Jevons Paradox

People say that more is less and less is more, but in economics, often less is less and more is more, particularly with efficiency.


Read more about this here: https://minuszeroeco.blogspot.com/2016/01/lesson-12-part-iii-economics-dark-side.html

Economics

Here are some terrible predictions by clever men. And some more reliable predictions about how much your running costs are going to be, depending on your capital investment.


Read more about this here: https://minuszeroeco.blogspot.com/2016/01/lesson-12-part-i-economics-story-so-far.html and here: https://minuszeroeco.blogspot.com/2016/01/lesson-12-part-ii-future.html

Solar Generation: Part One

How can you generate electricity? Here is a comparison of different methods including a comparison of energy return on energy invested. Guess which is the best way to generate electricity in you house?

Windows 3.0

 More about windows. This includes thermal bridges and comparison between installation costs and running costs of windows.

How big a battery would I need?

Our house produces more electricity than we use, so in theory it would be very easy to unplug from the grid and become self sufficient. We don't do this for three reasons:

First, being connected to the grid means that we have electricity when the sun is not shining, its rays are blocked by heavy clouds, or by snow on the roof. We don't need to worry about batteries or generators because the grid is our back-up power supply.

Second, since we produce more energy than we use, we can supply energy to the grid and contribute electricity to the community. We wanted the house to produce more energy than it consumes, and we like to feel that the extra energy is being used and making a difference.

Third, they pay us for any electricity that we supply. They pay us very well: about twice what we pay for day-time electricity and five times the amount for night-time electricity. This is similar to the second reason, since we can see from the negative bills that our electricity is making a difference. We can safely assume that there is more demand and less supply in the day time, so we are filling some kind of need by selling our electricity. It's less safe to assume that our electricity is worth twice as much as their electricity, and easier to see the feed-in-tariff as a boost to the solar industry. Even then it is probably a good thing as the renewable energy industry and its exploitation of a resource that literally falls from the sky still seems to be getting less subsidy than exploiting fossil fuel reserves, and if we are to transition from fossil fuels we will need solar panels.

Regardless of the politics, the highly tangible and easily countable financial considerations mean that we try to sell as much of our day-time electricity as possible, and use their night-time electricity instead. Looking just at energy use this is a bad idea. Our main power consumption is for heating water, which we mostly use in the evening. Currently we are heating hot water at night and it is sat in the tank steadily losing heat for most of the day. Also, the tank is heated by an atmospheric heat pump, getting heat from night-time air, which is colder than the daytime temperature by something like 10 degrees at any time of the year. If we were using electricity in the day time from our own panels, then the heat pump would do a lot less work to get the heat from the outside temperature up to the temperature in the water tank, and the hot water tank would be losing a lot less heat before we use it. This could save us as much as 25% of our electricity, but we don't do it because using our electricity in the day time is over 300% more expensive.

Our contract for selling electricity runs out after ten years and we certainly will not be able to get the same price, but it's not clear yet what the financial calculation will be. If we were to start using daytime electricity, we would also think about trying to use the hot air under the solar panels, which would be even hotter and need even less work to provide us with hot water, but that's another blog post.

Back to the question in the title: If we were to disconnect from the grid and wanted to get a battery to keep us in power, how big would the battery need to be? I have seven years of generation and consumption data to give me an answer.

When I said that we produced more power than we consumed, this has been true for every year and every month. The lowest producing month was October 2017 (670 kWh), which was the least sunny October since 1917 with only 100.9 hours of sunlight. September 2018 had even fewer hours of sunlight (94.4), but we made 800 kWh. That's the same as our highest monthly consumption, 800 kWh, in February 2013.

The longest period when generation stayed above consumption every day was 153 days from 20th April to 20th September, 2016.

The longest period where consumption stayed above generation was for five days between 12th and 17th October, 2017.

If we need a battery to cover all our energy needs, then it may be for these five days. In the simplest calculation, we need a battery of 33.1 kWh (the shortfall between the 70.5 kWh consumption over those five days and the 37.4 kWh generated). That's one or two Nissan Leafs.

There were five times when the consumption stayed above the generation for four days: from 14th January, 18th June, and 23rd October, 2013, from 6th September, 2015 and from 19th October, 2017. Many of these grey-outs are in September or October, when consumption is at its lowest. The snowy days in the middle of January 2013 were at a time of much higher consumption, and for those we would have needed to store 53 kWh to make up the gap between 61 kWh generate and 114.2 kWh consumed. The Teslas have 60kWh batteries.

Although the meteorological data confirms September and October as the months most prone to sunlight shortages, when the roof is covered with 22 cm of snow, our heating needs may also peak.

So the short answer is, we would need a 53kWh battery. Anything smaller and we are still going to need to rely on the grid and pay the monthly connection charge, or we would need some other backup, so the value of a smaller battery is limited.

Since most of our energy is for heating, it may make sense for us to look at storing heat rather than electricity. Phase-change materials may be useful for this.

Also, a more thorough answer would look at charging efficiency, discharging efficiency and electricity leakage. The figures above assume 100% of the electricity goes into the battery, 0% of the charge is lost over time, and 100% of the charge comes out.

Carbon payback in a month not three days: Check those facts!

It looks like a simple arithmetic mistake has struck again.

