energy security | Alloporus

In the mid-1990’s energy prices in Australia were some of the lowest in the OECD.

I distinctly remember the politicians of the day boasting about how good this was for industry and business and I have to say I bought the argument. Utilities that people have to have should be affordable. The marketing men can persuade me that a Mercedes is so much better than a Hyundai and well worth the price tag because it is a discretionary spend on my part, but water, power and waste removal I must have or we are back in the dark ages.

Twenty years later, the current government has announced a new energy policy that they claim will save the average family $100 a year on their energy bill. This new policy is supposedly a response to the problem that domestic energy prices have risen by 67% in the last decade, and with supply shortages forecast regularly, the medium term economics suggest this annual rate of increase will persist. Energy costs in Australia are now at the top end of the OECD ranks.

Oops.

Australia is also going to struggle to meet emission reduction targets it promised in Paris in part because this cost pressure from energy has become an excuse not to focus on renewables and to continue with power generation with a heavy emission profile.

Oops again.

Lots of rant and rave opportunities here, classic Muppetville. The one I want to unpack is that cost saving, $100 a year for the average family.

Median annual income in Australia is around $81,000 and has been increasing steadily at around 3.5% more than doubling since 1990’s when energy was cheap.

An income of roughly $220 per day is right up there with the highest in the world. Savings on the energy bill proposed by the government is 27c per day, not even the price of a coffee and cookie in a month.

The average household energy bill, on the other hand, is around $4.20 per day and currently increasing at close to 7% or roughly 29c per day.

Phew, that’s a relief. The government policy is going to save the average household most of the money they would have to spend to on the price rises. Superb.

Should average annual income continue to rise at 3.5% the 29c cost saving on energy is further compensated by an additional $7.70 per day in extra income.

This explains why economic growth is so important to governments. Despite inevitable difficulty around the margins, on average it puts money in voters pockets.

It also makes that first ‘oops’ identified earlier a huge blunder.

Energy is literally the engine of economies so to let its costs spiral and allow the security of supply to lapse is stupid however you spin it.

A post revisited — Investment in energy research

This post on the remarkable level of investment in energy R&D in the US was written in September 2011. It is not my intent in these retrospectives to play the ‘I told you so’ card but given the egg on the faces of the current and recent Australian governments over energy security, it is pretty hard not to.

Did politicians really think that we have coal, oil and gas and so the job was done?

Emission notwithstanding, did they just sit back and let the end of life for major coal-fired power stations be someone else’ problem?

Well in Australia they did. In America too I suspect. Trump is not pulling the Paris pin because he is a climate sceptic, he’s keeping coal going so that, at least on his watch, the lights stay on across America. Nothing will kill your voter base faster than blackouts attributed to poor planning.

So here is what Alloporus thought in 2011 about energy R&D…

Investment in energy research

In the US Federal research funding into energy is $3 billion. This figure includes investment into oil, coal and gas as well as solar and other alternative energies.

Then there is a further $5 billion invested by the private sector for a total of $8 billion in an industry worth $1 trillion a year; making investment in R&D only 0.8% of revenues.

Apparently $8 billion pays for about 9 days of military involvement in Iraq – pretty scary and perhaps something they might look at when considering reducing budget deficit, but I digress.

The point here is that 0.8% is woeful. Any company that spent less than 1% of revenue on R&D would not last long. Given that energy is so critical to economic performance and given that we have reached peak oil and will eventually run out of coal and gas too, 0.8% seems irresponsible.

And then there is a huge global movement that believes we must tackle climate change by reducing emissions from greenhouse gases.

What should the investment be? In successful economies upwards of 3% of GDP is allocated to R&D, which is roughly $430 billion. This amount must cover many sectors but energy security should be worth at least 5% of the available budget or an order of magnitude more than the current allocation.

We are kidding ourselves if we think that energy security can be achieved when we invest peanuts.

There is money to be made from energy. There always has been. I bet that the first hunter-gatherers who figured out through trial and error how to transport fire with them as they wandered were revered and feared. The thinking and testing that went into creating and catching a spark to start fires was, well, gold to the people who mastered it.

The smart individuals who put a wheel into running water or threw a lump of coal onto the campfire might also have made a relative bob or two.

So it’s not about the returns. It is that it is future money. The power stations cornered the market for a period long enough to scorch the space for new investment. If end of life is 30 or 50 years away there is no market for anything else until then. There is no need to look forward as energy is secure.

This lack of foresight might just be our undoing.