Net zero is an ideological position, not one based in science, engineering or even the real world. There may even be people (amongst the mendacious and profiteers) who think it is a good idea but the consequences are simply catastrophic.
Everything in our society is based around energy. It is as fundamental as water - which, without reliable, abundant energy we cannot clean. We're already seeing high energy costs making it cheaper to pollute.
Folk forget that when the lights go out - properly, not just due to government diktat for a day or two - the manufacturing industry cannot simply 'restart' when the power comes back on. Supply chains break, skills are lost, hundreds of hours in maintenance made harder by damaged tooling.
During the pandemic we had toilet roll shortages. Shortly after that, salad shortages. The statist zealots need to realise what happens when the power doesn't come back on and those shortages cannot be recovered for months - if at all. It is not hysterical to point out that when there is no energy, there is no society. How will the police/fire/ambulances be called when there's no telephones? Prescriptions? Forget it. I looked at the lad's inhaler the other day - all plastic apart from the sealed cylinder. If we can't get that regularly, he dies. Miliband dismisses this but that just proves his stupidity.
We need cheap, abundant energy and a lot more than we have. Those demanding we have less should be made to live in a world without it. I don't think they'd like it much.
I'm not sure whether it is included in the Services sector but the State's share of GDP is increasing and the efficiency of the public sector still hasn't recovered to pre-pandemic levels. An economy cannot grow in any meaningful way if public services are taking an even larger slice of the pie and doing it less efficiently.
A high net migration will suppress GDP/person and reduce the incentive of commerce to invest in productivity enhancements. When it is cheaper to just employ more labour, why bother?
We're hamstrung by governments that think the public sector is part of the economy rather than merely a consumer of wealth.
Yes, pub-sec uses private services, but it's just someone else's money moving around. Tesco's taxes pay for a nurse, the nurse shops at Tesco. No new wealth is created.
Note - I do NOT dispute the value of what some elements of the public sector provide: value is different to wealth generation.
In a Net Zero world, intermittent renewables require DEFRs or secure, reliable imports sufficient to "fill in the blanks". There are two basic classes of DEFRs, independent and dependent. Independent DEFRS include nuclear and hydro. Dependent DEFRs include batteries, pumped hydro and Green Hydrogen, all of which require additional intermittent renewable capacity to assure reliable, adequate charging/recharging. Independent DEFRs render intermittent renewables redundant capacity. Redundancy costs.
Looking at the productivity charts I think the ONS methodology is heavily flawed in our increasingly socialist economy. It's not only the electricity sector where higher spending implies lower real productivity. It surely applies to the NHS where there ever increasing deadweight from DEI and expanding layers of management don't result in more patients being treated.
Likewise, education productivity has been in decline with the erosion of standards and was hit even more by covid lockdowns. I'm now seeing some topics I covered in school not being addressed until a masters level degree. Educational disinformation means that much propaganda has to be unlearned before students can even begin to learn properly.
Public transport has had some covid and HS2/Elizabeth Line sized holes blown in it. Hence the kiss of death through formal nationalisation of the railways. Train drivers get more pay for no productivity improvement.
Productivity of police and defence has also fallen through the floor.
Higher costs are impingeing on the agricultural sector, with fertiliser and weedkiller bans threatening to reduce yields per acre, reversing the long term trend.
GVA measures are now almost wholly corrupted by socialism.
David. Can I add two key points to your discussion of productivity. Understandably, economists and others focus on labour productivity, because that is what translates immediately to potential income and consumption per head. But labour productivity isn't really an independently measured variable in any economy that is dominated by non-traded services. How do you know what the productivity of a hairdresser or social worker is? There is no independent measure of the value of their output, so what one finishes up with is a circular analysis - haircuts are worth what people pay for them; hairdressers charge a price that reflects what they want to earn; so productivity is largely measured by wages. Even more so with social workers.
1. By sacrificing productive sectors, we are committing ourselves to a future in which the dominant form of productivity growth depends on increasing the wages paid to service workers and, thus, the prices charged for those services. That is a vicious circle because fewer people can afford the higher prices, whether for tourist facilities or lawyers. The end result is an economy based on serving a rich elite who monopolise the high paid activities but with a largely impoverished workforce. Sound familiar - that is not only the US & UK today but ancien regime France, Germany, Russia. This does not end well!
2. In productive sectors, labour productivity is a function of capital accumulation and productivity. More output per head requires heavy investment. The energy transition leads to a drastic reduction in capital productivity through the economy - not just in energy production but in its use. That is what kills productive businesses. But this shift also diverts our limited capital funds from investments needed to increase productivity in the rest of the economy. You can't increase spending on transport or health care if all of the money has gone into wind farms or heat pumps or electric vehicles. That, on its own, is the clearest reason why accelerated economic growth and Net Zero are mutually incompatible.