In preparation for my lesson, I noticed my slides proudly announcing that five jerry cans of paraffin will put out two hundred times more carbon emissions than ten square metres of glass wool insulation. I had the carbon emissions for paraffin at a quarter of a tonne, which at first seems like a lot, but it's pretty much all carbon, and each one of those atoms is going to bond with a couple of oxygens from the atmosphere as they set of heating up the planet in their cosy little threesomes. You have to remember that fossil fuels are worth more than their weight in carbon dioxide emissions! Adding this to the extra density of the paraffin, a factor of two hundred is reasonable.

To give a little extra support for my students who are good with numbers but less good with foreign languages, I wanted to add a more precise weight of carbon equivalent to the glass wool. I could have just divided the quarter tonnes by two hundred, which would have given me one and a bit, but I wanted to get a more precise figure.

My first port of call for fact checking, as usual, was google. I assumed I could just ask it how much embodied carbon was in glass wool, and it would tell me.

I quickly found this greenspec.co.uk, which doesn't have any actual numbers, but has a few graphs. Very sensibly, it starts with different thicknesses of insulation to reach a respectable wall U value of 0.15 W/m²K, which would be about 23cm for glass wool. Then it has the embodied carbon value for a square metre of wall. If my I've read the graphs right, and my sums are correct, this gives 25 kg of carbon dioxide equivalent for my ten square metres of glass wool. Not two hundred times less than the paraffin, but ten times less.

I started looking for my own workings or references, but didn't find any. Usually I add a reference somewhere nearby, in the last few slides of a presentation or as a footnote of a blog post. At least it's good practice to do that, and I always expect it from my students!

So back to google again for a second opinion. I found a carbon footprint of 1.35 kgCO₂/kg for glasswool in table 4.3 on page 118 of Sustainable Construction Processes: A Resource Text, by Steve Goodhew, which is the same as the University of Bath figure I wrote about before. The density is 25 kg/m³ here on engineering toolbox, which gives a slightly higher figure. But if I go with the spec on google shopping of 10kg/m³, I get to about 13 kg of carbon dioxide equivalent for the roll. Twenty times less, not two hundred times less.

There's a factor of ten error somewhere, but since I didn't keep my original workings, I can't see exactly where it is. I've checked a few times, and I'm pretty certain that the roll of glass wool is 10 square metres, and since it's 100 mm thick, it's going to have a volume of one cubic metre. I can well imagine a factor of ten error sneaking in somewhere around there.

Anyway, in terms of the return on carbon investment, instead of a three day carbon emissions payback for switching from paraffin to insulation, it's actually a month. Still seems like a pretty good idea!

This does go to show that it's always a good idea to double check calculations.

When I prepared the lesson two years ago, I was comparing an 11-metre roll of 910-mm wide, 100-mm thick glass wool with five 18-litre cans of paraffin, both of which cost 6000 yen. I'm not sure if it's a trend, or there is some fluctuation, but now the glass wool is a thousand yen cheaper, and the paraffin a thousand yen more expensive.

How to build a house Part 4. Paying for the bloody thing

Financing is the main thing stopping many people from building their dream homes. Still others are forced into building a house because they have access to finance​, and that may turn into a nightmare.​

Unless you are one of the lucky few with enough cash to pay for a house up front, you probably need to get a mortgage. Banks can decide who to lend, or not to lend to, but as with many things, the biggest factor is whether you want to borrow money or not. As Henry Ford said, "whether you think you can, or think you can't—you're usually right."

I've heard foreign residents in Japan say that banks won't lend to them if they don't have permanent residency and permanent employment somewhere. That's certainly true if they think it's true, and don't go and ask any banks.

If you want to get a loan, then get it while you are employed. The bank will be happier to lend if you have a steady income, that has been paid into your bank for several years. Before I got a loan I was worried that I would be stuck to my job forever. I was also somewhat scared of monthly repayments until I'm into my seventies. As it happens, after getting the loan I felt much less chained to my current job, and I hardly think about the monthly repayments. ​They're just like rent, which I had got used to paying. ​

Money used to be bits of metal, then it became bits of paper and later bits of plastic. Now it's just bits on a computer somewhere. It's not a particularly scarce resource, but that may be easy for me to say with an overly privileged background and a life of undeserved comfort​!​

----

But​ whether you're paying in cash or from a hard-fought loan, the question remains: how much is the bloody thing going to cost?

It's like when you go to a restaurant and look at the prices on the menu. Except there are another few noughts on the cost of everything.

Glass of wine 300 yen. Light fittings: 300,000 yen.

Salad 500 yen. Bathroom: 500,000 yen.

Paint. You want paint?

This should not be surprising when you consider how big a house is.

The glass in our windows could have made a thousand drinking glasses, and the tiles on our floor could make a thousand ​plates. I don't want to think about how many chopsticks the wood could be split into.

It's important to understand the difference between price and cost​, which are not the same. Basically price is what you pay to get something, and cost is what the person who gives it to you had to pay. Businesses stay in business because of the difference between price and cost, and often the relationship is arbitrary. The price depends on how much ​the customer ​is able to pay, and how much other people are charging, not on how much it will cost the​ supplier to produce. The costs can't stay above the prices for long, unless that is funding another revenue stream​, as when Gillette sold shaving handles below cost, or even gave them away because they could make money out of the razor blades.

