FIT as Efficient Auctions

Jul 23 2014

Craig Morris at Renewables International kindly quotes my recent blog post about the recent German reform of the feed-in tariff. And he makes a very interesting point in closing his post:

No problem – show me a bidding process that is more cost-effective than feed-in tariffs and provides greater competition between market players large and small (not between energy sources; solar and wind complement each other, they do not compete with each other), and we can throw out feed-in tariffs. If the Commission is saying that we have to transition from FITs to bidding processes that are better , then there will be no such transition at all, for no such bidding processes exist.

The case for phasing out feed-in tariffs and replacing them with auction models is based on the idea that this will reduce costs. There is a true core to that idea. If you hand out feed-in tariffs that are higher than what is necessary under market conditions, electricity consumers will end up paying higher surcharges than needed.

But actually the present system (especially after the last reform) already makes sure that the feed-in tariffs are not above what market conditions require.

That’s because they are based on deployment records. If those are high, the feed-in tariffs get slashed. If they are too low, they stay constant, or may even increase.

That clearly is a reaction to market conditions.

And in contrast to auctions, there is no need for a complicated process to auction off individual projects, something that certainly won’t work for small rooftop solar.

We also know that the feed-in tariff has actually a rather good track record in reducing costs, to the point that it won’t matter ever so much that those costs will go up again slightly under the failed auction model Germany just introduced, with the EU Commission illegally requesting that to happen.

While I think it is a great point Morris made here and I agree completely with that, there is one technical detail where I disagree with his post. Morris writes:

Essentially, the ECJ made a distinction in its ruling of 2001 between “illegal state aid” and “legal state aid,” with German feed-in tariffs from the 90s constituting a legal form.

That’s not how I see the PreussenElektra case. In that case, the Court decided that the German system is not “State aid” in the first place. They did not say it is State aid, but should be allowed anyway.

That was the reasoning in PreussenElektra as well as in the recent Ålands Vindkraft case concerning measures of equal effect as quantitative restrictions (Article 34 of the Treaty on the Functioning of the European Union). The fact that the German system as well as the Swedish one does not allow electricity generated in other Member States is a restriction, but it is justified by an overriding purpose of environmental protection.

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The Case of the Luxembourgish Franc

Jul 23 2014

I am reading the June 2014 FATF report “Virtual Currencies: Key Definitions and Potential AML/CTF Risks”. The FATF (Financial Action Task Force) will have some major influence on the coming wave of worldwide Bitcoin regulation. They are in the business of setting worldwide standards in the anti-money laundering (AML) and counter-terrorist financing (CFT) fields. Since the Bitcoin network raises some questions in that field, I am sure that ten years from now there will be a recommendation from the FATF on how to deal with Bitcoin. If that recommendation is restrictive, that is one possible scenario where Bitcoin fails to go mainstream.

That means that the discussions at the FATF are important. The paper mentioned above is the first step in these discussions.

It starts off with a proposal for defining “virtual currencies”.

And the first thing necessary in the opinion of this paper is:

Virtual currency is a digital representation5 of value that can be digitally traded and functions as (1) a medium of exchange; and/or (2) a unit of account; and/or (3) a store of value, but does not have legal tender status (i.e., when tendered to a creditor, is a valid and legal offer of payment)6 in any jurisdiction.7 It is not issued nor guaranteed by any jurisdiction, and fulfils the above functions only by agreement within the community of users of the virtual currency. Virtual currency is distinguished from fiat currency (a.k.a. “real currency,” “real money,” or “national currency”), which is the coin and paper money of a country that is designated as its legal tender; circulates; and is customarily used and accepted as a medium of exchange in the issuing country.

They think that the status of Bitcoin depends on whether Mongolia (or some other country) has enacted a law yet recognizing Bitcoin as a second currency.

And that’s where the Luxembourgish franc comes into play. As the relevant Wikipedia article shows, Luxembourg recognized the Belgian franc as legal tender, along with their own currency. From the article:

Between 1944 and 2002, 1 Luxembourg franc was equal to 1 Belgian franc. Belgian francs were legal tender inside Luxembourg and Luxembourg francs were legal tender in Belgium.

So that’s an interesting precedent for one country having multiple currencies. Another one is the transition to the euro. Again, from the Wikipedia article:

During the period 1999–2002, the franc was officially a subdivision of the euro (1 euro = 40.3399 francs) but the euro did not circulate. Under the principle of “no obligation and no prohibition”, financial transactions could be conducted in euros and francs, but physical payments could only be made in francs, as euro notes and coins were not available yet.