But ... none of this will convince two overlapping groups:
(a) Those who believe that Net Zero is essential to save the world. There has never been a remedy for religious belief apart from painful disillusionment! Such beliefs are fact-free because they exist in an invented world completely divorced from what is going in the real world. What is worse is that such beliefs are true luxury beliefs, funded out of guilt by those who are benefitting from the increasing unbalanced distribution of income.
(b) Those who believe (genuinely) that technology has changed or will change everything and that the costs of low carbon technologies have fallen by several orders of magnitude. The mythology of the computer chip cannot be punctured, even though a modern smartphone is incredibly powerful not because of technology but largely because it costs 50 times (in real terms) what simple phones cost 30-40 years ago.
David, thank you. Another strong article that underlines the critical economic importance of cheap and reliable energy. It also, sadly of course, shows that UK continues to drive its economy downwards, relative to all our economic peers and especially to the economic leaders USA and China – who (a) have the cheapest energy and (b) seem substantially less wedded to Net Zero by 2050.
Two points, if I may. First, and rather obviously, it is hard – perhaps even futile – to use evidence against people and governments who are obsessed by an ideology, in this case Net Zero and the more complex supporting structure of ‘villainous’ CO2. UK, it seems, would rather remain on the economic horse and cart of righteous Net Zero, pretending to ignore the reality of being overtaken by almost every economy with cheap(er) energy.
Second, a more technical or presentational point. The very useful chart of recent AR6 strike-prices uses Intermediate Market Reference Price (IMRP) as a benchmark comparator. This IMRP of £65 per MWh looks only slightly lower/better than the strike prices for large-scale solar (£70), on-shore wind (£71) or even re-bid offshore wind (£76). [Possibly a tangential issue but, so far as one can tell, IMRP seems to be a European construct; its composition is unclear but it might be interesting to know whether it reflects a true market-price, unsullied by any subsidies.]
More important, one wonders whether this apparently quite small price-gap relative to IMRP offers unwarranted comfort to the Net Zero righteous, who might say that this modest extra cost is well worth paying to ‘save the planet’. Is there merit in adding a much starker second benchmark, perhaps using the average electricity price for USA and China – as suggested by that interesting IEA chart?
In practice there are very large volumes of power trade based on these prices either directly in term contracts, or in bilateral trading between electricity traders, generators and retailers and large consumers. Since they benchmark most CFDs, generators avoid most of the risk of deviation away from their strike price if they sell their output on this basis. Most intermittent generation tends to be sold (or volumes for sale under term contracts are firmed up) once weather forecasts are reliable enough for them to forecast output reasonably accurately. To compete, generators on ROCs also use these prices.
Furthermore there will be volumes sold by dispatchable generators (perhaps via interconnectors) to provide price hedges to retailers for some of their anticipated demand. These sales will have been made perhaps many months in advance at prices largely determined by CCGT generators simultaneously buying gas in futures and forward markets and selling power at a price that locks in a profit. Some additional hedge sales are made by nuclear when they have a sufficiently attractive price in forward/futures markets, but these are not part of the subsequent trading close to delivery unless they suffer an unexpected outage. As the volume of intermittent supply becomes clear, there are broadly two outcomes.
When supply is low those hedge purchases proceed as originally negotiated. There will be additional volumes required for which retailers will have to pay for less efficient generators to make a profit, perhaps based on prompt gas that may also be much in demand for heating, or by trying to procure additional supply via interconnectors. Intermittent generators who over-committed sales volumes will need to join in the purchases to fulfill their contracts.
When it's windy and /or sunny and intermittent output will be large, dispatchable generators can increase their profits by selling the gas they bought and buying in power from intermittent generators at much lower prices - which will again be dominated by day ahead pricing.
There is still further intra day trading, culminating in trade within the Balancing Mechanism to ensure that demand and supply are equal, but prices can be very disadvantageous for any party needing to trade to square its position.
Day ahead pricing has thus become increasingly important, especially as a result of the price volatility during the energy crisis. That made hedge sales risky for generators because they could suffer huge losses if they had a plant outage, and even in the mean time they could be required to provide large amounts of mark to market and margin collateral that could strain their balance sheets. Retailers also faced huge demand for collateral to guarantee that they would really pay the high prices they agreed for hedges. The consequence is that hedge trading has been curtailed (and many retailers went bust), and is why we have moved from the OFGEM cap being set infrequently to quarterly. The realistic hedging timeline is now only a few months, not the 12-18 months previously assumed by OFGEM.
