Tuesday, November 22, 2016

The stupidity of a carbon tax



Treasury is the one institution of Government that we have come to trust in recent months.  Why on earth does it want to sacrifice that confidence in pursuit of a hare-brained scheme, one in which its own words will “reduce the economy’s average annual growth rate” (Business Day, 10 November)? If it has its way, “household consumption falls by 0.23 percentage points, employment falls by 0.07 percentage points, and real wages fall by 0.2 percentage points.”
This is the best of a series of outcomes from a model of carbon taxes that Treasury has built.  I seem to recall some recent models, which proved beyond all doubt that Hillary Clinton would be the next President of the USA.  Do we have confidence that Treasury’s model has any greater predictive ability?
For a start, let us look at what Treasury hopes to do. “The modelling results suggest the carbon tax will have a significant effect on reducing SA’s greenhouse gas emissions.” That would be surprising. Remember we have had a carbon tax on large cars for several years – statistics show the 4x4 market growing strongly. Wherever you look in the world, it is the same.  India introduced a Rupee50/t tax on coal in 2010 and increased it to Rupee100/t in 2014.  Since 2010, its emissions have grown by over 600 million tonnes CO2. In 2012, Australia introduced a $A23/t carbon tax; by 2014, emissions had fallen by only 2.5% and the damage to the economy was enough to bring down the government (and remove the tax). So it is unlikely that the tax will have any significant effect.
That begs the question as to whether our greenhouse gas emissions constitute any problem at all.  Our total emissions are a little over 400 million tonnes a year – India’s emissions have grown by 600 million tonnes in five years, while China’s have grown by over 1 100 million tonnes at the same time. If Treasury’s tax resulted in our emissions falling by 2.5% (about 10 million tonnes), it would be less than the measurement error in India’s or China’s emissions.
But Treasury argues that “ratification of the 2015 Paris Agreement emphasises the reality that we will have to prepare to operate in a carbon-constrained economy - - .” Really?? The Paris “Agreement” is no agreement as normally understood. It asks us to state our intentions. If those intentions are not met, we can shrug our shoulders and come up with some new intentions.  And if anyone says they are cross with us for not living up to our intentions, we can walk away with nary a grey hair. Treasury’s ‘reality’ is rather like the 3D-movie reality – lift your head a little, and the illusion disappears. We have just cast off the iron shackles of the International Court of Justice; the silken threads of the Paris Agreement can brushed aside.
As always with taxes, you have to check the detail.  The carbon tax is no different.  All those little job losses, all that slowing of our growth, “will result [from] a modest tax rate - - - during the first phase of the carbon tax, up to the end of 2020.” Thereafter the tax rate increases, growth slows even further, there are more job losses, real wages fall further. Should Treasury not be worrying about us South African citizens, rather than trying to show the rest of the world that we want to play the carbon charade? Where are our priorities?
Something Treasury avoids discussing is the complexity of the system for collecting the proposed tax.  Every emitter (and there are thousands) will have to set up a measurement system to quantify its tax liability, and have an additional audit system to verify the measurements. Government will have a policing function, to make certain that all the emitters are in the tax net, and then there will be an army of assessors calculating the tax due against rules that change annually.  The rules include rebates for specific sectors and all manner of other fiddles that arise when you are trying to tax something so pervasive in nature. 
It also avoids discussing the other carbon taxes we are already paying.  In addition to the tax on large vehicles, there is a renewable energy levy and a tax on electricity generated from coal – these two add about 6cents/kWh to the price of coal-generated electricity. Then there are the liquid fuel taxes themselves, one of the largest contributors to the fiscus, and a tax which was originally set up to pay for road maintenance.  The carbon tax proposals come with a suggestion that there might be a VAT reduction, but remembering what happened to the fuel tax helps to understand the games Treasury can play.
Treasury now has a job to do, to restore our confidence in their operations.  We really don’t need a tax that will reduce the economy further, that will shrink household consumption, that will cost jobs, and that will reduce real wages – and achieve next to nothing.

Sunday, October 30, 2016

A world-class voice

For much of my life, I battled to understand grand opera.  Finally I took the trouble to follow the libretto of Boheme, and it all became much clearer.  The marriage of drama and music could enrich both. It took another twenty years and the skills of the New York Met Opera to convince me that Wagner was not just extended noise. The arcane level of the drama did not help - but I got there in the end. So now opera is one of the loves of my life.

Unfortunately one can also have too much.  The diet is rich, and if not served just right it can pall. For instance, I have seen numerous productions of Carmen, and one of the most memorable was a balletic version with a statuesque blonds as Carmen and a little man called Juan as Don Jose. In the closing act, he fought too vigorously with her, she gave him a really good klap that sent him reeling. He finally produced his knife and seemed to use it with real intent!

