Category: Economics – General

Too cheap to meter

John Quiggin26 Comments

Reading about the UK National Grid recently, I came across the interesting concept of demand turn up. Unlike the usual form of demand side management, where users are paid to cut usage in periods of excess demand, demand turn up involves making small payments to users willing to increase demand when the supply from renewables exceeds demand.

This looks strange at first sight, but it simply reflects the fact that, once the capacity is installed, the marginal cost of renewable electricity is zero. In the short run, taking account of the costs of shutdown and startup, the marginal cost of electricity from an operating renewable generation source is negative*.

So, demand turn up is just an application of marginal cost pricing, the same as off-peak pricing for coal-fired power.

The broader point is that claims that the electricity supply system must have a large component of coal-fired to meet “baseload demand” reflects the assumption that the system must meet the demands generated by a pricing system set up for coal (or nuclear which is broadly similar).

Margins

John Quiggin14 Comments

We’re all used to the fuss that takes place when the Reserve Bank cuts interest rates and banks don’t follow suit. On the other hand, when rates go up, the increase is almost always passed on rapidly and in full. But does this matter in the long run, or does competition sort things out. In this context, my wife Nancy pointed me to this interesting graph from the Housing Industry Association.

It seems pretty clear here that bank margins have increased steadily over the past ten years. I haven’t checked the data, but at least for mortgage rates, the current numbers look right to me.

China, me old China

John Quiggin22 Comments

One of the reasons I like blogging and opinion writing is that I’m better at thinking up ideas than at the hard work needed to turn them into properly researched journal articles, which is the core business of being an academic. So, it’s great when an idea I’ve floated in a fairly half-baked form in a blog or magazine article gets cited in a real journal article. Even better when it’s a colleague or, in this case, former colleague who cites me.

James Laurenceson, formerly of UQ and now Deputy Director of the Australia-China Relations Institute at UTS, has an article just out in the Australian Journal of International Affairs (paywalled, unfortunately, but well reading if you can get access), on Economics and freedom of navigation in East Asia, which cites a short piece I wrote last year and reproduced here. My key points were
* Contrary to many claims, China has no interest in blocking trade in the South China Sea, since most of it goes to and from China
* For the smaller volume of trade between other countries, the cost of taking a more roundabout route is so small that China could not exert any significant leverage by restricting access to the South China Sea
* There’s nothing special about this case. The whole idea that navies are vitally needed to keep sea lanes open is nonsense

Where I based the first two claims on a bit of Google searching and a couple of academic papers, James has developed the argument in convincing detail, addressing a wide range of possible counterarguments. If I could find someone to do the same thing for my third claim, I’d be very happy.

The IPA and 18C

John Quiggin60 Comments

The obsessive desire of the current government to protect the right to offend and humiliate people on the basis of their race or religion has been driven, in large measure, by the Institute of Public Affairs. The IPA has a mixed* record on freedom of speech, and on the kind of offensive speech that is the subject of 18C.

Some IPA fellows, such as Chris Berg and Matthew Lesh take the Voltaire line, defending free speech even when they don’t like the content. And, as far as I can tell, neither Berg nor Lesh has ever said anything offensively bigoted.

Unfortunately, they appear to be in the minority at the IPA. More representative of the general atmosphere of the IPA are cases like this and this, where IPA fellows were caught saying in public the kind of thing they want to protect legally.

And while Berg is keen to protect the right to boycott, the IPA also published this piece, suggesting that critics of coal could be prosecuted under the Corporations Act. I had a long series of Twitter exchanges with Tim Wilson, then “Freedom Commissioner” and now a Liberal MP, in which I asked if he would disavow this suggestion. He evaded the question repeatedly then (IIRC) blocked me.

Overall, I’d say the IPA should clean up its own act before pretending to lead a crusade (or jihad) for free speech.

* I mean this literally, not as a euphemism for “bad”

Adani, with an asterisk

John Quiggin20 Comments

Back in December, Gautam Adani came to Queensland and gave a very positive view of the proposed Carmichael coal mine in the Galilee Basin. Things went pretty quiet for a while after that, but it appeared that a final announcement on the project would be made in April. Now, Anna Palaszczuk and a number of lesser dignitaries have been to India and brought back the news that the project will shortly be approved by the Adani board, at least if Mr Adani has his way, which seems guaranteed.

That came as a surprise to those of us who have long argued that the project is hopelessly uneconomic, even on the optimistic view that the current uptick in the coal price will be sustained.

But it turns out that there’s an asterisk. The approval will be subject to finance. Anyone who’s ever sold a house knows that means nothing is guaranteed. In Adani’s case, the initial stages of the project will need $2.5 billion in bank finance, as well as a concessional loan of up to $1 billion from the Commonwealth’s Northern Australia slush fund.

You might think that at least the second of these is a safe bet. But Aurizon (the former Queensland Rail) has come up with a competing proposal, which doesn’t have the problems associated with Adani’s opaque (to put it mildly) financial structure.

The real problem though is with the banks. Of the big Australian banks, Westpac is the only one that hasn’t ruled itself out. But they will presumably want only a small share of the risk, as part of an international consortium and there are no obvious candidates. Moreover, given the combination of reputational and project risk associated with a massive coal mine at a time when coal is clearly on the way out, any sane lender would demand a hefty rate of interest and lots of security. It’s hard to see Adani coming up with either.

So, I’m guessing Adani is still playing for time. We’ll probably see a very big announcement with a very small asterisk. Crunch time won’t come until June, when they need to come up with some real money.

I can’t work with her: Turnbull

John Quiggin41 Comments

I read this headline and my immediate thought was that Putin, antivax and the disastrous WA election had finally galvanised our hapless PM into breaking with Pauline Hanson. Alas, it turns out the “her” in question was the newly elected ACTU Secretary Sally McManus, who had dared to espouse the doctrine that it is sometimes appropriate to break unjust laws. McManus joins the company of such monsters as Martin Luther King, Mahatma Gandhi and Nelson Mandela. Fortunately for Malcolm, all of these lawbreakers have one thing in common that ensures that, were they still alive, Pauline Hanson would be doing her best to keep them out of the country. He can rest easy knowing that he stands with all the “ordinary” (sound of dog whistle here) Australians represented by the One Nation faction of his coalition.