When you look at IMRP prices you do see some clear influence from the various terms applied to ROC generators and different vintages of CFDs in relation to treatment for curtailment and compensation when market prices go negative.
Weird Stalin also promised to "tread more lightly" on our lives. How's that working out?
Mr Milibean's pre-election promise of making the UK a 'clean energy superpower' should have been the crystal clear signal that the intention of an incoming Labour administration would be the rapid deindustrialisation of the economy, and the creation of a command economy with high energy prices and centralised control of access to energy forming the basis of that economy.
Yet a certain Labour supporting member of MENSA high IQ society campaigned vigorously for their election to government and turned up at the polling office to vote them in. Now she expresses regret - though not because thousands of decent working class men and women are going to lose their jobs or be deprived of good jobs at Port Talbot, Scunthorpe, Grangemouth and Whitehaven. No, it's because Labour turned out to be even more nasty than the 'Nasty Party' and cut the pensioner's winter fuel allowance. Vorders, along with the other 19.99999% of the electorate who voted similarly at the last election, perversely gave us a Labour government with an historic and unassailable majority by default simply because the fake Cons deliberately folded. The rest of us have to live (and die) with the idiotic, ideological, touchy-feely blindness of those who voted for the demise of the UK.
Countdown to Mission Impossible eh, Vorders? Enjoy the ride.
Labour didn’t get a big share of the vote it was the stupid electorate that gave up on the Tories compounded by FPTP that’s given them there majority. So far they’ve not shown much intent of exploiting this majority but suspect that’s because the battles inside the cabinet have yet to play out.
The problem is that so many of the general public have been taken in by the constant blizzard of false “climate change” propaganda (lies), just as they were taken in on the safe and effective (not) Covid jabs.
What will it take to waken up the general public? Maybe steadily increasing energy costs and ongoing deindustrialisation (Port Talbot, Grangemouth, the pending demise of the UK car industry, …). I’ve just come to the end of a two-year fixed price deal and the best new deal I could find, 15 months fixed price, is more than twice per month what I was paying. How typical is that?
That valiant contribution is now a thing of the past as the UK’s last coal powered station, Radcliffe-on-Soar, is closing down for good at the end of this month.
How about the onset of falling global temperatures? Global temperatures are currently at a record high thanks to the warming spike caused by the Hunga Tonga undersea volcanic eruption which climate alarmists are too embarrassed to talk about. They take us all for fools by pretending the spike is due to man-made CO2: https://www.drroyspencer.com/wp-content/uploads/UAH_LT_1979_thru_August_2024_v6_20x9-scaled.jpg.
The graph shows that prior to Hunga Tonga, global temperatures had more or less flatlined since 1998, disregarding transient ENSO events. If the Atlantic Multidecadal Oscillation (AMO) obeys the periodicity it has followed for centuries, within a few years we can expect a repeat of the 1950-70s cold phase which many scientists thought at the time was the start of a new ice age. I remember chilblains, windows frozen on the inside, sledging and outdoor skating then getting my car stuck in snow. https://edmhdotme.wpcomstaging.com/uk-temperature-analysis-from-1659-to-2019/.
We ain’t getting blackouts anytime soon because Ratcliffe will be gone. NESO has enough tools in its armoury to manage capacity crunches the biggest one being its ability to spend without limits. The threat comes from two places 1. if they force anymore CCGTs off the system so next round of CM contracts need to be watched. 2. EU or member states switching off an inter connector irrespective of contracts - in the short term I can’t see that happening as they are sensible and keep dispatchable plants so if the price is right.
Great comments. ...and I agree that things won't turn around until enough pain is felt from rising prices, deindustrialization and the accompanying loss of jobs, and blackouts - and I also agree that the Hunga Tonga undersea eruption in 2022 caused a spike in global warming. I wrote about it last year: https://alchristie.substack.com/p/the-real-reason-it-got-hot-this-year?
Also, the recent large increase in solar activity is probably adding to the warming. In both cases, it's only temporary.
Thank you David for a particularly fascinating Sunday morning read.
Earlier this week, my wife watched the early afternoon debate in the House of Commons prior to the vote on the controversial withdrawal of the winter fuel payment from many pensioners. She heard not one voice raise the core issue, the high cost of energy, which gives an insight into current parliamentary minds. I suspect if one confronted them with the bald statement: "Energy IS the economy", there would be merely blank stares or a robotic response involving "superpower".