So when Cape Town Opera announced that they would repeat a production of Carmen first done several years ago, I was somewhat hesitant - but, what the hell, Bizet's music is so gorgeous that even if the rest was boring, I could just revel in the sound.

It started with an "interesting" execution which, we slowly worked out, was Don Jose getting his comeuppance. The first act wasn't bad, although the action seemed to pause from time to time, and Don Jose should have been executed - he looked more like a corporal from the First World War trenches. 

But then things got exciting.  DJ's girlfriend, Michaela, turned up, wowed the guard, and managed to put real meaning into "scampering off." The girl was good looking and could act.  But she also had a voice, and she had hardly opened her mouth when I turned to my partner and asked "Who on earth is that?" A soprano with a glorious range, high musicality, perfect phrasing and a vibrant sound that could fill the Artscape auditorium effortlessly.

Her great aria in the third act,"Je dis que rien ne m'épouvante" ended on a pianissimo that faded to nothing - except the audience leapt to its feet and everywhere there were cries of "Brava!" It was a truly electrifying moment.

This was Noluvayiso Mpofu, who is still learning stagecraft at the Opera School, so she has a career of years ahead of her. She came second in the recent international Belvedere Competition, involving some 600 young singers from all over the world. What a privilege it was to hear such talent, and to be certain that in a few years you will be able to treasure the moment when you first heard that voice. 

Monday, October 24, 2016

Philosopher's stone as pictured in Atalanta Fugiens Emblem 21 Image: Wikipedia

Philosopher’s stone as pictured in Atalanta Fugiens Emblem 21 Image: Wikipedia

For thousands of years, some of the most intelligent men alive sought such things as the Philosopher’s Stone, which could turn dross into precious metal; the elixir of immortality; and the alkahest or universal solvent. The searches were in vain. The world needed more than a magic wand.

There is nothing inherently wrong in belief. Belief is only a hypothesis in search of a demonstration. The history of science is replete with the beliefs of great, wise men who struggled to understand Nature. Aristotle’s four elements, fire, earth, water and air, ruled chemistry and medicine for thousands of years. Eventually, careful measurements showed that fire had no mass, that earth was composed of elements, that life did not spring from water, and that air was a mixture, not a substance in its own right.

Alchemy was universal. Christian, Muslim, Hindu and Jew all pursued it. A mere 350 years ago, there were still hopes that the philosopher’s stone, the origin of all matter, might be found. Today, there remain several societies of alchemists. Belief in belief dies hard.

In November 2015, a cabal of latter-day necromancists, sorcerers, soothsayers, wizards, witches, mavins and shamans gathered in Paris. They claimed to have discovered a wondrous formula, which would allow adjustment of the average temperature of the earth. It mattered not that every test of the formula to date had proved a failure. All that was required was a twitch here, a stirring there, and the bubbling cauldron that Earth had become would revert to the quiet simmering that characterised the perfection of life.

What was most important was that every nation on earth should commit to the belief. This they would do by making Intended Nationally Determined Contributions. If the total of these Contributions was large enough, then global warming would become global cooling, and we would all live happily ever after.

This latter-day cabal has even set up a system of selling indulgencies. If you sinned by failing to meet your Intended Contribution, you could wish away your excess with Carbon Credits. The present generation of omniscients seems to have missed the fact that indulgence-selling led directly to the Reformation. For the rest of us, reformation is long overdue.

Thursday, July 28, 2016

Looking a gift horse in the mouth?


I see it is Eskom-bashing time again.  Awful Eskom! How could they turn down the gift of free energy?

Well, they could and they should. Try to put yourself in their shoes.  You are battling to keep the lights on and the wheels of industry turning. Then someone tells you there is a gift waiting for you in the Northern Cape. They say “Take it and pay!”

What do you say? “Thank you so much”? or “Could you come back later, please?”  or “But I didn’t order it.”  No matter.  “The Department has decided.” So you run to your Minister and she says ”Not me! Try the Minister of Energy.”

Slowly you discover this really is a mugs’ game. You thought you knew your job, and suddenly you have a second boss, who tells you to buy stuff you don’t want, at a price you had nothing to do with, while your new boss’ sidekick, the Regulator, tells you to keep your costs under control. No, I wouldn’t want to try to run Eskom.

And Eskom has reason to complain. The Department of Energy’s renewable programme is a great success, and it will in due course provide us with about 10% of our power. But from the Eskom viewpoint, that is a 10% drop in production, and they have assets that were supposed to be financed by producing power. To make things worse, they have to pick up the gift on the donor’s doorstep, not their own, and pay for its transport to Eskom’s own customers.

Worse still, the donor cannot tell you when his gift will be available, nor how big it will be when it arrives.  So you have to run your generators up and down to make sure there is enough power to keep your customers happy. But your generators are unhappy not being run at the nice even pace they were used to, and they wear out sooner than they should. More costs.

Anton Eberhard has recently suggested breaking up Eskom into a privatised generating company and a public transmission company, Gridco, which will buy power from all the private power producers, transmit it through the grid and sell it to distributors at a markup to cover costs.  Great idea.  It works well in Europe, where there are interconnections so that if your windpower dies on you, you can beg from your neighbour.

We don’t have that luxury. Neither does Australia, which is battling with an Eberhard-type model right now*. During one recent cloudy, still day, their Gridco had to pay $Aus14 000/MWh for enough power to stabilize the grid, when their average cost was $Aus100/MWh.

Be careful, very careful, what you wish for.



  

Tuesday, June 14, 2016

The "coal cliff"

We are facing an unheralded challenge.  We rely on coal for electricity generation in South Africa. Over 90% of our electrical energy comes from burning coal, and generation consumes nearly half of all internal coal sales. When Medupi and Kusile are fully operational, the coal demand will be about 150Mt per year.  The Department of Energy is encouraging some independent power producers to establish further coal-fired stations, which could boost the demand for coal even further. Great, but we need to know where all this coal is going to come from, and we don't.

Historically, most of it came from large coal mines. Some of these were “tied” collieries in which Eskom had invested capital, and which supplied coal on a cost-plus basis. They were linked to the power stations by enormous conveyor belts, so the costs of transport were low.

Increasingly in recent years, coal has been sourced from small independent collieries. In 2015, 18% of Eskom’s supply was from these small independents. Two challenges emerged.  First, the coal was moved by road, so the cost of transport was considerably higher. Secondly, it proved very difficult to control the quality of the supply.  A typical large power station, generating 3 600MW of electrical energy, will need a 30t truck load of good quality coal each minute of every day, and more often if the coal is of low quality. It is difficult to tell a good truckload from a bad one. In some cases, Eskom had to establish testing facilities at the individual mines to stop delivery of sub-standard material. This challenge does not arise when coal is delivered by belt, because sampling and quality control are far simpler.

In 2015, coal from the larger collieries cost Eskom of the order of R150 per tonne, and that from the smaller producers of the order of R400 per tonne.  The larger collieries, however, not only faced a lower price for their product, but many of them were exhausting the readily mined coal and needed recapitalisation. Eskom, short of cash, is understandably not interested in re-investing and wishes only to purchase on contract. In an interesting twist, Glencore used to own the Optimum mine which was tied to Eskom. Eskom claimed it was producing poor quality coal, and asked to R2bn in contract penalties. Glencore said it could not survive at R150/t and sold the mine to a Gupta-controlled Tegeta. Eskom has just announced it is paying Tegeta R473/t in advance. And if the delivered coal srtill isn't up to standard?

In the present climate, no-one else is particularly keen to invest in the coal business. It does not help that export prices are at a low ebb. 2015 was the first year for a long time that export revenues were lower than local sales, even in the face of a weak rand. To add to coal’s woes, there are environmental ambitions to reduce greenhouse gas emissions, and coal is a primary emitter. We* call them “ambitions”, because coal is over 90% of the source of our electrical energy. Replacing that 90% with some other source would demand far more capital than we can raise over the next 20 years. We are stuck with an ongoing need for coal for at least a generation.

We have a need for coal, but there seems to be a blindness about where, in only a few years time, that coal is going to come from. The supply from the existing mines is drying up.  There has been plenty of exploration, and new reserves have been identified, but we need investment now if we are to continue to generate power post 2020.

One plan that appears well advanced is to fuel the Mpumalanga power stations with coal from the Waterberg. There are several small miners waiting in the wings, while Exxaro’s Grootegeluk mine could readily create more capacity than that needed for Medupi.  Transnet has done extensive design work on a line from Lephalale to Emalahleni, but it will take at least five years to construct. Coal could be supplied from the Waterberg early in the 2020’s, so work needs to start now. However, the costs of transport will be significant.

Investment in the industry will only follow if coal prices increase.  They have been increasing, but too slowly to attract the needed investment. Even these relatively modest price increases have worried some in Government.  There has recently been a proposal by the National Energy Regulator, NERSA, to change its methodology for determining multi-year electricity pricing. If NERSA has its way, Eskom will have to account for the coal purchases by each power station. It will have to show that it is using the coal efficiently and that it is properly controlling the quality of coal supplied. NERSA intends to set different pricing structures for the cost-plus mines, for coal purchased in terms of fixed price contracts and for short-term contracts.

