[The Full Fact] feature about the latest Civitas wind-farm report raises several issues. In reply, I shall begin with some factual corrections, then address the substantive issues and provide a reconciliation between the papers.

Corrections to factual points

The figure of £16/MWh was mentioned in a report by Parsons Brinckerhoff, but they quoted it from the article in Power UK.

The article by David Milborrow and others was published in the March 2003 Power UK. Prices have inevitably changed since then. Colin Gibson is careful not to make excessive claims for accuracy. His paper begins with the words:

Disclaimer:

‘This document has been prepared in good faith, and endeavours have been made to make it as objective as possible using the author’s expertise together with reference to other documents. However,the results are for a specific set of input data chosen by the author, and IESIS and the author accept no liability for any loss or damage to others as a result of relying on information in this paper.’

He continues:

The author recognises the lack of empirical data for some types of generation particularly with regard to the probabilities that should be assigned to the various levels for each input parameter. However, the methodology should be seen as an aid to provoking debate to draw out the best engineering judgement regarding these input parameters. At various places in the paper there are indications (in red) of areas where the author would welcome further debate and input. Levelised costs, whilst being a useful guide in considering long-term energy policy, are not a complete substitute for total system cost studies in planning a power system.

He concludes:

The validation analysis provided as an appendix to the Covering Paper comes to the conclusion that the results are likely to be indicative of the relative costs rather than provide accurate predictions of actual cost.

It is hoped that the information made available here will stimulate the commissioning of a corresponding study based on the more accurate total system cost approach.  Resources to carry out such a study are not available to IESIS.

Ruth Lea draws attention to these caveats in her main text and again in the footnotes.

Gibson’s cost estimates, the caveats on the accuracy of which are discussed in his paper, are shown in table 1 below.

If [Full Fact] can draw attention to these reservations it will further raise the standard of the debate.

Substantive Issues

Ruth Lea’s paper serves to highlight this particular area of debate. Mainstream studies even without these intermittency costs, such as those by Mott MacDonald and Ove Arup cited, show offshore wind as among the most expensive options, more costly than gas or nuclear, without subsidies to support it. Onshore projects are cheaper but have their own amenity costs in damage to the landscape.

The issue of intermittency is less well known. A “capacity credit” of 20 per cent, as set out in the Milborrow article, really does mean that it takes five wind farms to deliver the nominal power from one. Improvements in storage and demand-management have the potential for greater benefits than building more wind farms.

The central study for DECC by Mott MacDonald, page i, explicitly excludes the costs of providing a reserve.

It [levelised cost] does not take account of impacts on the wider electricity system (such as reserve and balancing requirements, nor does it consider special revenue support measures (ROCs or capital grants etc).

Levelised cost regards the problem from the generator’s perspective, with the assumption that they will be credited for each unit of energy produced. Reserve costs do not show up in such a study and are usually borne by a different provider, who needs to pass them on to the customer.

Intermittency has many aspects. The Milborrow paper, providing a £16/MWh price tag, discusses as a reasonable benchmark failing to meet peak demand nine years in a hundred. If people want a higher service standard there will be a higher price tag. Wind is subject to many forms of intermittency, all of which need to be addressed if supply is to be kept constant. For example, there are costs involved in getting fuel to a gas-oil power station that needs to be fired up quickly to make good a fall in wind output. As Parsons Brinckerhoff put it in the 2010 update to Powering the Nation:

The peak duty (5%) for OCGT may be increasingly required to manage transient conditions when there are fast declines in wind generation as weather patterns cross the country. In this case the plant would need to be oil-fired as gas supplies would be unlikely to be delivered quickly enough through the gas network.

(http://www.pbworld.com/pdfs/regional/uk_europe/pb_ptn_update2010.pdf, with a graph on page 3.)

Wind can drop suddenly and for long periods. It can also blow beyond safe generation levels. Demand does not always follow the same pattern.

