Conservative radar

A rejoinder to Megan McArdle´s rejection of the prospects for solar PV.

My rant on solar energy against Tyler Cowen and for Paul Krugman (with boilerplate classical economics truisms) has attracted the attention of Megan McArdle at her blog on The Atlantic. I´m rather miffed by the poor quality of the takedown I rate. As Denis Healey said of an attack by Geoffrey Howe, it´s like being savaged by a dead sheep.

She starts by getting my name wrong. The rest of the piece is up to the same high standard. My tedious but necessary rejoinder below the jump.
Item 1:
McArdle:

It’s also possible that people who trade those stocks for a living – some of whom may even be as smart as James Wimberly, have considered this possibility, and don’t find it very likely.

So I must think Wall Street traders are all stupid and are getting it wrong. Better men than me have described the stock market as a casino, but as it happens I said no such thing. So it´s a combination of the straw man and ad hominem fallacies, commonly known as random mudslinging.

My argument does not imply the stupidity of the stockmarket, so its wisdom is not sufficient to refute me. For the sake of argument, let´s grant the full EMH creed that stock markets are the most efficient aggregators possible of information about future profit streams. I stressed that the next decade will be wonderful for the oil industry. Discount at 5%, and most businesses use higher rates, the prospect of 10 or 15 years of wonderful profits followed by a string of zilch when the bottom falls out of the market for petrol-horse-drawn buggies, and you still get a wonderful NPV today. There´s no reason at all for the Buffetts of this world to bail out of oil – yet (as it happens Berkshire Hathaway owns both wind farms and oil stocks). There´s no way to extract an opinion about the long-term future of an industry from valuations which are dominated by the short-term.

FWIW, and as an aside, I don´t myself see how the EMH theory can work, quite apart from the observed fact of irrational bubbles and panics driven by herd thinking. The horizon of traders – say the proprietary equities trading desk at Goldman Sachs – isn´t ten years, it´s more like a few hours; for its automated high-frequency trading algorithms, a few seconds. McArdle may be thinking of long-term fundamental investors like Warren Buffett, who do buy and sell based on their view of the discounted future profits of corporations. They certainly know more than I do about this. But such investors buy and hold; they make up a tiny fraction of trading volume, so it´s hard to see how their weak valuation signal isn´t swamped on a given day by trading noise and the constellation-like patterns the credulous like chartists see in it.

To return to the argument, the key point is that the stock market is at best valuing future profit streams, not sales. I pointed out that the solar panel industry is competitive and shows short-term constant returns to scale, and long-term increasing ones. It´s unlikely for such an industry, that follows the classical rather than neo-classical paradigm, to show above-normal profits. Have any huge fortunes been made from memory chips, fridges, or DVD players? To a classical economist like J.S. Mill, high profits are the result of temporary good fortune, monopoly, rents, or malpractice: accidents, pathologies or necessary evils (as with IP), not signs of health in the capitalist economy. Add the Schumpeterian point that an industry with a lot of competitors jostling for market share with minor innovations will have a high rate of failure by individual firms like Solyndra, and there´s no reason tor the Buffetts to get excited. And a competitive, normal-profit industry will still flood the world with dirt cheap solar panels.

It´s interesting to watch McArdle almost get this unsettling insight:

Wimberly points out that solar panels are fundamentally a manfuacturing business, not a resource business, which is certainly promising . . .

but then veers away back into her comfort zone with:
Item 2:

… but the prices of other manufactured goods that experienced steep declines did not necessarily keep plummeting to zero.

Another straw man. Neither I nor SFIK anybody else has made the silly prediction that the price of solar modules will fall to zero. This can only happen, the neoclassicals are right, to goods with zero marginal costs of production like information, including low-effort armchair commentary. The cost of solar PV panels will presumably flatline at some point. The question is whether this will be above or below grid parity with fossil fuel for generation. Is there any reason to think it will be above? I can´t see any, and one important factor suggests the contrary.

The cost of metallurgical silicon, made in hundreds of thousands of tons for sealants basically by Chinese sweatshops melting sand in open furnaces, is currently about $3.20 a kilo. It´s too impure for solar panels which have to use silicon over-purified by high-tech vapour deposition instead, at ten times the cost. As you´d expect, a lot of entrepreneurs are working on enhanced metallurgical processes. With some success: you can already mix the product with vapour-deposition silicon and keep inside the required purity. So there´s still a lot of room and good prospects for bringing down the price of the solar PV industry´s principal input.

Item 3:

Solar panel costs are not the only cost of a solar installation.

Quite so. Then she goes on:

As far as I know, the cost of these things is not falling as fast as the cost of solar panels.