To add to the challenge, the Energy Minister announced, in her recent budget speech, her intent to start a super-regulator to check NERSA’s decisions. So Eskom’s management’s decisions will be second-guessed by NERSA, whose decisions will be second-guessed by a new super-regulator. As a recipe for disaster, it has few equals.

The last time there was this sort of interference with market mechanisms in the energy supply industry, NERSA’s predecessor, the National Electricity Regulator, fought the good fight against inflation by controlling Eskom’s price increases below the CPI. For a few years, the cheapest power in the world got even cheaper. Then the bubble burst and we suffered blackouts, as well as huge price increases.

We have still not recovered from the damage to our economy. The cost when we first lost power was about R75 per kWh . As we adjusted to the lack of supply, the cost dropped. People installed their own generators and took other steps to mitigate the disaster. Today the cost of lost power is of the order of R7 per kWh.  That is twice what it costs Eskom to run their diesel-fired gas turbines, but it keeps the lifts working and the supermarket fridges cold.

What it does not do is to allow the unrestricted growth of industry. Since 2008, we estimate that about 60 major projects that could have created over 100 000 jobs have been cancelled because the power needed to run them was not available. There is a thesis that the growth in the economy and the supply of energy are no longer linked.  Any study of global economies soon shows that this thesis is flawed, to put it politely. Our own growth and our energy supply were in lockstep for 50 years. China’s economy and its power generation have similarly been linked for 25 years.

We need power to restore growth. Our past investment in coal-fired generation means that we are locked into coal for the foreseeable future. It is critically important that we recognize that the coal industry needs investment, and that investment will not happen while Government talks about introducing price controls and worse, actually does so. Eskom’s procurement policies, requiring all coal suppliers to have more than 50% BEE ownership, is making the challenge all the more challenging.

Where, oh where, is our coal going to come from?

* We? My friend Xavier Prevost, helped to write this, most of which appeared in Business Day yesterday

Saturday, June 11, 2016

The BP Statistical Review if World Energy



The annual Review has just been published (http://www.bp.com/en/global/corporate/energy-economics/statistical-review-of-world-energy.html).  The data are readily downloaded as an Excel spreadsheet.  A few minutes work soon gives an excellent idea of the trends in the world’s energy. The changes since 1965 in the consumption of the primary energy sources, in millions of tonnes of oil equivalent (Mtoe), are:


Global consumption continues to increase. A linear model suggest an annual growth of 176±7 Mtoe over the full period, although in this century it has been growing far faster, 265±18Mtoe annually. Much of this acceleration in growth has come from the use of coal, but that has slowed in recent years with the downturn in the Chinese economy.
Those who are concerned about our fossil fuel use will be gratified to know that we are getting a little less of our energy from fossils: 


The Kyoto Protocol seemed to have the effect of increasing our fossil consumption between 1996 and 2008. It took the economic catastrophe of 2008 to have any impact, and the relative consumption is now falling.

Some would point to the growth in renewable energy supplies, and indeed renewables are no longer completely insignificant. If we look at electrical generation rather than primary energy, then today nuclear yields about 2 500TWh annually, hydropower about 4 000TWh and renewables about 1500TWh:


Nuclear has started to grow slowly; hydropower is growing steadily at about 90TWh per annum; and renewable are growing exponentially – the past year added over 200TWh to renewable generation.  This growth comes primarily from wind power:


although solar photovoltaics have started to grow rapidly.

The BP Review permits a review of the efficiency of wind and solar power, because it gives both the installed capacity and the energy generated. The global capacity factor for solar PV was below 10% but has risen to about 12% in recent years. The capacity factor for wind has been growing steadily and is now about 22%:


The annual BP Statistical Review is a rich resource indeed, and my mining has only just scratched the surface.  For those having ambitions to control temperature rises by reducing fossil fuel consumption, it gives cold comfort – fossil fuel use is still growing at over 150Mtoe per annum and will make up more than 80% of global energy for quite a few years yet. Who are the culprits?  From the Review, you can soon work out who uses most fossil fuel.  Throw in population figures, however, and it is evident that the per capita consumption varies dramatically:

China consumes more fossil fuel than the US and Canada put together, but the average Chinese burns less than 2t of fossil fuel each year, where the average American burns over 6t and the average Saudi burns nearly 10t. India burns over 600Mtoe every year, but the average Indian uses just over 0.5t annually. If the Indian economy were to double, which is by no means impossible, it would use more fossil fuel than the US. 

There are those who strongly believe the globe is on a path to ruin unless the energy system is "decarbonised". The BP Review gives the hard facts. “Decarbonisation” is the stuff of dreams.