As a recipient of a post-graduate degree in Economics, this came as quite a shock to me.
To an economist, the Law of Supply and Demand is a sacrosanct as the Law of Gravity is to a physicist. It is supposed to be an immutable Truth. It states, among other things, that a state of price equilibrium is reached for any given product when the quantities that suppliers are willing to produce exactly equal the quantity demanded. If a product is in short supply, that is, if the quantity available at a particular price is less than the quantities demanded at that price, the price is supposed to be bid up over a period of time. In other words, excess demand = rising prices.
Conversely, if the quantity produced exceeds quantities demanded at a particular price, we see a surplus situation in the marketplace, and the price is driven down to the point that quantity supplied equals quantity demanded. In short, excess supply = falling prices.
The Law does not hold true in the Canadian Province of Ontario.
Consider the product that we call electrical energy.
We have a situation here where the public, through virtuous environmentally conscientious actions, have undertaken to conserve power consumption. Such actions have been taken in heed of warnings from environmentalists, urging from green politicians, and an altruistic desire to save the planet. It helps that by conserving some energy, our hydroelectric bill will be a little smaller at the end of the month.
Given the infrastructure of the power supply system, which includes but is not limited to nuclear, hydroelectric, coal, solar, and wind production, the quantities supplied have either remained steady or have increased.
We now have a surplus of electrical energy in our Province. Prices should fall. And yet they rise, and they promise to rise dramatically very soon.
The Province of Ontario has committed itself to supporting “Green Energy,” come hell or high water. And they are prepared to defy the economic equivalent of the Law of Gravity to do it.
In this post, I will supply you, my valued reader, with references to four current articles. They paint a dramatic mural that might be called A Tale of Three Countries, outlining these three countries’ pursuit of the Holy Grail of sustainable energy.
“They destroyed the Spanish market overnight”
The first Tale is about Spain, who has decided very recently to cut off all subsidies to wind energy suppliers as the country’s leaders stare directly at the humiliation of national bankruptcy. Spain has pumped $69 billion into the wind energy program since 2004. If they have scored victories, they appear to have been Pyrrhic: they have exhausted enormous resources in pursuit of success which have emptied their bank accounts and have left the country hopelessly indebted.
One would have thought that Sir Francis Drake would have taught them something.
Of course in Spain, the industry is now virtually destroyed, and the suppliers are deserting the country looking for profits elsewhere.
Alex Morales and Ben Sills write in today’s Bloomberg Business Week:
Spanish renewable-energy companies that once got Europe’s biggest subsidies are deserting the nation after the government shut off aid, pushing project developers and equipment-makers to work abroad or perish.
From wind-turbine maker Gamesa Corp. Tecnologica SA (GAM) to solar park developer T-Solar Global SA, companies are locked out of their home market for new business. These are the same suppliers that spearheaded more than $69 billion of wind and solar projects since 2004 that today supply more than 50 percent of Spain’s power demand on the most breezy and sunny days.
Saddled with a budget deficit more than twice the European Union limit and a ballooning gap between income and costs in its power system, Spain halted subsidies for new renewable-energy projects in January. The surprise move by Prime Minister Mariano Rajoy one month after taking office helped pierce investor confidence in stable aid for clean energy across Europe.
“They destroyed the Spanish market overnight with the moratorium,” European Wind Energy Association Chief Executive Officer Christian Kjaer said in an interview. “The wider implication of this is that if Spanish politicians can do that, probably most European politicians can do that.”
Spain’s $69 billion of investment in power capacity from 2004 to 2011 was about triple the spending per capita in the U.S. in that period, according to Bloomberg New Energy Finance data and U.S. Census Bureau population estimates. Most of the 2012-2013 spending will be for the legacy of projects approved before the aid cuts to wind, solar, biomass and co-generation. (Read more…)
Ontario: Into the Valley of Death rode the six hundred…
The second tale comes from Ontario, Canada, the land where the Law of Supply and Demand no longer applies.
Like many Western political jurisdictions, my home Province of Ontario struggles to come to grips with planned spending that exceeds revenue forecasts. In a controversial 2012 Budget, Ontario Finance Minister Dwight Duncan has announced that his government intends to continue to run a deficit until the fiscal year 2017-2018, adding an estimated $77 billion to the provincial debt load in the process.
In doing so, Duncan ignored many of the recommendations from a report that his own government commissioned. The so-called Drummond Report was long-awaited, and contained no less than 362 recommendations to help Ontario put its fiscal house in order.
A Special Report authored by Niels Veldhuis and Milagros Palacios appeared in the April 28, 2012 edition of the National Post. It describes the critical nature of Ontario’s growing debt problem:
As Ontario heads towards a fiscal crisis caused by over-spending and mounting debt, Premier Dalton McGuinty and Finance Minister Dwight Duncan have issued yet another top-to-bottom review of government spending. This, after Don Drummond’s recent and in-depth report, complete with 362 recommendations, was largely ignored by the Ontario government. With credit agencies breathing down its neck, the province needed to deal with the problem, not order more reviews and undertake further study. The same could be said for raising taxes.
While Ontario is in the worst fiscal shape among Canadian governments, it certainly is not alone.
With nearly all Canadian governments having released their 2012 budgets (save for Prince Edward Island and Newfoundland), there has been a void of leadership in tackling ongoing budget deficits and the alarming increases in government debt across the country.
