develop.

Today global investment in emerging markets is roughly 1/3rd of what is is needed annually ($1trn funded against $3trn required in Asia alone). The World Bank clearly cannot do all of that on its own. But for all of its challenges and the valid criticisms raised, the bank is one of the most valuable assets for fighting poverty in the International system.

Hopefully you can now say you know a little more about it.

The renewables driven revolution in electricity pricing

Away from the public eyes, one of the most radical transformations of wholesale electricity markets in the last 100 years is occurring. Since the time of Thomas Edison, almost all the electricity that we use has come from the combustion of fuels. By releasing the latent energy in coal, gas, wood or oil, we convert latent energy into heat, and use that heat to create steam. The steam forces a magnet to spin around a set of wire coils, thus creating a current. It is this innovation in science that created the modern world, but today a growing proportion of the developed (and developing) world’s electricity no longer comes from fuels. I am of course talking about wind and solar.

When power is created from the combustion of fuels it is dispatchable. This means that it can be turned on and off whenever the owner of the power station wishes. While a Nuclear plant will often generate electricity around 92% of the time, making it effectively a constant (hence “base”) generation source, most fuel based generation sources run for much less time. In the USA, coal and gas plants often run less than 60% of the time. By contrast wind and solar are not dispatchable. Rather, their production output is variable. Wind and Solar do not require a fuel to create energy, but they cannot control when they will produce electricity. It is this contrast that is at the crux of the challenge.

To ensure a power grid has sufficient electricity for all consumers, a grid operator such as National Grid, must estimate demand and source that demand on an annual, monthly, daily, hourly and sub-hourly basis. In complex power markets like the UK, the sourcing of electricity supply comes from an auction system. This is why wholesale power prices are in upheaval.

To match supply with demand, national grid asks companies that produce electricity to make offers to supply electricity. Each company states how much electricity it can supply and the price it will accept to supply that level. These prices are then sorted from lowest to highest and national grid will accept all bids necessary until it reaches the supply level it requested. This is called “Merit Order Dispatch”.

To explain this is shown in the table below:

Electricity needed 100MW   
Clearing auction price £30/MWh  
       
Bidder name Bidding price Quantity of power offered Quantity of Power Accepted
Wind 1 £10/MWh 20MW 20MW
Solar 1 £20/MWh 20MW 20MW
Nuclear 1 £25/MWh 30MW 30MW
Gas 1 £30/MWh 30MW 30MW
Coal 1 £40/MWh 30MW 0MW

As wind and solar have no fuel, their cost to run is essentially zero. As such they can bid any price they like. For Nuclear, the cost of fuel is considerably less than building the site, so it also bids a low price. By contrast gas and coal have to buy their fuels to combust them. As shown in the table above, coal can’t compete against wind and solar on cost and so it losses the auction. Everyone else is paid the marginal cost of production, which is the amount that gas receives (£30/MWh) and they supply the grid.

So what does this mean? Essentially as we build more wind and more solar, we will increase the number of electricity supply bids into the market which are below the viable level for any fuel based generation. This is why the USA’s Department of Energy wants to pay a subsidy to coal and nuclear. As wind and solar are not dispatchable, there is a concern that all dispatchable fuel sources will be unable to compete in the price auctions for the majority of the year, except for periods when electricity demand is extremely high. That would make most plants economically unviable, as they would be required to cover all of their capital costs, maintenance and staffing, based on generating electricity for less than 50% of the year. If these plants go, then what will provide the electricity when the sun goes down and the wind doesn’t blow? That is the question that energy market regulators are asking in the UK, USA, Europe and across the developed world.

To many the concept that renewables are cheaper than fuel based sources doesn’t seem correct. Indeed, most renewables remain more expensive than coal (though not in all areas and not by much), when considering the total cost of the system. But it is important to understand that wind and solar are fundamentally different in how they are financially structured and that explains the pricing disruption. Operations and maintenance of renewable power plants are minimal. Building the assets is the expensive part. As a result, Renewables always want to sell their power at any price in order to re-coup the cost of construction. By contrast a coal plant or gas plant will lose money if they try to sell electricity for below the cost of their fuel source. This gives renewables an incentive to bid almost zero, thus guaranteeing that they will be able to sell almost all their electricity they generate at any time.

This is actually worse in countries that have adopted a renewable government subsidy called a Feed-In-Tarriff (FIT). Under a FIT, the government guarantees the owner of a renewable company that they will receive a fixed price for the production of their electricity. However, the electricity has to be generated and supplied to the market in order to claim the subsidy. As a result, renewables have no incentive to put in competitive prices for auctions because they already have a fixed price.

