Ireland's Debt Problem

An economic policy based on rising debt and low corporate tax rates is not and never was sound policy - by Owen Martin

While the Irish media make a fuss over who will be the next leader of Ireland's biggest political party (Fine Gael), everybody ignores the real elephant in the room. According to the European Banking Authority, Ireland has the largest combined private and government debt as a percentage of GDP in the EU and two thirds higher than that of the US. 

 I'm not sure how this graph is not sending shockwaves through the Trump obsessed Irish media and political establishment - From EBA 

   
While Greece, Italy and Portugal have higher Government debt, Ireland's private sector debt to GDP dwarfs those countries. Which means that for the size of Ireland's economy, it's private sector has taken on alot of debt.

But not only businesses and industry. We have the 5th highest household debt as percentage of net disposable income in EU with about twice as much debt as income per household. This may explain how we rank so high in numbers of new cars across the EU.   People are taking out car loans that perhaps they can't really afford. It shows that we as a nation are still addicted to debt.

https://data.oecd.org/hha/household-debt.htm

Denmark, Netherlands, Iceland and Norway all have higher household debt than Ireland but these countries are doing much better when it comes to Government debt as percentage of GDP. Ireland ranks 5th in terms of Government debt to GDP. So while Greece and Italy have higher levels of government debt, they have about half of the household and private sector debt. Denmark's high level of household debt doesn't seem as bad considering they have half of Ireland's Government debt to GDP. 

https://data.oecd.org/gga/central-government-spending.htm#indicator-chart

Norway have the wealthiest government in Europe. In fact, they are far ahead of second place Luxembourg and Finland. Norway has slightly more household debt than Ireland. But that kinda makes sense - they are a wealthy country. Ireland has the 5th poorest Government in Europe (Italy and Greece lie at the bottom). Our government has dismal revenue, in part thanks to our low corporation tax rates. Yet we carry roughly the same household debt as Norway and have an even higher private sector debt to GDP.  This is called "living beyond our means".  Yes, Ireland could do with the € 13 billion in tax revenue owed from Apple. Laughably, the Irish government is appealing this decision. 

https://data.oecd.org/gga/general-government-financial-wealth.htm#indicator-chart

Irish Govt has the worst revenue in Europe yet reject a €13 billion EU tax ruling made in Ireland's favour

Of course if all that debt was used wisely, perhaps we could become richer. We are reliant on Norway's gas which arrives to us through UK pipelines. The Irish government have banned fracking so this dependence will continue for the foreseeable future. Imagine if some of that debt was being used to extract our own gas reserves.

Ireland spends the most on health after Iceland in Europe, yet we still have a permanently dysfunctional health system. 

Ireland has the third highest electricity prices in Europe.

The Irish government takes pride in divesting from fossil fuels and pushing through massive renewables and electricity infrastructure programmes that cost billions and without any proper assessment in the name of climate change.  We pride ourselves on having a massive welfare program and our representatives want to take in more refugees (without any proper assessment). Green/Left politicians cry out as to why we don't do more to tackle climate change, take on more debt (One cannot go the EIB looking for €5 million or €10 million; one needs to go looking for €2 billion. It is there.) and take in more refugees. Ireland is trying to save the world on a sinking ship but our politicians and media don't even realize we are on one.  Have we learned anything from the crash in 2008 ?


POSITIVES

On the positive side, exports are still strong and benefit from the stronger dollar as against the euro. If we went back to our own currency, it would be a strong one as the above graph shows. Presumably thanks to our exports. However, the weaker sterling is not good for exports to Britain. There is a chance that Ireland may actually benefit from Brexit if companies there relocate to Ireland. 

https://data.oecd.org/gga/general-government-deficit.htm#indicator-chart

Ireland has managed to get out of it's budget deficit abyss and back to something fairly normal. If Multinationals move out we could see some real problems, but we would no longer see the massive distortions to our GDP anymore. Perhaps that could be a good thing in the long run. Living on a false economy (now known as Leprechaun economics) is what got us into trouble last time.

I can't see how Ireland's economic fundamentals are much different to that of the Celtic Tiger era.   If anything, things have got worse.

