There are a number of good insights in this post at OilPrice.com by Leonard Hyman and William Tilles about the global electricity problems going on now. The first is their main point:
These and similar problems are not accidents and do not result from one-off difficulties or calamities.
but then they immediately lose sight of their opening observations: these problems are happening all over the world, in places that adopted “neoliberal economic policies” and those that didn’t, e.g. Germany, China. I agree with them that the federal government needs to provide incentives including funding to accomplish goals that a pure market system will not reach, e.g. redundancy. For such a goal to be accomplished within a market system there would need to be serious penalties for failures which would in turn reduce the efficiency of markets. That is one of the reasons there are hybrid systems practically everywhere in the world including in the United States. But this is an equally important observation:
A well-functioning just-in-time inventory management system is a thing of beauty, efficiency, and cost minimization. But because of the extreme interdependency, one factory relies on the output of another, often thousands of miles away, any break in this carefully choreographed manufacturing process results in chaos and dysfunction. This corporate mentality has resulted in electricity systems that are now relatively low-cost but increasingly fragile.
In my view a “carrot and stick” approach needs to be put in place and that is very difficult to sustain due to a pesky phenomenon known as “regulatory capture”, particularly prevalent in the energy sector. To provide a single example of the power of regulatory capture much of the story of the Deepwater Horizon oil spill was one of regulatory capture, notorious in the now-defunct Minerals Management Agency which notionally should have been able to prevent the catastrophe.
Here’s another interesting observation:
Installing individual, non-fuel power generation and storage systems provide the energy user with long-term price stability. Once installed, a solar and battery storage system provides long-term price stability for the life of the system, possibly 20 or 30 years! This is a gigantic inflation hedge— although not looked at that way at present. In inflationary times self-generation permits power users to cap their (self-generated) rates for an extended period—a considerable benefit against a backdrop of volatile energy prices.
Read the whole thing.
Reducing inventory has been a constant refrain at our network. It has helped with keeping costs down. Our costs run 20% or so less than our primary competitor. However, it means we run out of stuff pretty frequently. I am constantly having to approve substitute products, ones i have not used and never seen, hoping that they really are just as good as what they are replacing. This strikes me as a predictable catastrophe, much like the pandemic. And just like the pandemic we really were not prepared.
Steve
“However, it means we run out of stuff pretty frequently.”
Um, er, ever considered holding buffer stocks of certain items?
Quick quiz: What commodity is in short availability and restricting auto production? And what car company built buffer stocks and doesn’t know what shortage you are talking about?
That would be Toyota.
We carry supplies in multiple areas with a central depot as our largest buffer. Depending upon the individual supply we carry 2-8 months of stuff. If we carry more that will drive up costs. How much should we carry? We belong to 2 primary purchasing agencies and sort of have a third so we have lots of alternates. Some of the shortages i have seen over the last ten years have involved drugs or supplies that we could not obtain for well over a year. This is so widespread that I dont see any pattern to it* that would let us stockpile stuff we think is at risk, plus a lot of our stuff has limited shelf life. If we knew which were the certain items we wouldn’t be having the problem.
The exception is generic injectables. Usually very cheap unless a Shkreli decides to become involved. We know this group has been a problem for a long time now, but it is a pretty big group. Shelf life is a big issue though. For some of these drugs shelf life can be as short as 3 months with most others on the order of 1-3 years. Some need refrigeration. Some need to be stored away from light. All need temperature regulation even if they dont need refrigeration.
Steve
Funny — Toyota was a pioneer in just in time manufacturing.
But Toyota has always been better at applying JIT to eliminate waste, not JIT to get low inventories.
As for what you are seeing in the energy sector. Price volatility is inherit to the industry. It has price in-elasticity.
As an example, crude usage declined by less then 10% last year yet that was enough to drive the price below $0 (remember that?). Now demand has rebounded slightly more then supply and its caused prices go to $70.
