Guest essay by Eric Worrall
What do you do, if governments are threatening to impose damaging new taxes on your business, in the name of combatting “climate change”? The answer is surprisingly simple. It is a clever solution which creates a devastating setback, for politicians who were hoping to raise serious revenue from carbon taxes.
Back in 2014, E.ON split into two businesses – a politically favoured “renewable” business, and a bucket which contained their old school fossil fuel business assets.
According to the Wall Street Journal (in 2014);
E.ON, Germany’s largest utility company by market value, said it wants to shrink its core to focus on renewable energy, its distribution network and providing customer solutions.
The split will provide a clear distinction between business portfolios that vary in risk, with each company appealing to different investor groups, E.ON said.
Utilities in Europe have been hit hard by a surge in renewable energy generation, which Germany and European Union governments have heavily subsidized in the hope of curbing carbon-dioxide emissions. But the resulting oversupply of electricity has depressed wholesale prices, rendering power generation from conventional plants unprofitable.
E.ON said the renewables-focused EON SE would have low volatility and could tap growth potential from the transformation of the energy market.
Read more: http://www.wsj.com/articles/e-on-se-to-split-into-two-companies-1417388121
Why does this strategy benefit investors? The reason is it catches green politicians in an economic pincer. Politicians know that their economies can’t do without the old fossil fuel generators, and other carbon intensive assets. By isolating carbon intensive businesses in a separate corporate entity, business strategists turn carbon politics into a macroeconomic game of chicken. Raise carbon taxes, and nobody in the corporate world will come to the aid of stricken carbon intensive businesses. They will be allowed to simply collapse. No carbon taxes will be raised, and politicians will be left with the consequences – job losses and economic damage.
It gets better. European politicians are too committed to green subsidies and carbon pricing to openly reverse their carbon pricing and green subsidy policies. But they also can’t afford to let energy intensive businesses which are important to their national economies collapse. European politicians are now being forced to pay subsidies, not only for renewables, but also for unfashionable, energy intensive businesses, to keep them from closing.
The Department of Energy and Climate Change (Decc) has declined to comment ahead of a formal announcement today, but has previously argued these subsidies would ensure security of supply by providing a payment for reliable sources of capacity to ensure they delivered energy when needed.
“This will encourage the investment we need to replace older power stations and provide backup for more intermittent and inflexible low-carbon generation sources,” it has said.
But analysts believe it highly unlikely that any companies would have submitted bids to construct new super-efficient gas-fired plants at the price of £15-£20.
“This low price is better for consumers but it looks like it is being used just to keep existing coal, nuclear and gas-fired plants running. You have to wonder whether these plants would have remained open anyway and really need these capacity payments,” said one analyst. Energy companies say privately that they need the payments to modernise and refurbish plants that would otherwise close.
The subsidy game appears to be spreading and accelerating beyond energy generation. Resource giant BHP has also demerged carbon intensive assets into a separate business.
BHP Billiton has also modelled the impact on its balance sheet of a range of different carbon prices.
The demerger earlier this year of BHP Billiton’s most carbon intensive assets into a new entity named South 32 had also improved the resources giant’s climate risk profile, AMP Capital head of ESG investment research Ian Woods said.
“Carving out the aluminium assets into South 32 has enabled BHP Billiton to reduce its carbon emissions by around one third, in exchange for a relatively small drop in market capitalisation”.
Anyone who thinks aluminium plants can be allowed to fail – I doubt anyone is more than a few yards away from something which is made of aluminium. Be it the tin foil in your kitchen drawer, the corrosion resistant window frames in your new double glazing, the aluminium flashing which keeps your roof from leaking, the lightweight high tech engine block in your new car – its a long list. Yet as BHP indicated, Aluminium is not a major part of their market capitalisation. Now the energy intensive Aluminium business has been spun into a separate company, its not BHP’s problem anymore.
