Government wants to make the Fuels Sector more resilient — but will this do it?

Having done nothing as the oil majors closed down the Marsden Point refinery, the Ardern government is now belatedly moving into the  market to ensure what it  calls  “supply  resilience”.

Energy and  Resources Minister Megan Woods says  she  wants “to strengthen NZ’s fuel sector” through a suite of initiatives to encourage more competition.

She doesn’t say why suddenly there should be a  need for more competition, but implicitly there is  criticism of the big petroleum companies for their high prices – as if  government taxation wasn’t taking  more out of motorists’ wallets than the actual cost of the petrol.

It’s  rather like  the Prime Minister saying bank profits are too high, while ignoring the government’s action in printing  money during the Covid pandemic to ensure so much cash sloshing around waiting to be banked.

Shipping coals to Newcastle? No, it is being shipped to NZ – increasingly – while the govt funds those who switch to renewables

We were rewarded – on visiting Kiwiblog today – by finding this chart from The Facts, which shows how coal imports into this country have almost quadrupled under Labour.

David Farrar muses:

Maybe banning new natural gas exploration was a bad idea?

One reader, in comments below the Kiwiblog post, wants the PM to explain how it is better for the environment and our balance of payments (in deficit) to import nearly 2m tonnes of coal.  

Another reader ventures that most of this import will be for Huntly (and other similar furnaces).

As I understand it, Huntly was built to run on gas and/or powdered coal. NZ coal doesn’t powder in that way – it can’t go into a furnace designed for gas. Hence the Indonesian coal.

The correct answer is to burn gas in it. It’s NZ gas, and it’s better for the environment than coal. Win-win. But that takes us directly back to the question of why we have less NZ gas than we used to, and why we now run Huntly on coal.

But hey – the government is doing its best to shake coal out of our energy-producing systems. 

BCG report throws light on how we might avoid the power-price shocks that Aussies are facing

Retail electricity prices in Australia are expected to rise by 50%  over the next two years, with  Federal Treasurer Jim Chalmers said to be weighing up market intervention to stop those costs spiralling further.

The  Australian Treasury has assumed in the federal budget  presented  in Canberra  last  night that retail power prices will increase by an average of 20% nationally in late 2022 and a further 30% in 2023/24.

These  startling  rises  stem  from  Australia’s  drive  to  decarbonise  its  electricity  supplies. After  enjoying  a long  run of  cheap  electricity, Australian consumers  are  now  facing  what  will be  a  severe attack  on  household  budgets.

By  comparison,  with  80%  of our  electricity  already  coming  from  renewable  sources, New Zealand may escape  such  rises.

Orban et urbi

Hungary’s PM Viktor Orban doesn’t get a great press – at least outside Hungary where it’s harder to arrange.

So broadminded diversity connoisseurs might profit from a recent speech at the Bálványos Free Summer University and Student Camp (a ‘large-scale intellectual workshop of the Carpathian Basin’ apparently).

It reads both well and revealingly; logically constructed and strategically coherent; its premises stated and conclusions drawn.  Perhaps he could give Zoom lessons to more gushy and less focused global peers.

After the mourning, the problems are back

As new PM Liz Truss leads Britain in mourning the Queen, her problems are not diminishing.

But one decision which her new government managed to implement just before the Queen’s death was the sacking of Treasury Secretary Tom Scholar.

Critics of the move dubbed him the foremost civil servant of his generation.  Naturally enough.  

But they are probably right.

What makes it even more curious is that in addition to a steely grip and overflowing ability, Sir Tom is also preternaturally likeable.  He must be the first Treasury Secretary to get on with everyone – and give every appearance of liking it.

After an all-nighter at the height of the financial crisis, he took the time to pen a graceful, lengthy, name-checked and analytically impeccable thank you note to all staff.  Before dashing off to his next briefing.  That class gets noticed.

But perhaps he didn’t get on with everyone.  The Times reminds us that Truss spent two years as a senior Treasury minister.  

