- The economic death spiral Archived Message
Posted by Keith-264
on December 13, 2022, 6:49 pm
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https://consciousnessofsheep.co.uk/2022/12/12/the- economic-death-spiral/ I had not heard of Bill Bullen until he appeared in the media earlier this month. And so, I take his concern for Britain’s poor at face value: “More than 2 million of Britain’s most vulnerable households, facing the prospect of out-of-reach prices for gas and electricity, could shiver in silence this winter by disconnecting from the grid without their suppliers knowing, the chief executive of one utility warned. “As a result, there’s likely to be an increase in the number of winter illnesses and deaths among those using traditional prepayment meters, which have no digital connectivity and resemble those used in the 1970s, said Bill Bullen, founder of Utilita Energy. He submitted a ‘red flag’ report to the UK government calling on companies to take several curative measures, including swapping old equipment for smart meters so suppliers can detect when someone has unplugged. “’Unless the customer has refused a smart meter, there’s no excuse for legacy meters to exist today,’ Bullen said after his company surveyed 750 pay-as-you-go households. ‘Having no choice but to sit at home without heating or light is unacceptable, and our government and the regulator must intervene immediately to stop self-disconnections.’” Be that as it may, Bullen’s concerns may also have been affected by the impact of more than two million self-disconnections on the energy industry itself. As with any business, energy supply depends upon finding a goldilocks price which is affordable to customers, but which allows investors to draw a profit. When no such goldilocks price can be found, there is a risk of entering an energy death spiral in which those at the bottom disconnect, causing the costs to rise for an increasingly squeezed middle. As has been happening since the end of lockdown, for example, energy costs have been rising, leading supply companies to raise prices. This is mitigated to some extent by state-funding of a proportion of household bills. However, while the media talks about average prices rising above £3,000, the reality is that most people will be paying the same or less this year for their energy than they did last year. The simple reason for this can be found in the old adage that “the answer to high prices is high prices.” In short, millions of us are finding ways to cut our energy consumption, leaving holes in energy company budgets. In this light, we see that state support – although accounted for as a deduction from household bills – is effectively a bailout for the energy companies. Without it, we would likely witness an even bigger wave of energy company bankruptcies than we saw last year. In any case, recent runs on the pound point to the risk that prolonged state support could result in a wider currency crisis which, among other things, would result in yet another increase in the price of energy imports. Some – probably painful – restructuring of the energy system is inevitable at this point. Indeed, an increasingly restless electorate is likely to prefer re-nationalisation to an ongoing taxpayer-funded bailout. In and of itself though, restructuring or even nationalisation will not solve the underlying problem. This is that the global energy cost of energy has been rising remorselessly since the 1990s. This has been compounded in Britain since 2005, when the North Sea ceased meeting our oil and gas needs… which is a particular problem for a country which depends upon an abundant supply of cheap gas to fuel its electricity grid. This snapshot of the UK electricity grid at the time of writing gives an insight into the reasons why: The temperature here in Cardiff has not risen above freezing all day. And Cardiff is relatively warm compared to the east and north of Britain, where several centimetres of snow have added to people’s woes. Demand for electricity is in the amber zone where the Grid operators start searching for additional supply and prepare to operate schemes to disconnect heavy industry and to pay households to curb their consumption. Notice that Britain’s soon to be decommissioned nuclear power stations are running close to full capacity, and that the interconnectors from Europe are drawing close to maximum power. At the same time, however, the political class’s great hope for the future – wind – is all but absent. And even if the number of wind turbines were doubled, there still wouldn’t be enough wind. So what? – has been the broad attitude of successive governments. If energy prices rise, people will just have to suck it up. Indeed, while nobody in government will say it publicly, there will be government advisors who will point out the potential health, social care and pensions savings which would follow a cold winter in which a larger than normal number of older people died from the cold. This though, is where an energy death spiral morphs into an everything death spiral. Because energy is what economists refer to as an “inelastic” commodity. So long as people are connected to a supply of electricity and gas, and so long as governments avoid doing anything deranged – like sanctioning fuels they depend upon – then, irrespective of the price, people are going to switch on the heating when temperatures fall. Some will simply go into debt to do so… which is ultimately the energy company’s problem. Many