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A lot of strange things have been happening in the European power sector lately, from negative prices, to utilities closing down brand new power plants and, naturally, action in various places  to cut support for renewable energy (done in Spain and even mooted in Germany).

I've long described renewable energy producers as a price takers (i.e., they don't influence market prices in the short term and have to "take" market prices as set by other factors), but we are getting to the point, in a number of places, where the penetration of renewable energy is such that it has a real macroeconomic impact on the prices of electricity, and thus on the way power markets run. There's also been a big political battle brewing, as renewables "subsidies" are targeted by governments at a time of austerity in Europe, egged on by hardly disinterested utilities.

It is worth deconstructing what's been happening.

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Hi everybody, long time no see..

Here's something hopeful to take your mind off the conventions for a few moments.

Part of my Wind power series. And the usual full disclosure: I advise wind developers on their financing needs.

Last Monday, I was invited to the christening in Bremerhaven of the biggest special purpose vessel to be built for the offshore wind industry to date, the Innovation:

The vessel is owned by a joint venture of Hochtief, the German construction group, and DEME, the Belgian marine works group, and will be put to work first by Areva on Globaltech 1, one of the big wind farms in construction in Germany now (and one that was project financed) and later on Northwind, a Belgian offshore wind farm (also project financed, in this case with the involvement of my company).

The godmother of the vessel is Mrs van Rompuy, the wife of the President of the European Council, as befits a truly pan-European industrial development (the vessel was assembled in Poland, the owners are Belgian and German, with respective large French and Spanish shareholders, the first client is French and the base of operations is in Germany).

The ceremony took place in Bremerhaven in Northern Germany, a city being transformed by the offshore wind industry, and with the perfect backdrop of ongoing construction work for several offshore wind farms. See some more pictures below - including from the boat itself, as the guests were allowed to visit large bits of the vessel.

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This is what is suggested in a recent article of the Times of London:

French demand high price for `rescuing' nuclear industry with two new reactors (behind pay wall, but accessible here)

According to well-placed industry sources, EDF Energy has told officials that it needs about £165 per megawatt hour, almost four times the existing wholesale price of electricity, if it is to go ahead with Hinkley Point.


The Government has warned EDF Energy, and its junior partner Centrica, that nuclear power subsidies must be lower than offshore wind power to ensure public acceptance. The company argues that the total costs of the giant new offshore wind projects planned for the North Sea will be £180 per mw/h [sic], making nuclear slightly cheaper.

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As we enter 2012, a major political milestone is getting nearer in France, namely the presidential election, and I thought I'd try to start covering this in more detail over the next few months (as we collectively did last time round - see here). Hopefully, I'll have more diaries on various issues in the coming weeks.

The campaign kind of started in Autumn, as the greens and the socialists had internal primaries to select their candidates (more on this below), but it is really heating up now, as François Hollande, the socialist candidate, published today a manifesto attacking Sarkozy forcefully and presenting the values he will build his campaign on (truth on current situation, justice for all, hope for the young), so it's worth summing up what's at stake and how it works.

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There have been endless discussions as to whether the current economic crisis is a debt crisis, a banking crisis or (in Europe) a trade imbalance crisis.  Ultimately, we are facing redistribution issues between a wealthy minority and an increasingly beleaguered majority (the 99%) but it's worth remembering out how that actually played out to bring us to today's situation, and how that's playing out in the euro crisis.

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In a first for the French republic, the socialists are organising open primaries to select their candidate for next year's presidential election.

What is new this year is that the primary is open to all voters (in 2006, for the 2007 presidential election, there were also primaries but voting was limited to party members, ie roughly 200,000 people) - so a couple million people are expected to vote (all they have to do is pay 1 euro as a contribution to logistical costs and sign a declaration that they share "the values of the left").

Vote is happening in two rounds - the first one today, with 6 candidates, and a second one next Sunday if no candidate gets 50% this time, in a run-off between the top two candidates of the first round.

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Thu Sep 22, 2011 at 06:39 AM PDT

Bleed, you sinners!

by Jerome a Paris

Note: this is about the European debt crisis, but the parallels with the USA are obvious

"Bild" is impressed with Greek reform efforts

Until now mass circulation daily Bild has distinguished itself by ridiculing or humiliating the Greeks in its reporting on the country's crisis. But yesterday's announcement of deep cuts in retirement benefits and the number of government officials seems to have impressed the editors of newspaper. "Fewer retirement benefits! Fewer officials! Now the Greeks really have to bleed" is Bild's headline against the backdrop of the Acropolis under the sunset's light.