If she´d bothered to, you know, check this, she´d have found that as it happens and rather surprisngly balance-of-system prices have been falling in parallel to modules, as assemblers and installers have also been finding ways to do things better.
Item 4:
The US Energy Department predicts that costs will still be higher, without a carbon tax, for solar than other forms of generation for plants entering service in 2016. Again, so what? Krugman, Drum and I are talking about at least 10 years, not five. The short lead time of solar PV intallations – six months would be closer to it than six years – makes the estimate very dependent on your view of future prices. There are good reasons to doubt the Energy Department´s statisticians on renewables. They recently published growth estimates using a ridiculous methodology; see the third link in my post for my demonstration why. They aggregated different technologies (hydro, wind, and solar) into a non-operational category called ¨renewables¨, took the past average (dominated by slow-growing hydro and nuclear) and projected it, a simple howler.
Item 5:
You could not store the electricity output of the USA in current lead-acid car batteries. Your point, Madam? Why should anyone want to do this? I´ve already said my piece about the overhyped intermittency talking-point. Industry experts say intermittency is unimportant up to 20% renewable penetration. More radical solutions have to be found to get to renewable domination of electricity supply. My back-of-the envelope calculations for a system with mean wind output matching total demand suggest a need for around 30% balancing capacity. The balancing requirement for an analogous solar-dominated system would presumably be of a similar order of magnitude, for a combined wind-and-solar system rather less. Low-carbon ways to deal with this include intelligent grids and end-user load management, and more pumped hydro storage – all of which count as shovel-ready – and some new storage and geothermal technologies, which people are working on. Hot salt has been cracked technologically. Most important, the USA already has a very large reliable balancing capacity of nuclear, hydro, and natural gas plants, and interconnectors to Canada. Getting to 80% low-carbon electricity, with gas plants only switched on occasionally, is very much easier than to 100%. The current unavailability of very high-capacity batteries is a so-what issue. McArdle´s objection is a classic example of the coward´s fallacy: it´s currently impracticable to get to the goal of 100%, therefore don´t get started.

Item 6:
If Greens like me believed in the prospects for solar I describe, we will declare victory and stop fussing. As if there were not still so much to do: renewable electricity is only one wedge, and an easy one compared to transportation and deforestation. Speaking for myself I had already drawn the conclusion that there´s little need for lots of research into new energy technologies: the issue is to sustain demand to allow the rollout of the ones we already have. I´d now add Paul Krugman´s point: we have to combat an increasingly frantic rearguard campaign of the oil and coal industries to defend their privileges and subsidies (not paying a carbon tax is equivalent to a subsidy).

The prospective triumph of solar PV, from its invention in Bell Labs, is a great victory for innovative engineers and entrepreneurs acros the world. It is also one for a farsighted policymakers and citizens in three countries: Japan, whose technocrats ensured the development of the technology into mass-market devices; Germany, where the Green Party fought its way into a major political force, and won the argument for subsidised feed-in tariffs, first in Germany and now across the EU; and China, where a grassroots army of environmental activists have risked their careers and more to create and focus a popular demand for change that China´s oligarchs can no longer ignore. Will we hear a word of thanks from Ms McArdle and her friends to a bunch of foreign do-gooders? No: but neither will they pay more any attention in future than they have in the past to American denialists, oil shills, and namby-pamby fence-sitters.
Item 7 (actually her first):
The joke about the EMH economist and the dollar bill lying in the road, which I described as an old chestnut, is unoriginal. Ms McArdle might try looking up my term old chestnut. They tell the joke a lot in Chicago it seems. I think we should keep repeating it until they understand it, like the parable of the Good Samaritan.
* * * * *
The content of this flimsy post is much less interesting than its existence. I´ve blogged here for 5 years, on a good range of topics and at about the same standard, and this is the first time Megan McArdle has picked up anything I´ve written. When I wrote in the post:

Now here´s a hot tip to the oil industry PR men: work up some scares.

it was meant as a joke. But it isn´t one. I fear they are already on the job.

Author: James Wimberley

James Wimberley (b. 1946, an Englishman raised in the Channel Islands. three adult children) is a former career international bureaucrat with the Council of Europe in Strasbourg. His main achievements there were the Lisbon Convention on recognition of qualifications and the Kosovo law on school education. He retired in 2006 to a little white house in Andalucia, His first wife Patricia Morris died in 2009 after a long illness. He remarried in 2011. to the former Brazilian TV actress Lu Mendonça. The cat overlords are now three. I suppose I've been invited to join real scholars on the list because my skills, acquired in a decade of technical assistance work in eastern Europe, include being able to ask faux-naïf questions like the exotic Persians and Chinese of eighteenth-century philosophical fiction. So I'm quite comfortable in the role of country-cousin blogger with a European perspective. The other specialised skill I learnt was making toasts with a moral in the course of drunken Caucasian banquets. I'm open to expenses-paid offers to retell Noah the great Armenian and Columbus, the orange, and university reform in Georgia. James Wimberley's occasional publications on the web

22 thoughts on “Conservative radar”

  1. Another important point about Item 6 (which, by the way, contradicts all the other items): Seeing a trend line and knowing something is possible don’t mean you can declare victory. It means you get to spend the rest of your career working your ass off, but at least in the knowledge that what you’re working on isn’t utterly futile. Moore’s law (insofar as it has actually held true in various modified forms) hs been the result of tens of thousands of very smart, very motivated people working incredible hard. And there’s a long list of things that could have stalled progress completely (annd might have, if people hadn’t had that curve in the back of their minds.)

