Colm McCarthy: Donohoe needs to plan for when cold wind blows in our economy
The high cost of electricity demonstrates why public investment needs to be more carefully targeted, writes Colm McCarthy
Decisions about capital investment matter greatly for the long-run performance of the economy and two reports released last week should remind Irish policymakers that mistakes can be costly.
The International Monetary Fund sent a team to Ireland earlier this year to assess how state capital spending is managed: its report is politely critical, as is its style. The campaign group Wind Aware launched a rather less polite assessment of the very large subsidised investment which has been going into wind farms, one of the biggest state-sponsored programmes ever undertaken in Ireland. As the Government finalises its long-term capital plan, due to be released next month, there are lessons to be learned from both of these reports.
Electricity is expensive in Ireland and one of the reasons is the hidden costs of wind power, as well as the substantial wind subsidies explicitly added to consumers' bills. In the first half of 2017, according to figures from Eurostat, the European Union's statistical agency, the typical household in Ireland paid €0.2305 per kilowatt-hour, 30pc more than in the United Kingdom. Further increases in Ireland have been announced in the period since. Yet energy costs are a big political issue in the UK, prompting the government to threaten the power companies with a controversial price cap. In Ireland, for some strange reason, the public and the media seem to be more indulgent of high prices.
There are many reasons why energy prices vary internationally but the Wind Aware report points the finger for high Irish prices at the wind farm lobby. Roughly €300m per annum is paid directly to wind farms in the form of a price guarantee: if the wind farms are unable to secure their expected price in the wholesale market, this is very conveniently guaranteed by the Government and added to electricity bills.
The result is that investment in wind farms is not risky and lenders are willing to provide finance. This should help to explain the apparently commendable willingness of Irish 'capitalists' to risk life and limb in saving the planet through renewable energy investment: the risk has been off-loaded to the general public with the assistance of the Government.
This big subsidy is not the end of the story - there are further substantial hidden costs, drowned out by the insistence of wind-power lobbyists that their technology is a low-cost option.
Since wind farms are dispersed to hundreds of locations, many of them distant from the centres of high demand, there are additional costs for grid expansion and maintenance. The costs are hidden, added to the use-of-system charge levied on all generators and buried in consumers' bills. The Wind Aware report estimates that these extra transmission and distribution costs, incurred solely to facilitate the wind farms and not remunerated by them, exceed €200m annualised. And there are further hidden costs. Wind-power is unpredictable and intermittent, so stand-by capacity from conventional stations must be available to avoid supply disruption. The cost of stand-by payments to generators adds further expense in the hundreds of millions.
Ireland already has so many wind farms that some of their output must, at times of plentiful wind, be curtailed. In 2015 a total of €21m was paid to wind farms which had to be 'curtailed', that is, not permitted to generate. Wind farm construction continues apace: on current plans installed capacity will more than double over the next several years and the costs of curtailment will continue to rise.
Since wind power is intermittent, the conventional power stations, mainly the gas-fired units, are operated sporadically, ramping up and down in response to the variations in wind farm output. This imposes hidden costs as well as hidden carbon emissions. These gas units were not designed for intermittent usage and their useful lives will be impaired. In addition, they are not fully fuel-efficient when operated discontinuously. The sporadic pattern of generation imposed on them involves higher per-unit carbon emissions and the emission savings from wind are less than they appear to be.
The wind farms do indeed reduce Ireland's carbon emissions, perhaps by about 3pc or 4pc of the national total from all sources. But the capital cost of the installed wind fleet and the associated transmission and distribution infrastructure has been in the range of €4bn to €5bn, one of the biggest investment projects in the history of the State. It has never been evaluated properly by any state agency.
The IMF report was welcomed by Minister Paschal Donohoe. It will, he promised, "play an important role in identifying how institutions and public governance systems in Ireland who are responsible for planning, allocating and delivering public capital infrastructure might be further strengthened".
Since public capital investment is on an upward trajectory again after a severe slowdown during the financial crisis, the invitation to the IMF team was timely. Unlike some of the European Union institutions, particularly the ECB in Frankfurt, the IMF treats its member states as partners rather than antagonists. The IMF's fiscal affairs department sent over a team to run the ruler over the Irish system of selecting and managing capital spending by the State and its conclusions are a model of understatement.
For example: "There is room to improve the methodological rigour, sequencing, and effectiveness of the project appraisal and selection processes…" Amen. There is, on paper, a Public Spending Code in Ireland, released in its current version by the Department of Finance in 2005. It appears to require the careful evaluation of public investment projects and was an update of guidelines from the same source as far back as the 1980s. It has been blithely ignored by successive governments which have continued the stop-go approach to the capital programme at the aggregate level as well as the politicised selection of individual projects.
A sizeable cottage industry has grown up devoted to the justification of questionable projects on behalf of whatever state agency or lobby group sees itself as the project champion, with inadequate central procedures to ensure value-for-money. The Public Spending Code as published gives the game away: "Nothing in the Public Spending Code should be taken as precluding Government or ministers, under the delegated sanction arrangements set down by the Minister of Finance, from deciding to approve projects independent of the detailed application of the Public Spending Code."
There may well be additional funds available for public capital spending in the years immediately ahead, but given the inherited debt burden there can be no guarantees. A Brexit disaster, or wobble in the sovereign debt market, would see plans thrown off course and projects deferred or abandoned as so often in the past. Competing priorities will easily exhaust available resources even in a benign scenario - Irish Water has no adequate base of customer revenue so its huge capital requirement will be a claim on the central Exchequer. Housing, roads, schools and numerous other sectors have been staking their claims.
In these circumstances, and bearing in mind the limited capacity of the construction industry, a continuation of traditional Irish practice on public investment would be wasteful. Every bad project crowds out a better one somewhere else. When Minister Donohoe unveils the new capital programme, he should legislate to place a proper capital spending code on the statute book.