Author: Nicole Foss

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Facing the Future – Mitigating a Liquidity Crunch

Despite the media talking up optimism and recovery, people are not seeing the supposed good news playing out in their own lives. As we have discussed here many times before, the squeeze continues on Main Street, while QE has generated asset bubbles at the top of the financial food chain. Complacency reigns, but this is the endgame. Increasingly delusional collective optimism, based on illusory wealth for the few, has ben the driving force for 2013, even as the smart money has been selling everything not nailed down for most of the year – cheerfully handing the empty bag to a public that demands it. It’s been a five year long party, where, demonstrably, no lessons were learned from the excesses preceding the previous peak, and the consequences that followed from it.

Now, as a result of throwing caution to the wind again (mostly with other people’s money of course), we face another set of consequences, but this time the hangover will be worse. Timely warnings are rarely credible, as they contradict the prevailing wisdom of the time, but it is exactly at this time that warnings are most needed – when we are collectively irrationally exuberant on a grand scale. We need to understand the situation we are facing, in order to see why this period of global excess will resolve itself as a global credit implosion, what this means for ourselves and our societies, and what we can hope to do about it, both in terms of preparing in advance and mitigating the impact once we are confronted with a new, sobering, reality.

We are facing an acute liquidity crunch, not the warning shot across the bow that was the financial crisis of 2008/2009, but a full-blown implosion of the house of cards that is the global credit pyramid. Not that it’s likely to disappear all at once, but over the next few years, credit will undergo a relentless contraction, punctuated by periods of both rapid collapse and sharp counter-trend rallies, in a period of exceptionally high volatility. The primary impact will stem from the collapse of the money supply, the vast majority of which is credit – a mountain of IOUs constituting the virtual wealth of the world.

This has happened before, albeit not on this scale. Since humanity reached civilizational scale we have lived through cycles of expansion and contraction. We tend to associate these with the rise and fall of empire, but they typically have a monetary component and often involve a credit boom. Bust follows boom as the credit ponzi scheme collapses. Mark Twain commented on one such episode in 1873:

“Beautiful credit! The foundation of modern society. Who shall say that this is not the golden age of mutual trust, of unlimited reliance upon human promises? That is a peculiar condition of society which enables a whole nation to instantly recognize point and meaning in the familiar newspaper anecdote, which puts into the mouth of the speculator in lands and mines this remark: — ”I wasn’t worth a cent two years ago, and now I owe two million dollars.””

Few recognized at the time that the ensuing financial panic of 1873, at the culmination of a period of speculative excess, was going to lead to a long and grinding depression. The signs were there, as they are today, but few connected the dots in advance and understood what was about to unfold and why. Few ever do at comparable points in time.

Unfortunately, humans are not good at remembering, let alone learning from, and applying, the lessons of history. The information is available for those who care to look – far more information than people had access to at previous junctures – but not in the mainstream media. The media’s role is to reflect and amplify the mood of the time, spinning events in accordance with it in a self-reinforcing feedback loop. Real information – the kind we need if we are to face a future more challenging than anything most of us have ever experienced – is found elsewhere, with independent voices contradicting received wisdom when it most needs to be contradicted. That has been our task at The Automatic Earth for the last six years. We cover the events of the day, placing them in the context of the bigger picture we have developed since January 2008.

We aim to make complexity comprehensible, so that people can identify the most immediate and most significant threats and prepare themselves to face them. At the present time, the threat people most need to appreciate is a liquidity crunch, hence this is a major focus of our most recent Video Download release – Facing the Future. It is well underway in some parts of the world already and many more countries will find themselves affected in the not too distant future.

Essentially, a liquidity crunch creates a situation of artificial scarcity. People hold on to what money they have when they are unsure when they might earn any more of it, as makes perfect sense from an individual perspective. However, when a large number of people do so, the amount of money in circulation falls sharply, leaving an insufficient supply to sustain anything like the same amount of economic activity. Not just actual unemployment, but the fear of future unemployment can be enough to cause spending to plummet, drastically reducing money in circulation. When money is not available to change hands in exchange for goods and services, those goods and services are not exchanged. In the Great Depression of the 1930s, observers noted that “they had everything but money”. The people and resources were still there, but were not able to connect.

As an artificial construct, one might think that a loss of money would have little impact if other factors remained, but this is not the case. As we have explained before, finance is the global operating system, and crashing the operating system has severe consequences in terms of disrupting supply chains – with cascading effect – at both local and global levels. Since this is the major risk we face, and the consequences are likely to be severe, we need to take steps to prepare ourselves and our communities.

The more cohesive and close-knit a community, the better it is likely to be able to withstand external shocks, so all manner of community-building initiatives can be extremely valuable. In our new Facing the Future Video Download series, Laurence Boomert describes a wide range of demonstrably effective possibilities in considerable detail, explaining how and why they work. Such efforts address a liquidity crunch indirectly, through increased resilience.

https://youtube.com/watch?v=Bd-VZfhulWg%3Frel%3D0

However, there are also means to address the scarcity of money directly, and these are likely to have a very important role to play. Alternative currencies can go some distance towards filling the void left by a lack of money in circulation, albeit at a local level. These have been used in many places faced with an economic seizure at the national level, notably Austria, during the Great Depression of the 1930s, Argentina, following the financial crisis of 2001, and Greece today. They are very likely to arise spontaneously in times of crisis, but have the potential to be more effective more quickly if established in advance. A range of them is covered in our new Facing the Future Video Download material.


Nicole Foss and Laurence Boomert with Peak Moment TV’s Janaia Donaldson (center) in Vancouver, Canada

The best known, and arguably most effective, example of local currency in action is the Austrian town of Wörgl in the early 1930s. In the depths of the depression, with over 30% unemployment, the mayor, Michael Unterguggenberger, did not have the funds to cover projects he wanted to build to put his constituents back to work. Rather than use his reserves of 40,000 schillings, he deposited these in the bank and in 1932 issued local stamp scrip backed by his reserves. The scrip required a stamp each month, at a cost of 1% of its face value (a feature called demurrage), hence there was an incentive to spend the money rather than to hoard it. Although the incentive was small, the psychological effect was disproportionately large, keeping the money in circulation at a substantial rate. Although only a small quantity of scrip was issued, it circulated quickly enough to support a great deal of economic activity in a town previously caught in the grip of an economic seizure:

They not only re-paved the streets and rebuilt the water system and all of the other projects on Mayor Unterguggenberger’s long list, they even built new houses, a ski jump and a bridge with a plaque proudly reminding us that ‘This bridge was built with our own Free Money’. Six villages in the neighborhood copied the system, one of which built the municipal swimming pool with the proceeds. Even the French Prime Minister, Édouard Dalladier, made a special visit to see first hand the “miracle of Wörgl.”

It is essential to understand that the majority of this additional employment was not due directly to the mayor’s projects…..The bulk of the work was provided by the circulation of the stamp scrip after the first people contracted by the mayor spent it. In fact, every one of the schillings in stamp scrip created between 12 and 14 times more employment than the normal schillings circulating in parallel. The anti-hoarding device proved extremely effective as a spontaneous work-generating device.

The use of scrip enabled approximately 100,000 schillings worth of local government spending to occur on projects without the need to deplete reserves of national currency at all. In addition, a multiple of this amount in private spending occurred, even though only some 8000 schillings worth of scrip was ever in circulation. Altogether, it has been estimated that some 2.5 million schillings worth of economic activity was financed in one year.

As the stamp scrip was a creation of local government, people were allowed to pay their taxes using it. As there were substantial tax arrears, this was an effective tool for encouraging the acceptance of the currency. People were, in fact, paying their taxes early in order to avoid the 1% monthly loss due to the stamp fee:

On July 31, 1932 the town administrator purchased the first lot of Bills from the Welfare Committee for a total face value of 1,800 Schillings and used it to pay wages. These first wages paid out were returned to the community on almost the same day as tax payments. By the third day it was thought that the Bills had been counterfeited because the 1000 Schillings issued had already accounted for 5,100 Schillings in unpaid taxes. Michael Unterguggenberger knew better, the velocity of money had increased and his Wörgl money was working.

Mayor Unterguggenberger understood the nature of the crisis he was addressing and how is stamp scrip acted to mitigate it. Each Wörgl note was printed with the following justification:

“To all whom it may concern! Sluggishly circulating money has provoked an unprecedented trade depression and plunged millions into utter misery. Economically considered, the destruction of the world has started. – It is time, through determined and intelligent action, to endeavour to arrest the downward plunge of the trade machine and thereby to save mankind from fratricidal wars, chaos, and dissolution. Human beings live by exchanging their services. Sluggish circulation has largely stopped this exchange and thrown millions of willing workers out of employment. – We must therefore revive this exchange of services and by its means bring the unemployed back to the ranks of the producers. Such is the object of the labour certificate issued by the market town of Wörgl: it softens sufferings dread; it offers work and bread.”

It was not necessary for the stamp scrip to replace the national currency, only to supplement it. Local currency in Wörgl was always exchangeable for Austrian schillings, at a cost of 2%, but the scrip was so well accepted that few sought to covert it. One observer, Claude Bourdet, master engineer from the Zürich Polytechnic, reported on the success of the stamp scrip at the time:

“I visited Wörgl in August 1933, exactly one year after the launch of the experiment. One has to acknowledge that the result borders on the miraculous. The roads, notorious for their dreadful state, match now the Italian Autostrade. The Mayor’s office complex has been beautifully restored as a charming chalet with blossoming gladioli. A new concrete bridge carries the proud plaque: “Built with Free Money in the year 1933.” Everywhere one sees new streetlights, as well as one street named after Silvio Gesell [originator of the concept of Freigeld, or Free Money]. The workers at the many building sites are all zealous supporters of the Free Money system. I was in the stores: the Bills are being accepted everywhere alongside with the official money. Prices have not gone up.”

Local goods and services could be purchased with scrip, allowing scarce national currency to be used for non-local essentials and national taxes. If spread widely enough, this model could potentially have protected both local and national supply chains, at least to some extent. However, the central bank decided to assert its money monopoly, shutting down the Wörgl experiment in late 1933 after 13 months. The town then sank back into economic depression. The deprivation across the country set the stage for an unfortunate choice of ‘solutions’:

Only a central authority saviour can help people who are not allowed to help themselves locally. And as all economists will point out, when there is enough demand, supply always manifests in some way. Even if you have to import it. During the Anschluss of 1938, a large percentage of the population of Austria welcomed Adolf Hitler as their economic and political saviour. The rest is well known history.

The power inherent in a money monopoly is tremendous. As far back as the late eighteenth century, the patriarch of the Rothschild banking family, Mayer Amschel Rothschild, acknowledged the extent of power over money in saying ,”Permit me to issue and control the money of a nation, and I care not who makes its laws!” This was acknowledged in the early days of the United states, when debt enslavement was recognized as the power to conquer. Thomas Jefferson wrote of his concern in 1816:

“And I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around the banks will deprive the people of all property — until their children wake-up homeless on the continent their fathers conquered.”

We have had the inflation, in the form of a money supply expansion, largely based on credit creation, that has proceeded virtually uninterrupted for decades. Now we stand of the verge of the deflation that follows all credit expansions as night follows day.

Given its significance, it is no surprise to find the power of money monopoly defended. The ability to do so depends, however, on being able to project power at a distance through strong central control. As this in turn depends on the extent of chaos, the state of supply lines and the availability of sufficient energy, defence will not always be possible, and a money monopoly is not likely to stand the test of time. We will need to develop alternative trading arrangements, both for the present and for the future, as we will be faced with rebooting our financial operating system.

https://youtube.com/watch?v=9y9R0v96K48%3Frel%3D0

Given the potential for local currencies to mitigate the coming liquidity crunch, it is very much worth the effort to create one. They exist in many locations already, some with a history measured in decades. Emergency currencies have also been recently created in order to address the liquidity crisis already hitting the European periphery. For instance, the Greek town of Volos holds a market where all goods and serviced are denominated in TEM (Τοπική Εναλλακτική Μονάδα, meaning Alternative Monetary Unit):

In this bustling port city at the foot of Mount Pelion, in the heart of Greece’s most fertile plain, locals have come up with a novel way of dealing with austerity – adopting their own alternative currency, known as the Tem. As the country struggles with its worst crisis in modern times, with Greeks losing up to 40% of their disposable income as a result of policies imposed in exchange for international aid, the system has been a huge success. Organisers say some 1,300 people have signed up to the informal bartering network.

For users such as Ioanitou, the currency – a form of community banking monitored exclusively online – is not only an effective antidote to wage cuts and soaring taxes but the “best kind of shopping therapy”. “One Tem is the equivalent of one euro. My oil and soap came to 70 Tem and with that I bought oranges, pies, napkins, cleaning products and Christmas decorations,” said the mother-of-five. “I’ve got 30 Tem left over. For women, who are worst affected by unemployment, and don’t have kafeneia [coffeehouses] to go to like men, it’s like belonging to a hugely supportive association.”

Greece’s deepening economic crisis has brought new users. With ever more families plunging into poverty and despair, shops, cafes, factories and businesses have also resorted to the system under which goods and services – everything from yoga sessions to healthcare, babysitting to computer support – are traded in lieu of credits. “For many it plays a double role of supplementing lost income and creating a protective web at this particularly difficult moment in their lives,” says Yiannis Grigoriou, a UK-educated sociologist among the network’s founders.

Such networks clearly have significant social value in bringing people together to face hard times. Much can be gained through mitigating the psychological effects of deprivation in isolation, and the resulting relationships of trust can be enduring. Providing the ability to purchase goods and services, including essential staples, without the requirement for scarce euros, is also critical for those without any other means of support:

Back at the market, I’m told the TEM network in Volos is growing quickly. More than 1,000 people have joined or are waiting to join in this city of 150,000. Katarina, who joined a month and half ago, is selling homemade liqueurs, jams and sweets. For her, the network isn’t just about creating an alternative social structure. It’s about survival. She uses her credits to buy staples – vegetables, fruits and eggs – from others in the network. She said she wishes the TEM network were bigger – she wants to be able to buy things like olive oil and meat. Katarina said she’s been unemployed for five months now. When I asked if she’s received any help from the local government, she laughed. “The state is completely absent.”

https://youtube.com/watch?v=JTMXhSSOBSk%3Frel%3D0

The Greek government approves of this limited form of monetary creativity and has passed legislation encouraging “entrepreneurship and local development” as a substitute for the welfare state it is no longer able to provide. So far nothing more ambitious that might challenge the money monopoly has been attempted. The TEM system of electronic barter only goes so far, as it does not involve local government and cannot be used as a means to meet tax obligations. Local government has only been able to offer moral support:

The city has been hit hard by the crisis, said Volos Mayor Panos Skotiniotis. When construction fell off, the region’s cement and metal industries suffered. Unemployment is rising, and local funding from the Greek state is down 40 percent over the past three years. Skotiniotis said the municipality can’t support the TEM network in any official way. But he certainly sees its value. “It goes without saying that this currency is not substituting for the official state currency, the euro,” said the mayor. “But it’s a supplement for people who can’t meet their own needs.”

It is probably only a matter of time before a more ambitious form of alternative currency, along the lines of the Wörgl experiment, is tried in some of the regions of the European periphery where suffering is particularly acute. This may occur before or after these countries give up their doomed attempt to stay in the eurozone, but would probably be more successful if tried during a transition away for the euro, as this would amount to less of a direct challenge to the global money monopoly. Experiences gained in such an experiment would be valuable if communicated to other locations, many of which will be facing similar difficulties in their turn.

An alternative currency interchangeable with the national currency and usable for local tax obligations, as in Wörgl, is not necessarily a panacea, nor even a permanent solution, but it can make a significant difference mitigating the effects of a liquidity crunch in the short to medium term. Had the Wörgl experiment been allowed to continue, it is possible it would have run its natural course before the local economy could have become self-sustaining:

The activity would not have been sustainable. Once the taxes in arrears were completely paid and when people had paid enough taxes in advance to feel safe and comfortable (at some point they would stop paying forward), the scrip would lose a key part of its attractiveness. One way a government can ensure the demand for its currency is to mandate that taxes be paid in the government-issued currency. The other way is through monopoly legal tender laws. Wörgl could not legislate or enforce monopoly legal tender, so the demand for the scrip is partially attributable to the need to pay taxes.

Nevertheless, the monetary experiment allowed for many municipal projects to be completed and for local economic activity to be supported for a period of time. This was clearly beneficial. As with the TEM currency in Greece, part of the effect of local initiatives like this is psychological – alleviating a prevailing sense of isolated deprivation and brining a community together. This has value in its own right, independent of the monetary effect. Such a course of action should be tried again, and permitted to run for longer, but it is not clear that this will happen once we find ourselves facing widespread economic depression again. The money monopoly is even more powerful today than it was in the 1930s, and even more likely to defend its powerbase, at least while it remains capable of doing so.

Alternative currency can mitigate a situation of artificial scarcity caused by a liquidity crunch, but there are other limits that are not artificial. We were not facing resource limits, or a skills shortage, in the 1930s, but we are today. For a time, money will be the limiting factor, and local currencies may come into their own if allowed to do so, but beyond that financial crunch we will have to face physical curbs to growth. Energy will probably be the next hurdle we have to address. The future will be challenging and we must face it fully informed.

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Ragnarok – Iceland and the ‘Doom of the Gods’

Countries caught in the grip of financial crisis, with austerity measures compounding their problems, are continually being told to follow Iceland’s example. The assumption is that if a state can disregard the claims of the banking sector, it can address the threat of financial crisis relatively painlessly and get back to ‘normal’ quite quickly. Iceland is held up as an example, but the situation is actually far more complex. As such, it is worth exploring the situation in Iceland in all its complexity. It is an example in some sense, but not necessarily in ways which are transferable. It does, however, illustrate a number of lessons for post-bubble economies, and there will be many of those over the next few years. Continue reading “Ragnarok – Iceland and the ‘Doom of the Gods’”

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Where the Rubber Meets the Road in America

There has been a lot of attention focused on shenanigans at the federal level in the USA this year, with games of brinkmanship and political theatre over the fiscal cliff, the debt ceiling and the government shutdown. Cheap political points were scored in a series of unedifying spectacles, but there was no serious risk of default, despite the dramatic rhetoric. It is not at the federal level that the rubber meets the road in the US, but at the state and municipal level, where many states and municipalities are poised to hit a financial brick wall at a hundred miles an hour, as Detroit spectacularly did on July 18th.

They can neither print money nor monetise debt, meaning that tax hikes and service cuts are on the cards, along with the wholesale breaking of financial promises in some jurisdictions. Both pensions and bonds are at risk, along with the services residents depend on. One group of stakeholders – residents – is currently shouldering all the losses while others remain whole, for the time being. The losses suffered by residents, in the form of tax hikes and service cuts rarely make headlines, allowing a form of slow motion financial train wreck to occur on Main Street without the attention that would come with formal default on ‘protected’ obligations like pensions and bonds.There is a great deal of variety in the financial health of states and municipalities, so the crunch will be very unevenly distributed both spatially and temporally. The process has already begun in many places, however the long rally has distracted from the realization of local government in crisis that was dawning in 2010, and has postponed, but not prevented, the day of reckoning. The fundamentals have continued to deteriorate, but the perception of the situation has changed in the direction of far greater optimism, in line with the prevailing sentiment peak. Continue reading “Where the Rubber Meets the Road in America”

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Promises, Promises … Detroit, Pensions, Bondholders And Super-Priority Derivatives

Unknown Detroit, Corner of Michigan and Griswold 1920

On July 18th, the city of Detroit filed for Chapter 9 municipal bankruptcy, the largest such filing in US history. After kicking the can down the road, with increasing desperation, for many years, then end of the line has been reached. The city is finally admitting that far too many financial promises have been made, and that the majority of these simply cannot be kept. It does not matter whether the promise-holders have a good case for receiving services or needing payments, or whether those promises are legally protected. Promises that cannot be kept will not be kept. It is as simple as that. To complicate matters, however, the architecture of the financial system prioritises promises, in a perhaps counter-intuitive, and certainly self-serving, manner. This will make the task of allocating extremely scarce resources to stakeholders lower down the financial food chain very much more difficult. It is time for a good look at the range of promises made, the competing needs of the recipients, the leverage enjoyed by powerful players in shoring up their own position, and the real world implications for municipalities far beyond Detroit. Continue reading “Promises, Promises … Detroit, Pensions, Bondholders And Super-Priority Derivatives”

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Risk Management And (The Illusion Of) Insurance

The expansionist post war era has been characterised by the development of the FIRE economy (finance, insurance and real estate), with a greater and greater dependence on leveraged risk. A necessary consequence has been increasingly sophisticated mechanisms for operating at financially rarified levels far removed from any basis in real wealth. As the network of economic and financial connections has broadened exponentially, and become increasingly complex, greater attention had been paid to apportioning and diverting risk, and to anticipating and avoiding losses through insurance.

Insurance is the equitable transfer of the risk of a loss, from one entity to another in exchange for payment. It is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss…The transaction involves the insured assuming a guaranteed and known relatively small loss in the form of payment to the insurer in exchange for the insurer’s promise to compensate (indemnify) the insured in the case of a financial (personal) loss.

The use of, and dependence on, insurance has spread throughout society in developed countries, and has led to changes in the perception of risk. Rather than addressing risk directly through prudent behaviour or due diligence, risk management has become highly abstract. Being able to pay to officially offset risk can lead to the perception that risk has somehow disappeared. The supposed insulation, or buffer, adds to the comfort level of operating at high levels of leverage, in the same way that driving a vehicle with many safety features can lead to people driving more recklessly, because they feel more secure in taking risks they feel they control, or have paid to minimise. Continue reading “Risk Management And (The Illusion Of) Insurance”

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Scale Matters

 

Scale matters. When it changes, other things change as a function of it, often in unpredictable ways. Emergent properties are system characteristics that come into existence as a result of small and simple units of organisation being combined to form large and complex multi-unit organisational structures. One can know everything there is to know about the original simple units and yet be unable to predict the characteristics of the larger system that emerges as many units come together to interact as a larger whole.

For instance, knowing everything about an individual cell sheds no light on the behaviour of a sophisticated multicellular organism. At a higher level of organisation, knowing everything about an organism does not predict crowd behaviour, the functioning of an ecosystem, the organisation of stratified societies, or the dynamics of geopolitics as societies interact with one another. The complex whole is always far more than just the sum of its parts. Continue reading “Scale Matters”

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The Second UK Dash for Gas – A Faustian Bargain

Artwork: Ilargi

The UK is set to embark on its second dash for gas. The first, beginning in the early 1990s, occurred when gas was first permitted to be used for power generation. Prior to that it had been considered a premium fuel too valuable to be used in this way. The regulatory change initiated a substantial building programme for combined cycle gas plants, fuelled by North Sea gas. Very quickly gas generation became a major component of baseload in the UK, despite warnings that North Sea gas was a temporary bonus and its depletion would leave a structural dependency on Russian gas.

Twenty years later, now that those warnings have been borne out, the UK is increasingly concerned about security of gas supply. The extent of the gas dependency has been greatly increased in the meantime by the housing bubble years, during which many very large, open plan homes were constructed, requiring gas for heating. Also, many more existing homes than previously have installed gas or electric central heating systems, and often these homes are poorly insulated.

As the years of cheap gas are over and gas prices rise inexorably, the structural dependency on cheap gas begins to cause real pain. Household energy bills are at record levels, having risen between 6-11% in 2012 and predicted to rise again in early 2013.

Fuel poverty is sharply increasing:

At the Fair Energy summit today, hosted by The Independent and Policy Review Intelligence, Ed Davey, the Energy Secretary, will remind energy companies about new rules which mean they will have to be more open about the reason why electricity and gas bills are increasing. He says companies are exaggerating the expense of the Government’s energy efficiency measures.

His comments will follow the shocking claim from the Government’s Fuel Poverty Advisory Group that 300,000 homes will be pushed into fuel poverty by Christmas. A household is considered to be in fuel poverty if it needs to spend more than 10 per cent of its income on fuel for adequate heating.

The group also warns that unless the Government tackles the problem of people being forced to choose between heating and eating, nine million households could fall into fuel poverty by 2016. It is estimated that six million households are already in fuel poverty.

The timing is particularly unfortunate, as the gas crunch is hitting at the same time as the credit bubble is bursting, falling house prices are leading to negative equity, austerity measures are being imposed, including welfare cuts for many of the poorest, unemployment is rising and household budgets are being considerably squeezed. The UK is also facing its third cold winter in a row. Estimates suggest that for every 1% increase in energy prices, about 40,000 households are pushed into fuel poverty.

In response, the British government has mandated The Energy Company Obligation to improve the energy efficiency of the housing stock, but there are concerns that these measures would initially add to energy bills:

The Energy Company Obligation (ECO), designed to cut bills of poor households by forcing suppliers to fit solid wall insulation, offer energy efficient boilers and other energy-saving measures, could add up to £116 to the average bill and push families that did not receive support further into fuel poverty. It said that while there were 2.7m fuel poor households in England alone, it expected the measure to help between 125,000 and 250,000 households out of fuel poverty by 2023.

Previous governments, going back at least twenty years, had been repeatedly advised to address the poor energy efficiency of the housing stock, particularly for public housing. They could have done this when mitigation would have been readily affordable, but chose to wait until the transition, if it can be afforded at all in a period of financial crisis, will be far more painful.

The current government has taken the fateful decision to pin its hopes, and much of the energy future of the country, on trying to prop up falling conventional gas supplies with unconventional alternatives. The second dash for gas has been launched with the lifting of the interim ban on fracking (imposed after minor seismic events in fracked areas) and plans to build 30 new gas plants. In his recent autumn statement, Chancellor George Osborne has announced the creation of a new Office for Unconventional Oil and Gas, along with plans for a system of generous tax incentives.

A wholesale commitment has been made to the ‘shale gas revolution’, with the promise of decades worth of affordable gas, and that the American experience of falling gas prices can be replicated in the UK. The Chancellor has indicated that he “does not want British families and business to be left behind as gas prices tumble on the other side of the Atlantic”. The hype has been considerable, despite the acknowledgement that, even if the gas is plentiful and the technology successful in extracting it, unconventional gas could not make a substantial contribution to current levels of gas demand for at least a decade. Britain will be in energy difficulties long before that.

Matt Ridley, former chairman of Northern Rock and author of Genome and The Rational Optimist, offered this hyperbolic, but ill-informed, endorsement:

As recently as 10 years ago, there was a consensus that gas was going to run out in a few decades and grow ever more expensive in the meantime. Such pessimism is now a distant memory everywhere, except perhaps in the forecasting models of the Department of Energy and Climate Change. Gas, the most abundant fossil fuel, is going to last at least a century, probably much longer.

London Mayor Boris Johnson is on the record with even more over-the-top pronouncements:

We are…increasingly and humiliatingly dependent on Vladimir Putin’s gas or on the atomic power of the French state. And then in the region of Blackpool – as if by a miracle – we may have found the solution. The extraction of shale gas by hydraulic fracture, or fracking, seems an answer to the nation’s prayers. There is loads of the stuff, apparently – about 1.3 trillion barrels; and if we could get it out we could power our toasters and dishwashers for the foreseeable future. By offering the hope of cheap electricity, fracking would make Britain once again competitive in sectors of industry – bauxite smelting springs to mind – where we have lost hope…

…In their mad denunciations of fracking, the Greens and the eco-warriors betray the mindset of people who cannot bear a piece of unadulterated good news. Beware this new technology, they wail. Do not tamper with the corsets of Gaia! Don’t probe her loamy undergarments with so much as a finger — or else the goddess of the earth will erupt with seismic revenge. Dig out this shale gas, they warn, and our water will be poisoned and our children will be stunted and our cattle will be victims of terrible intestinal explosions.

Clearly the mayor has no idea of the energy intensity of bauxite smelting, and no understanding of net energy, along with very little respect for the very real concerns surrounding shale gas. Still, he is really only propagating the exceptionally optimistic forecasts of Cuadrilla Resources, which has been doing the preliminary drilling in the Blackpool area:

The huge scale of a natural gas field discovered under the north-west of England has been revealed, potentially revolutionising the UK’s energy outlook and creating thousands of jobs, but environmental groups are alarmed at the controversial method by which the gas is extracted.

Preliminary wells drilled around Blackpool have uncovered 5.6tn cubic metres (200tn cubic ft) – equal to the kind of recoverable reserves of big energy exporting countries such as Venezuela, according to Cuadrilla Resources, a small energy company which has the former BP boss Lord Browne on its board. It said up to 800 more wells might be drilled in the region, creating 5,600 jobs and promising a repeat of the “shale gas revolution” that swept the US, sending local energy prices spinning downwards.

To compare shale gas in in Lancashire to Venezuela is simply laughable, especially on the basis of a handful of exploratory wells in one small region of the country, but then so is suggesting that the US will be the next Saudi Arabia based on shale energy resources. It seems the shale hype is rife on both sides of the Atlantic. Estimates such as 120 years UK supply, and a £1.5 trillion injection into the economy, are being enthusiastically bandied about, albeit with minor acknowledgement that not all of it may be recoverable.


Protesters demand blanket ban on fracking. Photo: PA

We have covered the shale energy situation in the US at TAE before in detail, both with regard to gas and to oil. To recap, the energy profit ratio is extremely low, meaning that scarcely any more energy is produced than had to be invested in production. Depletion rates are very high, setting producers on a drilling treadmill that runs ever faster. Fracking is both capital and energy intensive, requiring a substantial surplus of both, well in advance of needing a return on either one.

As we have pointed out before, prices are set by perception, not by reality. The perception of a gas glut is what has depressed gas prices in the US, not realistic long term prospects of producing gas in meaningful quantities. The reality is quite different, as the insiders know perfectly well:

Geologist and official from Anglo-European Energy:

After buying production for over 20 years, hopefully I know the characteristics of great wells (flat decline curves, low operating costs, large production), and as you know, the shale plays have none of these. The herd mentality into the shale will eventually end possibly like the sub-prime mortgage did. In the meantime it is very difficult to sell any kind of prospect that is not a shale play.

Analyst from PNC Wealth Management (2011):

Money is pouring in from investors even though shale gas is inherently unprofitable. Reminds you of dot-coms.

Analyst from IHS Drilling Data (2009):

The word in the world of independents is that the shale plays are just giant Ponzi schemes and the economics just do not work.

Retired geologist for major oil and gas company (2011):

As I think you would agree, we are looking at a bubble here with caveats. The caveats are how corporate hubris and bad science have caused a lot of folks to think that gas is nearly too cheap to meter. And now these corporate giants are having an Enron moment, they want to bend light to hide the truth. The bubble will burst, folks will get run over, reason will be restored, if only temporarily.

Official from Bold Minerals LLC (2010):

The ‘bait and switch’ where one massive set of capital outlays in the ‘best’ shale uncovered was soon to be eclipsed by the recognition of even better shales which required even more outlays before a thorough technical assessment of existing shale positions had been obtained could only be classified as a type of ‘mania’. It has no precedent in financial scale to any of the previous lease plays that experienced a speculative frenzy in domestic onshore petroleum history.

Official at Phoenix Canada Oil Company (2010):

It is my strong view that we will see a near collapse of that play, probably sooner rather than later. Perhaps we will see a repeat of the coal bed methane (CBM) play ‘disappearance’ — where that ‘exciting’ development faded into history ‘without a trace’!

Official from Schlumberger (2010):

All about making money. I’m working on a shale gas well that was just drilled in Europe. Looks like crap, but the operator will flip it based on ‘potential’ and make some money on it. Always a greater sucker….

The low gas prices seen in the US have been a financial disaster for the production companies, although in a classic ponzi move they have made money flipping land leases even as they lost it on producing gas at a higher cost than they could sell it for. Drilling rigs are already deserting shale gas plays in the US in favour of shale oil – the next great white hope (which happens to suffer from all the same deficiencies as shale gas).

Rig count is a leading indicator of production, so we can expect shale gas production in the US to fall substantially. As production falls, we could see the US shift from perceived glut into real shortage, given the dependence there on affordable gas for both heating and electricity. We could then see a major price spike.

This is exactly the boom and bust dynamic the UK is proposing to set itself up for as North sea depletion rates pick up steam and desperation sets in. After all, it was a similar desperation over conventional gas prospects that drove the industry in the US into trying to develop unconventional supplies. However, the UK is unlikely to experience the full upward and downward swing seen in the US. It is far more likely the reserves will prove to have been overstated, and opposition to fracking in the UK countryside will be huge – far larger than the already substantial protests against on-shore windfarms.

Unlike the US, where landowners are paid royalties for the gas under their land, in the UK, mineral rights are the property of the government. The disparity between where costs and impacts would lie and where benefits would accrue increases the odds of opposition even further. The inevitable protests could delay the process well into the era of financial crisis, at which point it would not be realistically affordable.

The choice to pursue the shale option has been labelled a dangerous gamble:

Professor John Stevens, Senior Research Fellow in Energy, Environment and Resources at independent analysis organization Chatham House, opposes the government’s promotion of shale gas as a viable energy alternative.

“Osborne’s view of the future of energy is misleading and dangerous. It is misleading because it ignores the very real barriers to shale gas development in the U.K. and Europe more generally,” he said this week.

“The U.S. revolution was triggered by favorable factors such as geology, tax breaks and a vibrant service industry among many others. However, in Western Europe the geology is less favorable, notably with the shale containing a higher clay content making it more difficult to use hydraulic fracturing (fracking),” he said. He called the U.K’s “dash for shale gas” a”dangerous gamble.”

Stevens added that the government’s hope that shale would reduce the rising costs of energy in the U.K. were flawed.

“[The government’s view] assumes that gas will be cheaper in the future and, as already explained, while this could be the case it will certainly not be the result of any shale gas revolution in U.K. or Europe in the next five to ten years.”

As Professor Stevens points out, circumstances in the US and the UK are not at all similar. The UK is far more densely populated, and land-use in the countryside is tightly controlled. Fracking requires space and infrastructure:

Melissa Stark, Managing Director of Accenture’s Clean energy group, said shale gas can require a number of wells over one site. Even if the number of wells can be reduced by horizontal drilling, the site will need roads, machinery and storage facilities.

“One of the biggest challenges for the UK is probably going to be the population density. The UK is much more densely populated than the US making the management of movements more challenging.

“The sharp influx of logistics activity during the drilling and fracking phases can have a significant impact on the local community. Increased traffic congestion, damage to local roads, noise and air pollution are among the most commonly cited concerns.”

Ms Stark pointed out that fracking is extremely water intensive, requiring around 5m gallons per well. Although the UK is not a water stressed area, she pointed out that in certain areas in certain years, industrial water use can be restricted. Also the waste water from fracking needs to be transported off the site and treated or injected into wells deep underground. She said the UK will have to find disposal sites or build enough treatment works.

“As the volume grows, the question is can the used water treatment works keep up?”

In anticipation of substantial opposition, the government is preparing to remove planning control for fracking from local municipalities:

Under new laws, Government ministers, rather than local authorities, could have the final say on more “nationally significant infrastructure” projects, including onshore gas extraction. Proposals in the Growth and Infrastructure Bill would would exempt shale gas plans from some local planning procedures and consultations. The laws are aimed at stopping local blockages in the planning system to fast-track infrastructure and boost economic growth. Campaigners, who warn that fracking could cause “major damage” to the landscape, could have less opportunity to challenge unwanted developments.


Photo: AFP

Vague promises of ‘community benefits’, particularly if these come in the form of “voluntary contributions by developers to an area where their business has a long–term impact on local resources and the environment” are unlikely to appease anyone. However, if proposals to share business rates with local councils are, in fact, enacted, then councils, which a very squeezed financially, and set to become far more so, could effectively be bought off.

Apparently over 60% of England is currently under ‘license block’ consideration for the development of shale gas, much of it under the Home Counties. It is ironic that Conservative Party politicians are the most ardent champions of shale gas development, yet the land that would be affected is home to much of their key powerbase.

This does seem to be an obvious form of political suicide, and the fact that the present government seems blind to that is a measure of the level of concern over Britain’s energy future. The powerful impulse to deny reality in order to cling to business as usual is understandable, but terribly misguided.

Under such circumstances, it is natural human behaviour to look for a saviour. Given our ghastly choices, it wouldn’t be surprising if we were susceptible to false dawns….With the West on its economic uppers, and losing power relative to the rest of the world, a home-grown energy bonanza sounds appealing…

When the big energy companies and Western governments push in the same direction, they can, for a while anyway, create any conventional wisdom they like, even one with little regard for the facts.

Unfortunately for proponents of the appealing fantasy, reality wins in the end. We are not destined to see the geo-strategic map redrawn in favour of the West as a result of shale energy. Instead, we are going to be facing some very hard decisions on rationing scarce resources for the foreseeable future, and we are going to be doing it in a time of deepening financial crisis. Britain will be critically short of both money and energy, and sadly those twin deficits can be expected to aggravate each other significantly.

Shale gas is a Faustian bargain meant to kick the energy can down the road, but it amounts to nothing more than a cruel deception.

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Sandy : Lessons From The Wake Of The Storm

Disaster and Preparedness: How Well Are We Doing?Superstorm Sandy has been a devastating experience for many, and will continue to be so for a long time to come. Much of the damage will take weeks or months to repair, and some may take years. A myriad long battles with insurance companies are a given, as the available funds are unlikely to match the damage and there will be many arguments as to what is covered. The impacts are widespread, but unevenly distributed, as the repairs will be. Like Katrina before it, Sandy will be a defining event in the lives of many people.

Sandy illustrates a number of important points – how fundamentally dependent modern society is on centralised life-support networks, how interconnected different dependencies are, how crucial the role of energy really is, how disruption in one system can cascade into impacts in many others, and how unprepared people typically are to withstand even relatively short disruptions of essential services. Sandy provides a very useful case study in what we can do to prepare for challenging times, whether those occur due to hurricanes, ice-storms, earthquakes, financial collapse or other possible eventualities. Continue reading “Sandy : Lessons From The Wake Of The Storm”

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Renewable Energy: The Vision And A Dose Of Reality

In recent years, there has been more and more talk of a transition to renewable energy on the grounds of climate change, and an increasing range of public policies designed to move in this direction. Not only do advocates envisage, and suggest to custodians of the public purse, a future of 100% renewable energy, but they suggest that this can be achieved very rapidly, in perhaps a decade or two, if sufficient political will can be summoned. See for instance this 2009 Plan to Power 100 Percent of the Planet with Renewables:

A year ago former vice president Al Gore threw down a gauntlet: to repower America with 100 percent carbon-free electricity within 10 years. As the two of us started to evaluate the feasibility of such a change, we took on an even larger challenge: to determine how 100 percent of the world’s energy, for all purposes, could be supplied by wind, water and solar resources, by as early as 2030.

Continue reading “Renewable Energy: The Vision And A Dose Of Reality”

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India Power Outage: The Shape of Things to Come?

July 31: Indian national television reports on power outage (to a limited audience?!)”So far as I am able to judge, nothing has been left undone, either by man or nature, to make India the most extraordinary country that the sun visits on his rounds. Nothing seems to have been forgotten, nothing overlooked.”
Mark Twain, Following the Equator.

The enormous power cut recently seen in India, which affected perhaps 700 million people, serves to highlight the degree of the structural dependency we have built into our lives in the era of cheap energy.

Electricity is one of the most complex manifestations of our complex system and has come to be widely seen as a basic necessity. It enables many of our modern life support systems. Expectations have been raised, even in many of the slums of the world, that electricity will be available, at least some of the time. The lack of it, especially if that lack is sudden and unexpected, or prolonged, increasingly leads to social unrest.

It is instructive to contrast the extent of the dependency on electricity, and the expectations that surround it, in developing and developed economies. The way a blackout plays out in a place like India is quite different than a similar outage would be in a place where power supplies are far more reliable. The primary difference is one of resilience.

Power Generation and Infrastructure

The Indian blackout has been described as “an accident waiting to happen” by Suresh Prabhu, who ran India’s power ministry in the early 2000s. India’s electricity sector faces many chronic challenges thanks to the rapid development of the country. It is highly dependent on coal for 70% of generation, and commonly experiences coal shortages:

The fuel shortage is acute when it comes to coal, which accounts for two-thirds of the country’s power generation.

India has about 10 percent of the world’s coal reserves but output by the near-monopoly Coal India has stagnated, importing coal is far more costly and a lack of rail capacity from ports has held up supplies. Many power plants have less than seven days’ of coal stocks, a level seen as critical to continuous operation.

“Coal India has enough reserves. But evacuation (transportation) is the main problem,” said a senior coal ministry official. He said Coal India had set aside $900 million to lay train tracks in the next five years but the railway ministry had not responded to the plan.

Generation is water dependent, and the delayed monsoon this year has exacerbated existing water scarcity, meaning less water for hydro power and for cooling other forms of generating capacity. Lack of cooling water could cause generation, notably nuclear plants, to be shut down. Temperatures have stayed higher than normal, increasing demand for space cooling at the same time.

The lack of rain has also increased the need for irrigation water for farming, meaning increased demand for the power to access and use groundwater. Power use by farmers is subsidized, hence there is little incentive for them to conserve. The effect on demand at times of low rainfall can therefore be considerable. Climate change is likely to accentuate the water problems in the future, as monsoons may be increasingly affected, the melting of glaciers in the Hindu Kush would also reduce surface water availability and heatwaves would increase evaporation.

The economic impact on state electric boards expected to supply subsidised demand to farmers and many others is considerable.

Perhaps the biggest challenge, though, is the health of decrepit distribution companies that depend on subsidies and face huge losses from low tariffs and rampant power theft. Together, they are now saddled with debt worth some $35 billion and are increasingly unable to pay for new supplies.

“Generation capacity will only get financed if the financiers feel that the generators are selling power to distributors who are financially capable of paying for it,” Planning Commission deputy chairman Montek Singh Ahluwalia said recently in defense of a government plan to bail out the mostly state-owned distribution companies.