The British steel industry is already in my opinion playing this game. As WUWT reported, the British Steel industry is demanding subsidies, to keep the doors open. A major steel business in Britain just collapsed, with devastating job losses in a working class area. If steel receives support, Aluminium will demand similar support, then copper, then plastics and pharmaceuticals. There is a long list of businesses which are in a position to fragment into de-merged entities, each of which can then separately demand subsidies and special treatment from politicians, on pain of devastating macroeconomic damage if they collapse.
What can governments do to halt this explosive growth of corporate subsidy gaming? There is only one strategy which might work. They could attempt to reset the game, and restore a level playing field, by removing the excessive subsidies for renewables which initiated this ugly mess. In an environment where businesses survive or fail by their ability to solicit political favour, private investment is a risk, especially in unfashionable sectors, regardless of how vital they are to the overall economy.
A renewed and genuine commitment to a level playing field would in time restore confidence, and would allow market forces to begin to function normally once again. This subsidy gaming would never work in normal market conditions. In a healthy market, bankrupt factories are quickly acquired and re-opened by new investors. Only in a damaged, subsidy driven market, do political fashions take precedence over economic opportunities.
The end result of such a green energy evolution has been nicely analyzed by Euan Mearns based on European energy prices: http://euanmearns.com/green-mythology-and-the-high-price-of-european-electricity/
Pethefin
Thanks for the link – an interesting article and some very useful sites mentioned in the subsequent discussion.
I saw the headline in today’s Independent (UK paper) that renewables have become cheaper than conventional generation here. Hoping that someone will analyse their analysis in due course.
Big businesses love regulation from the government, they can afford the cost and buyoff the politicians but small companies can’t do either and lose their competitive edge thus eliminating them as competition and cementing big corporate monopolies and incidentally big campaign donations to big government politicians.
Exactly. But most of my leftist acquaintances totally fail to grasp this point.
And hence they invariably applaud the imposition of apparently restrictive regulations that in the long game will show themselves to benefit the big corporations that such people apparently despise.
Major vacuum cleaner manufacturers have relished the introduction of the vacuum cleaner power limit regulations in Europe. They all played along. It is small producers and the consumers who will lose out.
“It gets better…”
Not for us, the public. I attended speech a few years ago delivered by then British Deputy PM Nick Clegg. He described planned climate policies as a win-win. I can’t remember his exact words, but his gist was that even if AGW did turn out to be a load of nonsense (I had the impression he might be privately sceptical), they would be a great way of raising extra state revenue from energy companies – no mention of how the energy companies would obtain their money. Idiot politicians see ‘climate change’ as the most brilliant way yet to raise tax revenue and redirect it into the pockets of party financiers and their preferred voting blocs, with a gullible public (in their view) falling over each other to hand over their money in the name of saving the planet. Now it has started to hit us in a big way. Most affordable cars are no longer a tax write off for the self employed, the fuel escalator continues to punish workers outside London who need to travel, indirect energy taxes are so high that even the middle classes (those who cannot afford ‘eco-homes’) now have to restrict spending on travel, food, education, childcare and leisure or freeze during the winter. I have had to give up my household contents insurance, raised by £400 p/a due to unspecified and unjustified ‘increased flood risk’ – a look into the issue reveals well funded collusion between the green blob and the insurance industry in the form of scare-PR campaigns (despite no increased precipitation trend in the UK). Energy companies and financiers may be busy trying to find new and more imaginative ways to line their pockets with subsidies – they will always survive, but when the green bubble bursts, it will be the politicians who will have their backs against the wall. This sounds appealing right now, but historically nations undergoing severe economic hardship tend to elect very nasty extremist governments offering radical quick-fix solutions (all part of the plan for the most vocal eco-zealots who smell power), leading to further poverty and misery. CAGW is without a doubt the most potentially catastrophic belief system the world has seen since Stalinism.
++100
+1000
“it will be the politicians who will have their backs against the wall.”
The politicians originally responsible will never lose anything (that’s the nice thing about being “political”) as they will simply move on into a PR area or as a shill for corporate like in the US. The new politicians will now win by being “different”, same ol’ shell game which most of the public never catches on to. Gee just who to vote for, LOL.