  2. Yes, Mr. Wimberley, you’re absolutely right–if you keep your excerpts to very small half-statements, my post does indeed sound idiotic.

    I am very sorry I misspelled your name. It’s happened to me more than once on this blog, and I know how annoying it can be. I’ll correct it immediately.

    1. Because idiotic half-statements strung together make an insightful blog post?

      McArdle is pretty much the reason I won’t subscribe to The Atlantic again: anyone who pays her to blog deserves to take some kinda hit.

      1. “if you keep your excerpts to very small half-statements, my post does indeed sound idiotic”

        Then tell us how you were represented. I read your entire post and don’t see anything taken out of context or distorted. If you believe you have been wronged, make a case for it as JW has.

    2. “I am very sorry I misspelled your name. It’s happened to me…”

      Ah yes, because failure to do basic research and observe basic courtesy is never one’s own fault. It simply “happens”, just as one never miscalculates, but instead one’s calculator “messes up” (or, in some cases, Mises up).

    3. A full day after this claim and I notice Wimberley is still missing an ‘e’ in Megan’s article. Apparently ‘immediately’ was meant in as flexible a fashion as her arguments in general.

    4. Ah, the standard McArdle defense in response to any criticism. “I was taken out of context”. It must be a heavy cross to bear to be taken out of context all the time by everybody on the Internet, when one is making clearly coherent, informed and cogent points that others would surely appreciate if only they had a way to read McArdle in context.

  3. “if you keep your excerpts to very small half-statements”

    Well I’m relieved that she still thinks the best arguments maximize the number of letters. Certainly over the last ten years it appears to be her most important criteria. The weird thing of course, is how James Fallows puts up with having such a dimwit hack on the same column. Reflects poorly, it do.

  4. “I´m rather miffed by the poor quality of the takedown I rate.”

    That’s unfair to McArdle. All of her takedowns are poor quality.

  5. Not a bad take down, Sir. Megan McArdle is an innumerate twit. James Fallows and Tom Levenson offer some of the more amusing takedaowns of Jane Galt. But this wasn’t bad for a first effort.

  6. What I’d be most interested in knowing is the rate of starts for new coal power plants, especially in countries with no local coal supplies (therefore no coal lobby). A new plant takes a couple years to build and 30-50 years to pay off, so EMH (if accurate) would expect to see a significant dropoff for these.

    1. Brian

      A coal plant takes c. 10 years to pay off: a 10-15% pa accounting rate of return.

      Depends on what discount rate you use, assumptions re ‘spark spread’ etc but they are discounted over 30 year lives, and generate pretty massive Net Present Value (discounted benefits less costs).

      For obvious reasons: the emission of CO2 pollution is an unpriced externality, and a coal plant generates roughly 1 kg of CO2 per kwhr generated. So 1000 kwhr would generate about 1 tonne of Co2, which has been estimated to have a social cost of $70-80 ($300/tonne of Carbon emitted).

  7. Re: last comment about coal/oil industries not paying a carbon tax is actually a subsidy.

    I think a much more important subsidy was the $2-3T we just wasted on the (latest) Iraq war. If you work it out as a oil tax on the 20M bbl/day we use in the US that works out to ~$50-100/bbL subsidy depending on whether you amortize the cost over 5 or 10 years.

  8. The coal industry tracks longterm contracts and visits each government and business in plenty of time to solicit new long term contracts and new construction to handle that sale. They will have someone at every meeting that will consider whether to stay with coal or change.

    Examples abound. I know of this one just from reports I’ve read, but the details won’t differ that much from whatever’s in your own back yard:
    https://www.google.com/search?q=“oberlin+ohio”+”city+council”+”coal+fired+power+plant”

  9. I don’t think you score any points (besides hypocrisy points) by complaining about McCardle’s ad homonyms and snarkinesd in a case filled with this much rude, vicious bile.

  10. > mix the product with vapour-deposition silicon and keep inside the required purity.

    I wonder how this holds up over the lifetime of the panel, though. Any idea?

    This crap-at-the-allowable-maximum approach — aiming for the “minimum required purity” — isn’t encouraging.

    Trust a product made to the “minimum required” level has enough safety margin that the product over its lifetime won’t fail more often?

    This reminds me of a 1970s scandal from the Port of Seattle — long before the Internet, no link, just old meat memory.
    As I recall, the local newspaper found out that one of the big cylindrical “grain” silos at the port was kept full of pea gravel.
    Why? Because there were minimum required purity levels for shipping grain overseas.

    When they got in trainloads of grain containing less crap than the maximum allowable level of crap — the port added more crap from the silo.

    $$PROFIT$$

    Sucks, though.

    When you take a supposed bright line limit, and make it the target for production instead of an extreme high or low bound for variation, you get crap.

    And, of course, $$PROFIT$$.

    Unless you’re the buyer and end-user of the product, of course.

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