Populist-inclined state governments have made it difficult for distributors to set cost-reflective tariffs. However, with bank loans drying up, many distributors have been forced to raise tariffs sharply over the past six months.

Many of the state run electricity companies, which collectively lose $4.5 billion per year, are essentially bankrupt.

Supply, Demand and Unofficial Connections

Power infrastructure in India is not capable of providing the sufficient and reliable power supply that westerners take for granted. Some 300 million people have no access to electricity since the grid does not reach their areas.

While India ranks sixth in the world in terms of overall electricity production and consumption, its population of 1.2 billion means that per capita levels of electricity consumption remain low at just over 500 kWh per person per year, compared to more than 2,600 kWh in China and nearly 12,000 kWh in the United States.

Unlike in richer countries neither supply nor power quality can be reliably maintained:

Reliable operation of the large interconnected grids of North America and Europe is founded on established practices of tight frequency control and all control areas sticking to their respective interchange schedules. The grid frequency normally remains within +/- 0.03 Hz of the rated frequency, and any excursion beyond that is considered alarming. Utilities deviations from their schedules are minimal, and have to be made up in kind the next day. They are therefore not priced. Adequacy of generating capacity enables maintenance of requisite spinning and cold reserves at all times, for overcoming contingencies. In a regime with such discipline, all power plants must generate power according to the schedules decided by the concerned load dispatch centres, and pit-head and nuclear power plants can steadily operate at a substantially constant MW as per their respective schedule.

The situation, on each of the above counts, is very different in India. The peak-hour consumer demand far exceeds the available generating capacity. Capacity shortage is officially stated as around 15%. Load-shedding is a daily routine except in metropolitan cities and State capitals. Rural supplies are regularly rostered commonly and restricted to 8-12 hours a day in most States. State utilities, in their anxiety or compulsion to minimise load-shedding in their area, tend to overdraw power from the larger grid. Interchange schedules go for a toss, and frequency often plunges below the stipulated lower limits. As per a recent report, the frequency was below 49.2 Hz for about 25 % of the time during August 2009. On the other hand, industries and commercial establishments need back-up diesel generators for continued operation when power supply from the grid is cut-off or is curtailed (for a few hours every day), and domestic consumers have to bank on their own battery-backed “inverters” to get the basic amenities of light and fan round the clock.

Since deviation from drawal schedules of State utilities are inevitable and substantial, and cannot be returned in kind, they are priced. Utilities pay for overdrawal, and get paid for under-drawal at a frequency-linked rate, which goes up as frequency declines and goes down as frequency rises…

…Frequency is the most crucial parameter in the operation of an A.C. system. The rated frequency in India is 50.0 Hz. While the frequency should ideally be close to the rated frequency all the time, it has been a serious problem in India. There was a time it varied from below 48.0 Hz to above 52.0 Hz, even beyond its legally permissible limit of +/- 3%, i.e. from 48.5 Hz to 51.5 Hz as per Indian Electricity Rules, 1956…Frequency fluctuations are caused by load-generation imbalances in the system, and keep happening because consumer load keeps changing.

Poor power quality control has knock-on effects on equipment operation, including large-scale generation capacity. Equipment damage can, of course, further compromise supply and aggravate the effects of chronic fuel shortages. Crucially, nuclear plants do not function well in such an environment:

Nuclear power plants are particularly susceptible to frequency fluctuations. As frequency changes, the speed of the coolant pumps changes proportionately, and the coolant flow and consequently the temperature differential across the reactor also vary. The above temperature differential is a primary signal for reactor power control, and its variation gives a command for change of reactor power even when the reactor has been operating at the optimum level. This is turn causes unnecessary fluctuations of reactor power and undesirable wear of fuel rods, etc.

Demand often exceeds supply by 10%, hence rolling blackouts are a constant feature. Losses in the transmission and distribution systems are huge – 40-50% – thanks to decrepit infrastructure and extensive power theft. The power system (as with much of society) is plagued by corruption. This leads to great popular frustration:

Citizens could take to the streets if the blackouts continue, warned Harry Dhaul, director general of the Independent Power Producers Association of India, a non-governmental organisation that campaigns for improvement of the Indian power sector: “There will obviously be some agitation in urban areas, which have become very reliant on electricity … There could be riots; there could be protests.”

At the beginning of July, repeated power cuts during a spell of 40C-plus heat prompted hundreds of residents to vandalise electricity substations in the new city of Gurgaon just outside Delhi. Rioters beat up energy company officials, holding some of them hostage and blocking roads in several parts of the city.

A large minority of those in the blackout zone have never been connected to any grid – just 16.4% of the 100 million people who live in the central-eastern state of Bihar have access to electricity, compared with 96.6% in Punjab in the west.

In order to help balance supply and demand, consumers are required to inform the power distributor of the proposed load. They are supposed to apply for, and pay for, permission to connect the new device, but since this can take a long time and be relatively expensive, the rule is often not observed:

Central Electricity Supply Utility of Orissa (CESU) officers said most of the disruptions are due to damages in the electrical circuits because of undisclosed load. For adding new electrical devices, one can apply to the area junior engineer of the power distributor by paying the security deposits. If one adds an AC using 1 kilo watt power, he would have to make a security deposit of Rs 432 and so on, Sinha explained…

…CESU sources estimated that the undeclared load has gone up by around 20 per cent in the past few days. “This is because hundreds of air-conditioners and air coolers were installed by people to get respite from the scorching heat. However, very few people had actually announced these additions,” said CESU spokesman Golak Bihari Sahoo.

Electricity connections are financially out of reach of many, notably the many residents of India’s teeming slums.

Sprawling industries and emerging urban lifestyles in Ahmedabad enfolds in itself a dark and morbid life of scarcity, filth and deprivation. Nearly 41 per cent of people in the city live in slums.

There are 792 slums spread all across the city. Migrants from Rajasthan, Maharashtra and Madhya Pradesh who come in search of a livelihood also live here. But the majority comprises scheduled castes and scheduled tribes. A good percentage of migrants from Bengal and Bangladesh is also seen…

…”We have to pay Rs 750 for the connection and an additional Rs 250 to fix the metre box. Every month we get a bill of Rs 150-200. We cannot afford to pay more than Rs 1,000 for a connection,” said Gita Rabari, a slum-dweller of Baba Ramdev Nagar of Chandloda slums in Isanpur.

This does not necessarily mean that slum dwellers do not have electricity, but that ‘unofficial’ power connections are incredibly common.

A one-room slum hut next to the nahalla, the foetid, drainage canal which runs past the cremation pyres near Nizamuddin, costs about 500 rupees rent a month, usually paid to the local gangsters.

The slums around my place usually have electricity, illegal of course. Every electricity post is rigged with hundreds of wires leading down into the slum dwellings, and because of this illegal tapping (local garment shops and factories also do it) Delhi is cursed with power black-outs. Twice a day, for up to six hours at a time, in 111 degree [Fahrenheit] heat, my electricity goes. The poor suffer, while the rich in New Delhi crank up their noisy generators to charge their ceiling fans and fridges.

Power theft is not just an individual matter. It is also a means for small slum businesses to supplement their meagre income:

With nearly 25 per cent of the slums not having electricity, slum-dwellers have resorted to stealing it from those who have installed metres. There are also ‘dealers’ who illegally supply electricity to houses.

“My paan shop hardly provides me with any money. Therefore, I supply electricity to houses. I get the wire connections from an electricity metre in the neighborhood. Five to six houses can get electricity from one wire in just Rs 150,” claimed Raju.

Power theft has become a way of life. It is simple, low cost, and makes an enormous difference to the quality of life of those at the base of the economic pyramid:

Electricity theft is also part of the problem, but simply identifying the problem as “theft”—as many do—rather than recognizing that people deserve access to electricity, minimizes the social and economic reasons that drive people to frustration to the point where they feel they have a right to steal power from the grid.

Despite massive loans, debt, and the poorest paying for the power with their land or their lives, one-third of India’s households do not have enough electricity to power a light bulb, according to last year’s census. And so they steal it. And in stealing it, they increase energy inefficiency, by often grounding the wire they have hooked up illegally to the grid in the soil, thereby losing more power.

In this June 13 file photo, an electrical linesman repairs cables in the middle of a spider web of illegal subsidiary wires around the main cables in Allahabad, India. Stealing of power is a frequent phenomenon in Indian towns. AP Photo by Rajesh Kumar Singh

With such strong incentives, it is no surprise that the practice is endemic:

How can you live on a few dollars a day? Well, it helps a little if your electricity is free. For slum dwellers in Rohini, a residential district in North West Delhi, power theft is almost a way of life. There’s little or no effort to hide it, and the method is simplicity itself: just find the nearest overhead power cable, sling a metal hook over it, then run a wire from the hook to the home. The result: an illegal supply of free electricity that lasts until inspectors from the local power utility stage one of their periodic raids. And when that happens, people simply all wait for a few hours until the inspectors have gone before reconnecting.

The evidence for this is there for all to see. Across a main road from the slum is a line of pylons carrying mains electricity cables. As well as the thick wires they are supposed to be supporting, most of the pylons have dense tangles of other much smaller wires sprouting off in different directions. The proliferation of connections makes the pylons look a little like over-decorated Christmas trees.

These little wires run across the road siphoning off power from the transmission lines to homes and businesses located in the slum, which is a maze of little alleyways with children and animals running around. Most households here seem to have an illegal connection to the grid. In many instances there are several unauthorized connections – and on occasion a legal one as well…

…Although Delhi has been dubbed the power theft capital of the world, the situation in other parts of India is little better. There are no hard figures, but the best estimate is that somewhere between a third and half of the country’s electricity supply is unpaid for. No other country suffers revenue losses on this scale.

It is not just the very poor who do not pay. Power theft is far more extensive than that. The inability, or unwillingness, to pay for supply means that improvements to the system are very difficult to finance.

Slum dwellers’ unofficial hook-ups are the most visible sign of India’s power theft crisis, but there are yet bigger problems dogging the country’s energy sector. Meter tampering by middle class households seeking to pay less than they should costs still more, says Sangeta Robinson, an official with local utility North Delhi Power Limited, a subsidiary of energy giant Tata Power. And yet another huge loss – albeit one which no-one can quantify – is electricity theft by industrial enterprises.

Giresh Sant, who works for an NGO called Prayas campaigning for more efficient and accountable government, says the problem is one of corruption – and a vested electoral interest in turning a blind eye. No-one likes paying their utility bills, he says, so often politicians regard laxness about revenue collection as a vote-winner. And opportunities for personal enrichment through corruption related to industrial power theft have given them, as well as civil servants and utility officials, further incentives not to rock the boat.