Renewable UK (the British Wind Energy Association) drew attention through the Guardian to a report, “Impact of Intermittency” by Poyry about the feasibility of high wind penetration.

This is a study by a mainstream consultancy and its assumptions are instructive. Page 40 of the report shows 30 GW of nuclear capacity being incompletely utilized so that intermittent wind-generated electricity could be used instead. Rapid-response generators need to command high prices. In a review of intermittency by the same company, price spikes are envisaged (http://www.poyry.com/linked/group/study, page 13) up to £8,000/MWh.

Any study of wind-generated electricity needs to accept, as does Ruth Lea’s paper, that the costs are not all known. By drawing attention to these uncertainties and to the gap between a wind-farm’s nominal capacity and the 20 per cent capacity credit, she has served to advance public understanding.

Reconciling the Papers

Seen at one remove and without the itemization, via Parsons Brinckerhoff’s “Powering the Nation”, the Milborrow  estimate appeared very low if it was required to cover more than just operational intermittency. Transmission costs alone amount to around £31/MWh, on the basis of the Gibson paper, which is based on the cost of an existing line to central Scotland. Once again, it is worth stressing that he is hopeful that better data may be made available. We would all welcome a total cost study into intermittency by National Grid, who are probably best placed to conduct it.

The large difference in estimates to provide security of supply may be traced to a different assumption regarding capacity credit. Power UK in 2003 has 25GW of wind reducing conventional plant by 5GW. That is a capacity credit of 20 per cent. Following Eon’s evidence to the House of Lords Economic Affairs Select Committee (paragraph 10), the Gibson paper prefers 8 per cent. The smaller the capacity credit, the greater the costs of back-up generation.

Eon’s evidence continues:

This effect could be to some extent mitigated by more extensive electricity interconnections with continental Europe (which would enable “back-up” power to be imported), the longer term development of new electricity storage technologies at a significant scale (which would be able to store power from the grid and produce it when required), or more demand side management capability which would enable demand to be varied in relation to the level of wind generation.

The first of these options for mitigation, importing nuclear-generated electricity from France at times of peak demand, is the easiest to achieve. Existing storage facilities work better for managing predictable demand than unpredictable supply.

Summary

Ruth Lea follows Colin Gibson is seeking to draw attention to the costs of intermittency latent in wind power, but is very well aware how hard they are to quantify accurately.

Offshore wind is generally accepted as more expensive than other large-scale means of meeting demand for electricity. There are further potential uncertainties that detract from stability of supply and cost. These are more important from a customer’s perspective than from that of a generator.

Understanding of additional costs has developed since 2003. The Milborrow article in Power UK underestimated transmission costs. Scaling back optimistic assumptions about capacity credit increases the costs of intermittency.

A further unflattering comparison between the two economies was also made last week by the economist Paul Krugman in the New York Times who drew attention to research by the National Institute of Economic and Social Research which showed that Britain’s current slump was worse than that experienced in the Great Depression.

The research by the NIESR came on the back of the latest study by the McKinsey Global Institute into debt and deleveraging in the world’s major developed economies. The study, and the others which preceded it, indicate that Britain’s gross debt (public and private) grew dramatically between 2000 and 2008 and continued to grow from 2008 to the second quarter of 2011 (when the latest data was available).

What is the link between debt and growth? The McKinsey report discusses how important it is for economies to deleverage before they grow and Britain’s Coalition Government has built its economic policy around the premise that significant spending cuts (and so reductions in public debt) are a prerequisite for economic expansion. Both of these views are not necessarily incorrect. Nevertheless, a brief look, albeit at a small sample of countries, suggests that the relationship between debt and growth is far from simple.

Figure one plots countries along two variables; total debt (public, private, corporate) and the change in GDP between 2008 and 2011. There is no discernible relationship between the two variables. It is of note that the five countries whose GDP has not yet returned to 2008 levels are all European countries, four of which are in the Eurozone. Figure one suggests that a large amount of debt does not necessarily restrict the ability of an economy to grow. South Korea’s total debt is equal to 314 per cent of GDP equivalent to that of Italy, however South Korea’s GDP has grown by 8.5 per cent since 2008 while Italy’s shrank by 10.9 per cent.