Next time that you upload the contents of my brain onto the internet – could you be polite enough to ask in advance!!!
But you missed a bit – not only are the forces of Green zealotry and the insurance companies conspiring to increase the perception of risk. But the Green Blob and associated environmentalist meddling is conspiring to increase the actual risk. As seen in Somerset, where the suspension of dredging in the 1990’s has lead to silted drainage channels, which are prone to flood.
http://www.telegraph.co.uk/news/earth/flooding/10655005/The-flooding-of-the-Somerset-Levels-was-deliberately-engineered.html
Thanks, Eric Worrall. Very good article.
Yes, governments have distorted markets profoundly for pursuing a Chimera.
Civilizations can self-destruct, and not only by nuclear war, a war on carbon can do it too.
Bloomberg just posted an article on it’s website that will make your blood boil, kind of like this article does.
http://www.bloomberg.com/news/articles/2015-10-06/solar-wind-reach-a-big-renewables-turning-point-bnef
The turning point they describe is that so much renewable capacity has been added and since the power it generates is “free” (after you’ve paid for the capital costs) the capacity factor of fossil fueled plants is so low that it’s driving up the cost of fossil fuel electricity to the point where it’s less competitive than renewables. This is considered great news by the author. They go on the add that as they build storage capacity out they’ll need less back up power for the renewables as well. So you build solar with a capacity factor less than 20%, wind with a capacity factor of 25%, back up storage for the intermittency (are we talking hour or days??) and everyone gets “free” electricity. I guess there is no interest and capital to write down, no maintenance, not taxes but somehow, the “free” renewables get billed at triple the rate of the fossil energy. How stupid do these reporters think people are? How naive are journalists that they can print this nonsense?
Sean October 6, 2015 at 8:32 am
“How stupid do these reporters think people are?”
History shows people to be very stupid.
More likely uninterested and too mentally lazy to learn the fundamentals for themselves. Way easier to assume that the MSM and AGW “97%” group are correct and go back to reality shows, sports, video games and social media.
I believe humans invented language to facilitate lying to each other. We all have a predisposition to believe.
Wind is only free if there is wind. Wind is a resource that can’t be depended on. Recent information reveals that average wind speeds have decreased in the western U.S. over the past five years compared to the previous five years average. There is no way that future wind resources can be predicted unlike other fuels that can be used to produce power.
Wind is just like any other source of fuel. If you run out of fuel the “motor” stops.
Re “wind is only free if there is wind”.
This is true, of course. But critically, electricity or useful mechanical work extracted from the wind is never free. Since the process of extracting energy from the wind is expensive.
It is even more expensive if you attempt to do it in shallow sea water.
It is even more expensive if you attempt to do it from floating platforms in deep sea water.
It is even more expensive if you create so much wind generating capacity that other parts of the grid must be adapted to cope with the fluctuations in delivered power.
And on and on.
Here in the UK off-shore wind electricity is costing over four times the current wholesale rate.
And that is before you factor in other spending on additional grid infrastructure costs and so-called “innovation”.
That doesn’t sound like free to me!!!
Bloomberg is a top Bilderberg conspirator.
It’s a variation of the Nigerian scams where emails claim you have won millions in a lottery you never entered. The mentality is the same, the appeal of something for free overwhelms all commons sense and rational thought. Greed and sloth overcometh working for a living.
So what works for Nigerian scam artists also works for empty-headed reporters and their readers.
BTW I am emailing the author to explain to him that food is free also, just a simple act of nature. All you have to do is subtract the costs of growing, harvesting, processing, packaging and transportation and it is completely free like renewable energy.
I’m afraid no matter how stupid journals think people are the people will always be more stupid.
‘European politicians are now being forced to pay subsidies, not only for renewables, but…’
If only this statement were true then there would be none of this nonsense.
It is European consumers and taxpayers who are paying.