The political aspect is most acute in rural areas, where the larger-scale farming operations are collectively influential:

At least 20% of India’s power is consumed by farmers’ irrigation systems. Frequently they either get free power or pay low set charges that bear no relation to the amount of electricity used. The powerful farmers’ lobby is hard for politicians to ignore in country where a majority of the population still makes its living from agriculture.

The task of removing illegal connections often seems insurmountable:

A tired man with a thin mustache, Seth is one of the many people fighting block-by-block to clean up the system. It’s an unenviable task. If Sisyphus had been Indian, his sentence might have been to unsnarl the boulder-sized knots of wire that hang from every electric pole.

Many Indians have a long-standing reluctance to pay for power, dating back to the era when the state controlled nearly the entire economy, including the energy sector, and securing a legal power connection could take a lifetime.

Pervasive corruption acts as a barrier to change at every level of power system operation:

Corruption certainly has played a role in India’s power failures for decades. At every step in the supply chain, money is siphoned off, resulting in a shoddy system– from backup systems to warning systems to good cables. Currently, good cables intended for transmission get sold and shoddy materials put in their place.

It would be a herculean task to reform the power sector into anything remotely resembling what the developed world is used to.

Blackouts – Planned and Unplanned

The July 30th blackout appears to have begun in Agra, Uttar Pradesh. The transmission lines were apparently carrying twice the permitted load. When the Agra-Gwalior line went down, the effect was a cascade, with lines tripping one after the other.

The current prevailing theory is that the outage started with an internal failure in a power line in Agra, removing significant generating capacity from the grid. This event should have triggered an immediate order to all states on the grid to shed load, or intentionally reduce power delivery to their consumers. By the time this order was given, however, most other generators on the grid had already dropped frequency due to the load demand being greater than what they could generate. This happened as no regions shed load and the rest of the generators were struggling to cover for the lost power on the failed Agra line. Before anyone could react, the whole northern grid had collapsed.

The impact was considerable. People were trapped in the metro or stranded at stations, with electric trains unable to move and blocking the movement of diesel trains. Massive traffic jams formed in New Delhi as traffic lights went out. Electric crematoria ceased to function. Hundreds of miners were trapped underground. Water supply was heavily impacted. Some hospitals faced major difficulties in the following days:

Generators require fuel, which can be scarce during a blackout. The Wall Street Journal reported on Tuesday that at a major hospital in Gurgaon, the backup generators failed after prolonged use. This forced nurses to manually operate life-saving equipment such as ventilators for about 15 patients. “We were lucky that no lives were lost,” a senior doctor said. “The generators came back up in about 20 minutes.”

Out-patients also struggled:

Among those affected by the outage was 62-year-old Pramitha Devi, who was bidding to take the metro toward Ram Manohar Lohia hospital in New Delhi after her home dialysis machine was damaged by electricity fluctuations. A doctor who identified himself as R.C. Bhargava said the hospital’s generators had not been fully refueled since the July 30 grid collapse, leaving them with about two hours of electricity for the intensive care unit. “We have to make plans to shift critical patients to other hospitals,” said Bhargava.

In India, the issue is not whether or not there will be blackouts. People know that there will be, often for several hours every day. They prepare for outages and take them in stride:

When I was growing up in Delhi, we were well accustomed to daily summer power outages, euphemistically called “load shedding.” These blackouts were regularly scheduled every evening and often created an atmosphere of genial neighborly fun — people out on terraces enjoying cold drinks, talking with neighbors over walls, taking walks, kids playing in the street — and they didn’t seem particularly inconvenient. But all that was another time and a far cry from the catastrophic two-day power crisis that India experienced earlier this week.

The distinction that matters is between planned and unplanned outages. Planned outages are called rolling blackouts:

A rolling blackout, also referred to as load shedding, is an intentionally engineered electrical power shutdown where electricity delivery is stopped for non-overlapping periods of time over geographical regions. Rolling blackouts are a last-resort measure used by an electric utility company to avoid a total blackout of the power system. They are usually in response to a situation where the demand for electricity exceeds the power supply capability of the network. Rolling blackouts may be localised to a specific part of the electricity network or may be more widespread and affect entire countries and continents. Rolling blackouts generally result from two causes: insufficient generation capacity or inadequate transmission infrastructure to deliver sufficient power to the area where it is needed.

Rolling blackouts are a common or even a normal daily event in many developing countries where electricity generation capacity is underfunded or infrastructure is poorly managed. Rolling blackouts in developed countries are rare because demand is accurately forecasted, adequate infrastructure investment is scheduled and networks are well managed; such events are considered an unacceptable failure of planning and can cause significant political damage to responsible governments. In well managed under-capacity systems blackouts are scheduled in advance and advertised to allow people to work around them but in most cases they happen without warning, typically whenever the transmission frequency falls below the ‘safe’ limit.

Where outages are scheduled, people adjust their activities accordingly. However, unscheduled blackouts, or outages much longer than scheduled, cause public resentment. Disruption is tolerated, so long as it is organized disruption.

Unscheduled power outages are back to haunt citizens of Greater Hyderabad…

…”Central Power Distribution Company Limited (CPDCL) officials have suddenly started implementing three-hour power shutdowns without giving any schedule. We will be prepared for power cuts if the schedule is announced,” A Chandrasekhar, an IT consultant and resident of Habsiguda, told TOI.

Several residents complain power cuts were beginning as early as 6 am. Office goers and students are being put to inconvenience, affecting their daily chores in the morning due to the outages.

“There was no power in my area for more than an hour in the morning. We were not prepared as the power cut starts at 9 am. With this, we could not fill our water tank and got delayed to office,” ASR Murthy, an IT employee and resident of Srinagar Colony, said.

Potential solutions exist to the organizational problem, if not to the mismatch between electricity supply and demand.

“CPDCL has data of mobile phones of about 12 lakh [1.2 million] consumers in the city. They should at least inform citizens about power interruptions through SMSs on a day-to-day basis so that people can plan their chores accordingly,” M Uday Kumar, a resident of Kushaiguda, said.

Indian businesses and household compensate for the inevitable power cuts with generators, fuel supplies, renewable generation and inverters, and battery banks for power storage. The elements of redundancy – alternative means to achieve the same essential function – have endowed the system with flexibility and resilience. It comes at a cost however, for the equipment and for expensive generator fuel. This provides business opportunities for those who facilitate independent generation:

Microtek, an Indian company that specializes in selling power backup inverters, claims to have 100 million “satisfied customers.”

“Every year in the summer months demand peaks and there are power failures, so most middle-class families purchase an inverter. That’s why we’re in business,” said Manoj Jain, vice president at Microtek.

To be able to afford this, one must be relatively wealthy. Otherwise, inconveniences and the discomfort of sweltering temperatures without cooling must be endured.

Ironically, the super-rich generally do not bother, as their power supplies are far more secure. They are therefore more exposed to large scale unplanned disruptions than the middle class.

In the centre of Delhi, one of the world’s biggest, dirtiest, noisiest cities, is an island of calm. Here, government ministers live in vast, state-owned villas; judges, generals and senior bureaucrats walk their dogs across well-watered lawns as servants scrub their government cars; top politicians confer in compounds and the wives of unimaginably wealthy industrialists hold lunch parties catered by top chefs. You live here and visit India.

Last week, India visited this island in the shape of a giant power cut.

Such outages are a daily occurrence for the rest of the population – or at least the two-thirds of India’s 1.2bn inhabitants who actually have any electricity supply. But they are not for India’s elite. For the latter, power guarantees power. The bureaucrats in charge of Delhi’s grids switch off the supply to hospitals before they plunge the homes of top politicians into darkness. But this time the lights did go off. And so the residents of the most upmarket parts of the city – so confident of their power supplies that they do not have generators – had to sit in the fetid monsoon temperatures of 35 degrees [Celsius] like everyone else.

Impact on Development and Obstacles to Improvement

The unreliability of electricity supply has a significant impact on economic development, as it decreases productivity and increases cost substantially. In addition to supplying back up power, companies may have to arrange alternate water supplies or alternate employee transportation.

There are often equipment compromises that have to be made, and this has knock-on effects on operations. Businesses are often equipped to cope with intermittent power, but are worried about competitiveness and investment.

Work making potato chip display racks at Jayraj Kumar’s factory barely paused when much of India’s power grid collapsed. The backup generators kicked in automatically and the electric saws, presses and welding machines kept running, just like they do during the five-hour power cuts the factory in suburban Delhi suffers nearly every day.

India’s unreliable power system has forced businesses to create a workaround electricity system of noisy, dirty diesel generators that prepared them well when the world’s worst blackout hit the country Tuesday. But the trouble has also vastly increased businesses’s expenses, dragged down their productivity and hampered economic growth in the country. “Running a factory is very tough here,” Kumar said…

…Kumar, 56, started his business turning metal wire into display racks 23 years ago with just three employees. Now his company, The Rhino, runs a factory of 200 workers that churns out 1,500 red racks a day for clients from PepsiCo to Nestle that are ubiquitous in markets across India.

When the company opened its new factory in this Delhi suburb three years ago, “we knew that power would be a problem,” he said. “From the very first day, whenever we start an office or factory we immediately think of having a decent power backup,” he said.

Behind the cavernous whitewashed factory, lined with workers operating spot welding machines and kicking up sparks as they saw through metal, stands a large, green 80 megawatt generator on a brick foundation. In a corner on the ground floor is another generator rigged with a truck ignition that starts with a belch of gray smoke. Nearby, two more generators are hooked up, and, taking no chances, Kumar bought a fifth one Wednesday.

The factory runs 16 hours a day, at least five of them on generator power, he said. This backup system comes at a huge price for Kumar’s business. “Generators are meant for emergencies, they aren’t meant for production purposes,” he said.

Each generator costs 1 million rupees ($18,000) and has to be replaced every three years. The four full-time generator operators cost him another 1.2 million rupees ($21,600) in salaries. He pays 4 million rupees ($72,000) in diesel bills. In all, he estimates the generator power costs him 10 times as much per unit as the grid power and adds 20 percent to his overall costs.

And the fluctuating voltage from the generators wreaks havoc with his equipment. The welding and grinding machines work unpredictably on generator power, vastly slowing down production and reducing the quality of his racks. He is forced to pay an extra 6 million rupees ($108,000) to repair equipment the unstable voltage damages every year. “You cannot plan your production, your commitments are gone,” Kumar said.

