Ok, apologies for transgressing the rules. I have now posted here:

http://www.irisheconomy.ie/index.php/2009/02/16/national-insulation-for-economic-recovery-as-second-best-as-it-gets/#comment-11120

as requested and look forward to your response.

I don’t believe it is confidential, it just hasn’t been published. I will email you a copy further to clarification with SEI that this is ok.

While we are on the subject, I note from a previous post “If Irish home owners do not sufficiently invest in their house, that is their business”.

Do you not believe that the market can fail?

And:

“Third, will it reduce carbon dioxide emissions? Yes, if the subsidies are taken up. Direct emissions of carbon dioxide by households are some 7 million tonnes of carbon dioxide.

You forgot about about another 5Mt of emissions comes from energy use in homes.

“Let us assume that 5 million tonnes of that are for home heating (too high)”

No too low.

“and that the insulation programming reduces the energy bill by half (too high)”

depends on the intervention, but about right in many cases

“for one percent (too high) of houses”.

about 4%, but many will only choose one or two interventions which would reduce the energy savings

“Then 25,000 tCO2 is saved this year, but this is an investment so let us multiply by 10. Saving 250,000 tCO2 for €100 mln is 400 €/tCO2. Last Friday, emission permits traded for 8.65 €/tCO2. The 400 €/tCO2 is conservative on the one hand, but it omits the benefits of warmer homes…”

a positive with ancillary benefits on health and morbidity

“…and lower energy bills”.

If we accept your estimates, ie: half average bills (=€1000 on 2008 prices) on 1% of homes (175,000), that’s €17.5 million saved per annum, -20% comfort take up (this is where the health etc benefits come from) is €14 million p/a energy savings. That’s starting to look like money well spent all of a sudden!

“If the two cancel…”

That’s two positives. How can they cancel?!!

“…..the government overpays for CO2 emission reduction by a factor 50! (This factor is comparable to getting your hair cut in Florida rather than in Dublin.)

Clearly not.

Am I missing something?

I tend to discount confidential evaluations of a programme by the responsible agency.

I can’t sorry. It hasn’t been published. If you really want to see it I can ask SEI if it can be made available.

The findings will come as no surprise as CBAs on efficiency retrofits generally come to similar conclusions.

eg:http://erg.ucd.ie/publications.html (Homes for the 21st Century)

By the way, is there some logic that I have missed for considering energy efficiency projects differently from other capital spending projects? I mean this as a genuine question.

JC

The report explains the logic somewhat when it proposes that “energy efficiency schemes should only be funded in the future if the cost of achieving the reduction in carbon output secured by them is equal to or less than the market price for carbon credits”. Presumably the logic is that the exchequer will have to buy credits if emissions are not reduced, and that this simplistic cost-benefit payoff is all that matters at this time of crisis.

This is an almost incredible argument. One wonders if this same logic should apply to all capital spending projects? Not too many roads would get built under such restrictive criteria. Surely investing in energy efficiency should be assessed like all other capital spending and not singled out?

A further insight into the authors’ logic is perhaps unintentionally provided further on, when they state that “furthermore, the introduction of a carbon tax, in due course, should obviate in economic terms the need for any such schemes”. Ah - so markets are perfect and once the correct price signal is provided any truly cost-efficient and sensible investments with reasonable pay-offs will be made.

The only problem with this logic is that it is nonsense. Markets consistently fail when it comes to energy efficiency and numerous well-understood and intractable market failures can be identified in the area of residential energy efficiency. There are split incentives, ill understood benefits, information deficits, lack of trust, uncertainty of payoffs, high up-front costs etc.

The swift withdrawal of funding from programmes proposed would pull the rug out from under an emerging industry which will likely be worth billions in years to come. While the suggestion “to transfer responsibility for appropriate schemes…to the energy companies” is probably a good idea in the medium term, this transition must be managed in a way that doesn’t strangle a vital and rapidly expanding sector of the construction industry.