Little Evidence That Wind Reduces CO2 Emissions

Minister admits Ireland won't meet it's 2020 Emission Targets

Minister for Environment Alan Kelly has said it is no secret that Ireland is not going to meet the EU greenhouse emissions targets for 2020. He said that there was understanding in the EU that Ireland had come through a tough recession and that should be recognised in the targets set for each State after the overall target has been ratified. He said capital investment to adapt and mitigate was now beginning at a level that was required. He said this could not happen when times were tough. - Minister For Environment, October 2015.

A significant component of the Government's strategy for reducing emissions is to pepper the countryside with wind farms. The assumption that they contribute to lower emissions is backed up by little, if any, evidence.

The below graph shows little or no correlation between installed wind and solar and CO2 Reduction :

What did cause a reduction in emissions was the economic recession in 2008. In the below graph, it is self evident, that the resultant reduction in energy consumption (a direct consequence of the economic recession), brought about a reduction in emissions. The PIIGS countries (Portugal, Ireland, Italy, Greece and Spain) had their combined energy consumption reduced by 15% between 2007 and 2014 causing a 30% drop in emissions :

So the Minister is wrong on both counts - 1) installing more wind farms will not reduce emissions and 2) the economic recession, rather than acting as a barrier to emissions reduction, actually brought about the most significant reduction in emissions for many a year.


Sources:

Euan Mearns and Roger Andrews - Energy Matters Website

The European Union - what has it ever done for us ?

"Yeah, that's all very fine, but the Romans are making us use windmills, what are we going to do on a calm night ?"

Let's take a cursory look :

Ireland has received € 4.6 billion in Farm subsidies

http://farmsubsidy.openspending.org/IE/

and € 4.4 billion in structural funds for roads :

http://eustructuralfunds.gov.ie/csf-2000-2006/

http://eustructuralfunds.gov.ie/nsrf-2007-2013/

That's a total of € 9 billion since 2000.

According to the IMF, we were forced by the ECB to pay € 8 billion to unsecured bondholders, which we shouldn't have paid. So that leaves us in net receipt of € 1 billion.

But we seem to be missing the elephant in the room. Much has been made of all the above in the Irish media.

Due to EU regulations, we have been forced to turn our electricity system upside down and make significant changes to accommodate large amounts of intermittent wind. Irish Energy Blog estimates this total cost at € 20 billion:

http://irishenergyblog.blogspot.ie/2015/02/20-billion-committed-under-irelands.html

If we include REFIT over 15-20 years, this amounts to a minimum of € 2-3 billion. Then there are other support schemes for ocean and offshore energy which will be more expensive than onshore wind. This brings us up to circa € 25 billion. There will be no discernible benefit to the electricity consumer from these changes, in fact, its a net cost, particularly in these times of low fuel prices.

No mention hardly whatsoever has been made of this in the media, despite the fact that the sums for electricity dwarf the sums for bondholders, roads and farm subsidies.

This leaves Ireland at a net loss of € 24 billion as members of the EU.

The economics of electricity generation

The general definition of economic sustainability is the ability of an economy to support a defined level of economic production indefinitely - Thwink.org 

Able to be maintained at a certain rate or level  e.g. "sustainable economic growth" - Definition of Sustainability, Oxford English Dictionary

Traditionally, when you wanted to build a new gas plant, you obtained a bank loan on the basis that the output and hence income of the plant could be determined in advance and was at a price linked to the wholesale cost of gas. There would be a certain amount of downtime for maintenance but your plant would be running for most of the year. This meant that the bank was satisfied that you could meet your repayments.

Total generation capacity in the country was linked to demand for electricity in the economy with some spare capacity for reserve. This meant that the cost of your electricity bill was pretty much directly linked to the amount of electricity you consumed with a few added extras to keep the system running and of course, profitable.

During the last decade, with the advent of intermittent renewables, most notably wind generation, both of the above sound economic principles began to be unwound.

Wind generation requires a subsidy because the output of wind is uncertain and therefore banks would be wary of funding such intermittent generation. The wind might blow, then again it might not. If your 20MW wind farm is only generating at half output i.e. 10MW, the subsidy you receive in effect brings your output up to 16MW (10MW multiplied by € 80 / €50 ). In otherwards you would only have received 10MW * €50 = € 500 MWh but instead you will receive 10MW * 80 =
€ 800MWh. Now the bank will be much happier.

If we now go back to our gas plant that has received bank funding, its output is starting to become more uncertain as intermittent wind is pushed onto the grid. Therefore, its income which was once fairly regular becomes staggered and less certain. Now, the banks will become worried, how certain are the loan repayments ?

