Tilting at windmills

In considering how to value land under current economic circumstances answers may turn up in unexpected places. One of the most important state regulatory authorities, the Commission for Energy (CER), has taken the plunge and revised down their assumed value of land. In this case it is the site procurement cost for windmills. My colleague Laura Malaguzzi Valeri pointed me to page 41 of their document on Fixed Cost of a Best New Entrant Peaking Plant & Capacity Requirement for the Calendar Year 2010 where they say:

 “Due to the significant movements in the economy over the last year, the value of land has reduced. An independent assessment was carried out on current land values, and the RAs are satisfied that the estimate for 2010 is an reasonable reflection of the current costs.”

As a result, they have revised downward the value which they assume by 63%.

Because wind producers are price takers on the competitive wholesale market this will not affect current electricity prices. Nonetheless, the fall in land prices should reduce the long-term cost of producing wind energy, with beneficial effects for consumers.

If NAMA want to read up on the details of this valuation it can be found at:


9 replies on “Tilting at windmills”

I’m not sure whether I have seen it mentioned here before, but The Society of Chartered Surveyors and IPD do a quarterly index of returns on property, which I believe is well respected in the property business. If you chain together the “Capital Growth” returns for quarters from Q1 2008 to Q2 2009, the implied fall in “All Property” values comes out at 48.4%.

“All” appears to mean Commercial/Retail/Industrial in this context.

On closer inspection Prof FitzGerald may find that the site procurement cost relates to that for this theoretically optimal BNE Peaking Plant and not for windmills. This, together with an estimate of peak capacity required, provides the basis for the “Capacity Pot” from which capacity payments are made to all available generation capacity. These payments are considerably higher than those that would be required in a genuinely competitive market comprised of a number of generation companies with portfolios of peaking, intermediate and baseload plants of different vintages. Since the all-island market is too small to support the required number of generation businesses of this scale and diversity, electricity consumers are paying through the nose to preserve this optical illusion of competition in generation.

This, of course, is another story – to which little, if any attention, is paid.

I’m not sure that the site valuations used by the CER will be of much use to NAMA since they are only tenuously related to specific sites. Their value is in highlighting the CER’s penchant for making up numbers that will keep investors happy and deflect Government pressure to bring down electricity prices, while continuing to penalise consumers.

@Con you are right that the price is for land acquisition by “best new entrant plant”. Nonetheless, it is still interesting that the CER assessment is for such a significant fall in land values.
On the issue of the electricity market, I think you are wrong about the competitive nature of the market. We published research in September 2007 which indicated that the new Single Electricity Market would deliver a price for electricity close to long run marginal cost – the correct wholesale price. Ongoing research, to be publsihed in the Autumn, confirms that this has proved to be the case.
This work also suggests that the GB market is pricing below long run marginal cost. This is not sustainable – either the lights will go off over the next decade in GB or they will have to pay substantially more for electricity.
Where issues arise about electricity prices in Ireland is concerning the margin between what users pay and the wholesale price. This margin looks high.
A big issue which, was not picked up by the McCarthy report, is that instead of the ESB returning its profits from using its free carbon dioxide permits as a dividend to the government , it was required to use them to keep prices low. It is time for the Minister for Finance, on behalf of the taxpayer, to seek this money as a dividend, rather than seeing it frittered away as a subsidy to energy consumers. This would permit a lower level of taxation than would otherwise be the case. This would do more for competitiveness than subsidising energy prices.

@John, that wasn’t me. Nonetheless, I would be intrigued to know whether your research has anything to say on whether the Single Electricity Market is minimising the long run marginal cost of electricity in Ireland.

@ John
“Where issues arise about electricity prices in Ireland is concerning the margin between what users pay and the wholesale price. This margin looks high.” Does this not suggest a case for the use of the dividend to lower user costs [possibly for industry at least]?

How large a decrease in the level of taxation would be likely to result? And are we sure this would be used to improve competitiveness via such a reduction rather than allow continued wasteful spending?

Irish agricultural land since about 2000, has been the most expensive in Europe because of the small acreage coming on the market coupled with the demand factors including the so-called “lifestyle” farmers aided by the CAP welfare handouts.

Unskilled construction employment has provided income support for some part-time farmers but the small number of sales suggests the béal bocht pleadings from the multimillionare farmers who run the IFA, should be treated with caution.

More than €4 billion of the roads budget has been allocated to farmers and billions more provided for commercial property investment overseas.

NTMA/NAMA is an offspring of the Dept of Finance and its lack of transparency so far suggests that it would be foolish to expect anything other than the ultra-conservative in its procedures and development.

So the system of development land and the creation of artificial scarcity, is unlikely to change.

When will private sector workers have their Bastille Day?

Before Sept 16th, you have the potential of doing the country a service by revising the Medium-Term Review, but using a main scenario of low growth in the US and the Eurozone, over the next decade and extrapolating from our own experience in the 80s and that of other developed economies as regards the time for property markets to recover.
PIMCO, the multi-billion dollar US bond manager says nominal US GDP growth will average 3% in coming years compared with a recent average of 5%. Others refer to “anaemic” growth with high public debt and teh absence of asset price appreciation to fuel consumption.

Trichet said today he wasn’t “comfortable” with the current methodologies for extrapolating long-term potential growth in the Eurozone from the current circumstances but he did acknowledge that the consensus was that it would be less than the pre-crisis forecast of 2%.

Growth in Asia will only have an impact on Ireland via the MNCs and I guess we should be cautious about banking too much in the long-term, on about 15 US owned pharma/medical device companies.


Apologies. You inadvertently drew fire from Prof. FitzGerald when it should have been directed at me. He makes a number of assertions about Irish and British wholesale prices, the margin between final prices and wholesale prices, the application of the ESB’s ETS windfall, dividends to the Exchequer, international competitiveness and the level and incidence of taxation which deserve a thread in their own right. Perhaps he might kick off one – since he alone amog the current commenters is able to do this. The thread can then return to the land and property valuation issue.

In the absence of a separate thread I’m risking limited pollution of this thread to respond to the wide-ranging assertions Prof. FitzGerald has made.

1. LRMC: Economists everywhere get excited about competition in electricity because it allows them to design markets with prices determined by marginal costs. However, their analysis is always focused at the plant level and they miss the impact of competitive behaviour by firms with portfolios of generating plants of different types and vintages. And it doesn’t need large firms with large diverse portfolios. Smaller companies can own some plant outright, but have equity interests (with other firms) in larger plants. The plant-based marginal cost pricing used in the all-island market will generate surplus profits for a firm with a diverse portfolio of generating plants primarily because most plants will be partly depreciated. Genuine competition between portfolio holding firms will force them to concede at least some of this surplus profit – and consumers will benefit. Even though competition may not be functioning fully there, that is why prices in Britain, as Prof. FitzGerald has observed, are below the LRMC on a fully-costed new plant basis.

The gas markets on both islands could be integrated immediately leading to a 10% reduction in Irish gas prices; the electricity market will have to wait a while, but a 20% price reduction is achievable.

2. Margin between final and wholesale prices: Yes. This is high because of gloriously inefficient financing of network investment. Like the “competitive market surcharge” this is an implicit tax on electricity and gas consumers.

3. ESB ETS windfall: Yes. By all means tax this away directly. But also strip out the implicit taxes described in 2. above. The ESB has used this, with the CER’s agreement, to reduce the impact of the implicit taxes.

4. Competitiveness: These implicit taxes (similar to others in high “point-of-use” charges) fuel demands for higher pay – and resolute defence of existing pay levels. Strip them out and overall competitivenenss will be enhanced.

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