Consider that total provincial net debt (debt minus financial assets) is expected to reach more than $515-billion this year (2012-13), up more than $200-billion since 2007-08. As a percentage of the economy (GDP), the burden of provincial debt has increased to 29% this year from 21% in 2007-08.
Add on the current federal net debt of $663-billion and Canadians are leaving a legacy of over a trillion dollars in direct debt to the younger generation — more than 65% of GDP, up from 54.5% in 2007-08. Put differently, every Canadian family is being put into hock to the tune of $122,000 by federal and provincial government borrowing.
Despite this debt legacy, Canadian governments continue to borrow and spend. (Read more…)
In spite of growing fiscal concerns, the Ontario government continues to play in the Green Sandbox with taxpayers’ money. It clings desperately to its enormously expensive Green Energy initiatives, appearing to have learned nothing from the Spanish debacle.
Like Napoleon marching north in a futile attempt to conquer Russia, or the Light Brigade charging boldly into the Valley of Death, Premier Dalton McGuinty is determined to lead the province into the winter wasteland of Big Wind.
This should come as no surprise, as the province has turned a deaf ear to any who have expressed concerns about some of the other deleterious effects of wind power, including killing birds, suspending the democratic rights of municipalities, and threatening human health.
The situation has become so absurd, that additional wind power capacity only serves to add to a surplus of energy supply that exists frequently in the province. Yet Ontario continues to subsidize Green Energy, dragging the funds out of beleaguered homeowners by enforcing higher energy prices. “If you use less, we will just charge you more,” they appear to be saying, in flagrant disregard for the citizens’ pocketbooks.
The province’s electricity system operator is now calling for controls on wind energy, in order to save some money for taxpayers. Jim Spears reports in today’s Toronto Star:
Controlling the flow of wind power onto Ontario’s electricity grid could save consumers up to $225 million a year, says the province’s electricity system operator.
And it warns that with thousands of megawatts of new wind power due to flow onto the grid over the next few years, the problem will only more acute if rules are changed.
On windy days, Ontario is sometimes stuck with surplus power, as supply exceeds demand.
And that’s a problem the “simply must be tackled,” David Butters, the head of the Association of Power Producers of Ontario, agrees.
The figure for the potential cost of surplus wind power is contained in a presentation by the Independent Electricity System Operator.
Surplus power builds up when “baseload” power — power that runs all the time, or power that can’t be controlled — exceeds demand.
Baseload power is the output from nuclear power plants and big hydro stations that are designed to run all day, every day.
It’s technically difficult, or very expensive, to reduce the output from these plants.
At the same time, Ontario is rapidly building wind farms, whose output flows onto the system whenever the wind blows.
Merkel: German energy revolution is “demanding but exciting”.
The third country involved in this Tall Tale is Germany. I saw my first wind farm in Germany when I was driving on the Autobahn in 2001. It was kind of cool-looking, to be honest. German Chancellor Angela Merkel has recently reiterated her commitment to pursuing wind as the primary alternative to nuclear power, and wants to accelerate her country’s transition.
In the midst of such profound economic turbulence in Europe, it will be interesting to see if she can maintain her resolve, and her political popularity. A report titled “Germany Counts Cost of Nuclear-to-Renewables Shift,” The Financial Post discusses the decisions facing Merkel and her supporters:
Germany must invest tens of billions of euros in its power grid over the coming decade to avoid an electricity shortfall as it switches from nuclear to renewable energy, grid operators said on Tuesday.
Germany’s government, the federal energy network regulator and grid firms unveiled joint plans to build thousands of kilometres of new electricity lines by 2022, to help distribute volatile renewable energy.
Martin Fuchs, whose company TenneT operates the grid to carry offshore wind power from the North Sea to mainland destinations, said that on top of 20 billion euros that must be invested onshore, there would also be a bill of perhaps 12 billion euros to connect future wind parks.
German Chancellor Angela Merkel said that, despite the cost, there was no going back on the country’s decision to stop using nuclear power, describing her “Energiewende”, or energy revolution, as “demanding but exciting”.
“The process is gathering speed, so that we can catch up on a backlog and transmit renewable energy in a sensible fashion,” Merkel said at a news conference with the grid operators.
She added that that she wanted to establish the legal foundation for expanding the power grid by the end of the year.
Since Merkel’s abrupt policy reversal last year to shut more than half a dozen nuclear plants and accelerate a full nuclear phase-out following Japan’s Fukushima disaster, her government has struggled to come up with a clear plan to manage the shift.
Industry has warned of power shortages and companies are experiencing problems with plans for offshore wind power due partly to an inadequate grid. (Read more…)
So what’s a few hundred billion dollars between friends, eh? It’s not like we have anything else worthwhile on which we should spend it.
It might surprise you to hear that I am an unabashed supported of sustainable development and “greening the planet.” I have been an environmentalist since I was a young child, before it was fashionable. But I also know when I am getting the wool pulled over my eyes.
Any industry who consistently demands these sorts of obscene government subsidies and guarantees needs to go back to the drawing board and develop a product that people can afford. This is green-washing of the highest order.
So far, it has been a successful strategy – for the elite. Some individuals are getting very wealthy as a result.
Your comments and feedback are welcome.
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