That principle “no obligation and no prohibition” describes very well the status of Bitcoin right now. And just as the euro was a currency in Luxembourg even before they issued notes and coins, Bitcoin is of course a currency everywhere in the world, even if there are no banknotes and coins, and even if there is still no country that recognizes it as legal tender.

In contrast, under the definition of the FATF report, Bitcoin’s status as a “virtual currency” would immediately cease the moment any State in the world enacted a law that recognized Bitcoin as a second legal tender, as Luxembourg recognized the Belgian franc.

Having any State enact such a law sure would add some credibility to the Bitcoin project, even if it is a developing nation like Mongolia.

But why should that be a decisive factor for the legal analysis? The basic structure of the Bitcoin network does not suddenly change with such a development. Mongolia’s decision would have no effect on the blockchain.

But anyway, when discussing these issues, it is interesting to know that some countries had multiple currencies with legal tender status in the past. And the Luxembourgish franc is one case to point to.

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Book Review: Odds Against Tomorrow

Jul 21 2014

By Nathaniel Rich, link to Kindle edition here.

I bought this because it received a NEVIL award, as did my own global warming science fiction novel “Last Week” (FREE PDF file for that here).

This novel would be improved by just scrapping the third part. None of that makes sense to me. Especially the main character’s motivations. I have also some trouble understanding why Mitchell would stay in town when the storm hits, and why people trust him as some kind of authority on storms even though his field of expertise is statistics, not meteorology.

The basic idea of having a math genius making a lot of money from predicting risks for rich clients is interesting for a global warming novel. I liked that part. I am sure that the insurance industry employs people like Mitchell to figure out how much premiums they need to charge. All things equal, more risk means more business for insurance companies.

But I don’t think that he would be able to say anything about individual storms hitting any individual area. With global warming we know that extreme weather events will become more frequent and more damaging, but we don’t know when and where exactly they will hit.

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Book Review: Surviving Abe

Jul 20 2014

Surviving Abe: A Climate-Fiction Novel by J.Z. O’Brien, link to the Kindle edition I bought.

This is not, as someone living in Japan (like me) might think, about the Japanese Prime Minister.

It is also not so much about global warming. The “Abe” in the title is a destructive storm, but it only sets the stage for several independent survival stories.

The novel starts out with four stories. One of them merges with one of the others about half way through, leaving three sets of characters that don’t seem to have much to do with each other, except for the fact that they all somewhat suffer from the storm.

There is a set of antagonists (terrorists), who are developed not very much. Most of them only appear in the form of some e-mail text. Their motives, intelligence, and means of pulling their project off are rather open to doubt. If they want to cull World population from 7 to 2 billion, causing some extra deaths locally in the United States won’t get them very far. Even killing everyone in that country would be only around 0.318 billion people. Sabotaging infrastructure in a place they themselves live would be suicidal. And it is just not realistic to have them shut down the Internet and all radio communication on top of that.

Other antagonists serve as shooting targets for the good guys. The remain mostly without faces and names, just like targets in a computer game.

The author does a good job in developing the good guy characters. It is easy to follow even when he switches all the time between his three independent stories.

And the author also does a good job in keeping up the suspense.

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Commission Power Grab Failure

Jul 19 2014

The EU Commission may think that their illegal power grab ordering Germany around in the latest round of reform of the Law on Priority of Renewable Energy was a success.

And, on the surface, it was. Congratulations to the Commission, they did manage to have a larger influence on the final legislation than the German Bundesrat. Their idea of giving up the resoundingly successful feed-in tariff in Germany and introduce a system based on auctions has found its way into the final text of the law.

But this victory comes at a price.

For one, it is clear to anyone paying attention that the Commission has blatantly overstepped their competences. If you are interested in the legal details of that I recommend the latest paper from the Stiftung Umweltenergierecht (in German). There is just no reasonable doubt possible about the fact that this is a major Constitutional crisis for German democracy.

When the feed-in tariff was enacted in the first place, that was done by a democratically elected coalition of the Green and the Social Democrat Parties. When it was ended in 2014, it was done on orders from the Commission, who is not democratically elected by anyone, and who has no business whatsoever to give the German legislators any orders in this situation.

