The Spirit of Ireland

In an unrelated thread, people were asking for my opinion on the Spirit of Ireland (the specific project, not in general). So, at the risk of insulting people, here we go.

The project promises to:

  • “[Create t]ens of thousands of jobs
  • Achieve energy independence in five years
  • Save €30 billion importing fossil fuels
  • Create potential to add €50bn to our Economy
  • Slash carbon dioxide emissions”

and “[…] help secure European energy supplies” at that.

The secret is pumped hydropower. Wind power is variable and unpredictable and therefore cannot provide more than a certain share of total electricity supply. International studies cap the share of wind at 10%, maybe 20% if you’re lucky. The Government aims for 40%. (This came about after an optimistic study by the Dept Energy concluded that 30% may work, and that 40% is not infeasible.) The Spirit of Ireland wants to go to 100% wind. That means that electricity will have to be stored, so that supply and demand can be matched. The storage method in this case is to use wind power to pump water into a reservoir and use hydropower to generate power.

All this is proven and scalable technology.

The wholesale price of electricity varies quite substantially over the course of the day,  by an order of magnitude between peak and trough. This means that one could make a lot of money if one would be able to store electricity for 12 hours or so. The fact that the market is not rushing in to build pumped storage, not in Ireland and not anywhere, is because pumped storage is very expensive and often controversial.

The Spirit of Ireland has not released any detail on their cost calculations.  However, reservoirs have been build for thousands of years. It is unlikely that the Spirit of Ireland has a technological break-through that drastically reduces the costs. If pumped hydro is not commercially viable elsewhere, why would it be in Ireland?

In any case, their costs are private costs. If electricity is 100% wind in the foreseeable future, then all our existing power stations would be sitting idle. A number of them are quite old, but there are a good few new ones as well. This would amount to a destruction of capital that is measured in billions of euros.

Their employment numbers are suspect too. Their plan would destroy thousands of jobs at the ESB, but in return they plan to create tens of thousands of jobs. This does not square with their claim that they would reduce the price of electricity. For one, their labour cost would be 5-10 times as high as the current labour cost. It is also not clear what those tens of thousands of workers would be doing. Perhaps they would build the dams by shovel and wheelbarrow, and when the dams are finished, turn the turbines by hand when there is no wind. There simply is not that much to do.

The aim to reduce greenhouse gas emissions is not clear cut either.  Dams use a lot of concrete, wind turbines use a lot of steel and reservoirs generate a lot of methane. This would not reverse the sign, but take away substantially from the gains.

They promise to achieve all this in five years. The problem with that is that they’d need planning permission for turbines, transmission lines, and reservoirs. Five years may just be feasible if they’d start building now.

There is an interesting twist to the reservoirs. The plan is to build these in the west, where geology is indeed suitable. They plan to build the reservoirs with salt water. The environmental impact assessment is thus quite tricky. Under European legislation, they would need to compensate the loss of nature — that is, take a tidal saltwater marsh and turn it into a non-tidal freshwater marsh. Empoldering part of Dublin Bay would qualify, but may run into other objections.

In sum, the Spirit of Ireland is unrealistic in its every aspect.

Unfortunately, if you tell the story enthusiastically enough, there are always people who actually believe you — and this is probably more so in times of doom and gloom.

Greenspan on Irish Economic Recovery

Ronald Greenspan of FTI presented this paper to a Dublin conference this morning, with Brian Cowen in the audience:FTIgreenspandublin


Irish trade statistics still looking good, but…

Kevin O’Rourke has drawn our attention on a number of occasions in this blog to the collapse in world trade and its implications for the depth of the recession. Yesterday, the Financial Times reported that the World Trade Organisation was predicting a 9% drop in the volume of world goods trade this year, the largest drop since the second world war. Today, it reported that Japanese exports have halved compared to a year ago.

Against this backdrop, Irish external trade statistics have been remarkably healthy, albeit two caveats are in order. First, although Japan can report its February trade statistics today, the latest trade statistics on the CSO website (last updated 27 February) refer to December 2008. Presumably the January figures should be published in the next few days. Second, we only get monthly trade statistics for merchandise trade, even though the value of services exports is now about 75% of the value of merchandise exports, so the merchandise trade statistics only tell half the story.

