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.
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:
… 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.
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.
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.
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.
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.