In basic Constitutional theory, the Commission is part of the executive force. Giving them the power to legislate instead of Parliament is a serious violation of basic Constitutional values. Having them grab that power when they don’t have it in the first place makes this even worse.

That in turn makes it very hard to accept this introduction of an auction model for me. I was not convinced of its merits in the first place. But the fact of this illegal power grab actually succeeding makes me feel something close to seething hot anger at this failed policy.

Not a good place to start from. But now comes the fun part.

The German legislation until now was only a starting point setting a framework for the introduction of an auction model. To actually pull it off, there remains quite a lot of work to do and details to discuss.

Who is going to be responsible for the auctions? What exactly is the model for such an auction? Are people bidding in such an auction trying to form a contract with the entity who holds it? Are sanctions for someone winning an auction but failing to follow through a penalty for breach of contract (Vertragsstrafe) or an administrative sanction?

This will be one big, complicated mess. Good luck with trying to pull this off in the first place. It will of course be completely impossible to reduce costs with such a stupid basic idea.

Factors raising costs going forward are easily identified. Everyone brave enough to still consider building any solar project in Germany will need to hire a couple of lawyers to wade through the thousands of pages of regulations needed to actually pull an auction system off. It introduces a huge new layer of complexity.

Then they will need to pay their banks double of the interest they needed to pay under an easily understood and reliable feed-in tariff, because the bank will correctly perceive the risk as much higher. There is the completely new risk of failing to succeed with any bid. There is the completely new risk of having to pay high penalties because the project gets delayed for one reason or another.

The German Ministry of Economy is now in the process of trying to figure out how to do auctions for large-scale solar projects in a first experimental phase. And they are asking for comments.

I am not going to comment there, since that might possibly help with improving the auction model, which is the last thing I want. I want them to test their stupid idea and fail spectacularly.

But I note with interest a long paper the Ministry has commissioned, which discusses some of the possible alternatives. That paper states on page 9 that they expect the resulting price for large scale solar projects to be higher than the feed-in tariff in place right now. They note correctly that the transition to an auction model introduces a whole new set of costs, which will make the whole exercise more costly than a feed-in tariff model.

The fun part I was referring to earlier is this: Now an auction model gets its chance at bat. It will fail, of course, like it has failed almost everywhere else it has been tried. But we will see for the first time how utterly and indisputable that failure will be and have an opportunity to compare it to the feed-in tariff system in place until now.

There are basically three ways to measure the failure. One is the amount of cost added by the transition to an auction model. That will remove the idea behind this kind of thinking that auction models help to reduce costs. The costs will increase, as the study states at page 9. The only question is by how much.

The second is the complexity of the system. The study notes as one of their goals to find a system easily understood by citizens, so as to have citizens accept the transition to this model. They also note that this will be quite a challenge, considering the failure of this model in many foreign countries, and that the system needs to be transparent and easily understandable to achieve acceptance (page 10).

Their problem there is that it is completely impossible to build a “transparent and easily understandable” auction system. One of the big advantages of feed-in over auction is that the system is much easier to understand. No amount of tweaking at the details will ever change this fundamental disadvantage of auctioning.

And the third metric to measure the failure will be the volume of projects actually installed under an auction system. I am not sure how that will play out.

Of course, the auction system will by definition be unable to deliver more projects than the volume up for auction. But it may very well fail to deliver even that low volume for one reason or another. It depends on how much the system fails in reducing costs if that happens or not.

An auction system by definition allows bidders to enter high prices, so maybe the additional costs will get so high that some substantial volume will get installed by some brave souls still not terrified by the 1001 pages of legalese and the new sanctions introduced for failing to follow through on time.

And of course, I may be wrong in my assessment. Maybe the experiments with this idea will show that costs really go down, like the Commission and the German coalition parties seem to think.

Then they can build on that success and extend the auction model to rooftop solar systems in 2017. That should be even more fun to watch.

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Book Review: The Collapse of Western Civilization: A View from the Future

Jul 18 2014

By Naomi Oreskes and Eric M. Conway. I bought the Kindle version because of this review by Joe Romm at Climate Progress.

I am not quite sure if this is fiction or not.

The basic premise is that in 2393 Chinese historians look back at how global warming has played out and why humanity was not able to solve the problem as long as that was still possible.

That idea appeals to me, since I wrote a novel about a Princess coming back in a time machine from the 24th Century to warn humanity of how horribly global warming has played out (and to solve the problem in the one week she has left to live as a side effect of time travel). It is called “Last Week”. A FREE PDF file is here.