What does all of this mean though for businesses, consumers and investors? Well for now it means that the annual average wholesale cost of electricity has fallen in countries like the UK on a constant basis. That also means that most households and industries have paid less in energy bills than would otherwise have been the case.Wholesale market

But while the costs of electricity have fallen, other costs are occurring across the system. As coal and gas plants cannot compete in the market they are forced to close the plants early and suspend new constructions. A great win for climate change, but an outcome that has cost European utilities half a trillion euros according to the economist. In California, where solar PV deployment is high, prices in the wholesale market now go negative for periods of the day. Yes that is correct. Producers effectively pay other people to take the power that is being produced. In the same is happening in Germany.

The move towards greater renewables in the electricity mix is vital. But like any great transformation there will be unintended and unanticipated consequences. The greater the growth of renewable energy, the more inevitable it will become that wholesale power markets will change. If consumers are focused that could potentially lead to longer term price stability and cost savings. But only if they know where to look.

Germany’s election will decide the EU’s future

This September has been awash with commentary regarding the future of Europe. From Macron’s address on a future EU finance ministry, to President Juncker’s call for a new EU blueprint, Theresa May’s Florence speech and the upcoming German election result, it is clear that the tectonic plates are shifting. But in what direction and what does this all mean.

The EU’s political consensus is fracturing. The Brexit referendum has demonstrated that EU membership is not permanent and consequently that there are political consequences to constantly attacking the union. As a result, politicians who have previously attacked the EU in order to deflect unpopular decisions in their countries now face a choice: do they make a pro-federalist case for EU reform through integration or do they support a de-centralisation strategy. The choice is likely to be settled by two issues: the German election composition and Turkey.

Germany’s election is more complex than it seems. Current polling suggests that the CDU will win, but the question is whether they are able to govern with a “Jamaica coalition” of the FPD and Greens. A Jamaica coalition is desirable because of another party, the AfD. The AfD are on course to receive 11% – 12% of the popular vote and become the 3rd largest party in the Bundestag. If the CDU and SPD were to form another grand coalition, then the AfD would become the official opposition to the German government. A great podcast covering this is available here. If Germany does assemble another grand coalition, it is expected to be much more open to renewed EU federalism. However, if the FDP enters government then the dream of an EU finance ministry will be dead in the water.

Assuming a pro-reform minded Germany, the only barrier to further EU reforms would be Turkey. The migration crisis in 2015 was not resolved, but Merkel’s bilateral arrangement with Turkey has been a very effective stop-gap measure. Following a heated war of words between both nations in the last two years, the status of the refugee arrangement may be under review. According to the UN there are 3.1mn Syrian refugees alone in Turkey, though the official number may be higher. Were Turkey to renege on the deal, Greece would certainly see a significant uptake in new arrivals, as would most of south east Europe. Given the current hostilities and tension towards migration in the union, the risk that shengen may collapse in parts is very feasible. Such an action would again set back momentum towards a unified Europe.

The resurgence of pro-EU sentiment following Brexit, suggests that the political stalemate on further integration may finally be broken and that meaningful treaty reform is feasible. But this requires the German domino to fall into place and the migration pact to hold. As Guy Verhofstadt’s most recent book title suggests, this may be “Europe’s last chance” to successfully push through irrevocable integration among EU members.

UK Climate change – progress report

Ask many British industry experts whether the UK has an energy strategy and you’ll mostly be met with laughs or exasperated expressions. But while the UK may look like a mess to industry insiders, the country has been remarkably successful in de-carbonising its economy.

Let’s start with the big question: is the UK on track to meet its legally binding 2007 target of reducing CO2 emissions by 80% below 1990 standards by 2050? The answer appears to be yes. From 1990 to present the UK has reduced its gross emissions from 800mn tonnes of CO2 per annum to under 500mn tonnes. On a net basis (including emissions captured by newly planted vegetation or offset against renewables/re-forestation in other parts of the world), the UK has also fallen from 600mn tonnes in 1990 to 400mn tonnes by 2015.

UK climate target

But if emissions are falling, the next question is whether this is due to government policy or if this was inevitable. Examples of an inevitable decline would point to aspects like declining economic growth, de-industrialisation, declining population growth and basic energy efficiency gains. Thus, the question is whether any of these features have a role to play in the UK’s declining emissions story.

The answer is a partially. The UK population grew by over eight million people between 1990 and 2017, while the UK economy grew from USD $1trn in 1990 to USD $2.6trn today. These factors should have contributed to increased greenhouse gas emissions, but offsetting some of these rises is the decline in manufacturing from 17% of UK GDP in 1990 to 9.69% in 2016 . Nevertheless, UK CO2 emissions per capita have fallen from 9.7 tons in 1990 to 6.31 tons in 2017 .

