A really bad proposal!

Our Treasury has finally published a draft bill introducing a carbon tax.  They have been talking about it for years, and one would have hoped that had got it right by now.  They haven't. 

Of course, their timing couldn't be worse. The first protest came from the Chamber of Mines, which has requested a delay in the imposition of any carbon tax for five years.  It deserves every support.  

Our actual carbon emissions today are significantly lower than they were expected to be when the tax was first mooted.  The electricity crisis has increased the cost of power, which has made us more energy efficient, so that we are doing a little more with significantly less. Our economy is struggling for lack of power, but we are emitting about 80 million tons of carbon dioxide less than we were expected to do by this time. So any nudge to do more by imposing a carbon tax could well push our economy over the edge.  

Then we do not know what the outcome of the Paris discussions next month will be, but it is extremely unlikely that we will see any agreement of a legally binding nature, so there is no compulsion on us to try to cut our emissions further. 

It is also unlikely that any funds will be committed to assisting developing countries such as South Africa to reduce their emissions. It is eight years since we offered reductions if we got financial help. According to recent submissions by the Department of Environment Affairs and Tourism to Parliament, we have received about R200 million in aid, but we have already committed over R260 billion to adaptation alone. Less than 0.1% aid is no aid at all.  I can only conclude that the developed nations are giving no more than lip service to promised $100 billion a year meant to support such activities.  

The draft Bill that has been published for comment has some extraordinary provisions.  For instance, you could be taxed for burning wood, or wood waste, or biofuels. “Oh, but we will give you 100% exemption!” is the response.  Really? How kind. The Bill doesn’t define fossil fuels or pollution.  Yet it treats carbon dioxide, the source of all life on earth, as a pollutant. 

Meanwhile, the evidence that a warmer world will be a disastrous one is lacking – while we hear daily that record X has been broken, an examination of the data for the past 150 years of warming reveals no trends of increasing frequency of anything other than warmer days - but that is just what you would expect in a warmer world.  

We do not need a carbon tax now. One fears that Treasury may need more revenue, but to raise it in the name of saving the world from a disaster of the world’s making is a very bad idea.

How do you tell if it is "extreme"?

There are constant claims that extreme events are becoming more frequent, but when you really dig down, you cannot see any trends even in long-term data.  Of course, the scaremongers claim that it hasn’t happened yet, but their models predict it is going to happen any day real soon now, just you wait! All agree it has been warming for at least the past 150 years.If there were any effect such as the models predict, surely we would have seen it by now? It surprises many, but there is no detectable trend in extreme events in the historical data sets. 

However, it is not quite straightforward.For instance, how do you define an extreme event, particularly with phenomena that are not normally distributed? Do you only have to consider the high extremes,or must you also consider the low extremes? And how many extreme events does it take to determine a baseline, let alone a trend? 

To illustrate the challenges, consider the longest rainfall record we possess, that of England and Wales, which has monthly data back to 1766. The annual totals are close to normally distributed, as shown in the figure. 

A multi-parameter distribution such as a Weibull would do a better job, but we can treat the distribution as normal for the purposes of this exercise. The average annual rainfall is 918mm with a standard deviation of 119mm. 

We would expect 12.5 extreme events in 250 years, if an extreme event is defined as one that exceeds the 95% confidence limits. The figure shows that there are seven such events above the upper limit and four below the lower, or 11 in total, where 12.5 had been expected.

Given the slight skewness of the data and the approximation of normality, the difference is not significant. What is significant, however, is that there is no detectable change in the frequency of the extreme events.Indeed, to detect such a change with any degree of confidence, you would need far more than eleven events or, in the present case, far longer than 250 years. So those who claim we are facing disaster from “climate change” need to reflect on the fact that even with a generous 95% measure of extremeness, it took 250 data points to approximate a baseline.How can we tell if an event is extreme if we have no baseline? 

Is 95% generous? I think it is.Engineers typically design for the 1:100 year event, not 5:100. For really critical structures, they may use the 1:1000 year event. By and large, the engineers have been successful in protecting us against all manner of natural forces.The Great Kanto earthquake of 1923 devastated Tokyo; it had a magnitude of 7.9. The Great Tohoku earthquake of 2011, which caused the tsunami that destroyed the nuclear reactors at Fukushima, had a magnitude of 9.0 and the rebuilt, earthquake-proofed Tokyo was virtually unscathed.

When you hear that the effects of climate change will fall more strongly on poor nations, realize that it is probably true.However, it actually has nothing to do with climate change, and everything to do with some poorly engineered infrastructure in those nations.

