Monday, 16 July 2012

Tarnished Family Silver

Powering Up

In New Zealand we are to be offered an opportunity to buy up to 49 percent in state owned power generating companies.  The first to go on the block will be Mighty River Power.

Now we have all sorts reservations when it comes to public floats.  Normally the goods-on-offer are so dressed up with twinkling trinkets that that it's hard to see the shape of the unclothed beast beneath.  Most public floats are overpriced and over-hyped.  There are now rumours about that the Government will attempt to entice investors by offering some of the companies at a discount.  Maybe.  Caveat emptor.

But if the power company being sold happens to be up to its eye-balls in "green" electricity generation then our advice would be to treble down on said caveat emptor.  Wind power, for one, is a very risky business, or a complete crock--if you are a sceptical cynic.

Whilst wind power generation is not directly state subsidised in NZ (thankfully) it is indirectly (more deceptively) subsidised by our putative Emissions Trading Scheme.  In other words, the playing field has been legislatively tilted in favour of wind power at the expense of oil fired electricity generation at the taxpayer's expense.

Consider this cautionary tale about wind-power elsewhere, as told by Tim Blair in The Telegraph:
Bob Brown’s German solar vision for Australia:

Well, it is the way to go. The Greens have recently rescued the proposals for base load solar power stations, which will go in rural and regional Australia to make sure they are progressing ... We want this country to be at the cutting edge. I repeat, the example is firm and true. In Germany, where they did this because the Greens were in the balance of power, they have created 350,000 jobs. It was the strongest component of the German economy during the recent recession. It’s good economics.
You bet it is:

The wave of bankruptcies in the solar industry continues unabated – and once again, investors lose a lot of money. Meanwhile, Germany’s large solar companies have lost almost 25 billion Euros on the stock market …
The crisis in the industry has also hit thousands of green investors. Solar stocks were once seen as the big hope of the stock market. The future belonged to solar energy, it was said. In the first years, the share prices of solar companies increased dramatically. For most solar shares the peak was reached in late 2007.
Germany’s solar industry remains at the cutting edge. Cutting jobs and share prices, mainly.

The bankruptcies of roughly two dozen U.S. and European photovoltaic manufacturers have framed much of the story about an oversupply of solar panels and crashing prices over the past year. What’s less known is the impact on the PV manufacturing industry in China, where over 50 companies also have closed
It’s good economics.
We have a gnawing suspicion that when it comes to wind-power the lily will eventually prove to be well and truly gilded.  The economics will simply not measure up.

Firstly there are the indirect subsidies meaning that its more expensive than appears in its price (we are paying a higher price via a disguised indirect subsidy).

Secondly, there is the unreliability of wind itself.  Every wind power generation capacity has to be backed up by investment in reserve conventional generation capacity for the times when the winds are not howling down the mountain-side.

Thirdly, there is the embarrassing reality that wind turbines are never allowed to operate at peak potential: they would grind themselves into powder were that to be allowed. Consequently touting generation capacity is deceptive and misleading. 

Finally, there are the very high maintenance costs.  Each turbine generates at the margin at an inconsequential rate.  Hundreds upon hundreds of turbines are required to build substantial generation capacity.  To maintain each turbine, however, is extremely expensive: their innards herniate regularly . The marginal maintenance cost of every dollar spent on wind farm investment is much higher than other forms of energy generation.  We suspect that current pricing of wind-power does not take these full life-cycle generation costs of a wind-farm into account. 

The bottom line: be very wary about the ongoing profitability of wind-power companies.  When the government power companies come up for sale be very sceptical and cautious about those companies investing heavily in wind-power. 

When you see commercials like this below, be very, very cautious.  (Notice how the ad celebrates the unusually high costs of investment in this particular wind farm as a benefit.  While celebrating this may be designed to make Kiwis feel good about the company, it is commercial and economic blight.  But when it comes to marketing, never let cold hard commercial reality get in the way of a good story.)

No comments: