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Bad News For Boomers, The Sustainable Economy Rout Gets Bigger

Politics / Energy Resources Oct 12, 2012 - 10:42 AM GMT

By: Andrew_McKillop


Best Financial Markets Analysis ArticleBloomberg reports 11 October: Suzlon Energy Ltd., India’s biggest wind turbine maker, will fail to repay $209 million of debt due today in the nation’s largest convertible bond default. Its 2016 note slumped to a record. Suzlon won’t be able to redeem two notes maturing today after bondholders rejected its request for a four-month extension. The default will total $209 million.

Same-day news includes: Solyndra LLC, the failed solar-panel maker that received a $535 million U.S. Energy Department loan guarantee (and $25 million in California tax credits) before going bankrupt, faces objections to its bankruptcy plan from the Internal Revenue Service. The IRS argues in court papers filed in Wilmington that the plan can’t be approved because its principal purpose is allowing the owners of Solyndra’s parent, Argonaut Ventures LLC and Madrone Partners LP, to avoid future taxes.

Staying in the US, Romney's debating stance against Obama underlined the "You pick it, it loses" trail of Obama's compulsive spending in the so-called cleantech and green energy space, including Solyndra and electric car battery maker Ener-1, which collapsed in January 2011 with the loss of about $118 million in public funds, to which at least two new or potential large losers are rapidly moving up the list: Fisker and Tesla. These are both electric car makers funded by the Obama administration's Advanced Technologies Vehicle Manufacturing Program (ATVM). Other electric vehicle makers and suppliers of components and services, both US and foreign owned and drawing funds from the ATVM are also facing difficult times.

In total, more than 20 different cleantech/green energy companies or projects receiving funding from various US Federal loan guarantee programs, grants, facilities, regulatory aid and tax incentives are facing major difficulties at this time. The list is long and growing in the US, and growing even faster in other countries. For the US, the review published by Marita Noon in Town Hall Finance shows the Obama administration is however surely not giving up on throwing money at this "vital new investment space", despite having racked up the loss of billions of dollars of public funds since 2009

The USA of Obama, in line with its downsized role in the world economy, society and geopolitics is in fact already well behind Europe and China in the race to lose or waste public money on the cleantech and green energy "sustainable economy" quest, the elite theme bundled with the fight against non-existent global warming and the struggle to beat the non-existent threat of energy scarcity, as well as the real need to reward corporate crony capitalists close to the seat of political power.  Total losses of US public money in this elite bundle of needs are already lower than in Europe and China. Particularly in Europe's case, the present amounts and rates of public spending, and public losses are now dwarfed by the upcoming and potential losses. No figures can be given, but European state-backed, aided, encouraged or legislatively forced spending - including spending by captive consumers - can easily exceed 700 billion euros (about $910 billion) by 2020, unless these plans and programs are heavily reformed or simply abandoned.

In Europe, renewable-based electricity production and Obama's rising favorite for waste and loss of public funding - electric cars, allied technologies and urban redesign - are the biggest ticket items for corporate "sustainable economy" grubbing of public money among the EU's 27 nations. Long-term network analysis by the European Transmission System Operators for Electricity (ENTSO-E) outlines an increasingly dire, high-cost endgame for European electricity. Its analysis suggests that before 2020, at least 80 per cent of all power bottlenecks in European power grids will be directly or indirectly due to the integration of renewable energy sources. ENTSO-E also gives some tentative outlines of what remedial or anticipatory action would be needed to prevent almost certain, recurring but unpredictable power system blackouts in Europe, by 2020 and growing very rapidly afterwards.

It suggests that about 45 000 kilometres of dedicated high power transmission lines would have to be constructed, forming a European Super Grid, working at a higher operating level than current national power grids with their current low level of interconnection and low power exchange capabilities. Cost could easily exceed 350 billion euro ($500 billion), if the tie-lines or "interconnectors" were only or mostly underground HVDC lines but above all there is no possibility at all of this Super Grid being built, certainly not by 2020.

Power transmission system operators (TSOs) across Europe - and their counterparts at the distribution level (DSOs) - are struggling to cope with the overwhelming pace at which renewable-based power is being "ramped up" in Europe, wind and solar power in particular. Especially in Germany, Spain, Denmark and increasingly in neighboring countries the daily problems of balancing power supplies are now moving towards the point where power blackouts and extremely volatile power prices are inevitable. Most likely, these blackouts will start by this winter 2012/13 and will surely create political blowback, but will also lead to further and new flurries of big spending by governments in the state-protected cleantech and green energy space.