Having been privileged to do a recent self-build, I now have some insight into how inefficient construction is (and that is no reflection on any characters involved) and concluded that with suitable brain power applied, modular off-site construction could greatly boost productivity, so I don't think the current state should be a given. In fact without it, and the availability of appropriate manpower, construction targets will remain fantasy. (Few young people are attracted to work on building sites, for example, and I don't entirely blame them).
A question I can't hope to answer: will artificial intelligence bring a big productivity boost to service industries, with corresponding loss of jobs? I suspect I'm not alone in believing there are a lot of non-jobs in the economy.
One concept lost on socialists is that money moves. Businesses are relocating from the UK, Germany and California in droves, due to energy costs. Left behind are those with few resources, struggling with inflated energy bills.
Essentially it's pre-fabrication as pioneered in the "pre-fabs" of decades ago, some still standing. There's already a measure of it - whereas decades ago, carpenters would assemble an entire roof, pre-assembled roof trusses are now delivered to site. A current example is timber frame construction in which factory-made insulated panels are used. "Structural insulated panels" or SIPs is a further extension of this. Some manufacturers, predominantly German I believe, incorporate services such as water pipes and cables. I suppose the extreme is the "park home" or mobile home that's assembled and delivered complete on the back of a lorry. Off at a bit of a tangent, I feel there's a loose analogy with nuclear plant in that a great deal of such factory-based assembly is currently bespoke and so relatively expensive and inefficient. If variety could be reduced and a focus put on value engineering, it seems reasonable to suppose that properties could be built considerably less expensively. That is also the logic behind small modular (nuclear) reactors or SMRs, which politicians have found they can spell, even if they don't know what they are. Currently the best nuclear reactor is always the one we're about to build, so no wonder costs and schedules overrun. I hope that helps. What I can't say is whether there's money or incentive enough to pursue this vigorously. I don't see much of an incentive for a builder to build what we currently call an "affordable home", because many construction costs are fixed and it makes much more sense to me to spend a bit more kitting a place out with superior items and selling for a lot more. I think the current "incentive" is coercion - if you build an estate, you're forced to provide a quota of "affordable homes", or pay a levy.
Thanks. Do you have any companies in the UK that are building with 3D printers using something like concrete? We have a couple small companies trying it in the US. As for SMRs, yes one of the hoped for advantages is pre-assembling many of the components in a factory setting, making it possible for scaling.
I wasn't aware of any so had to delve - thanks for the nudge. From https://www.gira.com/uk/en/g-pulse-magazine/building/3d-house-germany#uks-printing-pioneers "Meanwhile in the UK, a £6m project is set to construct 46 eco homes using 3D Construction Printing (3DCP) technology in Accrington, northwestern England. (I was born in the general hospital there.) This unique project will prioritise affordable housing for low-income families and veterans." I believe the Chinese have 3D-printed a house or houses (or maybe by now a city!). Thanks for the information on the US.
Yes, it’s an interesting new building method. I’ll be keeping an eye on it to see if these giant 3D printers become successful. I’d like to go see one under construction to see how they incorporate the wiring and plumbing, etc.
And then there are the costs of £trillions on grid reinforcement , uncosted £trillions on distribution networks, new CCGTs to run inefficienly to provide back up to the unreliables.
1. "But Smith said Transportation and Retail are productive! RHEEEEE!"
2. I'd argue that expansion of the Financial sector of Western economies is an underappreciated factor in the 2008 financial crisis.
3. It can very argued that a large part of Construction is effectively driven by the Financial sector (rental properties, "You can afford this 2nd home, rent it out when you're not using it", etc) maybe Financials are as productive as assumed?
4. Consultant, n: A person who uses your watch to tell you the time.
I can't fault it. Thank you David for giving light over heat.
Net zero is an ideological position, not one based in science, engineering or even the real world. There may even be people (amongst the mendacious and profiteers) who think it is a good idea but the consequences are simply catastrophic.
Everything in our society is based around energy. It is as fundamental as water - which, without reliable, abundant energy we cannot clean. We're already seeing high energy costs making it cheaper to pollute.
Folk forget that when the lights go out - properly, not just due to government diktat for a day or two - the manufacturing industry cannot simply 'restart' when the power comes back on. Supply chains break, skills are lost, hundreds of hours in maintenance made harder by damaged tooling.
During the pandemic we had toilet roll shortages. Shortly after that, salad shortages. The statist zealots need to realise what happens when the power doesn't come back on and those shortages cannot be recovered for months - if at all. It is not hysterical to point out that when there is no energy, there is no society. How will the police/fire/ambulances be called when there's no telephones? Prescriptions? Forget it. I looked at the lad's inhaler the other day - all plastic apart from the sealed cylinder. If we can't get that regularly, he dies. Miliband dismisses this but that just proves his stupidity.