I’d end most internal flight subsidies, especially any where there is another subsidised public transport option. There’s very little point paying IÉ, BÉ and FR to bring people to Farranfore from Dublin and Back.

Regarding Electricity supply, CER allow 3c per kWh for transmission/distribution costs, before generation costs. Off peak electricity costs 4c per kWhr in total in France…..

> government ownership of corporations

> increases the risks of (1) cronyism and

> (2) using companies for public policy

Looking at AngloIrish, one could also conclude that (1) cronyism and (2) private corporations hijacking public policy — results in public ownership ;)

I would add that government ownership of corporations increases the risks of (1) cronyism and (2) using companies for public policy.

You make a number of valid points, but you come close to damning any of us who propose some form of privatisation for some of the existing semi-states as being simplistic and, perhaps, blindly ideologically driven. Others can respond as they see fit, but my focus is on the circumstances in each sector where these semi-states operate and I seek to examine the economic and industrial organisation and the extent to which sustainable, efficiency-generating and consumer-benefiting competition may be introduced.

Your acknowledgement of the electricity and gas “rip-off” is refreshing, but it was not occasioned by a “regulatory-market fault”. This results from the policy of successive governments not to part-finance a huge expansion of network investment and, in some vague way, to “promote competition”. The energy regulator has simply implemented this policy, much to the delight of the ESB and BGE, and households and businesses have suffered.

Privatisation of the energy networks makes sense because it will reduce network tariffs, and, thereby, final prices, and open access to investment finance that the Government either would struggle to provide or should not be called upon to provide. What to do with the remaining electricity generation and electricity and gas supply businesses is more problematic. Genuine competition in supply will only emerge in the context of integrated gas and electricity markets on the islands of Ireland and Britain - with the potential to integrate these markets further with the North West Europe (NWE) gas market and Ireland-Britain-France regional electricity market as progress is made to create the single EU market in electricity and gas. Compelling the ESB to divest generating plants so that its share of the generation market on the island does not exceed 40% was particularly idiotic. The ESB should have been built up to participate effectively in the Irish and the emerging EU and international markets. It has a world-class reputation that should have been leveraged. Instead it is being cut off at the knees in the Irish market to pomote this optical illusion of competition. I would be largely indifferent as to whether it was in the public or private sector. The only factor that would push me towards the private option is the constraint on the State’s ability to provide investment finance.

I agree with you that more, rather than less, public sector involvement may be required in some areas, for example, renewables. But it should be more as a facilitator given the constraints on public sector investment. However, privatisation of some semi-states will generate proceeds to finance participation in other sectors where the public sector may have to take the lead. I have previously made the case for privatisation proceeds to be used to bring the fixed telecoms network back into public ownership so as to begin to undo the damage casued by the bodged privatisation of Eircom.

Fine Gael has advanced an interesting proposal to take the water and waste services out of the local authorities and to create a single public sector body. This has the potential to generate significant efficiencies, but it will require service charges and the development of an appropriate regulatory revenue model. Again, the duration and extent of public sector participation should be clearly assessed.

Rail and bus transport present the biggest challenges, but it should not be beyond the wit of man to develop more sensible arrangements than those we have now.

I think my approach might be summed up as “selling some existing public sector assets to finance investment in new, and badly-required, assets”. However, any changes will need to be accompnaied by signifciant reforms in regulation and competition policy that will allow more democratic scrutiny and consumer representation in the competition and regulatory decision-making process.

It made operating profits last year of €23.8 million and paid €12.9 million to its shareholders. A sustainable, healthy growth by any comparison (given size and industry).Yes, that organisation is the semi-public sector dinasour: Bord Na Mona.

Transfering semi public sector enterprises into 100% private ownership does not neccessarily lead to more productive, efficient or competitive organisations. The unconditional benefits to private ownership are more often than not based upon theoretical-ideological arguments not empirical fact. The creation of public enterprise in Ireland (which provided thousands of jobs) and across the EU, provides just as much evidence of innovation than stagnation (think about state owned ‘Statoil’ in Sweden).

One of the rationales behind the creation of public sector enterprises in the 1950’s – 1960’s, in Ireland, was to create demand for local human capital. The state offered skilled employment to an existing workforce that could otherwise only be got through emigration. The public sector enterprises of CIE, Bord na Mona, Telecom Eireann, ESB, IDA amongst other public sector agencies gave employment to a whole new generation of Irish workers. It helped build a local culture of work, industrial development, applied skills and management that would have never occurred in the private market. It created the initial wave of networks for Irish business that exist today.

This important role of public sector enterprise has been neglected by economic commentators during the past 15 years. The fact that ESB and Bord Gáis over priced consumers during the ‘boom’ years was a regulatory-market fault. They like any organisation will rationally decide to maximise their profits given certain incentives. They, like every other private sector organisation and professional service over priced, and lets be honest, ripped off consumers. If anything, the introduction of the proft motive to these organisations was the causal factor (and incentive) for their overpricing. This coupled with a lack of competition would be an objective explanation.

The same arguments being propogated by esteemed economists about the benefits of privatisatising ESB, Bord na Mona etc are identical to the arguments that led to the privatisation of Telecom Eireann in 1999. A decision that has led to one of the most inefficient telecommunications network in the OECD. Private does not automatically equate to productive, efficient or competitive. It can lead to the flotation and reflotation of a very healthy organisation on the stock market, where speculators run rampant.

All organisations, whether public, semi public or private can lead to waste and inefficiencies. This is usually the result of a whole variety of causal factors. Identifying the ‘public’ nature of an inefficient organisation is just as simplistic as arguments against the ‘market’. Given the current unemployment crisis, the state should consider creating more, not less public sector enterprise.

Your’e opening a can of works, but deserve a response.

1. Security of energy supply is as much an EU matter as an individual member-state concern - similar to the ECB providing almost limitless liquidity to Irish banks and, indirectly, funding a portion of Exchequer borrowing. The electricity interconnector to Britain and LNG import (both of which should have been in place long before now) are positive steps. We can do more with renewables (and energy efficiency), but not as much as the Greens believe, and nuclear will have to come back on the agenda.
2. You’re absolutely correct to focus on governance. This is the single most important failing - most of the economic and financial disasters which have been visited upon us can be traced back to this. But, just because it hasn’t been done or has been done badly, doesn’t mean it can’t be done. However, we are now into the area of democratic governance and the empowerment of citizens via collective action and this takes us right off this blog.
3. It must be conceded that some international experience has been recruited, but, assuming they have genuine capability, the legislative and policy framework has succeeded in fettering them. Andso we are back to the previous point.

I continue to live in hope, but despair is never far away.

My own background is in public transport. As you point out, energy markets are very different to those of public transport due to the inter-connectivity possible with energy markets. I would suggest that when an energy crisis comes, and this will happen, many will be saying we are not in control of our market. Given your involvement with CER, amongst other energy bodies, I would be interested to know how energy security could be guaranteed.

Ireland’s long history of poor planning means public transport poses a very unique challenge. I’m not sure how privatized public transport can meet these needs, it has not previously worked in urban landscapes similar to Ireland (mid-sized cities in the UK).

Essentially, it all comes down to is poor governance. Whether private or public, it has been proven that public service is incapable of managing or regulating bodies charged with providing services.

Regarding regulation,why has nobody hired “some people with international experience of regulation and the design of competitive markets.” It seems obvious to me.

LL

Finally, in response to your question about Irish regulatory capability, hire some people with international experience of regulation and the design of competitive markets. There is no shortage and they would recover their salaries 10 times over.

There is no “one size fits all” solution when addressing the remaining semi-states that are network businesses. Solutions must be tailor-made to address specific economic, physical and technical features. The solutions are more clear-cut for the energy networks. Network economies mean that gas is generally supplied to final consumers using low pressure distribution pipes. In specific circumstances, it may be economic to use compressed (CNG) or liquefied (LNG) to supplement or extend supply, but pipelines usually win. Electricity is distributed using wires - there really is no other way. And because there is no direct substitute for electricity, consumers will often make a capital contribution to defray part of the costs of connecting them. There is less incentive for prospective gas consumers to do so, as there are fairly close substitutes available.

And, over time, the full costs of consuming these fuels and competing fuels are being internalised in final prices. Putting a value on carbon abated (via the EU’s ETS) and incorporating this is in prices of fuels is a good example.

Public transport (bus and rail) pose challenges in all these respects. There will always be competing modes of transport. Bus and rail must compete with the costs and convenience of these modes. Governments are reluctant to impose the full costs of using these substitute modes - meaning bus and rail will always look for public subsidy. Governments will also seek to ensure that services are provided in remote or sparsely populated areas and public transport operators will, or will be encouraged to, use profitable routes to subsidise unprofitable ones. In this situation the introduction of competition frequently encourages “cherry-picking” where new entrants will compete on the profitable routes, the profits of the incumbent will be squeezed and pressure will mount to drop unprofitable routes.

This does not mean that the potential to introdcue effciency-generating competition does not exist. Numerous options may be considered. For example, competition should be facilitated in densely-populated regions where most routes are profitable without subsidy and time-limited franchises should be opened to competitive tendering in more sparsely populated regions where some routes may be unprofitable and public subsidies might be required.

For the national rail and bus network some lessons might be learned from BGE. As semi-states go, BGE is probably the most operationally efficient - and could hold its own with - and probably beat - its international comparators. John Fitzgerald of the ESRI has frequently alluded to this. (My problem with BGE relates to wrong-headed, big-ticket networks investments and the gloriously inefficient financing of all network investment.) Indeed all other existing semi-states could usefully examine BGE’s operational model.

In relations to the fixed telecoms network, it may prove necessary to take this back into public ownership - and this strengthens the case for privatising some other semi-states to generate the required funding.

Different problems; different solutions. All are challenging, but they must be tackled. Infrastructure and utilities provide the backbone of the economy. We must believe that economic flesh and muscle will grow again.

@Richard Tol
“A comparison of Irish and British trains; or of British trains then and now may open your eyes. You may also want to compare the cost structure of ESB to its peers abroad. Or if you think that foreign companies are inherently different, perhaps you could investigate Bus Eireann and Dublin Bus versus private bus companies. Better service for less money is what you’d find.”

Really? I’m not aware of any decent comparison previously performed. Perhaps you can provide one.

In my own experience, they are reasonably similar in standard, except that the Irish Network is tiny compared to the British one. All of which is good bit below continental European standards.

Thank you. I realise you put names to the numbers in response to Michael’s reference to Colm’s reference to the IEA Review. And I have no objection to your suggestion that the ESB’s portfolio should be allocated among the other semi-states. Building the electricity interconnector when it was first proposed, integrating the markets on both islands, businding up the semi-states (divested of their networks) to compete in these markets and then privatising them would have been the best solution. But we are where we are and I’m seeking to tease out options that might reduce the excessive “competition-promotion” premium being imposed on Irish consumers until the electricity interconnector will be built.

With regard to your suggestion, it should be remembered that the ESB’s share of generation capacity is being reduced to 40% on the island and that Endesa has recently acquired some of its plants. The ESB will fight tooth and nail to hold on to its price-setting plants. We are rapadly getting back to the point where the physical scale of the Irish market when confronted with the scale of efficient generating technologies rasies a serious doubt about the ability to sustain efficiency-generating and consumer-benefiting competition. However, I would welcome further ideas and suggestions.

@Donal,

I agree. No point in re-visiting our previous useful exchange, but in response to your question I would make the following points.