So once we introduce alot of intermittent generation such as wind and solar into the system, all forms of generation, which were once dispatchable and reliable, become intermittent. This means that some form of subsidy needs to be introduced for the gas plant either in the form of a REFIT style subsidy on the market price or a capacity payment to ensure the plant remains financially viable throughout periods of high wind and solar penetration. So now, we enter into a new era of electricity generation economics where subsidies are required to maintain all generators, not just the renewables. We reach a stage where the gap between supply and demand is so large that there is simply not enough peanuts to go around for everybody and so subsidies are required for all. This differs from the heavily subsidized farming industry because demand for farming products is always equal to or above supply.

This situation that we then have is the exact opposite of the free competitive electricity market we were promised by the Fianna Fail government, when in 2006 they broke up ESB's monopoly on the market and set up Eirgrid to run the national grid. The fact is that when ESB controlled the electricity market, electricity was much cheaper (and no, I don't work for them).

The housing bubble evolved in exactly the same manner - there was a huge over-supply of houses, developers required subsidies in the form of tax reliefs and cheap credit (we now know that all that cheap credit was in effect a taxpayer funded government subsidy) and there simply was not and never could have been enough demand to maintain that level of supply indefinitely.

So the question is how long will it take for the levels of over investment in the electricity market to begin to become unsustainable and the bubble bursts ? It will most likely happen when the level of electricity bills becomes so high that more and more consumers fail to pay the bills on time or at all. Disconnections will rise. Quite a large proportion of the hikes in energy bills are loaded on industry. When most of them decide to jump ship to more competitive countries, as in the case of Cadburys, we are deep trouble, not just because of the resultant job losses, but because there will be a significant hole in the funding of the electricity bubble. When holes begin to develop at the bottom of a pyramid, the whole pyramid eventually collapses.

When this happens, subsidies to generators will be slashed, loan repayments will no longer be met, and the banks will be facing another hole in their balance sheets. In effect, this means that today, the electricity generation assets on the balance sheets of banks are significantly overvalued. Their current valuation is only as good as the ability of the electricity consumer to continue funding indefinitely the ever wider gap between electricity supply and demand (and the supporting grid infrastructure required to support it).

It may turn out that because electricity is a necessity good, the bubble will continue for longer than the housing bubble. This then means that people will have less discretionary spending in direct proportion to the increasingly higher electricity bills. So there will be a period where the electricity bubble will impact other sectors in the economy, themselves already impacted by the higher bills (e.g. a designer clothes shop will be impacted twofold with less customers and higher bills).

There are alot of industries dependent on discretionary spending in Ireland and along with the water charges (water is another necessity good), the hikes in energy bills will put a squeeze on them. Cold weather will also increase the demand for coal and oil - necessity goods which are now heavily taxed. With government policy, and the majority of investment, focused almost solely on electricity generation and windmills, people have little choice when it comes to heating their homes e.g. the investments into retrofitting and energy efficiency are tiny compared to wind energy.

In this scenario, different sectors in the economy will start to feel the squeeze and we will see another recession. This will be the beginning of the bottom sections of the pyramid collapsing. On top of this will be the disappearance of large industry - another section at the bottom of the pyramid gone. The electricity bubble will have collapsed but, like the housing bubble, will have brought down alot of other industries with it.

But whatever the sequence of events - one thing economists know for certain is that an economic bubble will eventually collapse.

George Orwell, Democracy and The Freedom of the Press

This day, 65 years ago, Eric Arthur Blair, otherwise known as George Orwell, passed away. He was one of the great defenders of freedom of speech and opponents of totalitarianism. His style of writing was always clear and engaging, whether writing about coal mines or toads and he was never afraid of challenging the consensus, a characteristic that many journalists and writers today could benefit from. There are quite a few parallels with Orwell's writings on the Soviet Union and the current energy debate in Ireland and elsewhere. If we look at a recent submission to the Dept of Energy by a wind company for example :

People fundamentally tend to support the consensus view. If a vocal minority succeeds in
dominating local and national media, a consensus can develop, and overall views can shift
radically, regardless of fact. The question is what is the consensus? The extremes views of
energy policy tend to make a disproportionate of column inches.