Those naughty engineers at VW

“How could they have been so stupid?” is a question I have heard numerous times over the past few days. “How could they not have seen the risks?” “Purposely defeating testing must surely be criminal?”

I think the problem may be deeper than it seems.  Perhaps those clever engineers were too clever.  Perhaps they recognized some things that we need to recognize.  Perhaps they have identified  underlying challenges that need to be faced.

One challenge is the use of language in American law that allows perfectly natural processes to be described as harmful.  For instance, we may think we know what a “pollutant” is, but US law defines carbon dioxide as a pollutant. I’m not certain how they manage to avoid arresting every citizen for breathing, or destroying every plant, but in 2007, the US Supreme Court held that the Clean Air Act gives the Environmental Protection Agency [EPA] the authority to regulate emissions of greenhouse gases. Two years later the EPA issued an endangerment finding that "greenhouse gases in the atmosphere may reasonably be anticipated both to endanger public health and to endanger public welfare.”

In the same vein, nitrogen oxides, which the VW diesel evidently emits at up to 40 times the legal limit when not being tested, are natural substances, produced whenever there is a wildfire.  Wildfires are part of nature – many fynbos species require fire to propagate. Lightning makes nitrogen oxides.  Many decay processes lead to release of ammonia, which is converted into nitrogen oxides.  And the nitrogen oxides are essential substances for the growth of most plants.  These days we use artificial nitrogenous fertilizers rather than night soil to fertilize our crops.

The perceived problem is that humans produce excessive nitrogen oxides.  So, for instance, nitrogen oxides were supposed to contribute to “acid rain”.  That is an environmental scare about which we do not hear very much these days, because it turned out to be another “sky-is-falling-on-our-heads” problem.  The Germans are particularly aware of the failure of “acid-rain”. They were suckered into spending billions uselessly to prevent Waldsterben – forest death.  They love their forests, and were horrified to think that the “acid rain” might be killing them.  It transpired that the forests were dying of old age, and that the “acid rain” was actually nurturing them. All rain is acid. What happens when rain reaches the ground determines whether the runoff is acidic or alkaline.

A real environmental impact of nitrogen oxides is the “eutrophication” of water. Nitrogen, being a nutrient, can stimulate growth of plants and algae in water systems to the point where the systems become unstable and the whole system dies.  The problem arises particularly from excessive use of artificial fertilizers.  So, for instance, the Mississippi river is a rich source of nutrients and there are frequently dead zones in the ocean at its mouth.

The impact of nitrogen oxides in the atmosphere is small.  Human-related emissions come largely from artificial fertilizers, sewerage works and animal feedlots, and to a lesser extent from the burning of fossil fuels. One of the oxides, nitrous oxide, is a potent greenhouse gas, but its concentration is very low, so that its impact is about one-ten thousandth that of the primary greenhouse gas, water vapour. It is also implicated in ozone destruction, but its effect is ameliorated by the fact that other nitrogen oxides help to form ozone at lower levels in the atmosphere.

How severe is the impact of vehicle emissions compared to all emissions, natural and anthropogenic? The EPA says about 40% of all emissions are anthropogenic, 75% of the anthropogenic emissions come from agriculture and only 5% from transport. So transport is responsible for 2% of the total emissions; aircraft, shipping, heavy construction and mining equipment, diesel-electric sets on trains and and the trucking industry are responsible for 80% of that.  So those awful VW diesels were making a small contribution to about 0.4% of the putative problem.

Perhaps the engineers at VW asked themselves some simple questions. How much is it worth spending to help reduce 0.4% of a putative problem? Are the limits set by a US regulator realistic?  Just because you can measure something, does it mean it is a problem? Is something which is predominantly natural a pollutant? Even if it is, when agriculture is the main source, isn’t that where it needs to be addressed?

American law is in danger of threatening all our lives, on the one hand by redefining our language and on the other by conferring power on Government agencies that in many cases have grown so powerful that they can no longer be controlled. These may well be behind the thinking that led the VW engineers to an economic solution to a non-problem.

Note well, I am NOT saying they were right to take the law into their own hands.  But I am saying that VW's reputation would have suffered far less if it and other car manufacturers had challenged the EPA in the court of law when the EPA first proposed its ridiculous limits.  The environment is not something to be protected at all costs. De minimis non curat lex.

BIG projects

Everyone seems to agree that megaprojects should be avoided.  They are over time and over budget.  On these grounds, we shouldn't undertake them.

This isn’t new.  When I was involved in international construction, my bible was a 1988 study by the Rand Corporation of the problems associated with large civilian infrastructure projects.  Fifty-two projects of a value of over $500 million (1984$) were studied.  Only four came in on budget, and the average cost growth was 88%. In contrast, 18 projects were completed on time and the average time growth was 17%. 