With regard to network valuations and revenues the CER is impaled on a hook crafted by the 1997-2002 government, but, at the time it seemed to welcome the fact that it would be impaled. As I have pointed out on many occasions previously, when it was confronted with a huge demand for network investment, a Government refusal to part-finance this directly from the Exchequer and an unwillingness by the ESB and BGE to allocate an appropriate share of thier borrowing capacity the CER was compelled to set network charges and revenues that would compel network users, and, ultimately, final consumers, to pay up-front to finance a signifciant share of this investment. The Exchequer currently (and for the foreseeable future) has no ability to part-finance network investment. The CER cannot retreat from its network revenue determinations (or the basis for these determinations). It is wriggling on its hook and can’t get off.

A carefully structured privatisation is the only way to get it off its hook. Under specific licence conditions the obligation to invest would be imposed on the buyers and the bidding would reveal a rational, market-based valuation of the network assets that the CER could then use in its revenue determinations.

And this benefit is quite separate from those the privatisation proceeds would generate.

At first sight it appears that the numbers exist for competition in electricity generation, but appearances can be deceptive. Colm McCarthy’s quote from the IEA Review refers to “generating companies”. And this, in practice, requires generating companies with a portfolio of plants (peak, intermediate and baseload) ideally employing a range of techologies and inclusing some price-setting plants. Single plant or single technology generating companies will rarely impact on price-setting in the gross pool in Ireland.

Throughout the EU very large, pan-European, vertically integrated across generation and supply (and along the gas supply chain), multi-plant and multi-technology are becoming the norm, viz. E.on, RWE, ENEL, EdF. The European Commission (via DG TREN) is somewhat behind the curve, but (via DG COMP) is having some success in forcing these behemoths to divest their transmission networks (thereby allowing genuine non-discriminatory access), abolishing non-compete agreements and preventing market foreclosure - despite opposition from national governments (primarily Germany and France) seeking to preserve the integrity and heft of their “national champions”.

The extent to which consumer-benefiting competition will emerge is debatable, but if sufficient pressure is exerted these companies (and similar smaller ones operating in other member-states) have the potential to reduce costs because all their plants are not carrying the full cost burdens of new-build, new-entrant plants.

In the Irish context only the ESB has the appropriate portfolio of generating plants (inclusing price-setting plants) and every effort is being made by policy-makers and the energy regulator to reduce its generation market share. Long-term (anti-competitive) PPAs were used initially to attract and retain new generating capacity and guaranteed capacity payments (based on the full costs of a new entrant peaking plant) are now being used in the all-island single electricity market (SEM). The market simply doesn’t have the scale to support a number of generating companies with similar portfolios to the ESB. It should not come as a surprise that Irish consumers are paying (and will continue to pay) a considerable premium to create the optical illusion of competition.

The policy-driven and regulatorily-approved inefficient financing of network investment is imposing another significant premium on Irish consumers. Privatisation of the networks is the only way to remove this premium.

Given the extent of interconnection, an integrated gas market on the islands of Ireland and Britain could be established immediately; electricity market integration will have to wait until the completion of the much-delayed East-West interconnector. Government policy remains focused on maintaining the full corporate integration of the ESB and BGE (even if it has been forced to transfer electricity transmission assets to Eirgrid). It appears that the costly SEM arrangements will have to be maintained in place, but it would make sense to work towards the integration of electricity generation and supply activities of the ESB and BGE in the context of an integrated market on the two islands and to privatise the integrated business.

Note that two other significant players in this market (Bord na Mona, Bord Gais) are also state-owned and fall under the same department.

It’s all very cosy.

If there has been a “cumulative sequence of policy and regulatory decisions that have led to this gloriously inefficient (and consumer-damaging) outcome” that we are in now, why do you assume we will suddenly make all the correct policy and regulatory decisions with a privatised ESB?

The numbers are there.

I can see that you know more about energy markets than I do.

Today’s UCC students have the benefit of adjunct professor of economics and ex- AIB chief, Michael Buckley’ insights on such issues as risk.