And it is not just fossil fuels. When its extra windy, Europe regularly sees electricity prices go below 0 for hours at a time as there is no use for the extra power from windmills. Obviously they are seeing the inverse right now.
I don’t know if solar/wind is really a great inflation hedge. Yes, the capital cost is fixed at construction; but they vary tremendously in its power output. Unless one seriously overprovisions the generation capacity (which eats any saving); one still needs backup using fossil fuels (defeating the inflation hedge). Storage would be the answer — but grid scale storage is still “5 years” away; a very hard physics problem.
Home energy usage, (heating and cooling) are big budget costs you cannot defer, or successfully finance over time, like a roof or a sunroom.
If consumers are concerned, it’s no surprise, I know that I’m concerned.
One way to spread out the inevitable and crippling energy costs on the way is home storage batteries coupled with NG or propane powered generators and very expensive solar panel roofing.
GNRC, which cannot seem to build up fast enough is the market leader, competing with Elon Musks home battery storage subsidiary.
My question is, can any path be seen at this point that leads to a built back better energy grid for Americans or are financing these “on your own “ alternatives really the smart move.
Here’s help.
https://www.illinoiscornstoves.com/
At around $5/ bushel and actually free if you go to the trouble to trespass and pick up what the combine missed, it’ll pay for itself over time.
Solar plus batteries is stunningly expensive, and it is not a solution for anyone. The systems being sold are suitable only for short term (12 hours?) power outages. The batteries are a significant fire hazard.
We have a whole house generator and propane. We us the propane mainly for heating. When running to produce power, the generator uses 30 gal propane/day, about $90. (Will be much more this year.) This is the price of a hotel room, so it is bearable during a short term power outage of a few days, but not for a month or more.
The problem here is that governments and banks have been suppressing investment in fossil fuel sources and in distribution systems. Fossil fuels account for 80% of energy usage, and this fraction has been stable for decades. Renewables remain a bad joke and a criminal fraud.
As to just-in-time distribution and stockpiling, these systems are inherently unstable and liable to failure from all sorts of shocks. And we have just had a bad shock–governments forcibly shutting down the systems in a lunatic and utterly unnecessary response to covid.
Some of these lunatics are currently running a big game of chicken in the East China Sea.
That would be Toyota. And they started preparing before Covid.
Perhaps operating in a leveraged environment causes one to constantly scan the horizon for risks. What Toyota did was basic risk management. When you have the ultimate business Godzilla of debt service staring you in the face you tend to focus on all the other risks facing you and address them as best you can. This ain’t no disco. No modest or short term efficiencies can overcome some of these risks.
Solar plus batteries is stunningly expensive
Compared to today’s energy prices, yes.
What will energy prices be in five years given utilities are sitting on their hands hoping for mild weather?
I’ve had a couple of solar quotes for my house. Solar makes sense here – higher altitude plus 300 days of sunshine a year.
But it didn’t make sense for us because our heating and hot water are natural gas. Our electricity use is relatively low and also isn’t super expensive. The ROI on a solar system – without batteries – is 20+ years for us, and that’s with subsidies. Not worth it. To make it worth it we’d have to convert the house to electric hot water and electric heat ($$$$). If we had two electric vehicles, that would improve the ROI as well and save money long-term, but the upfront cost isnt’ worth it when I can get a decent used gas vehicle for $15k. Plus, installing the electric car hookups would be another 5-6 grand for the wiring plus a panel and service upgrade.
In short, I think many proponents of green energy don’t understand many of the basic difficulties and expense of converting 80% of our energy production, distribution and consumption systems.
We looked at solar when gas prices were high. Break even was at about 14 years. Then prices fell so we held off. If you are 80 you wont see a return. If you are 40 and think higher energy prices are a concern it is probably a decent investment depending upon where you live. Of course not so much if you move. We run into the same issue we do with LED bulbs. Overall we use less energy with LED bulbs but if you are moving in a year or two cheaper to use other bulbs. (Have not found anything on LED production.)
Steve