Thrifty Northerners are offended by corrupt Southern free riders and want payback! (Replace "Northerner" by "Teapartiers" and "Southern free riders" with "welfare queens" or similar and you get the idea) - that article is a good example of what's been happening for a while now in terms of how the crisis is perceived - the crisis is no longer about economics (see here a list of potential solutions to the crisis) but about something else: a group smugly thinks they're working hard and weathering the crisis and sees no reason to help those that are struggling, seeing them as lazy or cheats or both - even if the result of such policies is to make things worse for everybody.

Some would call it morality, some would call it simply politics, but this is certainly not about rational decision-making.

But isn't it? I'm pretty sure most Germans would be ok with the solution to the current crisis which comes through higher wages for them. Their sense of righteousness at having sacrificed and thinking that these sacrifices are going to be taken advantage of by the profiteering Greeks is being whipped and promoted and inflated for a very good reason: it's a distraction from the real profiteering taking place: that of the investor class abusing the middle class in multiple ways and not sharing the fruits of growth anymore.

As I wrote a while back:

Germans should be pissed off (i) at their politicians for squeezing their wages to create profits for multinationals and their owners, (ii) at their banks for blowing off that money in stupid casino bets in US subprime and Spanish real estate, (iii) at their politicians for bailing out the banks at no political or practical cost to bank managers and bondholders, (iv) at their elites for blaming Greek laziness for the stagnant wages.

There is a "euro" crisis only because bond investors have taken the euro hostage, and claim the worst will happen if Greece defaults - and they've managed to impose sacrifice on the hapless Greek population and the other European taxpayers in order not to take any hit on their reckless investments. But this is not necessary (we could let Greece default, let investor take their losses and nationalise banks that fail as a result) - indeed it is economically catastrophic, as we enter a vicious circle of deflation and recession, but it can be made to look satisfying to those who can be encouraged to feel smug about this, because they get others to suffer more than them.

Again: replace "Germans by "middle class Americans," "bankers and investors" by "bankers and investors", "Greece" by "DoD" and "Greeks" by "Social Security recipients" and you get the idea...

In other words: propaganda works. And as usual it works by tapping into our worst instincts.


As I noted in a comment a few days ago, some of the most likely victims of the current banking crisis in Europe are going to be in the US. Yesterday, I talked to a colleague in a big European bank who confirmed this in stark terms: they (and other European banks) have no problem finding long term funding in euros, and are still finding short term funding in dollars, but they are no longer having enough long term funding in dollars.

Which means that European banks have basically stopped lending to US / dollar clients (something which includes the whole shipping and aviation industries worldwide...). And while that may sound innocuous, the underlying reality is that US banks do not do long term lending - close to 100% of long term lending (as opposed to bond financing) in the USA is done by European banks (and a few Japanese and Canadian ones). To give you an example, over 2010, of the 50 largest banks active in project finance (ie long term financing of infrastructure projects like bridges, power plants, hospitals, mines, etc...) in the USA, only a handful were American, with insignificant volumes contributed.

So soon enough, Boeing is no longer going to be able to sell its planes, GE won't be able to sell its gas turbines or wind turbines, construction groups will see big contracts delayed, and, maybe more interestingly, independent oil&gas producers will have more trouble finding money to drill new wells...

US banks find disintermediated finance (underwriting bonds and selling them to investors) more attractive - the real reason of course is that bankers make bigger bonuses selling bonds than negotiating loans, and banks take less risk on their balance sheet if they don't hold the paper (but then nobody knows who really carries the risk, as we've seen). Big US corporations can also find cheap funding on the bond markets. But infrastructure requires long term funding, and can be too complex to explain to investors, so bank lending still dominates that activity. And that means European banks, borrowing dollars from US money market funds and lending long term - the banks' traditional role of maturity conversion (ie using short term deposits to do long term investment). Trust is essential for such activity, and it's disappearing fast.

So strangely enough, the US panic about European banks will likely have real world implications for the economy in the US before they do in Europe.

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Following the recent announcement by the German government of the forthcoming closure of all nuclear plants by 2022 (see Merkel's nuclear exit), a new step has been taken today with a series of announcements to support renewable energy, including a specific financing programme to develop the offshore wind industry on a large scale (see here, in German only for now) via public development bank KfW.

This programme does two very smart things:

This is part of my Wind power series.
The usual disclosure is more important than ever in this case:  I advise wind developers on their financing needs, in particular for offshore wind projects, so this particular item will have a large impact on my work (though I'd note that, by making deals easier, it could arguably be said that it makes my job of putting financings in place somewhat less valuable...)