The official line is the need for a break with Treasury orthodoxy.  And there’s more support for this than you might think (or perhaps not).  

For example, Eurointelligence’s Wolfgang Munchau:

“There is a modern version of the Treasury view, as exemplified by Scholar and other civil servants in his department, the view that got Rishi Sunak to raise national insurance and corporation tax. We see those tax rises as right up in the annals of bad economic policy decisions on par with the early Thatcher government’s excessive monetary and fiscal tightening as the country went into recession”

Oh. And then:

“We keep an open mind on the Truss experiment, the biggest fiscal policy expansion in modern UK history.”

But you might also think that a top-line official like Scholar, after you had rejected all his orthodox arguments, would be the indispensable man for implementing your bold and courageous (i.e., high risk) policy.

The underlying issue (which Munchau also probes) is getting to grips with the relationship between government and its advisers – poor before Brexit and now dysfunctional.

“The reason why Brexit requires civil service reform is that Brexit requires a re-write of the most important regulations the UK inherited from the EU … two years is long enough to provide the underpinnings of a workable Brexit: a re-organisation of the civil service, or at least a change in the top tiers, followed by regulatory reforms.”

Most astute.  And it will require a great deal more than sacking one of the few top civil servants who probably understands the argument.

Because much of the unhealthiness of the relationship is in the failure of civil servants to give sound advice on policy cause and effect in markets, and for ministers to demand and use it.

The UK energy crisis is a reliable example.  Governments of all stripes wanted everything: high prices to drive innovation and saving; low prices to keep energy hogs happy; wasteful and undemanding energy efficiency programmes; while skimping on energy security.

They were abetted by their advisers and rent-seeking lobbies.  Policies were generated in sequential isolation and bent to wishful thinking, without an overarching understanding that transitional energy markets would be unpredictable, and a long-term market-driven transition needed a predictable government posture on supply security and the carbon price.

If you accept this, the Truss administration’s response is not exactly covering itself with glory.

They plan to fix the current power price below market level to encourage overconsumption this winter. Then presumably try to recover the enormous subsidies with energy taxes in later years.

I suppose you could argue that this is the logical culmination of the expensive energy policy for Western countries enshrined in the Paris Accords.  

And that it sends an unambiguous signal to average Brits that power will cost at least twice as much as before, and you need to go back to heating one room and turning off the lights (that’s assuming you can’t knock down your Victorian terrace house and build an eco-apartment).

But the problem with the government’s taking full responsibility for tinkering with market adjustment is precisely its ambiguity.  Because how do you know policy stability will survive the next crisis?

Truss and her ebullient new finance minister Kwasi Kwarteng (and presumably also her next Treasury Secretary) will be hoping that avoidance of fiscal orthodoxy and deregulation of productive sectors will pay for the continued regulation of the politically sensitive.  

As Munchau says: keep an open mind.

Something more than huff and puff? Our gentailers report good progress with their renewable energy developments

New Zealand’s  gentailers  are making  big  strides  towards  their  collective  goal of  decarbonising  the  electricity  production  system.

A new wind farm to be built by Mercury at Kaiwera Downs, south of Gore, is the latest example of the electricity sector’s commitment to building new renewable generation, helping (as the company says} to move the dial towards a decarbonised country.  

Earlier  this  year Contact  Energy  reported “strong progress”  on delivery of  its Contact26 strategy, which is focussed on leading NZ’s decarbonisation by connecting customers with its renewable development pipeline:

• A $300m investment approved to develop a new 51.4MW geothermal power station at Te Huka, near Taupō, targeting onstream in Q4 2024;
• Good progress on the 168MW Tauhara geothermal power station development which will supply around 3.5% of NZ’s total electricity demand by the end of next year;
• Growing the development pipeline by securing land access rights to support the development of wind projects through the Roaring40s partnership and entering a joint-venture agreement with Lightsource bp  initially to develop up to 200MW of solar power;   
• Ongoing strategic review of thermal assets supporting the announcement of the closure of Te Rapa next year, on track to more than halve its FY21 scope 1 and 2 carbon emissions by 2026.