The causes of the  overruns were identified.  Using new technology played a role; lack of familiarity with the construction techniques was another; institutional problems to do with environmental controls, labour practices and procurement restraints also loomed large. It was recommended that much more work went into the head-end design of the project to ensure that these factors were addressed as far as possible.

Does this sound familiar?  It should.  Medupi and Kusile are some of the largest coal-fired power stations in the world.  They are using supercritical technologies that are novel in South Africa. Eskom used to have the construction skills; they were lost over a decade ago when Government decided Eskom should no longer build power stations.  The stations have had desulphurization imposed on them for the most doubtful of environmental reasons.  They have been beset by union problems, which have even involved the destruction of construction equipment. They have had to maximize local procurement, and the acquisition of the major component, the boilers, was the subject of Government involvement.  The project starts were rushed when it was finally realized that we were about to run out of power. All the factors that are known to lead to cost and time growth were present.

So when people complain about the lack of information about our nuclear programme, perhaps they need to recognize that time spent in planning properly is time well spent, and when you are planning, there is very little information available to discuss.  

But above all, our nuclear planners need to read the update on the Rand report - Industrial Megaprojects: Concepts, Strategies,and Practices for Success by Edward Merrow, available via Amazon.

Do we face nuclear disaster?

 One of the joys of blogging is eliciting comments from readers.  They are not always polite; sometimes they are downright rude, but at least you know they have taken the trouble to read what you have written, and been sufficiently moved to respond. 

Last month I wrote about the Eskom problem, and one of my friends commented that  what I had had to say made sense, but that I needed to consider our nuclear programme.  The cost seemed excessive, and did we have the skills to undertake such a massive project? So I duly thought some more.

We have a good idea how much our nuclear power programme is going to cost. It comes from the 2010 Integrated Resource Plan (IRP2010). The financial basis was a very thorough study by the Electric Power Research Institute (EPRI), who reported a probable nuclear cost of the order of R30 000 to R35 000/kW for a fleet totalling 9600MW, or an overnight cost of R290 to R340 billion. EPRI also gave some estimates for the costs of renewable energy. Those estimates persuaded the Department of Energy to launch its highly successful renewable programme.
The draft of IRP2010 was discussed in open meetings across the nation. During the debate, the antinuclear lobby raised a great fuss about the nuclear cost. When Cabinet finally approved the Plan, it agreed to an arbitrary increase of 40% in the estimate.  Thus today the official estimate is R400 to R475 billion in 2010 Rand.  There is nothing mysterious or hidden about it. It has been widely debated, and modified in the light of the public debate.
Yet this has not satisfied some vocal minorities. They have proposed a figure of R1 trillion.  There is no basis for this estimate.  It is a figment of someone’s imagination. Yet some believe the figure, and criticize Government for not releasing the basis for its own estimate.  In fact, it is the other way round – Government has been open about the way it estimated the cost; the opponents of nuclear power have refused to give any basis for their guess.
Ultimately, however, the price will be that which is recorded in a construction contract.  Until that happens, it is actually pointless to haggle about the estimates – they are estimates, subject to a wide range of assumptions, and they are all we have until the assumptions become realities.
Government wants nuclear for the best of reasons.  One of the few statesmanlike actions of our President was his pronouncement in 2009, at the Copenhagen climate change gathering, that we would cut our greenhouse gas emissions provided we got financial and technical help.  It triggered an avalanche of goodwill and promises of billions in aid. Our nuclear programme is a major part of the war on carbon. This underlaid the IRP2010 recommendations.
It is wrong to assume that Government is only in it for the possibilities of diversion from a huge programme.  Of course, with this Government, any time you get tens of billions of taxpayers’ hard-won funds being spent, leakage is always possible. But this is not something that is exclusively nuclear.  It doesn’t matter what technology we choose. We will need an extra 80 terawatt-hours (TWh) of energy annually by the end of the 2020’s just to cope with our growing population. 80 TWh translates into an average generation capacity of about 9 GW. The capital cost behind an average kilowatt of energy is about R25 000.  Gas, coal and hydropower are somewhat cheaper, nuclear and renewables more costly, but R25 000 is a reasonable average. So 9GW will cost about R230 billion, whatever the technology employed. 
There have been pronouncements of economic doom at the prospect of spending so much.  However, we have committed to funding R200 billion of renewable energy. That is only going to yield about 10TWh per annum – I did say renewables were capital-intensive, didn’t I? Thus far, there have been no suggestions of misdirection of the money spent on the renewables programme.  Perhaps Government can sometimes be trusted to keep its hands out of the till.
The choice of nuclear has been dictated by the desire to reduce our carbon footprint.  Gas would not make such a large impact.  Gas emits less carbon than coal for a given quantity of energy produced, but we have no gas.  Hydropower would be a low-carbon option, but South Africa has no hydro potential. We would have to import it.  There are proposals to develop the Inga project on the Congo, which could potentially yield 200TWh per year, but it is a long way away.
Some people believe that wind or solar could meet our needs.  The problem is that both cost more than nuclear to build.  Using the figures from the EPRI report, wind would cost about R15 000 per kW installed.  However, it only delivers its installed power about 25% of the time, so the effective cost per deliverable kW is about R60 000.  Similarly, photovoltaics cost about R20 000 per kW installed, but deliver the installed power about 20% of the time, so they cost about R100 000/kW deliverable. Other renewables suffer from a similar high capital cost per deliverable kW.
We have managed to fund our renewable energy programme with power purchase agreements, so the capital cost is effectively hidden from the consumer.  But if 10TWh has required R200 billion in capital, then if it were all renewable energy, it would cost  around R1.6 trillion in today’s money to build the 80TWh we need by the end of the 2020’s, a good deal more than the equivalent nuclear programme.
Renewables are supposed to cost very little to run – they get their energy for free.  However, it is easily forgotten how recently the technology has developed.  The first 2.5MW wind turbine, today’s standard size, began operation in 2005.  The faults in the design were such that the company which developed it went out of business in 2012.  It is hoped that our fleet of turbines will last 25 years.  The life of European machines is more of the order of 15 years.  It is argued that they were an earlier generation to designs that were still evolving (which is true), but they were also smaller and therefore less highly stressed than the modern machines. One of the financial risks of the renewables is whether they can repay their capital investment over a shortened life.
Similar remarks may be made about all other renewable options except hydro power.  In contrast, nuclear power has demonstrated a long and predictable life. In many cases, a sinking fund has been established to ensure safe decommissioning. The long life has meant that the sinking fund is more than adequate to fund the end-of-life costs.  This is certainly the case with our own Koeberg.
Government is not being pig-headed in pursuing nuclear.  We need power, and if the power has to be low-carbon, then we have very limited options.  Not having enough energy is disastrous to the economy. Every kWh not delivered when it is needed costs the economy about R75.  We need to add about a quarter to our generating capacity over the next 15 years.  Nuclear can achieve that.

