3 thoughts on “The market as a learning process”

  1. Posted 26/01/2022 at 22:53 | Permalink

    Good article, Bruno.

    It makes you feel so naive when you try to compete on quality and realise your much cleverer opponents have just had the rules changed.

    As a man who supplies wood pellets for heating you will have seen how biomass boilers went from zero to huge and back to zero, in parallel with the Renewable Heat Incentive. So bad was it in Northern Ireland they had the “Cash for Ash” scandal.

    I am not sure if you raised the heat pump issue coincidentally, but ironically I think now represent a free market opportunity. Building Regs are changing to respond to the Climate Change Act and from ~2025 will ban fossil fuel systems (gas boilers), but they don’t mandate heat pumps, they will just be the best option that meets that criterion. You could use a biomass boiler, as an alternative. Assuming you don’t believe in no regulation whatsoever, the approach is reasonable.

    Where we do see regulatory capture is around heat networks. They have always been an option but never used because they were too expensive. Instead of competing to show how they could be better, the industry has influenced policy so that £800m of subsidies have gone in that direction, and planning policies often require them. Because most use gas they are actually increasing GHG emissions. One area you don’t mention, that has contributed to the public policy capture is the amount of jobs it has created in local authorities. That is why it is hard to change policy; it would be turkeys voting for Christmas.

  2. Posted 27/01/2022 at 13:00 | Permalink

    We need a thumbs-up option. Many good points. But I don’t agree that banning new gas boilers is just another regulation, and that opposing that would be tantamount to opposing all regulation. It should be determined on price (inc externalities), not by banning. It may well be that the loss of utility from not having the option to use gas even when it’s cold, dark and windless is greater than the social cost of the carbon that would be emitted if gas heating were still permitted.

    For instance, one solution to the big problem of network stresses with mass electrification could be heat pumps as complement rather than replacement for gas boilers. The heat pump does most of the heat and hot water, but when it’s very cold (so low COPs) or electricity is very expensive, the gas boiler takes over. Otherwise, we have to improve the network to cope with an extra 70 GW of peak electric heating demand, plus whatever we need for car charging if they coincide. I’m pretty sure the carbon impact of that costs less than the system reinforcement (generating or storage as well as network capacity) needed for the occasional extremes.

    Fortunately, it’s not exactly a ban on gas boilers. It’s a ban on gas boilers in new-build properties. But unless there’s a major change in our housing policy, that’s a tiny fraction of the building stock each year. It’s still wrong to ban as opposed to price them, but limited impact. There’s also the requirement to make gas boilers “hydrogen ready”, but I understand the cost of that is quite small, so gas is likely to remain the default unless the fuel-cost prices it out of the market, or the government takes other action.

    One problem for heat pumps is that the change in gas and electricity prices has left electricity still around 4X the cost of gas, which means gas heating remains a better bet than heat pumps at current prices. Rising gas costs only help heat pumps if electricity doesn’t go up too. Given the difference in capital costs (not just boilers but also changes to the building efficiency and heat distribution system to accommodate heat pumps), the energy cost differential has to be a lot less than the efficiency differential to signify.

    So I fear it won’t be as laissez-faire as you imply. The government has an explicit target to install 600,000 heat pumps per year. I bet they don’t leave it to the market to judge whether they’re right. And I bet the market doesn’t install 600,000 standalone heat pumps a year without a pretty big push from government. If they ban new gas boilers more broadly, I bet a roaring trade develops in repairing gas boilers, unless gas has been priced out of the market (in which case, they wouldn’t need the ban).

    Heat networks are a big problem. I agree with you about how they’ve tried to deliver them. The reality is (a) many heat decarbonisation options are easier with them, but (b) markets are very reluctant to install them for rational reasons. If gas prices stay high, that might change, but I have a feeling they won’t stay high enough for long enough.

    We may be stuck with gas for a while yet, but the market signals are pointing in the same direction as our strategic interests: we should reduce our dependency on it. If we allowed the market to encourage the reduction of gas consumption, rather than being obsessed with its elimination, I suspect we could get a much quicker and cheaper reduction, but not to zero. For the climate, earlier is better. And for the economy, cheaper is better. Net Zero is a dog that is used to justify irrational policy in everything it touches. https://youtu.be/SsVILwvYunU

  3. Posted 30/01/2022 at 09:32 | Permalink

    I’m long retired, but studied economics at LSE then worked inter alia as an economic policy adviser to bodies chaired by UK and Australian Prime Ministers, the latter including some state premiers as well as business, union and other reps, and for the Queensland government. The longer I worked, the more I became convinced that a combination of much smaller government and increased free enterprise was far superior to larger government, for many reasons. Unfortunately, in Australia, the situation has continued to deteriorate, with vested interests – including the public service – pursuing what they see as their own benefit, and beholden to various vested interests, in some states notably to trade unions, who now represent only 9% of non-government workers (I think 40-50% in the public service). I was driven out because, a high-level supporter told me, the heads of department et al felt threatened by my “honesty, integrity, intellect and analytical rigour.” In short, it was more difficult for them to give the nod to bad, politically-driven policy if I was involved. I believe that things have got much worse since then.

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