At an Institute of Engineers conference in 2007, Colm McCarthy said:

‘…a rough rule of thumb states that a market needs a minimum of four or five roughly equal generating companies and ease of entry for new parties before effective competition can take place..’ (IEA Review of Ireland).

http://www.engineersireland.ie/Conferences/Conf07/Documents/Colm_McCarthy-Promoting_Competition_in_Energy_Markets.pdf

The basic contention is that private sector participants operating in genuinely competitive markets and subject to tight regulation where markets are not possible will generate efficient outcomes. The politcial challenge is to design and enforce policy and regulation that will create these conditions.

It is very easy to identify bodged or ill-conceived privatisations or inadaquate policy and regulatory arrangements and use these these to damn the entire approach.

Eircom serves as the classic bete noir in the Irish context, but, of course, instead of learning from the mistakes that were made, it is used to bash anyone with the temerity to raise a head about the parapet and mention privatisation. The privatisation of the British rail industry is frequently fashioned into another useful cudgel, but little, if any, attention is paid to the privatisations that have been successful with a view to learning what aspects might be replicated successfully in the Irish context.

In passing a key feature of the problems with British rail is that it has been continuing government policy not to impose the full costs of road transport on road users and to subsidise the rail industry instead to facilitate switching from road to rail. However cleverly designed this distorts the incentives for private sector operators and easily leads to unintended outcomes.

In general these distortions do not arise in the communications or energy sectors. As I have pointed out previously, the principal reasons why Irish gas and electricity prices are among the highest in Europe are (1) wrong-headed network investment decisions, (2) excessively high levels of network revenue awarded by the energy regulator to compensate for inefficient financing of network investment and (3) and an entirely inappropiate competition model.

The cumulative sequence of policy and regulatory decisions that have led to this gloriously inefficient (and consumer-damaging) outcome may not be unwound without removing state ownership in the sector. No internal reform mechanism is possible as the energy regulator cannot retreat from the basis on which it has made decsions without blowing its credibility. Privatisation is the only catalyst for the necessary regulatory and legislative changes.

And this also applies to the other regulates utility sectors.

No intention to cause offence. Comment should be free; facts are sacred. And I accept that blog posts rarely convey the breadth of knowledge and expereince possessed by a poster. And by way of background and experience I was a Maths and Economics undergrad in UCC when you were doing your B.Comm and have worked mainly in the international energy sector since then. Obviously I focus on the energy sector, but I do so not only because of my experience, but because, in microcosm, it presents clearly much of what has gone wrong in Ireland in terms of democratic governance, policy, regulation and competition policy over the last 10 years. Much of the data and information is in the public domain (though it takes some serious effort as the powers-that-be are parsimonious in what they choose to reveal). The functioning of this sector impacts on all businesses and citizens and it presents the potential for significant consumer-benefiting reform that has a read-across to most other sectors in the economy.

Your arguments against the case I am advancing (and Richard Tol’s recommendations) seem to hinge on two factors. First, “that the best way to break the stranglehold of the vested interests, is to promote credible competition” and that, “given the control the unions have on electricity supply and in the State transport company” no direct Satte intervention may be countenanced.

With regard to the first, the key point is that the electricity and gas markets on the island of Ireland are simply too small to support sustainable and effective consumer-benefiting competition. The current process operates on the self-defeating premise that “we have to increase prices to attract and retain new entrants who will compete and bring down prices eventually”.

On the second, the current economic and financial crisis presents symptoms of a much deeper malaise. And that is a crisis in democratic governance. One key feature, that is relevant in this context, is the ability of the so-called “Social Partnership” arrangements to allow the trades unions to engage directly with government and to bypass the Oireachtas. Another is the huge expansion of statutory and non-statutory regulatory bodies that are not subject to effective democratic scrutiny or control and that allow gvernment to evade scrutiny and restraint.

Nothing much will happen until there is a widespread recognition that this is not simply an economic or financial crisis, but a crisis in democratic governance. The Government, the “permanent government” and the business and union elites are hoping against hope that some treatment of the symptoms will allow an eventual return to “business as usual”. I’m long enough in the tooth to realise that these formidable forces are likely to prevail - that’s why I waiting for flying green pigs, but it’s not going to stop me calling it as I see it.