more though, will rein-in their discretionary – and even some of their non-discretionary – spending in order to avoid the health consequences of getting too cold. Adding to the UK’s woes – and in part for similar reasons – is the rising cost of food. This is largely due to the high price of gas last year, which resulted in fertiliser prices becoming unaffordable to many farm businesses. As a consequence, crop yields of both human foods and animal feed have been lower than in previous years. Food is not as inelastic as energy – we can substitute potatoes for bread or Quorn for chicken, and most supermarkets offer low-cost versions of common items like baked beans, pasta and tinned tomatoes. Nevertheless, while the content of a food shop may change, the amount spent is likely to stay the same. As a result, as with energy, spending must be taken away from discretionary goods and services in order to make ends meet. This would be less of a problem if most of the population was engaged in energy and food production. Unfortunately, less than two percent of us work in agriculture along with just 0.5 percent working in the energy sector. Most of us are employed in the far bigger discretionary sectors of the economy from which spending has been haemorrhaging even as energy and food costs have driven CPI inflation higher. And we don’t need a crystal ball, runes or tarot cards to see that this ends badly. The UK economy is officially shrinking, although without the massaging of the figures we would be in an official recession – two quarters of shrinking GDP – already. Job losses and business failures are on the way, although banks and firms will likely hold out until after Christmas in the hope of a last-minute spending spree. But with input costs continuing to rise even as consumer spending is falling, we are likely already in the grip of a crisis of under-consumption. The reason the UK is faring particularly poorly can be seen in one simple – but oft overlooked chart: Energy – or at least that part which is available for productive work, exergy – is the primary driver of economic growth and productivity. In short, the more energy there is to go around, the more goods and services we are able to produce. This is broadly what was happening in the left-hand side of the chart, as the UK economy completed its post-war transition from coal to oil. The impact of the 1973 and 1979 oil shocks is easily visible, and explains why the UK economy experienced its stagflationary crises from the mid-1970s through the early 1980s. The once and done North Sea oil and gas surplus up to 2005 provided the basis for the debt-based boom in the 1990s and early 2000s. But once the UK became a net importer of energy, and without access to cheap fossil fuels, it has been downhill ever since: Worse still – for the UK at least – none of the proposed “solutions” to what the political class imagines are separate cost of living and energy crises – but in reality are part of the same predicament – can actually work. The recent LNG import deal between the UK and the USA may alleviate some of the supply shortages – making power outages less likely – but does little to lower energy costs. Further deployment of wind turbines will have little impact in the short-term because of the time and investment required to develop grid-scale wind farms. Nor, as economist, Lion Hirth explains, does further deployment of intermittent generation without the necessary balancing technology solve the problem, but is more likely to make the situation worse: “In a nutshell, wind turbines and solar panels generate too much electricity when it is not needed and not enough when it is. And in the absence of a viable storage mechanism, intermittency has to be balanced with fossil fuel generation which becomes increasingly expensive as the proportion of wind and solar in the electricity mix rises.” Nuclear suffers even greater cost and time issues and cannot replace gas as a balancing fuel. Like coal plants, nuclear plants can be damaged if operators attempt to rapidly increase and decrease load. Fracking UK shale gas – assuming it exists – would likely be the quickest means of increasing the UK’s supply of gas. But as with imported LNG, it would do nothing to lower energy prices. Indeed, the main reason why fracking was halted in 2019, was that the fracking companies asked the government to bail them out due to the cost of fracking being greater than the value of any gas recovered. Higher gas prices might be more favourable to the fracking companies… but not if consumers can’t afford the gas they produce. Coal – which, ironically, the UK still has mountains of – is probably the worst option of all… and not just for environmental reasons. Opening up new coal mines is expensive enough. But following the closure of all but three UK – four if we count the wood-burning Drax – coal power stations, we would need to spend billions of pounds to replace each of those that has already closed. In practice, then, there is just one potential short-term option, even if it is considered unpalatable to the political class – lift the sanctions on Russian gas, hope the NordStream pipelines can be reopened, and that Russia would be willing to begin exporting gas to Europe… and then, for the longer-term either put the R&D funding into solving the – many – technological holes in the energy system, or start planning for life in a much poorer and far less material economy. |
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