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Note: the article below, published initially on Histologion last month, was posted and update by its author, talos, on European Tribune and he has kindly authorised me to repost it here in full as it is largely relevant to the economic debates here. All the text below this paragraph is from him (without the images on the original, as they are not posted on authorised servers)

Takis Michas' article in the WSJ, written a month ago, about Greece and what he describes as its Descent into Anarchy (full article reproduced here) is a stunning piece of disinformation on the situation in Greece, an outlandish view of the disaster unfolding in the country, tainted by class prejudices and ideolepsy. It is so utterly unrooted in reality, that, were it published in Greece anonymously, it would be unclear whether this was perhaps a parody. This is the pinnacle of a genre of alarmist anti-left writings that seem to pop-up regularly in the local MSM to lecture the restless natives on the vileness of resistance to Authority and its true Prophet, the IMF, and blame the Left as sole instigator of all sorts of violence: A "violence" however, which on closer inspection mostly consists of jeering a corrupt politician or two, staging a protest against the pauperization of this or that social group, peaceful civil disobedience and strikes. In a zoology of militantly conformist, fear-mongering tall tales on display in the government-friendly media (and that's 90% of all MSM media), Michas' piece is Godzilla. That's why it was perhaps too tall for the Greek press and required a global newspaper to print it.

The WSJ readership of course, needs this potent injection of fear-mongering anyway, as the plebes in the US are rapidly becoming unruly themselves, faced with shouldering the costs of the banker bailout and this cautionary tale form the exotic Near East, complete with leftist dragons, is perfectly timed for domestic use.

As I said, if this was published in a Greek newspaper, in Greek, it would offer a hilarious peek at the paranoia that the crisis has bred among the country's upper classes, and would not merit a response significantly different from "you should go out more often". Since it is published in English, in a paper as broadly read among ruling elites as the WSJ, and might skew the perception of what is actually happening in Greece, it requires debunking, especially as I have seen the article being referred to on the www as some sort of authoritative picture of Greek "anarchy," since its publication. In the process it will provide an opportunity to relate the true story of the budding, if still incoherent, mass resistance to the ECB/IMF fiscal stormtroopers and their caretaker government in this peripheral ECB province I'm writing from, but also the truly darker side of collapsing neighbourhoods, mindless violence and general despair that is emerging from the deep cracks that the prolonged ECB/IMF induced depression has carved on the already decrepit social body. This panoramic view of civil discontent and societal unrest that answering Michas' article must include, and the true dangers lurking as the crisis deepens will be the major theme of this post, along with a discussion of things that have happened after the publication of this article: it has been a month thick with events.

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Mon May 23, 2011 at 04:51 AM PDT

Short termism is killing us

by Jerome a Paris

The FT had a timely article over the week-end about Short Long (pdf), a recent research paper on the irrational discounting of the long term by markets:

Andy Haldane and Richard Davies of the Bank of England show clear evidence of increasing short-termism in the pricing of companies’ shares across all industrial sectors. In their words, “myopia is mounting”. Their paper is not for the faint-hearted – it is stuffed with equations and complex charts. But what it shows is that investors place irrationally low values on the returns from long-term investment projects. Cash flows more than 30 years ahead from investments made today (...)  are scarcely valued at all.


Mr Haldane and Mr Davies rightly conclude that this short-termism is a market failure of a sort that raises big issues of public policy. It leads to investment being too low, especially in those long-term infrastructure and high-tech projects on which future growth depends.

In other words, markets (as they are structured today) are unable, on their own, to fund infrastructure and other similar public goods which underpin our prosperity. This has been hidden for a long time because the post WW-2 generations embarked in a massive infrastructure investment binge which still serves us to this date, and allows us to believe that infrastructure investment is not that critical. We see it's slowly fraying at the edges in various places.

But big infrastructure can only be done by public authorities, and since the mantra today is that whatever public authorities today is wrong, such projects no longer take place, or they happen in ways that ensure that the priority is financial investors making money today - thus the craze for PPPs and PFIs and other similar schemes, which end up costing more money to governments (but it's "rents" and not public "debt," so it's less visible), further reinforcing the notion that such projects are inherently wasteful while enriching a whole new world of parasites (including yours truly) - bankers, accountants, lawyers, consultants, which assess, fund, document and manage these big projects with the purpose of making money now rather than providing a service to all for the long term.

And that means building gas-fired power plants rather than renewables, new roads rather integrated public transport and private clinics rather than public hospitals - to the extent anything gets built, of course, because it also means, naturally, the privatisation of existing infrastructure, typically at startingly low prices (because you look at generating private-sector type returns from direct income rather than public-sector returns which take into account the positive externalities of infrastructure). In other words, profiteering rather than investing.


World oil production. Source: Graphoilogy using US EIA data

Near record oil prices (at $110-115/bl, WTI is at its highest ever except for a few weeks in July 2008) suggest that markets continue to be worried about tightness of supply. While some of that is linked to the disruption to Libyan oil production, there is a growing awareness that (i) the supplies of cheap oil are dwindling, and (ii) it is increasingly difficult for supply to follow demand growth.

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