36 thoughts on “Two graphs that explain a lot

  1. I’m not an economist, but I find JQ extremely accessible.

    Those two graphs are astounding.

    I see huge spending (I won’t say investment) by Govt in infrastructure that will almost certainly have to be abandoned because the boom price makes what-should-have-been marginal projects viable.

    Who, in infrastructure/treasury/Govt-audit departments will admit mistakes here?

  2. I think the biggest blunder in years was approving the construction of three LNG processing ‘trains’ on Curtis Island at Gladstone. We need all the current east coast gas production and more for ourselves. NSW is tipped to see business closures as early as 2016 due gas prices moving to export parity. I believe a local glass manufacturer has closed in anticipation of higher prices. An Australian owned ammonia plant is to be built in the US not here.

    Apologists for this decision assure us it only takes more drilling be it conventional, fracked shale or CSG. They must have taken Norman Lindsay’s ‘The Magic Pudding’ to heart whereby whatever is extracted is just as easily replaced. If you look at farmer protests against CSG drilling in northern NSW it’s hard to see drilling getting any easier as the years go by. My guess is the decision makers will be flogged with a lettuce leaf when it all goes bad.

  3. @Hermit
    “Electricity that would otherwise be curtailed as it exceeds realtime demand is not ‘free’. It is extremely expensive if it is largely fixed cost not related to working output.” Partly true, only. The wholesale price is determined by short-run marginal costs and demand. It’s already gone negative in Germany recently at times of high renewable output (like August 17), combining with must-run coal plants to create a glut. The unsustainable part of this is as you say the return on capital. Nobody is sorry for the coal plant owners today, but a similar problem will arise at very high penetrations of wind and solar. To give investors an adequate return, pricing for 24-hour service will have to shift to capacity payments. Our hypothetical steel electrolysis consumers will be on a deeply interruptible tariff, with a low or zero capacity component. So I think I’m right to equate this to “next to nothing”.

    We really do need analyses of 90% and 95% renewables scenarios for electricity. Making the last little bit of consumption all-renewable will be very expensive, compared to other pathways to emissions reduction. It may make sense to have the reserve largely gas, and offset the small amount of use by reafforestation or the like.

  4. Not a lot to see here, basically reflects Chinese demand for our two major export earners.

    For coal – high energy, low sulphur, low ash – will be further subject to this demand, over the next 5-10 years, by CCP decree. No matter what renewable fantasists believe.

    For iron ore – it will depend on how well stability in China holds up in the face of a surplus 30 million men of marrying age who *must* own an apartment, and the replacement rate of apartments that last no more than 15-20 years, and the undesirability of any apartment older than 5-10 years, for said demographic.

  5. @iain
    Iain, most coal pollution in Chinese cities comes from domestic, business, and industrial use of coal, not electricity generation. All else equal, taking coal from these areas and burning it in power stations would reduce pollution in cities. And this is basically what China is doing. Coal for heating, cooking, and industry is being replaced by electricity, LPG, natural gas, insulation and other efficiencies. Overall this reduces coal consumption and so reduces the need to import coal.

    And Iain, even if China knocks down apartment blocks as soon as they are competed, the steel rebar in the concrete will still be there and will be reused. It won’t have had time to rust away and they won’t throw it out and purchase iron ore from Australia to make new steel to replace it.

  6. @iain
    iain: China is already cutting coal consumption, absolutely. It will also protect domestic coal producers at the expense of imports. The recent Chinese announcement of limits on ash was basically a “get lost” declaration to Australian coal exporters.

    Iron ore is different, as China is structurally dependent on imports. But Chinese pig iron production has flatlined, leading a general decarbonisation of growth (see chart reproduced in my first link). Australia will continue to export iron ore, at just above the cost of production, but you can forget about growth.

  7. @James Wimberley
    James, I thought the new restrictions on the quality of coal imported to the Pearl and Yangzte Deltas were a big no thanks to imported cheap but nasty Indonesian and Phillippine lignite. Indonesia supplies 97% of China’s lignite imports and the Phillippines 3%. Indonesia is near the Pearl Delta while the Phillippines is closer to the Yangtze Delta. However, I don’t actually know just where in China their lignite is shipped to. It is possible it goes somewhere else. Lignite will basically always produce more ash per joule of heat or kilowatt-hour of electricity generated. However, lignite’s high water content can make it appear to have less ash per tonne than black coal but this is a water based lie. I presume China is not stupid enough to overlook this fact, but there may always be more going on here than meets the eye.

    Anyway, China will have to import Australian coal for some time to prevent inversions killing vast numbers of people as the London inversion did in 1952. Or rather, I should say killing vaster numbers of people than bad smog conditions already do. Chinese domestic coal, while extensive, is basically crud, so Australian imports will be some of the last to go, but go it will, for as you’ve mentioned, James, China really doesn’t like importing Australian coal and they now have better alternatives which they are putting in place.

  8. @James Wimberley
    I’m not sure if capacity payments are necessary. It used to be one good deed deserved another now it seems one subsidy deserves another. Some say have no subsidies at all and let the market work it out. In the last year I believe NEM prices have varied between -$40 and +$12,500 per Mwh. If we had variable time of use retail electricity pricing then backup sources could get high prices in heatwaves and cold snaps so they wouldn’t need standby payments. Tough if you’re a pensioner in a fibro home when it’s over 40C at 6 pm and the aircon costs say $3 an hour to run.

    I think it would be prudent to assume that after 2030 or so gas will be prohibitively expensive while crazy weather and fires will make forestry difficult.

  9. Capacity payments do seem an odd way to go about things. They certainly haven’t gone down well in Western Australia with hundreds of millions of dollars being paid out for no return what-so-evah to the average West Australian. One thing they have resulted in is the construction of a $95 million peak plant that looks like it will never be switched on. Renewables, specifically rooftop solar, destroyed any need for capacity payments, even if there was a good case without it. With home and business energy storage likely to take off in Australia it looks like capacity payments will become even less relevant. And there’s always the option of charging people the spot price of grid electricity plus a (large) percentage to cover distribution. There is an awful lot of underused generating capacity in Australia that will start to get switched on once prices go over 40 cents a kilowatt-hour. And boy, we’ve got a lot of room to go on demand management. Did you know that not once have I been offered a free movie ticket during a summer heatwave? So very wasteful!

  10. Tsk tsk. Check out the y intercept on those charts – these movements are not quite as dramatic as they seem.

  11. I couldn’t get rid of the intercepts, but they are clearly labelled, and I assumed that my readers are numerate enough to deal with them (surely no one supposes that these commodities were free at the low point. That’s why I warned about the nominal price, but not about the intercept

    Taking account of the intercepts, the movement in coal is not all that dramatic. The real price doesn’t change much from beginning to end, though it spikes a lot in the early 2000s

    But the iron ore price shift is pretty much as dramatic as it looks. It goes from a low of $10 to a high of nearly $200 in the space of a few years.

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