We need cheap, abundant energy and a lot more than we have. Those demanding we have less should be made to live in a world without it. I don't think they'd like it much.
Two other things:
I'm not sure whether it is included in the Services sector but the State's share of GDP is increasing and the efficiency of the public sector still hasn't recovered to pre-pandemic levels. An economy cannot grow in any meaningful way if public services are taking an even larger slice of the pie and doing it less efficiently.
A high net migration will suppress GDP/person and reduce the incentive of commerce to invest in productivity enhancements. When it is cheaper to just employ more labour, why bother?
We're hamstrung by governments that think the public sector is part of the economy rather than merely a consumer of wealth.
Yes, pub-sec uses private services, but it's just someone else's money moving around. Tesco's taxes pay for a nurse, the nurse shops at Tesco. No new wealth is created.
Note - I do NOT dispute the value of what some elements of the public sector provide: value is different to wealth generation.
Which pandemic, covid or the Black Death?
I meant COVID, but now you mention it..... 🤣
In a Net Zero world, intermittent renewables require DEFRs or secure, reliable imports sufficient to "fill in the blanks". There are two basic classes of DEFRs, independent and dependent. Independent DEFRS include nuclear and hydro. Dependent DEFRs include batteries, pumped hydro and Green Hydrogen, all of which require additional intermittent renewable capacity to assure reliable, adequate charging/recharging. Independent DEFRs render intermittent renewables redundant capacity. Redundancy costs.
Excellent analysis
Excellent piece with great visualizations. Well done.
Spare a thought for Scotland which not only has to put up with the idiotic and pointless Labour Net Zero but also the idiotic SNP Net Zero, by 2045 with energy not even a devolved issue in Scotland, as extolled by the delusional SNP Deputy First Minister and Economy Secretary: https://www.scotsman.com/news/opinion/columnists/scotland-green-industrial-strategy-jobs-net-zero-climate-change-kate-forbes-4778253.
Looking at the productivity charts I think the ONS methodology is heavily flawed in our increasingly socialist economy. It's not only the electricity sector where higher spending implies lower real productivity. It surely applies to the NHS where there ever increasing deadweight from DEI and expanding layers of management don't result in more patients being treated.
Likewise, education productivity has been in decline with the erosion of standards and was hit even more by covid lockdowns. I'm now seeing some topics I covered in school not being addressed until a masters level degree. Educational disinformation means that much propaganda has to be unlearned before students can even begin to learn properly.
Public transport has had some covid and HS2/Elizabeth Line sized holes blown in it. Hence the kiss of death through formal nationalisation of the railways. Train drivers get more pay for no productivity improvement.
Productivity of police and defence has also fallen through the floor.
Higher costs are impingeing on the agricultural sector, with fertiliser and weedkiller bans threatening to reduce yields per acre, reversing the long term trend.
GVA measures are now almost wholly corrupted by socialism.
Very astute broad spectrum view. Throwing money at things rarely improves anything - in fact, as you are pointing out, it makes them worse.
David. Can I add two key points to your discussion of productivity. Understandably, economists and others focus on labour productivity, because that is what translates immediately to potential income and consumption per head. But labour productivity isn't really an independently measured variable in any economy that is dominated by non-traded services. How do you know what the productivity of a hairdresser or social worker is? There is no independent measure of the value of their output, so what one finishes up with is a circular analysis - haircuts are worth what people pay for them; hairdressers charge a price that reflects what they want to earn; so productivity is largely measured by wages. Even more so with social workers.
1. By sacrificing productive sectors, we are committing ourselves to a future in which the dominant form of productivity growth depends on increasing the wages paid to service workers and, thus, the prices charged for those services. That is a vicious circle because fewer people can afford the higher prices, whether for tourist facilities or lawyers. The end result is an economy based on serving a rich elite who monopolise the high paid activities but with a largely impoverished workforce. Sound familiar - that is not only the US & UK today but ancien regime France, Germany, Russia. This does not end well!
2. In productive sectors, labour productivity is a function of capital accumulation and productivity. More output per head requires heavy investment. The energy transition leads to a drastic reduction in capital productivity through the economy - not just in energy production but in its use. That is what kills productive businesses. But this shift also diverts our limited capital funds from investments needed to increase productivity in the rest of the economy. You can't increase spending on transport or health care if all of the money has gone into wind farms or heat pumps or electric vehicles. That, on its own, is the clearest reason why accelerated economic growth and Net Zero are mutually incompatible.
But ... none of this will convince two overlapping groups:
(a) Those who believe that Net Zero is essential to save the world. There has never been a remedy for religious belief apart from painful disillusionment! Such beliefs are fact-free because they exist in an invented world completely divorced from what is going in the real world. What is worse is that such beliefs are true luxury beliefs, funded out of guilt by those who are benefitting from the increasing unbalanced distribution of income.
(b) Those who believe (genuinely) that technology has changed or will change everything and that the costs of low carbon technologies have fallen by several orders of magnitude. The mythology of the computer chip cannot be punctured, even though a modern smartphone is incredibly powerful not because of technology but largely because it costs 50 times (in real terms) what simple phones cost 30-40 years ago.
David, thank you. Another strong article that underlines the critical economic importance of cheap and reliable energy. It also, sadly of course, shows that UK continues to drive its economy downwards, relative to all our economic peers and especially to the economic leaders USA and China – who (a) have the cheapest energy and (b) seem substantially less wedded to Net Zero by 2050.
Two points, if I may. First, and rather obviously, it is hard – perhaps even futile – to use evidence against people and governments who are obsessed by an ideology, in this case Net Zero and the more complex supporting structure of ‘villainous’ CO2. UK, it seems, would rather remain on the economic horse and cart of righteous Net Zero, pretending to ignore the reality of being overtaken by almost every economy with cheap(er) energy.
Second, a more technical or presentational point. The very useful chart of recent AR6 strike-prices uses Intermediate Market Reference Price (IMRP) as a benchmark comparator. This IMRP of £65 per MWh looks only slightly lower/better than the strike prices for large-scale solar (£70), on-shore wind (£71) or even re-bid offshore wind (£76). [Possibly a tangential issue but, so far as one can tell, IMRP seems to be a European construct; its composition is unclear but it might be interesting to know whether it reflects a true market-price, unsullied by any subsidies.]
More important, one wonders whether this apparently quite small price-gap relative to IMRP offers unwarranted comfort to the Net Zero righteous, who might say that this modest extra cost is well worth paying to ‘save the planet’. Is there merit in adding a much starker second benchmark, perhaps using the average electricity price for USA and China – as suggested by that interesting IEA chart?
Continuing to enjoy all your articles. RLW
The basis for IMRP is clear. They are hourly day ahead prices from futures exchanges, dominated by trading on APX.
https://bmrs.elexon.co.uk/market-index-prices
Pointers to the legalese
https://www.lowcarboncontracts.uk/news/how-intermittent-market-reference-price-imrp-will-be-calculated-from-1-january-2021/
In practice there are very large volumes of power trade based on these prices either directly in term contracts, or in bilateral trading between electricity traders, generators and retailers and large consumers. Since they benchmark most CFDs, generators avoid most of the risk of deviation away from their strike price if they sell their output on this basis. Most intermittent generation tends to be sold (or volumes for sale under term contracts are firmed up) once weather forecasts are reliable enough for them to forecast output reasonably accurately. To compete, generators on ROCs also use these prices.
Furthermore there will be volumes sold by dispatchable generators (perhaps via interconnectors) to provide price hedges to retailers for some of their anticipated demand. These sales will have been made perhaps many months in advance at prices largely determined by CCGT generators simultaneously buying gas in futures and forward markets and selling power at a price that locks in a profit. Some additional hedge sales are made by nuclear when they have a sufficiently attractive price in forward/futures markets, but these are not part of the subsequent trading close to delivery unless they suffer an unexpected outage. As the volume of intermittent supply becomes clear, there are broadly two outcomes.
When supply is low those hedge purchases proceed as originally negotiated. There will be additional volumes required for which retailers will have to pay for less efficient generators to make a profit, perhaps based on prompt gas that may also be much in demand for heating, or by trying to procure additional supply via interconnectors. Intermittent generators who over-committed sales volumes will need to join in the purchases to fulfill their contracts.
When it's windy and /or sunny and intermittent output will be large, dispatchable generators can increase their profits by selling the gas they bought and buying in power from intermittent generators at much lower prices - which will again be dominated by day ahead pricing.
There is still further intra day trading, culminating in trade within the Balancing Mechanism to ensure that demand and supply are equal, but prices can be very disadvantageous for any party needing to trade to square its position.
Day ahead pricing has thus become increasingly important, especially as a result of the price volatility during the energy crisis. That made hedge sales risky for generators because they could suffer huge losses if they had a plant outage, and even in the mean time they could be required to provide large amounts of mark to market and margin collateral that could strain their balance sheets. Retailers also faced huge demand for collateral to guarantee that they would really pay the high prices they agreed for hedges. The consequence is that hedge trading has been curtailed (and many retailers went bust), and is why we have moved from the OFGEM cap being set infrequently to quarterly. The realistic hedging timeline is now only a few months, not the 12-18 months previously assumed by OFGEM.
