From a Bloomberg article today:

The 15 mile-per-hour winds that buffeted northern Germany on July 24 caused the nation’s 21,600 windmills to generate so much power that utilities such as EON AG and RWE AG (RWE) had to pay consumers to take it off the grid.

Rather than an anomaly, the event marked the 31st hour this year when power companies lost money on their electricity in the intraday market because of a torrent of supply from wind and solar parks. The phenomenon was unheard of five years ago.

With Europe’s wind and solar farms set to triple by 2020, utilities investing in new coal and gas-fired power stations no longer face stable returns. As more renewables come on line, a gas plant owned by RWE or EON that may cost $1 billion to build will be stopped more often from running at full capacity. It may only pay for itself on days like Jan. 31, when clouds and still weather pushed an hour of power on the same-day market above 162 ($220) euros a megawatt-hour after dusk, in peak demand time.

“You’re looking at a future where on a sunny day in Germany, you’ll have negative prices,” Bloomberg New Energy Finance chief solar analyst Jenny Chase said about power rates in wholesale trading. “And a lot of the other markets are heading the same way.”

Europe’s biggest power markets give preference to renewable energy including forcing some utilities to use their fossil-fuel plants less. That cuts into profit, complicating investment decisions as the companies try to meet emission targets and replace older plants and networks that Citigroup Inc. estimates will cost them more than 900 billion euros by 2020.

Profit Margins

Northern Europe’s renewable-energy goals call for about 200 gigawatts of solar and wind capacity by 2020, or almost a third of the current installed base, compared with about 70 gigawatts today, according to the Finnish energy consultant Poyry. Even by 2014, gross profit from burning coal in Germany may skid by as much as 41 percent, according to Barclays Plc.

The gross margin at a coal power plant after deducting fuel and emission permit costs, the so-called clean dark spread, may “collapse” to as low at 3.50 euros a megawatt-hour, Barclays analysts including Peter Bisztyga said in a Sept. 1 report. The spread was at 6.15 euros today, Bloomberg data show.

Narrower margins mean it will take longer for companies to pay off building new gas- and coal-fired facilities. Those plants are needed. They can run around the clock, preventing blackouts when the sun sets or the wind dies as European power demand grows 5 percent through 2015 compared with 2010, according to Paris-based bank Societe Generale SA’s forecast.

‘Squeezed Out’

“The more intermittent technology like renewables, the more baseload generation will be squeezed out,” Volker Beckers, chief executive officer of RWE’s U.K. Npower unit, said in an interview at Bloomberg’s London bureau. Npower’s plants are largely coal- and gas-fired, or baseload, meaning they can run around the clock.

Electricite de France SA is spending 6 billion euros on its new 1,650-megawatt nuclear reactor at Flamanville in Normandy. Dong Energy A/S, Denmark’s biggest utility, inaugurated its first power station in the U.K. in February, an 824-megawatt combined-cycle gas turbine plant for 600 million pounds.

EON will miss its 2015 forecast by about 3 percent for earnings of 13.3 billion euros to 13.8 billion euros before interest, tax, depreciation and amortization if average power prices are 57.30 euros a megawatt-hour, below EON’s forecast of 60 to 62 euros, UniCredit analyst Lueder Schumacher said.

At 58.50 euros, RWE’s recurring net income will be 2.2 billion euros in 2013, compared with the German utility’s forecast of 2.5 billion, he estimated.

‘Depress’ Prices

“Too much wind can depress power prices, but then there are times when very little wind is blowing,” Poyry Director Phil Hare said in a telephone interview.

Based on weather patterns over the past 10 years, there’s a 72-hour period each year when a wind farm would produce less than 5 percent of its potential output, Hare said. “Some other plant has to be there, but the company has to make the return on its investment in just those 72 hours over 10 years.”

Germany’s renewable energy boom will make hedging the power output for utilities’ coal and natural-gas plants “more and more difficult,” according to an executive at Edison Trading SpA speaking at a conference in London.

The country’s renewable energy output may rise to 200 terawatt-hours in 2020 from 120 terawatt-hours last year, Andrea Siri, Edison’s head of continental power and origination, said yesterday, citing a regulatory forecast.

2 Million Homes

Solar plants in Germany generated as little as 23.8 megawatts at 7 a.m. Berlin time yesterday compared with 11,570 megawatts at 1:30 p.m., according to a European Energy Exchange AG’s website, tracking power capacity. A steady supply of 1,000 megawatts is enough for about 2 million homes in Germany.

Power prices on the Epex Spot SE exchange in Paris that handles German and French supply vary hour-by-hour depending on how available capacity is. At times they can become negative when renewable energy peaks and there’s a surplus of power.

At such times, generators or the grid operator pay consumers to take their electricity if they aren’t able to reduce output or hedge it. Grid operators in Germany, Europe’s biggest power market, are also required to take renewable output if it is available, just as in Spain and France.

The highest-ever hourly price in the combined German-French intraday market was 162.06 euros a megawatt-hour for delivery between 6 p.m. and 7 p.m. in Germany on Jan. 31, while the lowest was minus 55.11 euros for 2 p.m. to 3 p.m. on Feb. 6, data from the exchange showed.

Negative German Prices

The negative German prices on July 24 occurred on a day when winds averaged 15 mph in the northern state of Mecklenburg- Western Pomerania, home to many wind farms, Bloomberg weather data show.

Germany’s same-day electricity price was below zero for nine hours on that windy day on July 24, with negative prices for a total of 31 hours so far in 2011, according to Epex data. France had 9 negative hours this year.

The joint French-German intraday market started last year and has so far helped to “buffer the volatility of prices,” Epex company spokesman Wolfram Vogel said by e-mail on Sept. 16.

“The law in Germany is that renewables have priority, so utilities have the choice of turning plants down for a few hours or paying a negative price to someone in Germany or abroad,” EON spokesman Georg Oppermann said in a telephone interview. The company’s traders can protect EON against losses by watching weather patterns, he added.

‘Clearly a Negative’

“The huge amount of renewable capacity due to be added to the grid will depress not just spreads but also the outright power price,” UniCredit analyst Scott Phillips said. “This is clearly a negative predominantly for all thermal power plants, particularly coal.”

Britain plans to install more than 8,000 offshore wind turbines by 2020 to get 15 percent of electricity from renewable sources. Germany installed 7.4 gigawatts of solar photovoltaic capacity last year, the most of any nation, driving total capacity to 17,200 megawatts. Spain aims to get 20.8 percent of its total energy from marine energy, geothermal and offshore wind projects, as well as hydropower, by 2020.

German wind power capacity peaked at close to 12,000 megawatts on July 24, according to Meteogroup data, the last day of negative prices. Four days later, the most that the country’s wind parks generated was 315 megawatts.

Photovoltaic and solar-thermal plants may meet most of the world’s demand for electricity by 2060 — and half of all energy needs — with wind, hydropower and biomass plants supplying much of the remaining generation, the International Energy Agency said in August.

Capacity Payments

U.K. energy regulator Ofgem is considering paying generators to keep plants open as back-up suppliers, compensating them for down time. The so-called capacity payments, which also are being studied in Germany, are likely to favor gas over coal, as gas plants can be turned on and off faster, according to Phillips.

Subsidized power rates called feed-in tariffs, a proposed carbon floor price in Britain and other measures favoring renewable projects will lead to a shift in the “merit order” of plants across Europe, he said. Power from renewable projects will be the first to be used, followed by gas-fired power plants, which release less carbon-dioxide than coal stations.

“Margins are going to get worse over the next few years but as the value of the plant for backup starts getting interest, it becomes an issue of what they’re worth, not what they cost,” Hare said.

Beezer here.  It’s all complicated, but eventually the cost of fossil fuels will rise to a level where the real options become very clear indeed.

From a wide ranging interview of celebrated economist Daren Acemoglu, published at the Minneapolis Federal Reserve website, comes a discussion of what is called ‘directed technological change.’   Simply put, economists try to model the effects of technological changes, both at the micro and the macro level.

In one section of the interview Acemoglu talks about the conflicts between fossil fuel energy systems and technological innovation in so-called ‘clean’ energy.  Can a huge economy like that of the US navigate towards cleaner systems without damaging overall future growth? 

Directed Technical Change & Global Warming

Region: I definitely want to ask about your related work with James Robinson on economic and political transformation, but first let me jump to another of your seminal contributions in economics: directed technical change. In brief, the idea is that innovation is directed by two competing forces: the price effect that encourages innovation toward scarce factors and the market size effect that does the opposite, directs it toward abundant factors.

You and your co-authors recently applied this idea to the environment—global warming, in particular—and concluded that because of the externalities involved, sound policy should re-direct technical change toward clean technologies without delay, and also that optimal regulation with carbon taxes and research subsidies need not reduce long-term economic growth.

And you compare it to other economic analyses of climate change intervention, such as the Nicholas Stern report and William Nordhaus’ work. But could you give a quick primer on directed technical change and how you apply it to climate change?

Acemoglu: Sure. It’s useful for me to express it the following way, I think. The directed technical change idea really has two layers to it.

The first layer is sort of obvious to economists, but hadn’t really been developed and stated. It’s that just as we think all other factors go toward more profitable areas, investment in new technology and innovative activities also goes toward more profitable areas. I think in a micro sense, nobody would doubt this. We don’t talk of “technological change” in the abstract. We talk of technological change in the pharmaceutical sector, for example. We talk of technological change going after heart disease. We don’t just talk of broad technological change. And when we want to understand technological change for heart disease, we ask, What’s the market for heart drugs, beta-blockers, ACE inhibitors, statins or whatever?

So, that’s the most important part. Directed technical change was pushing this idea at the economywide level. Technology, either across sectors or across different types of factors—factor-augmenting or factor-substituting technologies—is also going to be determined by their profit incentives.

I first tried to develop these ideas in the context of inequality and skill-biased technological change. There the market size and the price effects, which you’ve mentioned, turn out to be quite important. If you want to understand how this works in a more detailed level, you need to understand how these market size and price effects work. They create countervailing forces, but one of them always dominates, and so on.

When we turn to the environment, I think the bigger picture insights seem to be more important. Market size and price effects come out in the context of the environment, and they’re in our paper, of course. But for purposes of our conversation here, I think I can do justice to the main ideas without getting into those details.

Essentially, the bulk of the literature in environmental economics has been about how we have to tax economic activity to slow it down so that we don’t damage the environment. If you think of a single-sector economy, with one sector that depends on coal, or on gas, that’s the only thing you can do: slow down that one sector. If you want to reduce carbon emissions, you just have to slow down that sector. Now, you don’t directly slow it down; you change its composition of factors, perhaps, but you can’t let that sector take off at a very rapid rate and still, at the same time, limit carbon emissions.

Our perspective was, well, the economy has several technologies; some of them are cleaner than others. How should we shift toward the cleaner ones? When you look at the climate science, there’s a lot of emphasis precisely on this and on questions such as, When is it that nuclear power will become economical? When will geothermal or wind or solar solve both their cost and their delivery problems?

Therefore, the perspective shouldn’t be, How can we slow down economic activity? Instead, it should be, How can we shift the composition of economic activity away from dirty technologies to cleaner technologies?

Now, that’s a very directed-technical-change-related question, but it already comes with a very important implication: The focus shouldn’t be on slowing down economic activity, but on changing its composition and changing the type of technological changes that the market generates.

Moreover, and importantly, we expect there to be a distinctive cumulative aspect to research. Different technologies often build on past successes in the same line of technology. So when you’re building a new car, you build on the past advances in car technology; you don’t as much build on advances in solar technology. In the same way as when you build new solar panels, you’re building on the previous solar panels, not on the diesel engine. What that means is that there’s going to be strong self-reinforcement in changing the direction of technological change. So when technological change shifts away from the dirty technologies that are so fossil-fuel-dependent to the cleaner technologies, it will also make it potentially cheaper to produce these innovations, these cleaner technologies, in the future.

That was the basic observation that I think was most important in the approach. And that’s the source of the more optimistic conclusions. Let me explain that in the following way. If you have a Nordhaus-type model—and I don’t want to caricaturize it, because Nordhaus in other work has considered richer models—but the seminal contribution that Nordhaus made in the early 1990s, for example, was sort of a neoclassical growth model used for the environment, and reducing carbons is reducing capital accumulation. In a model like that, parameters are going to determine how aggressive you should be in reducing carbon, but when you reduce carbon, you’re reducing GDP, you’re reducing growth.

The more optimistic aspect of our perspective came from the realization that if what you’re doing with environmental policy is “tax one sector, but subsidize another sector,” you might actually achieve in the long run quite successful growth, because the other sector is going to pick up the slack. If we have enough technological ingenuity—and that is an if, which I think we tried to make explicit in the paper—and can generate cleaner technologies that avoid the negative environmental consequences of coal and oil, then there is no reason for our economy not to grow at a healthy rate in the long run. So that was the optimistic part.

So in that sense, factoring in directed technical change made this conclusion much more optimistic relative to Nordhaus and, of course, more optimistic than Stern’s review, which was much more effective, and I believe rightly so, [in warning] of the potential dangers from climate change.

But on the other hand, it also made policy prescriptions much more proactive than Nordhaus and, in that sense, far more similar to Stern. And the logic of that relates very tightly to the directed technical change aspect. In the Nordhaus approach, it’s like a ramp-up thing: You don’t want to do too much because reducing emissions today is costly, while the future is discounted. If you can cut things in the future, why do it today? Now you can also add, “We don’t know where we’re going to go, so let’s go slowly,” a very gradualist approach.