He must use the most basic, labor intensive machines, because generator power would destroy computerized equipment. When he tempted fate by importing two 5 million rupee ($90,000) machines that printed large format ads to adorn the racks, they both stopped working within a week, he said. He can’t export his products because their quality is too low, but he can’t get the machines that would make them better either, he said. With reliable power, he would instantly increase his output by 30 to 40 percent, he said.

His work in China has left him jealous of the infrastructure there. Smaller countries such as Vietnam and the Philippines have surpassed India and he laughed about a one-minute power outage he once experienced in Singapore that turned into a major news story.

The massive blackout has brought India’s power supply problems to far greater attention:

While India created dubious history on Tuesday with the world’s largest blackout, its $100-billion software and services sector managed to keep its lights and links with clients on by drawing power from diesel gensets. But not before India’s image as a premier investment destination for technology was called into question by jittery clients worried about the ability of companies to provide uninterrupted services.

“The blackout has impacted the perception of India at a country level. India’s image has taken a beating,” said Som Mittal, president of IT trade body Nasscom.

A number of factors have rendered increasing supply problematic. Apart from the endemic corruption that complicates every transaction and adds cost at every turn, there has also been political infighting, with the power system used as a political football:

Lack of political will coupled with successive governments’ short sightedness has cost the country dearly in terms of implementing several projects. For example, in 2008, the energy infrastructure company Reliance had proposed to build an 8 gigawatt (GW) natural gas power plant. The political party in power at the time allowed the company to acquire the land in Dadri, Uttar Pradesh, for power plant construction after compensation was given to land owners and farmers. When the opposition party came into power in the next session, political rivalry triggered biases and this land was declared disputed. Reliance lost the case in Supreme Court and construction of the plant has now been shutdown. This plant could have been instrumental in reducing the daily power cuts utilities make in and around Uttar Pradesh.

In addition, higher costs are being imposed for access to land for the construction of new generation:

The interest rate on government land loans has increased from 9 percent in 2010 to 14.5 percent in 2011. This increase in land loan interest rates has made it less feasible for private firms to invest in power plants. Higher land costs increase the amount of initial capital needed, and the impact can be seen in the form of increased electricity costs and lower returns for utilities.

Troubled international relations also aggravate attempts to broaden fuel supply options and reduce fuel constraints:

India’s relations with certain neighboring countries have hindered the development of its power sector, as seen in the case of the Iran-Pakistan-India Pipeline. India has considered various proposals for international pipeline connections with other countries. One such scheme is the Iran-Pakistan-India (IPI) Pipeline, which has been under discussion since 1994. The plan calls for a roughly 1,700-mile, 5.4-Bcf/d (billion cubic feet per day) pipeline to run from the South Pars fields in Iran to the Indian state of Gujarat. While Iran is keen to export its abundant natural gas resources and India is in search of ways to meet its growing energy demand, a variety of economic and political issues have delayed the project agreement. Indian officials have made it clear that any import pipeline crossing Pakistan would need to be accompanied by a security guarantee from officials in Islamabad.

India’s rapid growth rate – 8% per year in recent years – leads to projections that $300 billion will need to be spent on new generating capacity and new transmission and distribution infrastructure over the next 25 years in order to meet demand. Of course, given the impact of the global financial bubble bursting, those growth projections are highly unrealistic. However, capital scarcity in a period of economic depression is likely to mean investment drying up and problems becoming far worse before there may be any chance of improvement.

Attempting to Regularise Power System Operations

One area where some tentative progress is being made towards getting supply and demand more closely aligned, at least in places, is in addressing power theft. Despite the seemingly overwhelming scope of the problem, programmes of sticks and (at least a few) carrots are showing some signs of beginning to regularise operations. The 2003 Electricity Act specifically criminalized power theft for the first time, and established enforcement mechanisms including special courts and specialist police stations dedicated to tackling the issue. Monitoring systems are beginning to be built in order to provide for auditing and accounting of supply and demand, so that the scale of the problem can be quantified.

State authorities are increasingly attempting to target the impact of load shedding on the perpetrators of power theft, rather than using the blunt instrument of citywide rolling blackouts:

The state government will rationalize load-shedding by cutting power supply to those who do not pay their bills on time. At present, an entire city has to put up with power cuts because of a few defaulters. In the new system, consumers who pay their bills regularly will get power while those who default on payments will face cuts.

In the new system, consumers will be segregated feeder-wise. Normally, each feeder supplies power to 100 to 600 consumers. Those drawing power from a feeder with a distribution and commercial loss of 33% and above will face power cuts in cities. In case of rural areas, distribution and commercial losses of 37% and above will attract power cuts. This means that only a certain set of consumers within a city or a town will face power cuts while those in neighbouring areas will be spared.

Currently load-shedding is carried out on the basis of the group (A, B,C,D,E and F) a city or a town has been placed in depending on its distribution and commercial losses. The new system, by factoring in losses at the feeder-level, will see power cuts being affected at the micro level.

Villages where power theft is rampant are also being threatened with outages, despite the power of the rural lobby.

The Maharashtra State Electricity Board (MSEB) has decided to implement around 11 hours of load shedding in the villages of Sathpati, Umrole and Manor, which has reported a loss of over 50 per cent of power generated…

…Sathpati village is likely to be affected the most due to the load shedding as it is from here that fishermen export their catch. The fishing jetty has around 550 boats which depend on ice for storage of fish. Fishermen fear that lack of electricity will affect the manufacture of ice and storage of fish. The daily requirement of ice for the fishermen of the village is around 350 tonnes. With the fishing activity discontinued during monsoon, a large quantity of fish caught during the past week has been kept in cold storage for export. Fishermen are worried as load shedding may lead to rotting of the fish.

MSEB officials say that there are over 5,000 consumers in the three villages but most of them enjoy zero billing. Stolen power is used by the villagers to organize night cricket matches and other sports. Festivals and marriages also largely function on stolen electricity. The electricity board has already fined seven customers for power theft and recovered Rs 57,000 from them. The load shedding, say officials, will continue till the power theft is minimised.

The idea of privatisation is gaining traction, on the grounds that this may improve management and lead to greater cash flow, which could fund improvements to the system. The two largest private power companies (Tata Power and Reliance Energy) have been given control of electricity supply in the Delhi area, and claim to have limited losses through a combination of pursuing legal action, ‘educating people about the merits of paying for power’, and offering small financial incentives.

Through dozens of power raids every week, among other strategies, they have managed to dramatically reduce theft in Delhi. BSES, the Reliance subsidiary that handles two-thirds of Delhi’s power, has sent more than 650 people to prison and booked more than 114,000 cases in special courts that handle only electricity cases. By the end of last year, BSES…..had cut theft from around 52 percent in 2002 to 28 percent. They want to bring that down to 10 percent.

Tata Power is offering slum-dwellers enough electricity for lights and a fan for a fixed price of 179 rupees ($4; £2.30) a month. This does not sound like much, but considering that it amounts to probably almost half the monthly rent for a person living in such an area, the cost is still very high relative to ability to pay.

International aid programmes are bringing some funding to bear on slum connections, but the scope of such projects could hardly be described as ambitious in comparison with the scale of the problem:

Reliance Infrastructure, the Global Partnership on Output-Based Aid (GPOBA), and other partners have launched a project to provide improved access to safe electricity supply to around 104,000 Indian slum dwellers. The GPOBA Improved Electricity Access to Indian Slum Dwellers project aims to provide up to 26,250 new and upgraded electricity connections for residents of the Shivajinagar slum in Mumbai. About 8,000-12,000 new connections and 5,000 upgraded connections are planned in a first phase expected to be completed by 2011.

Currently, many slum households in Mumbai do not have access to safe and reliable electricity. The challenge is that there is no support beyond the regulated point of supply (the metering point). Arrangements are informal and the lack of an institutional framework to support the financing of connections for the poorest leads to bottlenecks in connection investment. The relatively high upfront costs of the connection, which are estimated to be in the region of US$105 per connection, also act as a significant constraint.

Under the GPOBA scheme, households will pay less than half the connection cost, with GPOBA providing a one-off subsidy to make up the difference. Payment of 90 percent of this subsidy will be conditional upon independent verification of working connections and of six months’ supply and billing. The connection work (wiring from the meter to the house and internal wiring) will be carried out by licensed electricity contractors chosen directly by the customers. The scheme offers a framework not just for performance-based subsidies, but also for community awareness building, training of electricity contractors, and a check on quality of service to the hutment.

“The Mumbai slum electrification scheme presents an opportunity to understand how output-based aid can be used to supply basic services in areas beyond the regulated utilities’ responsibility,” explains Mustafa Zakir Hussain, GPOBA and World Bank task manager for the project. The GPOBA project, financed through a US$1.65 million grant, forms a financing window in a larger Slum Electrification and Loss Reduction program, led by the US Agency for International Development (USAID) in cooperation with the International Copper Promotion Council (India) or ICPCI.

The project targets approximately 100,000 slum dwellers of the six million in Mumbai alone – over 50% of the population. At this rate, progress will not be rapid, and it will remain difficult to combat unofficial connections when legal ones are still expensive and can take months to arrange.

While government officials are trying to convince the illegal electricity suppliers to get metres provided by the municipal corporation, the slow process of getting electricity after filling up the application form puts off many.

“I had applied for electricity months back. I own a shop. They are asking us to pay Rs 3,600 to get a connection for commercial usage,” said Bharat Thakore, a paan shop owner in Chandlodia slum.

“We are planning to appoint an individual from the slum itself who can take our applications in bulk and give them to the municipal corporation. This will fasten [hasten] the long awaited process of getting electricity. When we are ready for legal connections, we are being asked for more money,” said Thakore.

Residents are typically not optimistic about the prospects for improvement:

Citizens of Gurgaon, often dubbed the millennium city, told NDTV that the power shortage and lack of water have been a major hit to the city.

What’s more, the residents said that this isn’t at all unusual for them. One male resident said on average they have 10 – 11 hour power cuts when they have to rely on generators and tankers to supply them with water. One resident said its was “hell to live” there, while another said “If you want a millennium city go to Hong Kong.”

India’s Power Future

India’s power system problems are part of a much larger crisis of decrepit infrastructure, unable to be repaired thanks to lack of funds and lack of political will to tackle endemic corruption. Moving forward will be difficult, and, even without a looming global financial emergency, it would take decades to construct a power system recognizable in the developed world. By the time it could hypothetically have been accomplished, fuel shortages would have become far more acute than they are today, as the world would be well past the peak of the hydrocarbon age.