First they came for the gas companies

In the evolution of disastrous policy, there’s often a point where a smart public figure throws his or her lot in with the whole caboodle.

Think of eminent economist J K Galbraith solemnly telling us shortly before the Thatcher-Reagan revolution that big capital, big labour and big government were here to stay with us for ever.

The Financial Times’s economic commentator Martin Wolf has long been a serious fixture in the UK media, and one with an anchor in reality.

But the European energy crisis is creating so many challenges.  And once you start down the path of tinkering, it just gets harder to stop.

Writing in the Financial Times, Wolf starts with orthodoxy:

“There exists a standard, professionally approved package. It is, as IMF staff have recently repeated, to allow price signals to operate freely and target the vulnerable.” 

End of story? Not this time.

“A rise in prices that imposes such big costs on almost everyone, while giving huge windfalls to a few producers, is something else altogether.”

And targeting help is “very hard”.

Nonetheless it’s part of his answer: namely “to cap energy prices at below the current market rates”, paid for with government subsidies, while also “simultaneously targeting assistance at the most vulnerable”.

It’s hard to see what this adds to the orthodox solution except worse incentives, extra government responsibility, and different political targeting.  And one guesses, more demand for another raid on energy producers to pay for it.

It seems inevitable that there will be a big contraction of demand at current sky-high prices – expect public libraries to be busy in winter.  So, despite bold forecasts, no one has any idea what the market price will actually be.

The two key issues are to get some additional income to the groups who will have to make the most sacrifices (and by the way be happy when they spend it on more useful things than heating their bathroom) and also to remove blockages and disincentives to supply (for both the short-term emergency and for long-term security).

The risk of tinkering – even with the intelligence of Martin Wolf behind you – is that you start to believe that a bit more spin and distributional games with the voters will solve the deeper underlying problems.  

More likely it postpones them.  And as we have seen, invites more tinkering to fix the problems created by your initial tinker.

When someone as good as Martin Wolf gets his teeth into this approach, you might be a little worried.

Certainly it demonstrates the pressures on Britain’s freshly-minted new Conservative leader Liz Truss, who faces a big decision right now. 

She has said that she doesn’t believe in windfall taxes. So you might hope she is not a tinkerer.  

But the pressures are huge, the vested interests have been getting at her, and the smart money is starting to move in favour of – a Martin Wolf-style price freeze.

It was nice to hope that Truss might be willing to sweep away the multiple distortions and vested interests of the green energy policy to provide a market consistent with energy at reasonable and stable prices; security of supply; and a not-impossibly-expensive carbon reduction track.  

But perhaps not right now.

The economic importance of coal – why we shouldn’t rush to toss the baby out with the bath (or Bathurst) water

Defying the  critics  and  climate  change warriors, the country’s biggest coal miner has reported a near tripling of its underlying profit as higher prices lifted revenue.

At  the  same  time the  company,  Bathurst Resources, underlined  its  value to the broader  economy by generating a  substantial proportion of  its earning from  exports.

Coal production was down about 8% to  1.9m tonnes, of which just under half was export coking coal used in steel making. Production was affected by bad weather, which caused flooding and slips.

The  company  is  looking  at expanding production, including the output from one of  its Waikato  operations.

The profit of $30.5m for the year ended June compared with $66.7m the year before.  But stripping out one-off items, such as changes in value of investments and the previous year’s impairments, the underlying profit was $43.1m compared with $14.8m.

Power without the pain of unbearable prices – how our electricity companies have been performing

The big  power companies on  which New Zealanders  depend for   energy supplies in their homes, factories  and farms  have had  a  remarkable  season.  But  unlike  their counterparts in Australia and the  United  Kingdom they  have  navigated  it  without inflicting  the same  sort of pain on their consumers in soaring prices.

An  earlier  post from our  authoritative London writer this  week on  Point of  Order charted the  UK issues. The  lessons are  instructive.