But let’s think of the logic of directed technical change with cumulative research. The less we do on green technology today, the less knowledge is accumulated in the green sector, so the bigger is the gap between fossil-fuel-based technology and energy, and the cleaner energy, so the harder it will be in the future to close that gap. With more proactive, decisive action today, we already start closing the gap, and we’re making it easier to deal with the problem in the future.

Beezer here.  The main point is that somehow the government needs to keep subsidizing technological innovation in the clean energy areas.  Without this effort, and Acemoglu argues net GDP growth may be unchanged by the subsidy, it will become harder in the future to transition into cleaner energy systems because postponing initial innovation also postpones other innovations that always follow the initial discoveries.    It’s the old saw about when is the best time to plant a tree?  Now.   As almost always, hat tip to  Mark Thoma’s economist’s view for highlighting this interview.

From the blogpost at London Banker here are excerpts from testimony by millionaire Marriner Eccles to a Congressional Committee in 1933.  It was an historic event because Eccles made recommendations for the FDIC, Federal Reserve Board reforms, income and inheritance taxes, social security and unemployment insurance among other far reaching ideas. 

Beyond that Eccles provides a precise description of the problems faced by the US then, during President Franklin Delano’s second year of office.  It’s astonishing how much his description of the problems then match our current problems.  He showed what was needed to be done back then.  Unfortunately for the US today, this speech and Eccles’ reasoning have long been forgotten.  So we continue to do the wrong things today, to repeat the errors that were made in the late 1920s and early 1930s which plunged the country into a Great Depression.

From the post:

I repeat there is plenty of money today to bring about a restoration of prices, but the chief trouble is that it is in the wrong place; it is concentrated in the larger financial centers of the country, the creditor sections, leaving a great portion of the back country, or the debtor sections, drained dry and making it appear that there is a great shortage of money and that it is, therefore, necessary for the Government to print more. This maldistribution of our money supply is the result of the relationship between debtor and creditor sections – just the same as the realtion between this as a creditor nation and another nation as a debtor nation – and the development of our industries into vast systems concentrated in the larger centers. During the period of the depression the creditor sections have acted on our system like a great suction pump, drawing a large portion of the available income and deposits in payment of interest, debts, insurance and dividends as well as in the transfer of balances by the larger corporations normally carried throughout the country….

The maladjustment referred to must be corrected before there can be the necessary velocity of money. I see no way of correcting this situation except through Government action.

Beezer here.  Eccles saw that there was no shortage of capital in the country, but that there was a huge drop in demand caused by an increase in private debt.  He correctly saw that this imbalance basically left most of the country impoverished and under employed, with all the money concentrated in the hands of a very few at the top of the income ladder.  Interestingly, he argued against increasing the money supply.  It was not needed, Eccles believed.  The problem was primarily one of distribution–money had flowed upwards from labor to banks and creditors.  Too much so, therefore Eccles recommended raising taxes on the wealthy, including tax reform that reduced the ability to pass on wealth via inheritances.   By doing so, Eccles argued, demand would be returned to previous levels and so would employment and overall economic health.   And so too, Eccles made clear, would the ability to pay down both private and national debt.

Here we have a good chance at entering recession again as demand continues to slumber and may decline even more as the government withdraws from its role as ‘stimulator of last resort.’

Meanwhile the talking heads at CNBC warn of money growth, the soon to come dramatic rise in inflation and soaring interest rates resulting.  What’s needed, these dimbulbs all parrot as if reading from a script, is to cut government spending now and to de-regulate business so the private economy can start creating jobs again.   

The most ideological of this ideological bunch is one Rick Santelli who reports from the Chicago Mercantile Exchange, a major trading platform for the Treasury market.   Santelli sounds like the press secretary for Tea Party Republicans Paul Ryan and Eric Cantor.  When anyone mentions the political logjam in Washington Santelli blames President Obama, who recommends using both spending cuts and increasing revenues to balance budgets, as being the stubborn one compared to Ryan and Cantor, who want only cuts and refuse to even talk about raising revenues.  Santelli is so ideological he has long ago stopped realizing he’s channeling Andrew Mellon. 

You’d think that being totally wrong on every call he’s made about the markets would cause Santelli to take a second look.  For almost four years he’s warned that rates are going to rise soon, that inflation is going to gallop out of control soon, that interest rates are going to rocket upward soon.  For almost four years the markets have done precisely the opposite.  If anyone listening to Santelli had actually put some skin in the game based upon Santelli’s predictions they’d have lost money.  Lots of money. 