There are major basic technical problems for ramping up the percentage of power coming from renewable sources, in a large-sized power system. The first is their generation capacity is "non-dispatchable" meaning that it is not possible or easy to increase their production on request from TSOs who will be obliged to cut off DSOs if there is regional or national (and in Europe the increasing risk of continental) shortage of electric power supply. Another major technical problem is that their intermittent power generation makes it necessary to bring on line fast-responding dispatchable power units in order to maintain system frequency and supplies to users at 50 Hz. In theory but only in theory, these back-up and stand-by units can be gas fired power plants, which are low cost to build, can be short-start and are high efficiency (CCGTs). Conversely, neither conventional coal-fired plant nor any kind of nuclear generation are adapted to this role.

Real-world power plant economics, corporate decision making, and government interference prevents the theoretical gas-fired solution from being achieved, shown by the simplest of figures. In Spain, where renewable based electricity has been ramped up almost as fast as Germany, operating hours of the nation's CCGT’s (combined-cycle gas turbines), and particularly its coal plants have slumped by around 50 percent for CCGTs and by 70 per cent for coal plants between 2004 and 2010. No fossil-fuelled power with high marginal costs (fuel costs), even CCGTs can compete with renewable-based power plants which have nearly zero marginal costs. In Spain already, this has resulted in collapsing revenues and profits for Spain's utilities, including the largest as measured by its quite rapidly declining market cap, Iberdrola with over 33 000 employees in 40 countries - to add to the nation's sombre economic crisis, ever rising unemployment and social despair.

Future government spending, not only bailouts to utility companies, is guaranteed by another technical factor: because dispatachable power plants are obligatory (in present national power systems) for controlling the frequency of the network, their disappearance would put the security of the entire system at risk. Yet the European Commission, enacting the elite quest to "ramp up renewables" has set the Large Combustion Plant directive for further downscaling and decommissioning thermal power plants across Europe by 2016. This directive fixes new CO2 thresholds and operating limits that many or most present plants cannot meet or comply with. This is supposedly to "encourage" more spending on, and faster development of renewable-based generation, the development of Smart Grids and construction of the totally hypothetical European Super Grid.

The above Commission directive, which several countries such as Poland may simply reject, will lead to massive spending needs in the states where it is enacted - for example an estimated 50 percent or one-half of the UK's coal power plant will have to be closed by and replaced from 2016.

In the UK, approximately half of all present coal plants (a total of 14 coal or majority coal-fired plants with a combined capacity of about 23 000 MW) face closure in the next four years. Replacement costs, even if lowest-cost gas (not CCGTs) can easily exceed $20 billion, and any other alternative will be more expensive. More important, the business case for replacing current plant with new thermal capacity has crumbled to nothing; almost zero incremental capacity is expected to enter the market in the coming years. Conversely, the UK government soldiers on with its plan to build the world's biggest offshore windfarms, in UK waters for a present estimated cost of 199 billion GBP (about $320 billion) by 2020, and force the construction of "new build" nuclear, but with no possibility of any new nuclear plant being operational by 2020. State-guaranteed power prices currently proposed to incite nuclear plant building and operation are in the range of 140 - 165 GBP per MWh (1000 kWh), pricing this electricity at around $350 per barrel of oil equivalent.

This however is not enough, shown by the ever declining number of corporate bidders for "new nuclear build" in the UK. Elsewhere in Europe, the shutdown of conventional thermal power plants, also due to simple obsolescence but now vastly accelerated by the quest to ramp up renewables has led to an increasing number of European countries either implementing, or probably bringing in Capacity Remuneration Mechanisms (CRMs). By remunerating the financing of back-up generation capacity (calculated on MW power), this new system would filter downstream as additional revenue flows for thermal plant operators, such as CCGTs but also including other types, which might prevent them from operating at a loss and having to close. In August, Italy became the latest country to support the financing of its thermal units this way, joining other countries including Spain, Portugal, Ireland, Greece and the Nordic countries who have already done so. France, Germany and the UK are almost certain to also implement so-called "capacity markets".

The CRMs, like any other sustainability-related elite mechanism for creating new ways to remunerate corporate graft and greed, such as the CDMs (Clean Development Mechanisms), will of course firstly create tradable financial instruments but, exactly like CDMs, face serious technical drawbacks. The most basic is simple: they offer no guarantee that adequate generation capacity will be available, because they will operate as "pure upstream" financial levers for inciting or pressuring investors to build power capacity that could or might never be needed. Actual electric power market "signals" will be ignored until far too late, making this another cumbersome, fraud-prone way to waste both public and private cash, while further driving up electricity prices.

In a telltale sign that CRMs are unlikely to benefit the highly limited number of mostly European bankers and brokers who operate Europe's fraud-riddled ETS carbon credits trading system with the European Commission and related institutions (notably the EIB), the Commission is very critical of national CRMs. It wants a pan-European CRM system under its control, like ETS. The pitch of the Commission is that national-based CRMs would "hinder efficient power market functioning", which it goes on to claim will then hinder the proper analysis of the "possible causes of lack of investment in generation”. This prose, we can note, comes from the same Commission which continues to defend ETS as vital for preventing global warming Apocalypse! In total, Europe emits less than 15 percent of world CO2, and amounts covered and in any way affected by ETS represent less than 2.5 percent of world emissions. More important for European electricity users and consumers, power prices will surely and certainly rise much faster than inflation because of CRMs and the intricate barrage of other "sustainable energy" policis and programs in Europe.

In Europe, the quest to "switch" from fossil energy to renewables basically only concerns electricity production due to the European biofuels "plan" becoming nearly an openly admitted farce, but this quest, to date, has been a reliable builder of an ever-growing layer cake of spending. Above all however, the circus must go on growing - and electricity is far from the only "underlying support" for building policies, enacting laws and producing regulations enabling politicians to hand over public money to their corporate huckster friends and backers out to make a killing.

Transport and "sustainable urban development", as Obama's new and enduring flirt with electric cars and vehicles shows, is another rich lode of mostly useless spending with its inevitable spiral of fraud and graft. Here again, both China and Europe are well ahead of the US. The main interest in shifting "sustainable economy" spending to transport and urban development is clear - renewable energy is now a crisis riddled industry with massive overcapacity. Both the car industry and urban real estate are vastly overleveraged sectors facing dire problems of so-called adjustment, more simply the threat of implosion and collapsed asset values which will throw a harsh light on the political mismanagement and corporate graft that runs riot in these sectors.

At the May 4th EU-China Urbanization Forum held in Brussels, vice premier Li Keqiang said that China will invest more than 5 trillion yuan ($795.5 billion) in urban development and energy saving projects through an undefined period of time, possibly by 2017-2020. Selected projects will "protect the environment" and will favour closer collaboration between China and the EU. Spending targets will shift away from energy production, due to China's massive overcapacity in both windpower and solar power and tidal wave of bankruptcies, shutdowns and forced restructuring in these sectors, and will focus urban transport and real estate upgrades.

 Sustainable urban transport is simply a codeword for electric cars and vehicles, and European "plans" or supposed plans for switching from thermal engined cars and vehicles to hybrid and all-electric road transport are not yet enshrined in European Commission, Parliament, Council of Ministers and other laws, directives or decisions. Nonetheless, an increasing tide of legislation and regulation is now focused on forcing the pace of urban, regional and national transport development.

As in the US and China, the pure schizophrenia of political deciders and corporate elites is clear: they have to "save the car industry" at the same time as they effectively ban or exclude cars from city centres, where more than 80 percent of all citizens live, and redevelop cities to minimize or heavily reduce the need for cars in cities. Chinese proposed plans for "sustainabilizing" its 5 largest cities will include caps on the number of thermal (non-hybrid and electric) cars allowed on a unit-area basis, while the implosion of sales growth in the Chinese car industry is treated as almost a national tragedy.

These sets of opposed and contradictory goals, run together and simultaneously, guarantees the maximum amount of wasted funds, corporate graft, and almost certain failure of achieving any or either of the proclaimed goals. Electric car development in France and several other EU27 countries is now spreading out from the upstream of car making, to the downstream of urban redevelopment and "value adding". The focus is urban electric car recharging, parking and servicing stations, with the current unfunded French "plan" defended by government ministers and some city mayors as able to achieve an average or typical construction of 6000 high power charging points in each of 13 major cities "by about 2017". As I noted in other recent articles, these charging points may include high power 86 kiloWatt charging, creating a sure and certain outlook of major power shortages at times of peak charging - and vast power spending needs when or if electric car fleets were ramped up, which is very unlikely.

Unlike the crusade to develop renewable energy and "switch" from fossil fuels, the new derived sustainable economy quest to save the car industry with a "switch" to electric cars, and save urban real estate through "making it sustainable" is not yet defined. At present, this Sustainability-2 spending only has vague "spending package" goals, such as the Chinese plan or supposed plan, which in theory would also encourage or feature European investment in Chinese real estate.

The probably deliberate lack of fixed goals, quantitative targets or timelines of course makes it easier to deny the existence of such plans or supposed plans when they reveal themselves to be useless and instantly invaded by corporate cash grubbers and hucksters. At the same time, also of course, the endgame crisis of the shattered global economy continues - the real economy crisis - which no amount of sustainable economy talk and wasted funding can hide from public attention.

By Andrew McKillop


Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Co-author 'The Doomsday Machine', Palgrave Macmillan USA, 2012

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

© 2012 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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