​House builders are in almost exactly the opposite situation. Once you buy a house from them, you will never buy anything from them again. In fact there is a chance that you will demand some extra work from them to fix the inevitable problems that houses come with. This means they need to ​make all their money up front.

There is a large margin on houses in Japan, ​and​ they will basically charge you as much as they can get away with. If you start asking questions, they can easily justify any price they want by producing pages of lists of items with prices to the yen. Most of these item prices will also have large margins either because they have hiked them, because they are list prices and the actual amount they pay suppliers is much less, or because they are over estimating numbers or lengths or weights.

You could pay anything between 10 and 50 million for a house. Paying more will not necessarily increase the resale value of the house. ​In Japan, the value is basically in the land. In most places land is​ a good investment​ because they don't make it any more so its ​value increases over time​. There are some fluctuations, so timing can make a difference, and the exact location could be vulnerable.

Building a house may not be a good investment in financial terms. But in terms of security it gives you a more solid foundation in the community, and also​ more​ psychological​ stability​, so is worth it if you plan to stay in Japan. Find somewhere you want to live!

​Building a cheap house may end up costing a lot more long term in heating and maintenance.​ These costs are usually not taken into consideration when you're building, but the heating bills are also coming out of your bank each month, just like the loan repayments. The difference is that one day the loan repayments will stop, but you're still going to have to pay for heating and cooling. Even when they do tell you how much the energy bills will be, actual heating and cooling costs are typically twice the estimates and simulations.

​Building a Passive House, or at least using Passive House software during the building process, will give a much more reliably estimate, and will allow you to make realistic comparisons between the cost of heating and the initial costs. ​

These solar panels... are they going to last?

Ugo Bardi writes about ​the energy return on photovoltaics. Citing an article from Bhandari et al. that looked at 231 studies on ​how much energy comes out of photovoltaics​, and how much energy went into producing them, he comes up with an average return of 11-12 for southern Europe. ​This sounds worthwhile.

(From Dale and Benson)

​This graph paints a slightly different picture. It plots the number of years it takes for panels to generate the energy it took to make them against the growth rate of solar production. The payback got at least three times better in ten years, and the growth also increased three times. This means that, so far, more energy has gone into making solar panels than has come out of them. Hopefully, the growth will stop at some point, and the line will swing into the green as panel production stops growing while the installed panels keep generating. That depends on economics. 

Older estimates were that panels would still generate 80% rated power after 20 years, but according to Engineering. com, panels produced after 2000 will still be producing over 90%, losing only half a percent per year. So technically the panels will still be generating.

Economics is about resources. Somewhere human time is factored into ​it. We consider this resource very precious. ​I remember large scale road building projects in the UK that would decimate forest, destroy habitat and create pollution ​just to take a couple of minutes off people's car journeys. There is an economic pressure to reduce the amount of human time needed for tasks.

Another view is that human time is infinite, and the natural resources are limited. The classical economic view looks at productivity and considers environment assets to be externalities and essentially deems them infinite.  

​Hopefully growth of solar panels will go down, and they will become net energy contributors, but there is a powerful economic mechanism supporting production. If growth increases and we start throwing away the old panels, then that line may stay permanently in the wrong part of the graph, and photovoltaics will have just helped in our longer mission of depleting the world's resources.

The only redeeming feature is that they work very well in space, so we can take them with us when leave the planet! 

​References:​

Bhandari, K. P.,  Collier, J. M., Ellingson, R. J. and Apul, D. S. (2015). Energy Payback Time (EPBT) and Energy Return on Energy Invested (EROI) of Solar Photovoltaic Systems: A Systematic Review and Meta-Analysis. Renewable and Sustainable Energy Reviews​,​ 47(July): 133–41. doi:10.1016/j.rser.2015.02.057.

Dale​, M. and Benson​, S. M., ​(2013​). ​Energy Balance of the Global Photovoltaic (PV) Industry - Is the PV Industry a Net Electricity Producer​? Environmental Science and Technology, 47(7), pp 3482–3489

​Green Rhino Energy looks more at the real cost of solar ​energy (warning: includes equations).

Just planning ahead to make a battery charger for electric cars

"Are we nearly there yet?" the kids ask from the back seat.

"Yes we'll be there soon," I say, and I'm sure we will be. Soon is always too late for some but takes others by surprise.  

So we are half way through the ten-year contract with the Chubu Electric Power Company, and when it ends there is almost no chance that we will be paid as much as the 48 yen per kWh we are now getting. The tarriffs have been steadily falling each year, as was originally planned. Solar panel prices have also been falling, so the calculation of return on investment remains a little short of the ten-year contract that electricity companies are tied into for domestic installations of less than 10 kilowatts. Installations over 10kW are considered commercial, and they are tied into a lower price for twenty years. The prices of solar panels, as with all commodities, is somewhat arbitrary, and it is not completely clear whether the government is deciding the feed-in-tarriff rate based on the price of the panels, or wether the price of the panels is being set so that the feed-in-tarriff will pay the cost back. 

