What should a green investment bank do?

The Guardian asked a range of commentators the following questions about a green investment bank, an ideal widely talked about for the UK. 1. How should it most effectively be set up?

2. What should it use its financial resources to support?

My response was

1, The German state investment bank KfW is an attractive model. This entity lent €60bn last year, almost half of which went to companies involved in environmental protection of one form or another. It raises money on the international capital markets but its conservative policies and long-term perspective have meant it has been able to continue supporting smaller companies and environmental projects throughout the last two difficult years. If implemented here, our equivalent should be located outside London, have lending offices spread across the UK and offer private individuals a chance to invest in its activities.

2. In 2009 KfW put about €9bn into building refurbishment. Its activities have been geared towards helping property companies and social landlords improve the poor insulation standards of post-war German housing and commercial property. It has helped improve many hundreds of thousands of homes, providing more comfortable accommodation that it is much cheaper to run. KfW's lending has also created an effective and flexible eco-refurbishment industry. This has improved employment and skills, particularly in the less prosperous eastern parts of the country. We should copy the German emphasis on housing renovation as a primary activity of the bank, rather than let the UK entity focus on risky venture capital investments

Is the UK subsidy for solar PV a good use of scarce funds?

The Guardian web pages are reverberating to the clash of arms between George Monbiot and UK supporters of feed-in tariffs for solar photovoltaic panels and other small-scale renewables. Monbiot claims solar power is an extremely expensive way of generating electricity in the UK and that the new scheme is another way of subsidising the wealthy middle class. The fans of feed-in tariffs note the success of similar schemes in other countries. They think that the cashback proposals will help create jobs in businesses that install and maintain low carbon energy sources. The UK scheme will help drive down the costs of renewable technologies and increase public support for wind and alternative sources of electricity. The argument has focused on solar photovoltaic panels installed on domestic roofs. This note tries to quantify some of the costs and benefits of the new scheme. I'll take one of  the simplest possible examples: an installation of 12 panels on the roof of a medium-sized house in the south west of England, where solar radiation levels are relatively high for the UK. Does solar energy make sense in this country?

Before considering interest costs

a)      The installation will generate a maximum of about 2 kilowatts in full sun on a south facing roof at midsummer.

b)      Over the course of a year, we can expect the panels to produce about 1800 kilowatt hours.

c)      The value of this output would be about £70 in today's UK wholesale market.

d)      The system will typically cost about £10,000. The price of the solar panels is tending to fall but the associated electronics are in very short supply worldwide. The most important component is the 'inverter', the device that takes the DC low voltage current from the roof and turns it into an 240V AC current that is precisely aligned to the frequency of the AC on the local electricity grid.

e)      A system will probably last about 25-30 years, although there will be some fall in power generated as the solar panels age.

f)        If we assume the system lasts thirty years - and make no deduction for the decreasing production at the end of its life - the full cost of the installation is about £330 per annum. This is without considering any interest costs, maintenance or the probable need to replace the expensive inverter at least once during the 30 year life.

g)      The absolute minimum annual cost of the installation is therefore at least four and a half times the wholesale value of the electricity generated. (£330/£70).

h)      We might choose to compare the cost of the system with the full retail price of the electricity produced. If the homeowner is paying 12.5 per kilowatt hour, the annual value of the electricity produced is £225 (1800 kWh times 12.5p).

i)        Without the huge subsidy provided by the feed-in tariff, the annual electricity output comes nowhere close to covering the costs of the installation over its thirty year life. At current electricity prices, the system will produce electricity worth £7,750 compared to an installation cost of £10,000. In conventional terms, this is an extremely bad investment for society as a whole. Because the feed-in tariff rewards homeowner with over three times the current retail price for electricity, it may nevertheless be good for homeowners that invest in solar. The people who pay for this generosity are all the other homeowners using electricity in the UK who don’t install panels on their roofs. This is the crucial point: a subsidy system that may be good for recipients may be damaging for the rest of society.

After interest costs

j)        If I have £10,000, I could put some solar panels or I could invest my money in 30 year government bonds. Today, these bonds will pay me about £450 a year before tax. If I pay tax at 40%, this falls to £270.

k)      When assessing whether solar panels are a good investment, the rational householder will consider the prospective disadvantage of not getting this income of £270 a year, as well as the cost of the initial purchase. He or she will factor this loss into their thinking on solar panels.

l)        Adding £270 a year to the annual cost of £330 produces a total figure of £600 a year as the full financial impact of putting up solar panels.

m)    This is almost three times the full retail of the electricity produced. Without large subsidy or huge increases in the future prices of electricity, solar panels are a terrible investment.

The proponents of feed-in tariffs seem to accept this broad logic. But they respond by saying that the scheme will assist in the development of a new industry and drive down prices. There may be something in this argument. However the cost of solar installations is largely determined by the world market for PV panels, of which the UK will always be a tiny part. We cannot make much of a difference to global prices. In fact, it can be argued that the new UK subsidies are likely to divert scarce inverters to the UK where they will typically produce about half the maximum output of an inverter in a sunny country. So the UK feed-in tariffs, at least as applied to solar PV, might be said to be actually decreasing the total amount of renewable energy produced around the world.

Does this analysis apply to wind power? No, not completely. A moderately sized wind turbine suitable for a farm – such as the Aeolus Power 50 kW model in a good location - will produce 100 times the electricity of a 2kw solar installation for about 25 times the cost. In other words, the productivity of the capital employed is about four times as great. This means that small scale wind power is almost economic. If, for whatever reason, we choose to subsidise small scale renewable energy in the UK we need to focus our money on wind energy. This argument applies even if electricity prices double or treble in the next decades. Wind we have in abundance, sunshine we are short of. By any standards, focusing on solar PV doesn’t make sense and will add to the energy costs* of householders not benefiting from the feed-in tariffs.

* Assume one million households (about 4% of the UK) install PV panels producing an average of 1800 kWh a year. The annual subsidy will be approximately £700m, all of which is paid for by other electricity users. If all this cost is eventually paid for by householders, the cost will be about £35-£30 a year, or perhaps 5% of current bills. (Only about one third of  UK electricity demand comes from homes but householders will eventually pay the whole subsidy cost because of higher prices for goods and services because of the increased price of electricity).

Biochar proponents get spammed

George Monbiot wrote about the carbonisation of organic matter in the Guardian last month ('Woodchips with everything. It's the Atkins plan of the low-carbon world', Tuesday 24 March 2009), saying it was yet another miracle cure for the climate problem. And, like previous miracle cures, he said ‘biochar’ would turn out to be a dangerous delusion. It would deflect attention from taking real action on climate change. Parts of the planet would be turned into vast forest plantations with limited biodiversity to provide feedstock for huge factories. Vital food-growing land would be lost to vast corporations farming wood for turning into biochar. It is a re-run of the biofuels disaster, he said.

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