Figure two plots the same set of countries, excluding Switzerland for which data was not available, along two variables: the increase in debt between 2000 and 2008 and the change in GDP between 2008 and 2011. There is a relationship between these variables with a negative correlation of -0.47. The negative correlation could indicate a relationship between growth in debt and GDP, furthermore because the increase in debt occurred before the change in GDP the result cannot suggest that falling GDP caused the growth in debt. This result does seem to chime with the view that countries which take on debt quickly are more likely to take on unsustainable levels of debt which subsequently act as a drag upon GDP. However, if we take the UK out of this calculation the negative correlation falls to -0.2, suggesting that the UK’s experience may be dominating this result. It is also important not to overstate the significance of this result when one bears in mind the fact that Germany took on very little debt between 2000 and 2008 yet its GDP in 2011 had not yet recovered to its 2008 level. Clearly there are other factors at work in these results suggesting that examining debt levels in themselves may not be particularly useful in predicting future economic growth.

Finally, figure three examines the relationship between debt levels and growth between 2008 and 2011. Unlike the previous set of results one cannot be sure that in this case the two are not affecting one another: a fall in debt could spur growth but can growth also result in a fall in debt when the two are occurring simultaneously. As with figure one there is little discernible relationship between the change in debt and the change in GDP between 2008 and 2011. The US and South Korea deleveraged and grew, yet leverage increased in Japan and Canada and these two countries saw GDP levels rise above those of 2008. Once again the European and Eurozone countries recorded a fall in GDP and a growth in debt.

Debt is a concern for governments and individuals everywhere, however one should be cautious when attempting to come to general conclusions about how debt affects growth. Clearly the simplistic analysis above ignores, and fails to control for, a number of important factors and the sample size is too small to make generalisations. Nevertheless the results may tentatively illustrate that a growth in debt should be viewed with more concern than the total level of debt and that the key issue is how sustainable debt is. This conclusion is perhaps obvious but politicians across the world should bear it in mind as they embark on significant austerity measures.

Krugman rightly points out that one of the most important ways in which a national economy is not like a corporation is because corporations sell the bulk of what they produce to other people while the vast majority of what America and all big countries produce they themselves consume. Turn this on its head and one can appreciate the importance of this distinction:

If corporations sold the vast majority of what they produced to their own employees they would need their employees to be able to buy their product(s). The only way that the company could guarantee the biggest market for its products would be to ensure that all employees had enough income to afford them. The company would have an incentive to take steps to redistribute wealth or, perhaps more effectively, pay its employees a similar amount. Therefore it would not be beneficial for a company to pay its CEO vast multiples of what the other employees earn if as a result these employees could not afford to buy its product(s).

This counterexample explains why (economically, because clearly redistribution is justified on other grounds as well) states engage in redistribution: prosperous economies are those where people can afford to sustain merchants by buying their wares (if anyone doubts this then take a look at the interest swirling around the Christmas retailing figures).

Countries are not companies, but they do share some of the same characteristics. One of the simplest ways in which the two entities are similar is the way in which both have outgoings and income. For the state income comes in the form of tax and outgoings take the form of services. In essence tax is a payment for a service, the state is sometimes in a better position to provide a service (perhaps because of economies of scale or because they can prevent free-riding) than an individual, group or business. In return all individuals are forced (preventing free-riding) to contribute. Although some will balk at this description, perhaps because they pay taxes and have private health care, it is fair (if simplistic).

In this sense a state, like a business, needs to make sure that its outgoings do not exceed its income, otherwise it will need to take on debt and this could threaten the solvency of the state. Krugman perhaps treats this issue too lightly when he discusses the problems of Greece, Ireland and Spain. More importantly though he does not go further and neglects to explain that one of the main reasons that the state is not a corporation is that in many respects it is not exposed to competition and so should be incredibly wary of spending money. It should be wary of spending money because unless it does it in a competitive market environment it is difficult to assess whether it has spent money wisely.