   

I think this graph shows that costs of solar installations over ten years met the residential electricity rates in the middle of 2014. At that point​, in theory at least,​ incentives become moot since it's cheaper for people to buy their electricity in the form or solar panels than it is to buy electricity company​. Of course not everyone has the capital to be able to do that, but the feed-in-tarriff was still above the price people were paying for electricity. According to solar partners.jp, the amount you get for selling electricity is dropping by 2 or 3 yen per kWh per year. You could sell 1kWh for up to 33 yen in 2016, and it will be 30, 28 ​in 2018​ and 26 ​in 2019. So if I'm lucky and still able to get a new contract with my old panels, I may get over 25 yen per kWh when my contract runs out.

At 25 yen per kWh it's still worth my while to connect to the grid. My income from the panels will halve, but it will still be three times more than I pay for electricity. 

A worse scenario is that I get paid some market value for power generation, which could be around 11 yen. ​It may be a fixed rate or a floating rate. The worst scenario is that they don't pay me anything, but just expect that power to flow into their grid. I think that is very unlikely.

There has apparently been a deregulation of the electricity market, which in theory means I can shop around for the highest bidder for my electricity. Japan For Sustainability has an interesting story here about Renewable Energy Hopes and Hurdles Amid Full Liberalization of Japan's Electricity Market. "In April 2016, Japan woke up to a fully liberalized electricity market" the article begins, although even by ​June 2017 I can't help feeling that most people are still oblivious to this new reality. ​

Increased competition tends to bring down prices, which may be bad news for people trying to sell​ electricity​. You can find out here whether changing your electric company will give you cheaper bills: https://enechange.jp/try. It's easy to find companies that will sell you electricity, but it's harder to find those that will buy it off you, unless you have larger sources. I searched around the website for https://ne-greena.jp, who offer 100% renewable energy, but ​they are not interested in buying renewable energy​ from my roof!

At some value less than 20 yen per kWh, it stops making sense for me to pay the electricity company the monthly flat rate to connect to them, since we​ make more electricity than ​we​ use. The big question going forward for anyone investing in renewable energy is how much electricity will cost. Jay Carlis claimed in 2013 that electricity prices are not going down and he​re's a Guardian article from 2011 about electric cars taking over.

More information:

Support Japan for Sustainability

Statistics on solar generation and feed-in tarrifs in Japan

Do solar panels have a dark side?

While browsing through the battlefield of prejudices and preconceptions that is the internet, I came across the graphic below, proudly showing how much better coal and oil are than solar power. This was a retort to Bernie Sanders boasting about the great contribution solar power was making to job creation. They cite the broken window fallacy, which is the mistaken belief that breaking a window is good for the economy, because of all the work it for glaziers, carpenters and painters. I can't help feeling that the broken window that this metaphor really applies to is the global environment, which the economy has been breaking for the past couple of hundred years, and has yet to seriously think about repairing. ​Anyway, the author's conclusion was ​that it takes 79 solar workers to produce the same amount of electric power as one coal worker produces.

Of course, he is missing the fact that almost all coal workers' 2016 efforts have now been burnt, while most of the solar jobs were installing production capacity. If all of these workers stopped for 2017, then coal and natural gas would produce zero kWh. Solar, on the other hand, would produce more or less the same amount. In fact those panels installed in 2016 will still be producing power for at least the next quarter century. In addition, many of the jobs in the solar industry are leading directly or indirectly to increasingly efficient solar panels and better ways of using them, so when those panels eventually need replacing, their replacements will be more efficient, cheaper, lighter, less energy intensive and with a lower environmental impact in their production and disposal.

This guy has a similar story, and once again it seems to be coming from the right, and firmly putting renewable energy on the left wing, and the left field. "Our lives are improved by finding ways to reduce the amount of labor in them, not increase it​," they both claim​.

​Of course, a lot of labour-reducing measures have not lead to a reduction in labour but an increase. In the 1930s John Maynard Keynes predicted that ​his grandchildren would be working 15 hour weeks. He didn't actually have any grandchildren, so that part of his prediction was wrong to start with. But his sister's grandchildren, interviewed here and now retired, worked a lot more than fifteen hours a week. In fact one claims it was more like fifteen hours a day. Work has expanded to fill the available time. Computers have not yet liberated the masses from work, but have enslaved millions behind their keyboards. Cheap products have just allowed people to buy more. One of the​noble aims of the industrial ​revolution was to provide every man with his own shirt, but it has just led to many overflowing wardrobes. ​A kind of Jevons paradox exists here too, as we spend all our time using these labour saving devices. But I digress from the solar issue.

​The bottom line is, of course, that solar panels do require work, energy and resources in their production, and looking backwards it's difficult to argue that they are using less carbon. Looking forward there is a different picture, and solar power and other renewables make zero-carbon energy production possible. Burning fossil fuels does not. There is no reason to ever build another coal plant in the United States​, or anywhere else for that matter.

Could Passivhaus be cheaper?

Passivhaus, Herefordshire, 2016 

I don't just mean cheaper than it is now, but could Passive House be cheaper than a regular building. And I don't mean cheaper in the long term, but cheaper to build.