As Margaret Thatcher pointed out, Governments have no money.
Fox News…” Former United Nations General Assembly President John Ashe accepted more than $500,000 in bribes from Chinese businesspeople in exchange for help obtaining lucrative investments and government contracts, according to federal court documents unsealed Tuesday, sparking an investigation into whether bribery is “business as usual at the U.N.”
The U.N. is nothing but corruption !!!!
Since 1948!
++100000
“In a healthy market, bankrupt factories are quickly acquired and re-opened by new investors.”
Ah, so that how the world’s largest sewing machine factory in Clydebank has kept going since Singer’s had to close it. http://www.singersewinginfo.co.uk/kilbowie/
Ah, so that how the Ravenscraig steel works in Motherwell kept open after its owners decided it was no longer viable.
https://en.wikipedia.org/wiki/Ravenscraig_steelworks
Ah, so that’s how all the shipyards on the River Clyde have kept going since they virtually all went bankrupt.
Ah, so that’s how all the locomotive works in Glasgow have managed to keep going since they all went bust.
The Hillman/Rootes car factory in Linwood?
The Coats cotton factory in Paisley?
Aye, laddie, let’s dream on.
It wasn’t the health or otherwise of the economy which permanently closed these factories. The plain fact is that other places were becoming more efficient at making the same products. But I suppose it all begs the question as to what counts as a ‘healthy market’.
Sure grant tax benefits to emerging markets for investment. Of course .gov ALWAYS reverses its decision when it starts to catch on be profitable and craps the emerging market out then too. To increase tax on those fossil producers or anyone in this junk laden global economy isn’t going to anyone any good. The best you can hope is to seal any tax havens that are setup for funneling cash away by global corp. not little joe. Obama and others wont go there though, cause they’re crony-fascists, if they were anything different the market would’ve tanked when Obama entered office.
Why does that line make me think of Al Gore?
He’s gained his wealth by playing both ends against the middle. As long as the “green” can be directed his way, he’s all for it.
100 or years ago he would have been running the “shell game” at a carny.
No, he would have been running a church, then, too.
Some time ago on WUWT there was a study of all alternative electricity and fuel sources and how they compared to fossil fuel in terms of co2 and did they save any petroleum or coal. Wind and ethanol from corn (maize) were a break even. I can not find that post. Help.
Europe is going bankrupt thanks to several forces with global warming hysteria being one of the major forces but also passively allowing millions of very angry young male Muslims into Europe means more disruptions and even destruction of entire countries. This suicidal policy is quite amazing to watch. Aghast.
There is a solution to this on-slot:
https://pgtruspace.wordpress.com/2015/10/05/middle-east-refugee-solution/
will we take advantage of the opportunity presented to us?…pg
When government determines winners and losers in an economy, instead of acting as an impartial referee it becomes a cancer, crippling if not destroying healthy economic growth.
Bureaucrats always destroy the society they manage ALWAYS! It is us or them!
WE don’t need them…pg
Ronald Reagan told you this would happen. To paraphrase, govt does this if it runs tax it, if stops subsidize it.
And history repeats sigh…
carbon emitting has devastatingly damaged the environment of earth…. steps should be taken to reduce it
C or CO2???? Surely C.
Where did this carbon, which we have been “emitting” come from?
As far as I am aware, it came FROM the “environment of earth”.
We haven’t emitted it. We have simply put it back where it started!!
But jokes aside, you will have difficulty convincing anyone here that your alarmism is supported by any real science. Keep trying, if you like. But you had better come up with a more sophisticated argument, if you plan to convince anyone.
As a carbon-based life-form, how does it feel to be declared that you are composed of pollution?
That man-made global warming ruse has from the beginning been a planned fraud – as testified by the IPCC itself: http://cleanenergypundit.blogspot.co.uk/2011/10/west-is-facing-new-severe-recession.html ;
latest considerations are at http://cleanenergypundit.blogspot.co.uk/2015/08/midsummer-musings.html