ISIS and all that

One of the great experiences of my life was an exploration of the Middle East.  Seven years ago, in 2008, Angela and I traveled through Jordan, Syria and Iran.  We went to many of the great sites on antiquity.  The three P's, Petra, Palmyra and Persepolis were the greatest, and Palmyra the greatest of the three.

I wrote up our experiences in another blog a-nutty-prof.blogspot.com, and went to look at it again today, to remind myself I wasn't dreaming. And there, indeed, was the pretty temple of Baal Shamaan.

 Inside there was a tree growing that, we told ourselves, would surely one day destroy the temple.
 

We were wrong - today came the news that ISIS had done the ridiculous, they had blown up this ancient monument, which had survived since 150A.D. One has to ask what they thought they were doing, other than wasting a lot of explosives.  Did the temple offend their sensibilities?  Are they really so sensitive that the workmanship of the ancients makes them feel guilty? Belief is so irrational.

But today also brought the news that the British Embassy in Tehran had re-opened. 
 
 

We were privileged to spend a few days there in 2008, and were amazed at its splendid grounds in a park in the middle of the city.  The Brits were asked to leave a few years later, but now they are back. Something ISIS has yet to learn - the more things change, the more they remain the same!

Will Eskom survive?

My phone rang - "Could you come and talk to us?" 

"Who are you?" I replied. 

"I'm a parliamentary researcher," he said.

"Well, what do you want me to talk about?" I asked.

"Should we give Eskom the R30 billion they are asking for. Can you advise us?'

And so it was that I and an economist friend, Rob Jeffrey, found ourselves before the Standing Committee on Appropriations, talking about more money than I usually discuss. We said that if Eskom were truly a business, its shareholders would ask what it intended to do to get out of the mess.  Instead, there has been an awful silence, as if going bankrupt were something to be faced with stoicism.

The end result is that Parliament has managed to refinance Eskom by selling off Vodacom.  Nowhere has there been any discussion of what should be done do avoid a slow, insidious decline into dysfunction. 