Low energy buildings, Pennyland, 1979

When we were building, we found in most cases the extra demands of passive house provided extra opportunities for builders and contractors to charge us more money. I think this was partly our fault for not finding people who were interested in changing the way they work, so rather than seeing our house as an opportunity to learn how to build better houses in the future, they saw it as a diversion from their usual practice. Where we did work with people who were used to working to rigorous energy specifications, I got a strong sense that they were able to charge more because they thought nobody else could do what they were doing, or because they were aiming for rich customers who just judged value by the price tag.

The theory behind Passivhaus is that increasing insulation means massively reducing the heating system, so extra costs insulating are balanced by lower costs installing a heating system. Since Passivhaus also required a ventilation system, and rather than removing the heating system it just scales it down, this seems like a challenge. The cost of extra insulation, structural changes to accommodate and support the insulation, airtightness barriers, increased window specs and ventilation system all need to add up to less than a fraction of the heating system. 

State of the art building, Lavenham Wool Hall, UK, 1464 

According to this report from the Passive House Trust, sponsored be AECOM, passive houses cost 3-8% more in Germany, where many are built to the standard. In the UK they typically cost 15-20% extra, although the extra costs are less for large projects, terraces, north-south oriented buildings, and projects where the design can change after tender.

But some people are saying that Passivhaus can, and will cost no more, for example Passivehouse Plus in Ireland give the builder's view on why passive house doesn't cost extra.

And Nick Grant says here that if you think Passivahus will cost more, it will!

Low cost, zero maintenance house, Japan
Twentieth century

And there is a best practices document developed in collaboration with EEBA, and Proud Green Building that asks this question: Can you build a high performance home without additional cost?

And they answer: YES!

Bird Table, Huddersfield,
Turn of millenium

You can Download your copy today! Which will tell you about putting a value on high performance, how to shift costs where they matter most, opportunities in green remodeling, builders' perspectives on achieving high performance, high performance home ratings and certifications, case studies and financial considerations.

Review: The Big Short (2015)

This is the first film review I've done. I briefly dabbled in review writing in a magazine that I used to put together at school, until we got a rather caustic letter from one of the people in the play I had reviewed saying, "the only thing worse than amateur dramatics is amateur criticism." So read on at your peril!

Film reviews have even less connection with low energy building than the nonsense I usually write, but this movie was about mortgages, and they have everything to do with building houses. Without financing, low energy buildings will not get off the paper, and unless you have extensive savings, or you are going to spend ten years building your house with the remains of your pay, you will be going to the bank to borrow money. If you are in Japan it makes financial sense to get a loan from the bank even if you have the money since you get a tax rebate for having a mortgage, but I digress from the content of the film.

The Big Short (2015) is based on actual events leading up to the economic crash of 2007 and 2008. For anyone who missed it, mortgages were considered as safe as houses for the banks lending money, while in the real world brokers were getting paid bonuses for giving as many mortgages out as possible, even so-called Ninja loans to people with no income and no assets.  

As I was getting my loan in Japan I had heard of people going to the bank and being handed actual cash from the bank manager, which they passed across the table to the landowners or the people building the house. In more "developed" economies, this money is just numbers on a computer somewhere. The bank is not lending you money that they have taken out of their safe and can count in front of you, but they are adding numbers onto a balance sheet somewhere. 

This makes sense so far, but the money needs to be balanced with assets. In a deregulated financial market, these debts are bundled and sold as mortgage bonds, then traded and tranched, tranched and traded. The movie has a nice scene with Jenga blocks representing the debts, and does a very good job at explaining financial concept in a clear and engaging way.

The Big Short follows four people who realised that a lot of the mortgages were not being paid back, and the bonds were being given more credit than they deserved. So they started investing money into the loans having too high a credit rating. This is the part I don't really understand. 

Financial institutions have a whole range of jargon that makes things very difficult to understand. There are two reasons something sounds difficult to understand. One is that it is a complicated system that inherently is difficult to understand. The other is that someone is bullshitting, to separate you from your money, or to keep them out of prison, or both.

I understand investing in a house or in land, since that has intrinsic value. I understand investing in stocks and shares because those businesses generate wealth. I understand investing in commodities. I understand that governments sometimes want to generate money and they will issue bonds, and I guess the countries they represent have value. I also understand that these things can be bundled together into funds. But when I hear of "financial instruments" like "structured investment vehicles" alarm bells start ringing. I know those terms are designed to make our eyes glaze over. 

The people who saw the impending collapse of the mortgage world put money into something called a Credit Default Swap, which is a regular payment that may lead to a payout if a loan defaults. I think I pay something like this for my own house loan. 

So I suppose I do understand what is happening here, I just don't understand why it is allowed to happen, especially with people's life savings. Putting money into something being valued too highly is gambling. This should be in Las Vegas, not Wall Street.

There is a precedent in insurance. Shipping was a dangerous business, and people could pay premiums to insurance brokers in return for large payouts if the ships sank and the cargo was lost.The idea goes back to the ancient world, and for example the Code of Hammurabi made provision for an extra payment on a loan so it would be cancelled if a cargo was lost. The first insurance policy independent of the loan goes back Genoa in 1347. The modern insurance industry grew out of London and you may have heard of a Mr Lloyd, who had a coffee shop there in the late 1680s frequented by ship owners. For a while anyone could take out an insurance policy on a ship being lost, but during the 19th century, there were problems with people gaming the system, leading to the Marine Insurance Act of 1906 and the concept of "insurable interest". This means that you can only insure against losing something if you have an interest in keeping it. The Life Assurances act of 1774 is an earlier example of this concept.