As a consequence we can state that the fall in UK emissions seems to be primarily driven by alterations in the UK energy supply.

UK Renewable Generation

As the table above shows, the UK has expanded its share of Renewable Generation from 5GWs to 35GWs in little over 7 years (the equivalent of 10 – 12 Hinkley points). However it is worth noting that a significant proportion of the renewable electricity generated has come from re-converting the Drax power station in Yorkshire, so that 50% of the towers now run on biofuels (aka woodchips). Drax power station was the 2nd largest power plant in Europe when it was built, with ~4GW of coal capacity. Today over 60% of the electricity it generates comes from woodchips, mostly from North Carolina and Canada. Perhaps not (in this authors view) exactly “renewable” but certainly a step up from Coal.

It’s worth pausing to mention coal briefly. In 1990 the UK relied on coal for circa 30% of its electricity needs. Today that figure is below 9%. Moreover no new coal plants will be built in the UK and in April[1], the National Grid reported that the UK had its first day without any coal fired electricity generation in over 200 years. This trend seems set to continue. In 2017 Scotland set a record for 70% of generation coming from renewable resources, while the UK has averaged 50% of electricity from renewable resources for the 2017 period to date.

Bizarrely perhaps for people accustomed to thinking of the UK as wet and windy, the leading source of Renewable generation in the UK is now Solar PV.

UK Renewable Energy techs

The stalling of wind has been largely driven by strong local community resistance and cuts to the UK’s principal subsidy tool, the Feed in Tariff regime. However Solar PV has surged and UK developers now believe that Solar PV can be built without subsidies and will compete at around the £70 – £90 per Megawatt hour. This is comparable to the Levelized Cost of Energy that a new Combined Cycle Gas plant would require. In a further sign of confidence Blackstone (a leading Private Equity fund) and Lightsource (a leading UK developer) approved a £1bn fund to buy already operational UK solar sites in 2017[2]. It is precisely the emergence of a secondary market, through tie-ups between PE firms and Developers, which reflect the maturity of Solar PV in the UK market and should attract further buyers.

Beyond the wholesale market, the most exciting new frontier is on the retail side. The latest papers by the UK energy regulator Ofgem and the UK Department for Business, Energy, Industry & Skills (BEIS) have highlighted sweeping changes to the classification of battery storage and how these assets can earn revenues. Alongside more favourable battery deployment laws, the UK is also introducing TimeOfUse tariffs into the retail sector, allowing savvy energy users the opportunity to reduce their electricity bills through smart meters and smart appliances. In a sign of things to come, Ikea has announced a scheme to sell Solar PV panels and Lithium ion storage batteries to UK home owners. These changes, while still too early to fully assess, indicate a continued progression towards a distributed UK clean energy system.

Of course the UK has much more it can do. At circa 100,000 Electric Vehicles on the road (from over 20mn ICE vehicles), the UK has a long journey to reach a 20% reduction in transportation by 2020. Similarly on the heating side, the UK will be fortunate to reach a 10% reduction, despite a committment to a 20% reduction by 2020. But these failures have to be placed in context.

Improving Energy Efficiency is the key to reducing heating emissions. But replacing/refurbishing existing housing stock is extremely hard. The simple fact is that if the UK built more new homes (the current rate is a pitiful 100-150k per annum) to even moderate specs, the UK would make significant progress in reducing its heating emissions. On the transportation side the UK may be lagging, but with the 3rd largest EV fleet in Europe (Norway is the largest) its hardly a laggard. EV’s remain expensive and at any rate the real emissions in transportation come from freight, rail, aviation and shipping. In all of these regards, the move towards electricification, hydrogen fuel cells and second generation bio-fuels is progressing and the UK remains a leader in funding Hydrogen deployment.

In short the UK probably deserves a 7/10 on its climate change score card. Could it do more? Certainly. But is it behind its targets? The evidence would suggets otherwise.

[1]Real Estate IPE, 2017 https://realestate.ipe.com/news/investment-vehicles/uk-pension-funds-allocate-11bn-to-blackrock-renewables-fund/10019933.article – Blackrock renewable funds

[2] Guardian, 2017, https://www.theguardian.com/environment/2017/apr/21/britain-set-for-first-coal-free-day-since-the-industrial-revolution

All the wrong issues

Despite 7 years of stagnant economic growth in Europe, austerity in Britain and growing inequality in the US, the political left has never looked weaker. That is a problem. All good political systems require competition of ideas to help both sides refine and improve the policies which they offer their electorates. In the founding of any democracy it is widely acknowledged that a failure to create two equal political parties, who can act as counterweights to one another, is essential. Some even believe that if the Russian Communist party had split into two parties in 1990, one moderate and the other traditionalist, it would have fundamentally changed the trajectory of Russian democracy.