We identified a prime cause of the problem as being a disturbed cash flow. This was the result of political demands being made on something that should be governed by economics not politics.  For example, back in 1999, there was the political decision to forbid Eskom to build the next big coal-fired power station.  This was somewhat irrational, because Eskom had both the experience and the skills to build power stations and bring them on line within budget and on time. It demonstrated this definitively as it completed the Majuba power station. Every year for 6 years a new unit came on line on 1 April. Medupi and Kusile have only too clearly shown that the experience and those skills are critically important if you are going to build power stations.

Recently, there has been the decision to require Eskom to purchase coal from some small, Black-owned coal mines at a cost of over R450/t, when the going rate from the large mines is less than R200.  Now there is nothing wrong with providing a subsidy to achieve socially desirable ends, but there is everything wrong in hiding that subsidy within a Public Enterprise. Eskom has squeaked about the cost of coal, Government has thundered about the need to stop exports, and then remembered that coal exports are now one of the things that keep this economy afloat.

There are several other examples of political decisions that have contributed to the destruction of what was once a thriving and efficient business.  It must be stressed that we are not criticizing the political decisions as such – South Africa is a democracy, and we all have to live with our political decisions.  Our concern is that Government has seen fit to load the costs of these decisions on Eskom.  Because it is a business with a huge cash flow, it has been able to carry the costs for just so long.  Now the back of the camel is broken.

This is why we have thought long and hard about what needs to happen to restore Ekom to its historical functionality.  We believe the solution is to identify the parts of the business that should be in open competition, and excise them so that when called on to perform a political function, that function can be properly costed and seen as a subsidy.

It would be simple to create an electricity supply company, responsible for generation of electricity as a national asset.  It would be called ESCO, and would be in open competition with, for instance, the renewable energy generators and the new breed of co-generators that the Department of Energy is fostering.  ESCO would hold the present generation facilities of ESKOM, and it could build new facilities using the sort of financing model employed with such success in the Department’s Renewable Energy programme.  That programme has raised nearly R200 billion against nothing more than long-term power purchase agreements, which will bring us of the order of 8 terawatt-hours (TWh) of electrons annually. R200 billion could buy somewhere between a fifth and half of the nuclear power programme, which would yield between 15 and 40TWh of electrons - cheap at the price.

Equally, it would be simple to create a company to distribute electricity. It would be called EDCO, and it would be in competition with municipalities and others who wished to enter the market. ESKOM already distributes about half of South Africa’s power, so EDCO could readily be set up and have both a significant cash flow and a strong asset base.  It would need to have Government support to enforce collection, but once achieved, the business would be self-sustaining and could yield a reasonable dividend.

There remains the question of how to get the electrons from the generators to the distributors.  We have a national highway that performs this duty.  One of the problems is that it is not presently cost-reflective – it doesn’t matter how far the electrons have to travel, or what the losses are along the way, the cost of transport is nominally the same. There is no apparent cash flow to create a business. The transmission grid is a huge asset, but it needs to expand.  Funding the expansion has been a direct charge on the national purse.

We believe that this, fundamentally, is the reason why Parliament has struggled for nearly a decade to create an Independent System and Market Operator (ISMO).  Eskom already performs all the functions of an ISMO.  We envisage creation of an electricity transmission commission, ETCOM, to buy electricity from ESCO and other generators and to sell to EDCO, municipalities and any other distributors.  Initially ETCOM would take over the transmission assets of Eskom. Its capital requirements would remain largely a charge on the fiscus.  However, it would need to develop a model for the costing of power transmission. Electricity should cost less in eMalahleni, next to the power stations, than in Johannesburg.

ETCOM would initially be a commission, funded from the fiscus.  As its economic model evolved, it might be possible to allow competition into the space.  For example, the ESCO generation unit called Koeberg might contract directly with the City of Cape Town for the provision of power down the City’s own transmission line, who would pay less than for the power they bought from ETCOM, who in turn had transported the power from Mpumalanga. As competition emerged, ETCOM could slowly morph into being a company in its own right.

We see a major role for the National Energy Regulator, NERSA, in regulating this process as it develops.  At present NERSA operates in a difficult morass, particularly with power transmission not being cost reflective.  Trying to price power requires the annual production of a 200-page report. We can foresee it growing its role to the point where licensing new generation facilities or new entrants to the distribution market become more important than the task of trying to cost electricity nationally. It would be far simpler to monitor the costs of the production of power with an identifiable business, ESCO. With EDCO pricing distribution, it would be far simpler to bring under control those municipalities who are at present overcharging to balance their books.

We need a path forward to ensure that Eskom survives. The national investment in refinancing must not become a case of throwing good money after bad. Our model may not be perfect, but we believe it to be rational and to provide an essential element in a debate that is currently not being held. Let the debate begin!