Nothing about insurance is in the movie, but it seems a hundred years later this idea had been forgotten, and so a group of investors were able to walk into Wall Street banks and effectively place these bets, which were later turned into financial instruments and sold to other investors.

The movie tells this story well, focusing mostly on four investors who saw the crisis coming. I like the way this film is billed as a comedy. Perhaps they wanted Jim Carrey for the Christian Bale character, Jack Black for Brad Pitt, and Ben Stiller for Ryan Gosling. 

I rolled off the couch laughing when the Brad told us that 40,000 people die every time unemployment goes up 1%. 

The few people who made millions out of banks failing may be quite amused. The people involved at every level with the irresponsible lending habits leading up to this crisis, who still have their salaries and bonuses, must be laughing all the way to the bank. Where they still work. 

One counterfactual idea strikes me though. What if, instead of trying to make money out of it, those clairvoyants had pushed the credit raters to look a bit more closely at the assets and start downgrading them? In fact, could their investment into the mortgage failures have helped the collapse? 

A house of cards will only fall down if you knock it, and to be honest since we came off the gold standard in the 1930s our whole economy has just been based on bits of paper. More recently it has been bits in a computer somewhere. 

The real story here is not about mortgages, but about shadow banking: financial institutions beyond the regulations of traditional banking. This steadily increased through the 1980s, speeding up in the middle of the 1990s, and by 2000 there was more money in shadow banking than in traditional banking. To take a extremely pessimistic view, this is like betting that you have a dozen broken eggs when you only have a box of ten eggs. And you are betting with the eggs. 

So is that the joke at the heart of this "comedy"? I'm still not really laughing yet. 

It's tempting to look at the four heroes of the story as important players in a financial system that is trying to buffer against risk, who helped expose problems in ratings of the mortgage industry. But it's more likely that they were out to make money from insurance payouts that in a moral system would have gone to people who had lost their savings or their homes, and that they were very much a part of the shadow banking system that still seems way too big. Rather than addressing the problem, they gave banks the opportunity to sell trillions of dollars worth of bets that the mortgage bonds would not fail.  

So what does this have to do with building a house then? Well, perhaps not very much, but when you are borrowing money, you might want to know where it comes from. Remember the Adam Smith line: if you owe the bank a hundred pounds then you have a problem. If you owe the bank a million pounds, then the bank has a problem.

Anyway, on a scale of one to three, this movie definitely gets a three.

Let me leave you with some words Woody Guthrie sang in the 1930s: 

"The gambling man is rich and the working man is poor

And I ain't got no home in this world any more"

Notes and References

The relationship between unemployment and death was not a joke, and data can be found on page 300 of Thomas, W. L. and Carson, R. B. (2014) The American Economy: How it Works and How it Doesn't, Routledge. 

See also: TUC (2010) The Costs of Unemployment, a TUC Briefing to Mark the European Year for Combating Poverty and Social Exclusion.

Östring Lilja, Sara (2010) Insurable interest in marine insurance: A necessity or an obsolete way of thinking? 

Economics as Thermodynamics

We tend to think of human activity as something altogether different to thermodynamics, but James Lovelock looked at the amount of energy that people have used and noticed that things start to get culturally interesting when we use more than one watt per square metre. As I wrote before, he linked human activity to the reynolds number, which is a measure of turbulence. 

Tim Garrett of Utah State calculated total human wealth is proportional to the amount of primary energy we consume. One 1990 US dollar is approximately 10 milliwatts.  

It's worth noting that this is talking about power and not energy. Wealth is not proportional to the amount of energy. It is proportional to the rate at which energy is used. So when there is inflation, and the amount of financial wealth increases, there is an increase in the rate we are using energy. In the fossil fuel paradigm, this means an increase in the rate we are using up resources. Inflation is compound, so the increase is exponential.

If we change to renewable sources of energy, we may be able to reduce the rate we are using up resources, but unless we have a zero-carbon economy, we will still be using up those finite resources. If you're heading towards a cliff, slowing down is not going to help: you need to stop or change direction. We don't need an economic paradigm where growth is used as the main metric, and lack of growth met by frowns on the faces of newscasters. 

Free market economics has been an interesting experiment, and we seem to be doing well at the moment, but in terms of experiments, it's a bit like an experiment with drugs. I once asked a friend what speed was like, and he said it was like riding a motorbike. But you had to walk back. The sooner we realise that free market economics, along with fossil fuel use, is an addiction, and that we too are going to have to walk back, the sooner we can start kicking the habit. 

When I talk about costs in terms of energy rather than in terms of money, I've been worrying that I'm just being an idealistic hippy. In fact, the reality may be precisely the opposite. Energy is the real metric, and money is just a loose approximation to it. Energy underlies the motions of the universe, not just in the shine of the sun and the orbits of the planets around it, but in the myriad human activities and their effects on a macroscopic level. It is people who don't see this who are living in a fantasy world. 

It's also worth going further into generalisation and thinking about the future. People spend a lot of time worrying about where to invest their money for the future. The Bible says that love of money is the root of all evil. Not the money itself. Rather than worrying about money, we should be thinking more about how we invest energy. It is now in great abundance, but there is no guarantee that it will be in the future. Money may lose most or all of its value, but energy will always have currency.  