When you look at IMRP prices you do see some clear influence from the various terms applied to ROC generators and different vintages of CFDs in relation to treatment for curtailment and compensation when market prices go negative.
Thank you
Got a piece in gestation on international energy cost comparison.
Weird Stalin also promised to "tread more lightly" on our lives. How's that working out?
Mr Milibean's pre-election promise of making the UK a 'clean energy superpower' should have been the crystal clear signal that the intention of an incoming Labour administration would be the rapid deindustrialisation of the economy, and the creation of a command economy with high energy prices and centralised control of access to energy forming the basis of that economy.
Yet a certain Labour supporting member of MENSA high IQ society campaigned vigorously for their election to government and turned up at the polling office to vote them in. Now she expresses regret - though not because thousands of decent working class men and women are going to lose their jobs or be deprived of good jobs at Port Talbot, Scunthorpe, Grangemouth and Whitehaven. No, it's because Labour turned out to be even more nasty than the 'Nasty Party' and cut the pensioner's winter fuel allowance. Vorders, along with the other 19.99999% of the electorate who voted similarly at the last election, perversely gave us a Labour government with an historic and unassailable majority by default simply because the fake Cons deliberately folded. The rest of us have to live (and die) with the idiotic, ideological, touchy-feely blindness of those who voted for the demise of the UK.
Countdown to Mission Impossible eh, Vorders? Enjoy the ride.
Labour didn’t get a big share of the vote it was the stupid electorate that gave up on the Tories compounded by FPTP that’s given them there majority. So far they’ve not shown much intent of exploiting this majority but suspect that’s because the battles inside the cabinet have yet to play out.
Net Zero is so mind-numbingly stupid I can only conclude that it is a massive globalist hoax to deliberately destroy our hard-won civilisation: https://metatron.substack.com/p/debunking-the-climate-change-hoax.
The problem is that so many of the general public have been taken in by the constant blizzard of false “climate change” propaganda (lies), just as they were taken in on the safe and effective (not) Covid jabs.
What will it take to waken up the general public? Maybe steadily increasing energy costs and ongoing deindustrialisation (Port Talbot, Grangemouth, the pending demise of the UK car industry, …). I’ve just come to the end of a two-year fixed price deal and the best new deal I could find, 15 months fixed price, is more than twice per month what I was paying. How typical is that?
How about the onset of blackouts? Last December the UK was only saved from a blackout by a heroic contribution from coal-fired electricity generation: https://jaimejessop.substack.com/p/cold-weather-in-britain-lays-bare.
That valiant contribution is now a thing of the past as the UK’s last coal powered station, Radcliffe-on-Soar, is closing down for good at the end of this month.
How about the onset of falling global temperatures? Global temperatures are currently at a record high thanks to the warming spike caused by the Hunga Tonga undersea volcanic eruption which climate alarmists are too embarrassed to talk about. They take us all for fools by pretending the spike is due to man-made CO2: https://www.drroyspencer.com/wp-content/uploads/UAH_LT_1979_thru_August_2024_v6_20x9-scaled.jpg.
The graph shows that prior to Hunga Tonga, global temperatures had more or less flatlined since 1998, disregarding transient ENSO events. If the Atlantic Multidecadal Oscillation (AMO) obeys the periodicity it has followed for centuries, within a few years we can expect a repeat of the 1950-70s cold phase which many scientists thought at the time was the start of a new ice age. I remember chilblains, windows frozen on the inside, sledging and outdoor skating then getting my car stuck in snow. https://edmhdotme.wpcomstaging.com/uk-temperature-analysis-from-1659-to-2019/.
We ain’t getting blackouts anytime soon because Ratcliffe will be gone. NESO has enough tools in its armoury to manage capacity crunches the biggest one being its ability to spend without limits. The threat comes from two places 1. if they force anymore CCGTs off the system so next round of CM contracts need to be watched. 2. EU or member states switching off an inter connector irrespective of contracts - in the short term I can’t see that happening as they are sensible and keep dispatchable plants so if the price is right.
Great comments. ...and I agree that things won't turn around until enough pain is felt from rising prices, deindustrialization and the accompanying loss of jobs, and blackouts - and I also agree that the Hunga Tonga undersea eruption in 2022 caused a spike in global warming. I wrote about it last year: https://alchristie.substack.com/p/the-real-reason-it-got-hot-this-year?
Also, the recent large increase in solar activity is probably adding to the warming. In both cases, it's only temporary.
