Thursday, February 23, 2017

Unintended consequences part II

Alternative energy

This week The Economist has a long spiel on Alternative energy and how it generate grid issues. While this is true to some extent the reason is not entirely what the Economist thinks is the problem. There is no doubt that someone has to pay for potential power.  But, and this is important, the nature of the competition is changing.  Rooftop solar is a problem because the houses are empty during the day and full at night.  Its a problem because rules are such that utilities have to buy the power when its available, not when its needed.

But again technology is at the rescue.  In countries where the obligation of the utility of buying rooftop solar is low (and that battery technology is now emerging as a cost effective solution) then there is the potential for true shift in production away from polluting technologies.  I am happy to pay for the nearby potential power from the gas powered station if, and only if, the utility is also happy to pay me for potential power -- eliminating market disruptions via subsidies and economies of scale (as the number of battery owners increases the risk of disruption falls.

More interestingly what has happened to solar cost over the past five year is absolutely dramatic.  In June 2016, Dubai signed agreements to buy power at 2.99c per w/hour -- this was already an amazing price, if you consider that only 5 years ago, the most competitive Spanish plant was pricing its power nearer 15.0c per w/hour.  More amazing, in the past month Dubai signed another agreement where the price of power was just 2.0c per w/hour.

Trump and is coal friends are trying to turn the clock back -- first by removing subsidies (and allowing coal producers to pollute to their heart's desire (black heart)), but the reality is that coal's time has past!  Within the next decade solar costs should fall below 1.0c per w/hour -- making solar the cheapest form of energy, with zero variable costs and a life span of 20/30 years.

The addition of batteries will regularise the grid far more effectively than what is available today, and the wide distribution of batteries across the network will dramatically reduce congestion within the networks.  The Trump push against green energy is perfectly timed -- without the distortion the market will allocate resources more effectively -- and in all cases solar (and wind) wins!

The unintended consequence -- the push for coal/gas and other polluting technology will actually encourage the installation of solar and wind, because in a perfectly competitive environment the green energy solutions ARE more economical.

NAFTA

It didn't take long, Mexico is already sniffing around to replace some American imports with imports from other countries; the first to be hit are the farmers (you know the middle state that voted for Trump) next will be Texas and Arizona -- and a bit of California.

It has finally dawned on Mexicans that food security is critical, and the games being played by the Federal (under new management) government and some state governments has given the idea that reducing its dependence on the US may be an excellent idea.  First, will be agricultural products, it just so happens that Argentina is looking for export markets for its grain production -- second is meat again Argentina and Paraguay are looking for new export markets -- they also have the added benefits of not using hormone in their beef production.

Mexico is America single largest grain export market...suddenly your sure bet has become a not so sure thing.  Travel restriction, border harassment and even the occasional cop playing the why are you hear card have made America a far less welcoming place for many Mexicans.

So it is more than possible that Trump will find itself with a far larger trade deficit -- remittance should be tailing off, the 2016 remittance bump was outside the norm and should resume its historical trend sometime in 2017.

For farmers in Iowa this is all terrible news, for Arizona, New Mexico and Texas its a warning shot that should not be dismissed out of hand.  Trump's America has increased the cost of business (harassment, uncertainty) its only natural that Mexico looks for new markets.  The most amazing thing here is not that its happening, but its an organic shift -- there are no political pressures, there is a "feeling" that the political landscape in the US could become more volatile, more anti foreigners, and the way to reduce that risk is to reduce exposure.  The US has always been Mexico's largest trading partner -- before NAFTA it was around 75% of all Mexican exports were destined for the US market, but now its nearly 90%.  maybe too much of a good thing.

When "salt of the earth" farmers start going bust maybe congress will pay attention, then again maybe not!

2 Comments:

Blogger JohnL said...

Re alternate energy, Ontario Canada and Germany have embarked on this journey already, the cost effects are easy to see. Power prices in those jurisdictions have not declined quite the opposite.
Solar does appear to be quite effective as a peaking power source however. Summer time power demand does peak near the middle of the day which does coinside with solar output peak quite nicely.
But comparing a low capacity factor power source (wind solar) to high capacity factor power sources is simplistic.
Low capacity factor supply costs never seem to incorporate the cost of the back up supply, be it batteries or conversational generation. High capacity factor supplies do not require these back ups, therefore it is not an apples to apples comparison.
I never seen anyone argue that low capacity factor supplies are cheaper and include the total costs incorporated in their analysis. This is on a dollar for dollar basis, with no eco-effect biases applied.
Great blog, by the way.

February 23, 2017 at 9:44 AM  
Blogger Frozen in the North said...

I will not discuss Germany. But Ontario is another issue; the province had, 10 years ago, the opportunity to buy ultra cheap hydropower from Quebec (I'm talking something like 0.04 per W/h. Politics got in the way, and therefore Ontario decided to go solar. where the cost was around 0.14 per W/h. It gets worse for Ontario because a lot of the province's old (especially Nuclear) power plants were coming up to the end of their economic life -- replacing these is expensive (and the cost of decommissioning was never capitalized). In a sense Ontario was lucky, the 2008 financial crisis reduces the demand for electricity from the automobile industry -- when so many plants were shut down (ok not good for the workers...) Ontario could cut back on the construction of new capacity.

Ontario CHOSE to purchase more expensive power for political reasons -- Quebec was more than happy to have a long-term customer, but these decisions were taken by politicians, and now Ontarians are paying the costs. However, its important to note that Ontario's biggest problem was its aging power infrastructure. Unlike Quebec, Ontario doesn't have access to hydropower -- a matter of geography. To this day the push to slar at 0.14 w/h when the same quality of power was available at 0.04 w/h is an amazing story of waste and mismanagement.


November 9, 2017 at 8:16 AM  

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