Reference

Garrett, T. J.: No way out? The double-bind in seeking global prosperity alongside mitigated climate change, Earth Syst. Dynam., 3, 1-17, doi:10.5194/esd-3-1-2012, 2012.

Five years of solar power!

Our Suntech display panel congratulated us the other morning on five years of generating solar power. We've made over 60 Megawatt hours. That would keep a 60 watt light bulb going for over a hundred years. But we don't have any 60 watt light bulbs, they're all low-power leds.

In the same period we've used under 30 Megawatt hours. Around 45% of what we have generated. We sold around 90% of the electricity we generated, and bought around 75% of the electricity we used. I'm not sure how much sense this makes in environmental terms or for overall energy usage, but economically it makes sense since we only pay 11 yen for off-peak electricity, and they have been paying us 48 yen per KiloWatt hour for our solar power, totaling over 3 million yen. 

Our contract lasts for another five years, and we will see what is available at the end of that. In the meantime I can start working on my plan to use the hot air under the panels for our atmospheric heat pump, rather than the frigid night air. I think it will take that long to find a brave enough heat pump engineer to tackle the project, or to learn enough about heat pumps to try it myself. 

(Corrected 10th January: originally said "Gigawatts", changed to "Megawatts". We're not a nuclear power station!)

Or maybe we should not be worrying about storing solar energy

There's a conventional wisdom on solar power in particular, and renewables in general, that we need storage to make it work properly. According to brave new climate that will probably stop them from being effective. 

They look at the energy return on energy investment (EROEI) and cite the low score for solar. In other words, the amount of energy that will come out of solar panels is not really enough to make solar panels. This means they are not sustainable and rather than contributing energy, they are using up energy created elsewhere. He suggests we should not just talk about the actual energy used in the process of manufacturing the solar panels, but also things like food and education for the people who are making them. 

Anyway, an energy source with an EROEI of one would just produce enough energy to support itself, and would be of no use to the society. The threshold for useful energy sources is something like 7. 

I have sometimes watched fish jumping out of the river to catch a fly, and wondered whether they were using more energy to catch the fly than they got out of eating it. EROEI is a bit like that. 

He quotes an EROEI of 3.5 for solar panels in Germany. This is already marginal, and if we have to store energy from renewables, then we also need to add the battery infrastructure into considerations of the EROEI, which could make solar a net user of energy rather than supplier. 

There are two other considerations. First is that solar production costs are falling all the time, and this includes embodied energy. The other is that we may soon have batteries parked outside each house in the car. 

Is it worth it? Present value factor

Building a house is a series of decisions, and a lot of these decisions put one-off capital costs against month-on-month running costs.

For example you could add insulation somewhere that will save 10,000 yen every year in heating and cooling bills, and cost 150,000 yen.

The first thing to think about is how far into the future you are going to be making savings. Let's say it's thirty years.

So if you're going to save 10,000 yen every year for the next 30 years, how much is that worth? 

Well, at first sight you'd think it's 300,000 yen. But it's not that simple. You have to think about inflation and interest.

First, imagine you don't have the money. In that case to make the capital investment you're going to have to borrow it, probably from a bank who will charge interest. This means the capital will cost more than its face value. In other words the saving from the running cost is worth less.

Second, imagine that you do have the money. In that case, spending it means you can't invest the money somewhere else, so you lose out on the opportunity for earning interest. So again the value of the cash in hand, or wherever it is, is more than its face value, in the long run.

This can all be expressed as the present value factor, which can be calculated by this equation:

 F_pv = 1-(1+P) ^-n / P

Where P is the interest rate, and n is the number of years.

But what if you're bad at making investment decisions, and would probably have lost all the money? In that case, you will probably make the wrong decision here, too, so you can stop reading, if you haven't done so already. You probably stopped reading before the equation.

And what about inflation? If the prices are going to go up, then that 10,000 yen per year is going to be increasing. Won't that balance out the interest? Can't we just multiply the annual saving by the number of years after all? 

Lesson 12, part III: Economics, the dark side of Energy efficiency

"Like the 2006 changes, it was predicted that the introduction of these limits would result in a 20% reduction in energy use for heating. A survey by Liverpool John Moores University predicted that the actual figure would be 6%"

UK energy policy, laws and regulations handbook: strategic information and basic laws.

Why did a predicted 20% reduction in energy use turn out to be 6%? The 1974 Warren Alquist act in California was predicted to lead to 80% saving in energy efficiency. Research into actual energy use has suggested they made no difference.

Remember that the oil shock inspired low-energy buildings in Europe and energy efficient products in Japan?

Today, country A uses four times more heating than country B, while country B uses fifty percent more to twice as much energy for hot water, lighting and appliances. It seems like country A would be Japan and country B somewhere in Europe. In fact country A is Germany and country B is Japan. In spite of low energy building standards, Germany uses four times more energy for heating, and in spite of all those energy efficient products, Japan uses up to twice as much energy for hot water, lighting and appliances. Or perhaps it is because of the efficiency.

Jevons paradox, inspired by 19th century economist, suggests that more efficiency will lead to more consumption. He was looking at coal, for example Watt's steam engine that was 75% more efficient than its predecessor, but ended up using much more coal.