Here  in  NZ, consumers may  have  complained, too,  but  by  comparison they enjoyed plentiful supplies without  the  problems when they become too dependent on wind  and  solar  power  as a  result of the drive to decarbonise.

Companies  such as Meridian  are already  fully renewable in  their capacity while Contact and  others are adding  to their  renewable  generation. Besides  its  Tauhara  project, Contact  plans  to  build  a  new  $300m  5.1MW geothermal  power  station  besides   its   Te  Huka  power  station,  near  Taupo.

Why does bad policy seem to get worse

A little learning is a dangerous thing they say. But it can be fun.

Take history for example.  Followers of Herodotus get to admire the elegance of different theories of historiography.  One of which, surely, is that error is not necessarily self-correcting.  

Or, put in another context, bad policy seems to breed worse policy, until finally disaster brings forth reformation.

If you’re looking for examples, consider what is still (for historical reasons one hopes) referred to as Britain’s energy market.

For a longish spell at the end of the last century, there was a burst of market-led reformism.  Prices were normalised, assets and investment decisions moved to the private sector in a market framework.  Productivity benefited.

A less-obvious benefit was that long-standing issues buried in the framework of regulation – coal mining subsidies and the costs of nuclear decommissioning for example – were surfaced transparently and to some degree even dealt with.

But all good (or even mediocre) things come to an end. Often without a formal announcement.

Still, you don’t need the most acute historical understanding to see how signing up to far-reaching and un-costed decarbonisation targets might open the door to government seeking to dictate more and more energy market outcomes, with less and less regard for the long-term cost.

The long-term costs of turning the UK’s energy producers, buyers and distributors into cost-plus contractors are now emerging.

But in their concern for short-term micro-management, Britain’s politicians and bureaucrats perhaps neglected the one thing which everyone agrees they are responsible for: long-term energy security.  

As is so often the case, it’s the more baroque consumer-facing policy disasters which get the most visibility. The European energy market has a rich crop of those just now, from dependence on Russia to self-induced nuclear shut down.

But the UK’s stands out for the beauty with which consumer policy achieved all the goals it was designed to avoid.

First, a market-loving Conservative government decided to encourage market competition with lots of new suppliers selling energy bought cheap without the bother of long-term contracts.  Because customers might conceivably worry about the security of supply from these dodgy modestly-capitalised outfits, the regulators built in moral hazard by requiring customers to be bailed out by everyone but themselves.

The result, oddly enough in a competitive market, was significant variation in prices. 

That was not to be tolerated so another Conservative government brought in a price cap, to stop suppliers charging more than the market rate.

Funny thing those market rates.  As global prices went up, the new suppliers went bust and the cost of subsidising their customers pushed up the price cap.  

Which had steadily marched from £1200 annually for an average household at the beginning of the year to around £2000 now.  And it is expected to be lifted by the regulator to around £3500 at the end of the week.

We all know what the textbook answer is to market disruption of this kind: free up prices to choke off demand and increase supply; identify and compensate the vulnerable with cash (and be happy when they spend it on something other than heating their home at 22 degrees); and remove the constraints on domestic energy production (avoiding those badly-designed windfall profit taxes).  All of which is most compatible with a moderate – and stable – carbon tax.

But surprisingly few of the serious folk are saying the obvious.

Students of history might observe that growth in the pool of nuttiness does not have a restraining effect.  

Indeed recent coverage in the Financial Times suggest that the nuts are finding encouragement to go further.

So we are not surprised to find that the failings of the contemporary price cap lead to calls for full price control, or better still state allocation of energy to the needy (the Soviet Union developed a working model for this).  Even more wacky, that Britain’s last reliable energy supplier (Norway since you ask) should be morally browbeaten into selling gas below the market price because … they are getting too rich.  Well the Norwegians have for some time been saying that they have a preference for long-term contracts.

As she takes up her new post, Britain’s likely new PM might bear in mind that in addition to being the father of history, Herodotus was also dubbed the father of lies. It could help avoid the attraction of making bad policy worse. It might even reverse the trend.