The Johan Cruijff principle

Besides being one of the best soccer players of all times, Johan Cruijff is also a sage who spouts wise platitudes in a heavy Amsterdam accent. One of them is that every downside has an upside.

The economy is contracting rapidly. This is bad. However, greenhouse gas emissions are also contracting rapidly. This is good.

The EPA will today announce that we will be much closer to our Kyoto targets than previously thought. See Harry McGee’s piece in the Irish Times. This means that we will not have to spend all of the 270 million euro that is reserved for importing emission permits. Every little bit helps.

The details in today’s announcement are of historical interest. The latest EPA emissions projection is based on an ESRI economic projection of mid January.* How times flies. Back then, we thought that cumulative contraction would be 7% between 2008 and 2010. If only.

Should anyone want to update the emission projections, the output elasticity of CO2 is about 0.7 while the output elasticity of all greenhouse gas is about 0.5.

*We also projected emissions at the same time. See another piece by McGee.

National insulation for economic recovery: As second best as it gets

On Feb 8, Ministers Gormley and Ryan announced the National Insulation Programme for Economic Recovery. There is €100 mln on the table, so I will not comment on the last three words of the title. The press release is worth a close examination for those who study spin.

There are two components to the programme, each worth €50 mln.

The Home Energy Saving Scheme subsidises / co-finances investments in energy efficiency improvements for private owners of houses build before 2006. The energy efficiency of the average Irish house is indeed not great. Better efficiency would indeed lower energy bills and reduce emissions, and retrofitting buildings is indeed a labour intensive business. So, did the government find the ultimate win-win-win policy?

Not quite.  If Irish home owners do not sufficiently invest in their house, that is their business. There are externalities, such a carbon dioxide emissions, but these would better be addressed by a carbon tax. (A carbon tax is increasingly likely, and thus the prospect of double regulation.) A carbon tax has the advantage that it brings in revenue rather than increase government spending. Furthermore, it would affect office buildings too.

A carbon tax would also leave home owners the choice how best to improve the energy efficiency of their house. The government programme is heavily biased towards insulation. This is needed in many houses, but in many other houses it may be better to replace the heating system. There are subsidies for that too, but only for a very limited set of heaters that may not be appropriate for all houses.

There are many reasons why home owners do not invest in their houses. A prominent one, “can’t get a builder”, has disappeared but has probably been replaced with financial worries and constrained credit. It is not clear that homeowners will rush to avail of these subsidies.

The Home Energy Saving Scheme is clearly aimed at the middle class. The other component of the insulation programme, the Warmer Home Scheme, is aimed at the less well-to-do. Information is not easily accessible, but it is clear that the Warmer Home Scheme (1) is largely limited to insulation, (2) aims at “communities” rather than individuals, and (3) that eligibility criteria are negotiable. While it will take the sharp edges of “poverty” for some, chances are that these people would rather take the money and decide themselves whether to insulate the attic or not.

Will the insulation programme deliver? First, will it save money? Probably not. Assuming that transaction costs are zero and assuming that homeowners will not use the improved insulation to increase the comfort of their home, the payback period of the investments is 3-20 years (according to the always optimistic calculations of engineers). With more realistic assumptions and current interest rates, only some measures have a positive net present value.

Second, will it bring jobs? The government predicts “thousands of jobs”. If that means 10,000 jobs, then the cost per created job is €10,000; but if “thousands of jobs” means 1,000 jobs, then the cost per created job is €100,000. And, of course, the €100 mln in government funds and the $X mln in private funds is diverted money, not new money.

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. Let us assume that 5 million tonnes of that are for home heating (too high), and that the insulation programming reduces the energy bill by half (too high) for one percent (too high) of houses. 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 and lower energy bills. If the two 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.)

Will the national insulation programme do harm? I do not think so. But, it is a decidedly second best way of reducing emissions, creating jobs, or reducing povery.