It seems that a modern grid serving the whole population reliably and seamlessly will remain a pipe-dream. The future of power in India is far more likely to involve something much less ambitious, but also arguably far more appropriate for an energy and capital constrained era rife with uncertainty and unrest. Given its complexity, the ‘ideal’ central station power grid will be difficult to maintain anywhere under such circumstances, very much including the developed world. Rather than aspiring to reach an unattainable goal, it may well be better to design a simpler and more decentralised system based on micro-grids, and designed to deliver basic needs, rather than wants. Decentralised systems may be less efficient, in that one sacrifices economies of scale, but they are also more resilient, and that will be critical.

Private power alternatives are likely to flourish to an even greater extent than they already do, at least where liquidity remains available, as power system problems become even more acute in the future. The industry is being unbundled, with generation, transmission and distribution being separated, as they have been in many places that have pursued liberalization of the industry. Generation in particular has seen increasing private investment, to the point where it accounts for about a quarter of capacity.

India has set its sights on renewables, with an ambitious target of 15% of energy requirements from renewable sources by 2020:

India’s Solar Mission aims to generate 20,000 MW of solar power and deploy 20 million solar lighting systems for rural areas by 2022. This tremendous scale-up is expected to drive down costs rapidly so as to achieve grid parity in that time frame. A key enabling policy for this is a Renewable Purchase Obligation (RPO) requiring state energy providers to buy a certain percentage of their energy from renewable sources, including a carve-out for solar specifically. There are also significant opportunities for improved energy efficiency.

One interesting application of solar photovoltaics is to use solar panels to cover irrigation channels for agriculture. This not only generates a significant quantity of electricity, but also reduces evaporation from the open channel, thereby easing water shortages. The potential benefits are considerable, although this remains a large-scale, top-down, expensive and technologically complex approach, which is unlikely to be the best means for India to proceed over the longer term. (See for instance this TED talk on the ancient art of water harvesting in India for an example of more appropriate traditional technology that is far more sustainable.)


This solar panel laid on the vast stretches of agricultural channels in Gujarat generates 1 MW of electricity per KM & prevents evaporation of 1 crore [10,000,000] litres of water every year

Many argue for a system of feed-in tariffs – premium payments for renewable power fed into the grid – which have been successful in delivering so much renewable generation in various European countries, notably Germany:

Ironically, one region that did well during the power crisis in India was Jodhpur, where, after a brief interruption, the windmills kept hospitals and households powered up while the rest of the country went black. Were the World Bank to have pushed a model, such as that successfully employed in Germany and other countries, where a “feed-in tariff”—a guaranteed rate of payment for energy fed into the national grid– for renewable energy had been put in place, small farmers and others in rural areas would be able to both provide power to the grid and earn money in doing so.

But instead, they foisted on the largest democracy a neoliberal model—where unions were busted, power was privatised, people were treated like pawns on a giant chess board, while they targeted the affluent and heavy industries first for energy delivery using some of the most environmentally destructive energy resources on the planet. The assumption: energy services would eventually trickle down to the poor. Nearly two decades later, after billions in investment, one-tenth of the world sits in the dark, the planet is rapidly heating up, and the only thing trickling down to the poor is contaminated water or, if they’re lucky, enough water to keep their parched crops alive.

While wind power can be very useful, it is not a panacea. While it may have helped in the recent blackout, and clearly helps at other times, dependency on intermittent power can also contribute to the problem of unscheduled load shedding when the energy source is not available:

K. Kathirmathiyon, secretary of Coimbatore Consumer Cause, says the problem of unscheduled power cut has arisen because the State is heavily dependent on wind power during the windy season. TANGEDCO officials say that on most of the days the load shedding in an area is according to a schedule, though it is not yet announced. There is no load shedding or it is for a shorter duration when the wind energy generation goes up.

Unfortunately, India is not Germany. The existing power hierarchy and the pervasive corruption would make implementing such a system very difficult. But more significantly, feed-in tariffs around the world are very likely to be cut back or abandoned in a global financial crisis, even in the locations where they have been very successful. In fact this is already occurring, as we discussed here at TAE in The Receding Horizons of Renewable Energy. This will leave people who have borrowed money in order to build large projects without the income stream needed to service the debt incurred to do it. Trusting government promises to pay for 20 years are risky at the best of times and in the least corrupt of places.

The other objection to this approach to utilising renewable power is that the requirement to feed into expensive and complex infrastructure greatly reduces the energy returned on energy invested (EROEI) of what is already a low EROEI energy source. As with all such sources, the energy profit ratio is too low to sustain a society complex enough to produce them in the longer term. Renewable power is a misnomer, since the materials required to harvest it are not themselves renewable, and the ability to build and maintain the infrastructure depends heavily on the continued availability of high EROEI energy sources. However, it can be used to make a huge difference to people’s lives, and it will make a larger difference for a longer time at much lower cost if it is implemented in such as way as to maximise the EROEI by minimising the requirement for extraneous infrastructure.

Embracing a simpler future before being forced to do so by circumstance could allow a country like India to avoid a great deal of expense, keep to a human scale where much of the impact of corruption could perhaps be avoided and provide basic services for far more people. Unfortunately, this approach is highly unlikely. It feeds neither the demands of the wealthy for developed-world level electricity services, nor the appetite of the corruption machine for large-scale projects where funds can be spun off in the direction of the well connected. India is therefore likely to see greater attempts to improve service for those who can pay, and to remove service to those who cannot.

Some experts are more hopeful than in the past because a number of Indian officials have made politically difficult decisions in recent months to raise electricity prices. State governments in Tamil Nadu, West Bengal, Rajasthan and Punjab have moved to stem losses at public utilities that had been selling power for far less than it costs them to buy it. Besides providing more money to invest in additional supply, the higher prices for consumers and businesses should also help lower demand for power.

“I think everybody has realized that there are no free lunches,” said Chandan Roy, a former director at India’s largest state-owned power producer, the National Thermal Power Corporation.

India Versus Developed Country Power Systems

Power systems in developed countries do not face the obstacles of fuel shortages, supply /demand imbalance and corruption faced in India. Despite aging infrastructure, and underinvestment that will store up problems in the future, the systems presently have sufficient integrity to allow for good control over power quality parameters. Equipment is not damaged by power surges or brownouts. Electricity supply is reliable and stable. This has been the case for so long, that it is taken utterly for granted. An indicator of just how reliable power supply has become was provided when a 1994 earthquake temporarily knocked out power in Los Angeles:

Now we have so much artificial light that after a 1994 earthquake knocked out power, some concerned residents of Los Angeles called the police to report a “giant, silvery cloud” in the sky above them. It was the Milky Way. They had never seen it before.

Very few provide for back ups, as these would almost always be seen as an unnecessary expense. Private safety margins are few, hence resilience of the larger system is much reduced. Rare interruptions to supply therefore cause difficulties, and can rapidly lead to public anger. Access to however much electricity one could want, whenever one might happen to want it, and at an affordable price is seen as an entitlement, or even as a basic human right. The structural dependency on electricity supply has increased to the point where it has become a life support system in many ways. Without it, the technology traps will close very quickly. Witness the effects of a 2011 incident in California:

“Electricity was primarily a luxury when the majority of our grid was built 50, 60 years ago. Most people didn’t require computers to do their jobs every day. They didn’t need the Internet access. IPhones didn’t need to be charged, and communication was all hard-wired, so you could still make a phone call when the electricity was out.”…

…Schools closed, planes were grounded for hours, traffic lights went dark and gridlock followed. People were trapped on rides and in elevators at SeaWorld and Legoland. Pumps failed at water-treatment plants, flooding San Diego Bay with more than 2.5 million gallons of raw sewage and forcing beaches along the coast to close.

What an investigating commission later called a “cascading and uncontrolled” shutdown became the most extensive power outage in California history.

This is a dangerous situation. The dependency is so much greater in western societies, that cascading system failure is a significant possibility if the grid were to experience a major disruption. Underinvestment is chronic, and this is storing up many challenges for a future when the money needed may not be available. As in India, no one wants to pay for the means to preserve the grid current capacities:

No one is taking care of the grid — the network of transmission lines, inter-connectors and transformers that is essential to life as we know it; two, supply cannot keep up with demand; and three, rate-setting is a political rather than an economic process. It should not come as a shock, so to speak, that neglect, failure to prepare and playing politics with essentials should lead to disaster…

…No less than the American Society of Civil Engineers said in a report released in April that the grid could break down by 2020 unless investment in it is increased immediately by about one billion dollars a year. Why so much? Because, according to the report, more than two-thirds of the system’s transmission lines and power transformers are at least 25 years old, and 60 percent of the circuit breakers have been in use for more than 30 years.

Investment of the massive size required would require increased rates for electricity, and that simply is not going to happen in a political climate where people are not expected to have to pay for anything; not their government (no new taxes) not their wars (Iraq was “off the books”) and certainly not their electricity. Despite being deregulated like many other aspects of economic life pursuant to the Reagan Revolution, electric utilities who raise their rates soon find that deregulation does not extend that far. In Maryland, when it was revealed that moving to market rates would cause Baltimore Gas and Electric to increase rates by 72 per cent, that was the end of deregulation.

In this, as in so many other areas of public life, we are like the ass starving to death because he is equidistant from two bales of hay and can’t decide which way to go. We either have to spend tons of money propping up the old system, or expend tons of effort and thought coming up with a new one. By refusing to do either, we drift faster and faster toward the precipice over which India has just tipped.

The estimated cost of grid renewal is huge:

The American Society of Civil Engineers (ASCE) calculated that an additional investment of $107,5 billion was needed by 2020 to keep the electrical infrastructure whole…

…The utilities walk a fine line between satisfying their customers and keeping their investors happy, with costly expenditures in infrastructure bound to hurt profitability unless public utility commissions allow rates to keep pace with investment…

…”By 2020, the cost of service interruptions will be $71,5 billion, or, if you break that down to households, $565 over that period,” Andrew W. Herrmann, president of ASCE, said.

As we move further into financial crisis with the bursting of the global credit bubble, it will become more and more difficult to fund infrastructure investment, and we are living on borrowed time as it is. We have already been coasting on past infrastructure investments for a long time. As India demonstrates, even truly decrepit infrastructure can function much of the time, so we are not yet at all close to risking any kind of permanent blackout scenario. However, India also demonstrates that compromised infrastructure does not deliver reliable power, and western economies have a much stronger dependency on constant power availability.

The central station model of electricity supply, with large power plants distant from demand feeding into a transmission grid, is under threat worldwide. In a capital and energy constrained environment, it will not be able to deliver what we have become accustomed to. The greater the extent of dependency, the greater we can expect the impact to be. We in the developed world, as in India, should consider looking to simpler, cheaper, more decentralised models. And we should be getting our expectations in line with what reality can hope to deliver. We are going to have to live within our means, and that will involve a much larger adjustment than most of us can currently imagine.