In contrast, this book has no time machines in its plot. It also doesn’t have a plot, or a story, or main characters, or antagonists. I don’t think it qualifies as a novel.

Instead, it reads like a learned article reflecting on what exactly makes humanity miss the obvious need for drastic countermeasures. Much of it is documented with footnotes. If this is science fiction, it is more science as fiction.

But there is also a strong fictional element. The authors tell us how much degrees of global warming we end up with. And how China dealt with the problem of relocating 250 million people from their coast lines. And many other things in the future, which obviously are impossible to document exactly with a footnote. About one third of the book is speculation about what might happen.

The authors blame something they call the “carbon-combustion complex”, which is a parallel to the “military-industrial complex” term already well known.

They may be correct. If so, it would help to have the “carbon-combustion complex” on the other side, the side of the climate activists. That is easily done. All it takes is to realize that oil companies and other fossil fuel owners would realize massive profits from rising fossil fuel prices, and that of course a fast phase-out of fossil fuel means higher prices (less supply).

I am preaching this all the time on this blog under the name of Phaseout Profit Theory.


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German Federal Court of Justice: EEG is Constitutional

Jul 15 2014

The German Federal Court of Justice has published a decision from June 25 on an attempt to resist the German feed-in tariff system.

The plaintiff in that case paid the feed-in tariff surcharges for April 2012 (about 10,000 Euro) and claims them back with this lawsuit. They argue that the Law on Priority for Renewable Energy is unconstitutional.

The reason for that: In their view, the surcharges are a “special tax” (Sonderabgabe), which means a tax raised for a specific purpose. Such a tax is problematic under the German Constitution, because it calls in question Parliament’s right to decide about how to spend all tax income.

The Federal Court of Justice did not share these concerns. They say that this is not a tax in the first place. A tax requires that the funds raised by the surcharges become part of the state budget. They don’t. All these funds never touch the state budget, they all flow only between private persons.

That of course is also true when discussing if the system is a form of “State aid”, as the EU Commission claims. For exactly the same reasons explained in this opinion, that is not the case as well.

Some people call the new requirement for renewable energy installations over 10 kW to pay 40% of the surcharges (after a transition period) a “solar tax”. That is not correct either. Again, these funds are never in the state budget.

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Bitcoin Based Cap and Trade

Jul 13 2014

New video in the Youtube Bitcoin 101 series about a crazy idea to develop a Bitcoin-based global CO2 cap and trade system called Sno Cap.

I just saw this at the Reddit Bitcoin forum. I have no idea if it might work. But just like Bitcoin itself is creating a global currency based only on the power of mathematics, it might just be possible to create a global cap and trade system based on the Bitcoin global public ledger.

Anyway, as someone with a strong interest both in Bitcoin and global warming issues, this obviously deserves some attention.

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WTO and Renewable Energy

Jul 12 2014

For later reference, just a quick link to a new book financed by the German Ministry of Economy on the matter (in German language). Thanks to this Tweet by Heiko Stubner for the link.

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NEVIL Award for “Last Week”

Jul 12 2014

Climate activist Dan Bloom has kindly awarded a “NEVIL” to my novel “Last Week”, available as a FREE PDF file here.

The “NEVIL” award is named after Nevil Shute, author of the novel “On the beach“, which is the best known of his 24 published novels. It is a book about everybody on the planet dying from radioactive fallout after a nuclear war, which may be an appropriate metaphor for global warming considering the possibility of Venus syndrome.

I recall that Jim Hansen seems to have changed his mind about that risk. So maybe it is less likely to happen than Germany beating Brazil by 7 to 1. But global warming is a potential human extinction risk, at least more so than nuclear war. And calling attention to that risk by writing novels is what I want to do.

I feel pleased and honored to be included in a list with Paolo Bacigalupi, who in contrast to me is a professional fiction writer who knows what he’s doing.

I have started a list titled Cli-Fi: Climate Change Fiction on Goodreads, and I have read and reviewed some efforts of other authors who write about climate change. But I have yet to find one climate change novel that actually proposes a solution to our little global warming problem that might just work. I am motivated in part by doing exactly that, and “Last Week” does propose a solution, like my other two global warming science fiction novels.

The other motivation is that I would like to scare readers, since humans are by nature not suited to understand the enormity of this risk. See this 2012 post titled “Don’t Fear the Raptor” for a more detailed explanation of that point.

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