But why are the political left so weak? The answer is that they are focusing on all the wrong issues. LGTBQQ rights, climate change, religious tolerance and gender equality are important issues in making our world a better place. But they are not the reason why people decide to vote for one party or another at the ballot box. Hillary Clinton did not lose because every Trump voter is a climate-denier, racist, misogynistic homophobe who wishes to punishes poor people. Though there were likely many of those too. But the reality is that people vote for bread and butter issues and as Bill Clinton once famously quipped, it’s often about “the economy stupid”.

Politicians in the modern era have a tendancy to focus on issues that are at best tangental and at worst, irrelevant, to the day-to-day lives of most citizens. Climate change is a huge issue, one that I passionately seek to help fix every day. But it isn’t something you can explain or resolve in a tweet. It also is something that is extremely hard to explain to citizens that work 9am – 5pm in an office. The same is true with the rise of identity politics issues. It is morally clear that Donald Trump’s ban on transgender service in the military is wrong, but if democrats think that they will win votes over these issues then they are misguided. As sympathetic as the ordinary citizen is to the suffering of others, it takes more than the empathy that one may feel from an article or a youtube clip to vote for a political party that is also raising your taxes or restricting your social rights.

If we acknowledge that the issues championed by left wing parties are the wrong issue to win elections and political power, then intuitively one must ask why parties cover these issues. In part the answer lies in the  membership base and in part it is a feature of the social media age. Political parties draw their strength from loyal members, who contribute funds as well as time to help win elections and in exchange they are granted an input into the policy making process. Today though, members are no longer content with “an input”. Grass root activists, inspired by social justice movements like Occupy Wall Street and other online anarchist strctures, are seeking to rebuild the entire political governance of their parties. In doing so, the parties are sacrificing external clarity of message for the ostensible goal of greater internal cohesion, as all factions and members feel more engaged in the policy creation process.

In the social media age, these internal struggles play out across the public sphere and muddle the waters. Moreover, the areas of greatest acrimony and therefore greatest publicity, are not issues of inequality or climate change (where agreement is much stronger) but rather the extent of engagement with identity politics issues. These topics, ranging from the appropriate use of social pronouns (if such a thing still exists), towards use of public facilities (notably toilets) and removing statues, hold no interest to the vast majority of society but they are fought though they are an existential battle, by left wing activists across social media platforms. In the maelstrom all other issues are lost. The conservatives in the US understand this well. Breitbart, Fox and other right wing activist groups are easily able to distract the political left from delivering clear messages on inequality, healthcare and the economy by effectively trolling the political left with social politic clickbait. Milo Yiannopolous andDonald  Trump are experts at this.

Many could contest that the political left is stronger than it has been portrayed, but the success of Jeremy Corbyn in the UK and Macron in France is misleading. Macron was the ultimate example of the “lesser of many evils vote”, a product ofthe disastrous   Socialist government election process, a crippling leadership scandal in the Republican party and a desperation to keep the National Front out of power. Corbyn is even stranger. A product of the anger felt by many in the UK who suffered disproportionally from the reduction of public spending in social services and a rising anger that the system is rigged which came from the financial crisis. Such anger against elites is ironically why Corbyn and Macron share so many similarities with Trump, in that they are all populists that are riding a wave of anger against the perceived liberal, effete elite. But the perceived success of these leaders is due to electoral circumstance, not the strength of their political positions.

Jeremy Corbyn persuaded young students that their debt would be removed, while sending two contrasting visions of Brexit to Labour voters in the north and labour voters in the south. Macron did even less. It is perhaps unsurprising therefore that Macron’s popularity has dropped faster than any French president in the last 20 years. Meanwhile Labour may being riding high in the polls, but Jeremy Corbyn still polls as a “less trusted to govern” leader than Theresa May. A leader that lost an election and is expected to be removed in the next 12 months.

In politics there is a disctinction between doing the right thing because its right and doing it because it looks right. The Conservative party in the UK will never outliberal the Liberal Democrats and they will never be seen as more progressive than parties whose foundations were built on championing the rights of excluded groups in society. Similarly the Labour party and Democratic party will never win over aspirational voters, who want a better quality of life by championing social issues as their primary selling point.

The obsession with social politics issues is a problem for the political systems of western liberal democracies. If we can’t move on from it and focus on the bigger picture issues that affect the day-to-day lives of millions, citizens will start to wonder what democracy is doing for them anyway. Confused onlookers from China and Sinagpore may be asking that already.