The ramifications of this are important. The Government should ensure that all citizens have access to good quality health care and education but does it need to directly provide these services? No – it might be better that private providers serve customers, while the state pays people so that they can choose these services themselves. The exertion of choice and the market can help improve outcomes (although one does need to ensure that information asymmetries and other market failures are addressed).

It can be damaging to run the state like a corporation, but it can be equally damaging for the state to take on activities best left to corporations or the private sector.

The focus on wind-power, driven by the renewables targets, is preventing Britain from effectively reducing CO2 emissions, while crippling energy users with additional costs, according to a new Civitas report. The report finds that wind-power is unreliable and requires back-up power stations to be available in order to maintain a consistent electricity supply to households and businesses. This means that energy users pay twice: once for the window-dressing of renewables, and again for the fossil fuels that the energy sector continues to rely on. Contrary to the implied message of the Government’s approach, the analysis shows that wind-power is not a low-cost way of reducing emissions.

Electricity Costs: the folly of wind-power, by economist Ruth Lea, uses Government-commissioned estimates of the costs of electricity generation in the UK to calculate the most cost-effective technologies. When all costs are included, gas-fired power is the most cost-efficient method of generating electricity in the short-term, while nuclear power stations become the most cost-efficient in the medium-term.

• Full press release
• Full report

Read the rest of this article on The Commentator here

The first question: how big is the overlap?

In the month before sentencing, one third of offenders had been in regular employment. DWP term this “P45 employment” to recognize that it does not include the self-employed, informal cash-in-hand work, or wages too low to trouble the tax system. The matching process covers “recordable offences”, meaning from more serious motoring offences upwards and leaves out many crimes normally punished only by a fine, such as TV licence evasion. This has some effect on the make-up of the people matched between the two databases. Over half those sentenced had been claiming out-of-work benefits in that month, with almost a quarter on Job-Seekers Allowance. For theft or handling stolen goods, two thirds had been on out-of-work benefits and under a quarter (22 per cent) in P45 employment.

The corresponding statistic is what proportion of people on out-of-work benefits, especially Job Seeker’s Allowance (JSA), committed an offence. Of 1.2 million JSA claims open at the start of December 2010, 400,000 were listed in the Police National Computer as having offended in the ten years previously. The proportion is one third. For all out of work benefits, the fraction is just over a quarter of claims, but with the distortion that many people are eligible for more than one benefit. It is a substantial proportion, but there are still rather more law abiding citizens on out-of-work benefits than offenders.

The Second Question: What does it mean?

A criminal record is known to make getting a job harder. Nearly half (47 per cent) of prisoners were still on benefits two years after release. Three quarters claimed at some point in that time and the average was to claim for almost half the period. Add to that 11 per cent back in prison after two years and 46 per cent back in prison within two years and the numbers are much higher than those progressing to P45 employment. Only 15 per cent were employed (on a P45 basis) after two years and 29 per cent had been employed over the period. After prison, some barriers to employment persist, whatever the motivation of the ex-prisoner.

The high level of overlap does not imply total correspondence. Two thirds of JSA claims were by people without recordable offences. One third of offenders in 2010 had been in P45 employment and more can be assumed to have had other forms of work. One third of individuals sentenced for theft or handling had not been receiving benefits in the previous month. The message of the data linkage is that society does not have to presume that a whole category of people break the rules. There are people that commit offences that have jobs and who do not claim benefits. There are people receiving benefits that have never committed any offence. The linking gets beyond that. It is possible to tell which individuals both claim benefits and commit offences. It is even possible to tell whether they have little success finding honest employment. In those cases, there is a much stronger argument for suggesting that people could be obliged to work for their benefits, especially when considering that this may apply to around a quarter of out-of-work benefit claims.