Cant and DECC

I was contacted recently by someone who was studying the renewable heat sector. They asked:

We read your blog on Picking Losers and I guess the question is, given that DUKES Table 7.6 gives the existing renewable heat total for 2009 as 966 ktoe, is it that some of the categories that DUKES has as renewable heat, are rejected by DECC as not renewable heat in the 2020 sense?

For example, DUKES lists the technology break down as below.

• Solar thermal 69.5
• Municipal Waste combustion 31.3
• Biomass - landfill gas 13.6
• Biomass - sewage sludge 67.9
• Biomass - wood domestic 375.2
• Biomass - wood industrial 164.6
• Biomass - animal biomass 40.3
• Biomass - plant 203
• Geothermal 0.8

As you note in your blog this total is something like 450 ktoe more than the NREAP states for 2010. Is it possible that they decided that there was double counting with electricity or that some of these are not really renewable?

I thought my reply might be of interest to others besides the original questioner, so I have decided to post it here:

Dear X,

I can only speculate in answer to your first question. There's probably more value in testing DECC on it. But for what it's worth, I would approach this from the perspective of the incentives and the process. How do DECC arrive at their figures, and why?

It would be optimistic to think that DECC approach this exercise from a pure, analytical perspective. I doubt the figures are based on their best attempt to estimate current and future renewable heat production. The process is driven by the need to show how the UK will meet its targets under the Renewable Energy Directive (RED). They therefore already have their endpoint - 15% of relevant energy demand - which is not based on any rational calculation of achievable or probable performance, but on political gaming and compromise.

This endpoint is then sub-divided, again not on the basis of any rational calculations, but on the basis of political compromise heavily influenced by pressure from certain interest groups. We thus end up with a target for renewable heat of 12%, as part of an irrational division of an irrational target. (Broadly this is achieved by setting a target for renewable electricity based on nonsense propaganda that they want to believe, accepting that we have to put in 10% for renewable transport even though no one believes we will achieve it, and assigning the rest to renewable heat. The rationale for the defining figure - renewable electricity - is something that I imagine we could spend many happy hours ridiculing.)

But 12% (or 15%) of what? To say what final heat demand (or any other final energy demand) will be in 2020 requires heroic assumptions on prices, technology and the economy, about which the range of uncertainty must be huge. So they draw lines based on assumptions that suit their political narrative, rather than on any substantial rationale. They believe we will have made significant improvements to the efficiency of the building stock, despite their reluctance to send the necessary signals or introduce other effective incentives, so they draw a steadily declining line for heat demand. On electricity, they compromise between a similar belief, with only marginally sounder foundation, that they will deliver efficiency improvements, with an assumption based on the lobbying of the big energy companies, that people's energy demands will be moved increasingly to electricity. And on transport, they have to admit that no one has a clue how to rein in our demands on the scarcest fossil fuel without provoking a revolution, so they project continued growth.

Nevertheless, taking an irrational proportion of an unknowable figure gives them an overall figure for the amount of renewable heat they think ought to be produced in 2020. Now they have to fill in the intermediate years, and divvy them up between technologies (because that's the way bureaucracy works, not because it's a rational economic approach). Governments much prefer to set ambitious targets (and costs) for long after they are gone than to take on a proportionate share of those targets (and costs) during their period in office, so they generally draw hockey-stick profiles for how we will achieve distant targets.

The distribution between technologies is based on the rule that all must have prizes, so they put in a bit for everyone, rather than assuming that the most efficient solutions will predominate (and they subsidise inefficiently to try to achieve this spread). Some attempt must be made to give the appearance of rationality, so they weight the allocations according to which lobby groups make the most ambitious claims for the potential of their favoured technologies.

As for why they start in the wrong place, it doesn't half make it easy to outperform at low cost your early targets on a hockey-stock profile if they are set below the level that you can already achieve. This is especially helpful if a nagging doubt in the back of your mind is telling you that the targets in the other two sectors are ambitious - you will want some "good news" in hand. And it's also a helpful head-start, if you know that, for budgetary reasons, you probably won't be spending as much as promised - some illusion can be created of progress greater than is actually being achieved.

I doubt that your generous explanation for the discrepancy is a significant factor (as, I suspect, do you). A reasonable amount of it won't be eligible for the RHI, but that doesn't seem any reason for them not to count it if it is eligible for the RED, any more than they would ignore the electricity from EfW or large hydro for the same reason. Even if we take the RHI-ineligible technologies out of it (EfW, LFG, sewage sludge), we are still well over their starting figure.

It may be that a material proportion of the domestic wood heating is also ineligible, in the sense that it is too small and "undeemable" to count (open fires and stoves, using log or pellet). But I doubt they aren't going to use a reasonable estimate of this heat towards our RED figures. After all, if the French and Italians did the same, they would be making their lives unnecessarily difficult, as such a large proportion of their total renewable energy is produced in this way. If other countries will certainly insist on counting it, it will be allowed, and if it is allowed, why would we ignore some of the cheapest renewables out there?

As I say, I don't have good information why DECC's figures are inconsistent with DUKES, but both cockup and conspiracy theories suggest that this is a mismatch based on ignorance, rather than judgment. I reckon, broadly speaking, that they had a starting point in 2005 and an end point in 2020, and putting in the real figure for 2010 would have suggested a steeper gradient than they fancied. So they invented numbers for 2010-2015 that put the burden on the post-2015 government, but allowed them to look like they were getting somewhere in the meantime.

But I could be wrong. Perhaps this is a case where Hayek's description of the use of knowledge in society and his warnings about the limits to centralised information and control, where Buchanan and Tullock's observations of how incentives work within the political system, and where the new insights from the application of complexity, uncertainty and chaos theory to economics, are not applicable. Perhaps the Government's numbers are well-informed, altruistic and clairevoyant.

Cheers,

Bruno