Thank you David for a particularly fascinating Sunday morning read.
Earlier this week, my wife watched the early afternoon debate in the House of Commons prior to the vote on the controversial withdrawal of the winter fuel payment from many pensioners. She heard not one voice raise the core issue, the high cost of energy, which gives an insight into current parliamentary minds. I suspect if one confronted them with the bald statement: "Energy IS the economy", there would be merely blank stares or a robotic response involving "superpower".
Having been privileged to do a recent self-build, I now have some insight into how inefficient construction is (and that is no reflection on any characters involved) and concluded that with suitable brain power applied, modular off-site construction could greatly boost productivity, so I don't think the current state should be a given. In fact without it, and the availability of appropriate manpower, construction targets will remain fantasy. (Few young people are attracted to work on building sites, for example, and I don't entirely blame them).
A question I can't hope to answer: will artificial intelligence bring a big productivity boost to service industries, with corresponding loss of jobs? I suspect I'm not alone in believing there are a lot of non-jobs in the economy.
One concept lost on socialists is that money moves. Businesses are relocating from the UK, Germany and California in droves, due to energy costs. Left behind are those with few resources, struggling with inflated energy bills.
Not sure what you mean by "modular off-site construction ". Sounds interesting. Could you elaborate?
Essentially it's pre-fabrication as pioneered in the "pre-fabs" of decades ago, some still standing. There's already a measure of it - whereas decades ago, carpenters would assemble an entire roof, pre-assembled roof trusses are now delivered to site. A current example is timber frame construction in which factory-made insulated panels are used. "Structural insulated panels" or SIPs is a further extension of this. Some manufacturers, predominantly German I believe, incorporate services such as water pipes and cables. I suppose the extreme is the "park home" or mobile home that's assembled and delivered complete on the back of a lorry. Off at a bit of a tangent, I feel there's a loose analogy with nuclear plant in that a great deal of such factory-based assembly is currently bespoke and so relatively expensive and inefficient. If variety could be reduced and a focus put on value engineering, it seems reasonable to suppose that properties could be built considerably less expensively. That is also the logic behind small modular (nuclear) reactors or SMRs, which politicians have found they can spell, even if they don't know what they are. Currently the best nuclear reactor is always the one we're about to build, so no wonder costs and schedules overrun. I hope that helps. What I can't say is whether there's money or incentive enough to pursue this vigorously. I don't see much of an incentive for a builder to build what we currently call an "affordable home", because many construction costs are fixed and it makes much more sense to me to spend a bit more kitting a place out with superior items and selling for a lot more. I think the current "incentive" is coercion - if you build an estate, you're forced to provide a quota of "affordable homes", or pay a levy.
Thanks. Do you have any companies in the UK that are building with 3D printers using something like concrete? We have a couple small companies trying it in the US. As for SMRs, yes one of the hoped for advantages is pre-assembling many of the components in a factory setting, making it possible for scaling.
I wasn't aware of any so had to delve - thanks for the nudge. From https://www.gira.com/uk/en/g-pulse-magazine/building/3d-house-germany#uks-printing-pioneers "Meanwhile in the UK, a £6m project is set to construct 46 eco homes using 3D Construction Printing (3DCP) technology in Accrington, northwestern England. (I was born in the general hospital there.) This unique project will prioritise affordable housing for low-income families and veterans." I believe the Chinese have 3D-printed a house or houses (or maybe by now a city!). Thanks for the information on the US.
Yes, it’s an interesting new building method. I’ll be keeping an eye on it to see if these giant 3D printers become successful. I’d like to go see one under construction to see how they incorporate the wiring and plumbing, etc.
It was in the news this week that Oracle is designing a data centre that will consume 1GW of power. They are going to run it with three SMRs.
There's no chance facilities like that will be located here with our energy costs and lacklustre approach to new nuclear.
And then there are the costs of £trillions on grid reinforcement , uncosted £trillions on distribution networks, new CCGTs to run inefficienly to provide back up to the unreliables.
The economics of the madhouse.
Great article as always.
They’ll never spend on distribution it will be forced DSR
1. "But Smith said Transportation and Retail are productive! RHEEEEE!"
2. I'd argue that expansion of the Financial sector of Western economies is an underappreciated factor in the 2008 financial crisis.
3. It can very argued that a large part of Construction is effectively driven by the Financial sector (rental properties, "You can afford this 2nd home, rent it out when you're not using it", etc) maybe Financials are as productive as assumed?
4. Consultant, n: A person who uses your watch to tell you the time.
Great article. I hope someone who can make a difference gives this read, but I fear that there’s no stopping this train until it comes off the tracks.