A good way to think about this is with vending machines. There are plenty around Japan, serving hot and cold drinks to thirsty customers with a couple of coins rattling in their pockets. Considering the economics, we have the cost of the drinks, the maintenance and the heating and cooling on one side, and the income from the money going in on the other. The cost of the drinks will be balanced per drink sold, but the heating and cooling costs are going to depend on the time and the temperature outside, so there is some kind of break-even point of the number of drinks that must be sold per month.

What would happen if the vending machines became twice as efficient? They wouldn't need to sell as many drinks per month to break even. This means there are a lot more places where vending machines could be installed, and the result would be more vending machines. More efficiency would not lead to less energy use, but to more energy use.

These low-energy building standards and highly efficient products may not be helping the energy problem at all. They may be leading to more energy use. Or at best, we may just be using the energy we saved elsewhere.

Engineering estimates don't take into account consumer behaviour.

They can try, as we can see in the next part.

Reference
Freakonomics: How efficient is energy efficiency?

Lesson 12, part I: Economics, the story so far

I had to confess from the start that I don't really understand economics. But I also suggested that nobody else does either, since we're looking at incredibly complex systems.

The story so far
It all began with solar power. Food was the original source of human energy, recently collected by plants from the sun, sometimes via animals. Around four hundred thousand years ago, give or take half a million, fire was discovered. This meant that food could be cooked making digestion quicker and meal times shorter, also making more food available.

The next major development in energy use can probably be attributed to James Watt inventing a practical steam engine that ran off coal, and was first used to pump water out of coal mines to allow more coal to be mined. This led to the exponential growth in energy use and carbon emissions that we still witness today.

Oil started to join the picture in 1859 when it was discovered in Pennsylvania. Production in that year was two thousand barrels. Ten years later four million barrels were produced per year.

The great smog of London came in 1952, reckoned at the time to have killed four thousand people in a couple of weeks. Modern estimates put the figure three times higher. Smog is a mixture of smoke and fog, and they decided to do something about the smoke, bringing in the Clean Air Act in 1956.
More recently, in the 1970s came the oil shock. Global prices rose in 1973, and again in 1979. I didn't go into the causes, but they are probably connected to peak production during the sixties. Troubles in the Middle East are often connected with the oil shock, but they may be a result rather than a cause.
The oil shock led to low energy building standards in Scandinavia, and energy efficiency in Japan. Each of these can play a part in solving our energy problems, but more on that later.

At around the same time, the Club of Rome report of 1972 started ringing alarm bells about global warming. They were ringing for a while before the world woke up and in 1988 the Inter-governmental Panel on Climate Change was formed to deal with it.

This year, or hereabouts, three significant events have happened. We've reached one degree centigrade of warming, domestic solar power has reached grid parity in many countries, and at COP21 in Paris governments agreed to keep warming well below 2 degrees centigrade. Just to put these apparently small numbers of one or two degrees into context, if it was your body temperature, you'd be going straight to the doctor.

So what about the future?

Where's all the butter?

I thought it may just have been a supply chain problem to my local supermarket, but there was no butter in the Watahan across town either. I just checked when I was over there getting some wood for some shelves but that's another story.

They were doing that trick where they move the mirror at the back of the fridge further forward, so it doesn't look like it's half empty. And even when there is butter, there's a sign saying that people can only get one pack at a time. They have milk and cheese so it's not all dairy products. And they have cream too, so it's not a luxury issue. I'm not exactly sure of the process, but I thought milk, cream and butter were like fractions of raw milk. If the yields of milk are low, then you'd expect shortages of dairy products in general.

Or maybe butter is the result of cows going jogging, and the cold winter has meant they stay inside. 

I'm sure the reason is more to do with human economics than bovine ergonomics. 

Butter was one of the first edible commodities. Pliny the elder mentions it is "the most delicate of food among barbarous nations" and while it would quickly go off in the warm climates of the civilised mediterraneans, in Northern Europe butter would keep well, and the Scandinavians were exporting it from the twelfth century.

As well as trade it has a long history of being stored, most interestingly as "bog butter", in firkins buried in medieval Irish peat bogs. Some still survive.

Weight for weight it contains roughly the same energy as coal. So with a relatively long shelf life and high energy per weight, it has long been a tradable commodity.

So where is it going or where has it gone, and should we be worried?   

Does it have anything to do with the "guns and butter curve"?

There seem to be wide fluctuations in the price of butter on this graph based on US Bureau of Labor statistics. Although the most worrying part of it is that healthy food prices are going up while unhealthy food prices are going down. Perhaps butter is confused as to whether it is healthy or not?

According to Dairy Reporter the US prices in September 2014 were at an all-time high, so perhaps that's where all the butter was going? Japan ranks 8th among the world's butter consumers, but 11th among its produces, with Australia producing twice as much, and New Zealand almost ten times as much. Perhaps this pacific butter changed course and headed stateside for a better profit. 

Anyway, butter has been traded internationally for over 800 years and they still haven't got steady prices and a constant supply worked out, so that should tell us something about the economic model we are using. 

Also it's a good thing to have a few packs of in your fridge. I'm not sure whether we need to start burying it in peat bogs again just yet.