Of course we have a lack of demand problem, which is measured by unemployment.  The less demand, the higher the unemployment.  The longer the government waits to apply the right cure–to hire directly and to fund said hiring by raising taxes on the wealthiest Americans who are currently hoarding cash as a store of value–the quicker demand will recover.   But this real world cure contradicts Santelli and, well you must understand, Santelli is supremely confident in his viewpoints.  It seems he becomes even more confident the more wrong his predictions.  He’s become a joke, an irritant who should simply limit himself to reporting price moves rather than promoting economic viewpoints that are precisely the opposite of the truth.

The irony about Santelli’s theories is that they only come into play when we’re close to full employment and don’t have any demand or output problems, situations which will never happen if we actually follow Santelli’s recommendations.  In Santelli’s world even the eagle eyed squirrel won’t find a nut, never mind the blind one.

The truly sad aspect of all this is that these folks are misleading their viewers and, as a cable channel for all things financial (in Santelli’s case all things Tea Party),  you’d assume by this time the audience is probably tired of being given very bad advice, investment-wise. 

Oh well, waiting for the laissez fairy, or the confidence fairy (excepting PT Barnum’s ‘there’s a sucker born every minute’ confidence game CNBC plays), or the invisible hand, or the tooth fairy–whatever–is becoming a very dangerous game to play.

A while back we urged people to raise cash.  Republican intransigence against directly hiring people, either to rebuild infrastructure, or to rehire teachers, police and firefighters laid off at the municipal level, is having the inevitable effect of pushing the economy back into official recession levels.

While a double dip might make Republicans relent, or at least push traditional Republicans into a coalition with Democrats in the House and thus overcome Tea Partiers, the odds of this happening are still low, in our opinion.  The worse the double dip, the higher the probability of this badly needed coalition forming, however.

So when is the time right to wade out of cash?   Right now if you can take risk and sleep at night.  Put 10% to work now, and repeat the process on volatile down days.   Put the funds into companies that are growing and if they pay a dividend so much the better.  The ride is likely to be bumpy, of course, and there can be no guessing what will eventually turn out to be the lowest lows.    A lot of folks are advising utilities because they pay hefty dividends and are considered defensive.  We disagree unless you’re willing to quickly trade out of them once interest rates turn.  Traditionally one buys utilities when interest rates are high, and the stock prices low.  That’s when you buy utilities.  And of course your so-called advisor is telling you to dump utilities when that happens.  Ignore the advice.  Just like you should ignore it now, when you’re being told to buy defensive utilities.

What’s the ultimate sign of a bottom?  Look for the number of new highs.  If you get a string of bad market days and one day there’s only one stock making a new high (while the new low list is long) you’re at bottom.  If you see that happen, back up the truck.

What the country needs is millions of jobs that pay a livable wage and provide health benefits.  The confidence fairy and the laissez fairy are still comatose, so tax cuts won’t have any dramatic effect.  Most of the money will go towards debt reduction and not towards consumption and investment.  For the wealthy, the money just sits there in short term deposits even though the real rate of interest is negative.

The New York Times summarizes our poor position succinctly.

WASHINGTON — Another 2.6 million people slipped into poverty in the United States last year, the Census Bureau reported Tuesday, and the number of Americans living below the official poverty line, 46.2 million people, was the highest number in the 52 years the bureau has been publishing figures on it.

Multimedia

Graphic

Income and Poverty Rate at 1990s Levels

And in new signs of distress among the middle class, median household incomes fell last year to levels last seen in 1997.

Economists pointed to a telling statistic: It was the first time since the Great Depression that median household income, adjusted for inflation, had not risen over such a long period, said Lawrence Katz, an economics professor at Harvard.

“This is truly a lost decade,” Mr. Katz said. “We think of America as a place where every generation is doing better, but we’re looking at a period when the median family is in worse shape than it was in the late 1990s.”

The bureau’s findings were worse than many economists expected, and brought into sharp relief the toll the past decade — including the painful declines of the financial crisis and recession —had taken on Americans at the middle and lower parts of the income ladder. It is also fresh evidence that the disappointing economic recovery has done nothing for the country’s poorest citizens.

The report said the percentage of Americans living below the poverty line last year, 15.1 percent, was the highest level since 1993. (The poverty line in 2010 for a family of four was $22,314.)

The report comes as President Obama gears up to try to pass a jobs bill, and analysts said the bleak numbers could help him make his case for urgency. But they could also be used against him by Republican opponents seeking to highlight economic shortcomings on his watch.

“This is one more piece of bad news on the economy,” said Ron Haskins, a director of the Center on Children and Families at the Brookings Institution. “This will be another cross to bear by the administration.”

The past decade was also marked by a growing gap between the very top and very bottom of the income ladder. Median household income for the bottom tenth of the income spectrum fell by 12 percent.