Why do we need a consensus ? Surely what we need is independent analysis of wind energy and other forms of energy so that people can make an informed view, not abiding by a consensus based on information provided from only one side of the debate  (i.e. the invested interest side). They also seem to have quite a poor view of people's intelligence, implying that people will follow the herd like sheep. People making up their own minds is something not conducive to their interests. One wonders if they would like The Thought Police from Orwell's 1984 to swoop down on dissenters or if they would like to design the perfect human embryo for accepting wind farms as in Huxley's Brave New World. 

Of course the irony is that it is next to impossible for one of the mainstream papers to say something negative or critical about wind energy (apart from notably The Irish Examiner). Patrick Nyberg found that there was a herd instinct in Ireland and it seems that the wind lobbyists are becoming increasingly frustrated that this herd instinct is not getting behind their project. During the Celtic Tiger, the mainstream media published very little negative articles or comments about the housing bubble and this helped fuel the herd instinct, eventually leading to the large banking collapse.  Orwell once wrote about the sometimes unspoken and unwritten rules with which the Press operate (see here for original). The same remarks can be made about the Press in Ireland today as regards wind (Orwell of course was writing about the British press). I have replaced references Orwell made to "Soviet Union" with "wind energy" -

At this moment what is demanded by the prevailing orthodoxy is an uncritical admiration of Wind energy. Everyone knows this, nearly everyone acts on it. Any serious criticism of the wind industry, any disclosure of facts which the wind industry would prefer to keep hidden, is next door to unprintable. And this nation-wide conspiracy to flatter the wind industry takes place, curiously enough, against a background of genuine intellectual tolerance. For though you are not allowed to criticise the wind industry, at least you are reasonably free to criticise the fossil fuel industry. Hardly anyone will print an attack on wind energy, but it is quite safe to attack fossil fuels, at any rate in books and periodicals.

The issue involved here is quite a simple one: Is every opinion, however unpopular — however foolish, even — entitled to a hearing? Put it in that form and nearly any intellectual will feel that he ought to say ‘Yes’. But give it a concrete shape, and ask, ‘How about an attack on wind energy? Is that entitled to a hearing?’, and the answer more often than not will be ‘No’, In that case the current orthodoxy happens to be challenged, and so the principle of free speech lapses. Now, when one demands liberty of speech and of the press, one is not demanding absolute liberty. There always must be, or at any rate there always will be, some degree of censorship, so long as organised societies endure. But freedom, as Rosa Luxembourg [sic] said, is ‘freedom for the other fellow’. The same principle is contained in the famous words of Voltaire: ‘I detest what you say; I will defend to the death your right to say it.’

Not content with attacking locals who don't accept the propaganda, the wind lobbyists then set their sights on universities, publicly funded bodies and politicians who don't toe the line :

The key to achieving this education and guidance and leadership role is to have credible organisations and authority figures delivering neutral unbiased information, so that people are well informed and can form their own views. Developers’ views unfortunately do not carry much weight, as they are seen tobe biased. Some of this distrust we must attribute to the excesses of the building boom. In ourview, bodies such as the SEAI, DCENR and ESRI should be at the forefront of the public messaging around the fundamental case for wind [This is a strange interpretation of "neutral unbiased information" - admin]. The SEAI’s recent definitive study on the displacement of fossil fuels and CO2 abatement rates per MWh of wind generation is precisely what is required. [see here for an rebuttal of this] There is an unfortunately widening gap between local councillors and national policy and politicians, as seen by local county development plans being changed locally and overturned by the Department of Environment. This tension between national level policies and local interests has always existed, but it should not be so pronounced within the same political parties. Again, an education programme within political parties and at annual conferences could both sides understand the other sides concerns. 

We believe that the economic case for wind has been thoroughly proven, but the message hasbeen lost. A case in point is a headline in the Irish Independent 29th July “Electricity bills to rise as green energy levy soars by 50pc”. In fact the presence of wind reduces electricity prices. The PSO levy is 75% attributed to peat and gas contracts. We understand that the ESRI budget for energy policy research is constrained. With a renewed focus on the affordability of energy policies, we believe an investment in ESRI funding for this area would pay dividends. 

The universities also have a role to play as independent and respected guides of policy. When bad science is trotted out by vested interests, then Irish academics should be not only prepared, but incentivised to step in and set the record straight. Our tax pays their salaries to promote solid science. There is a lot of research and development money channelled through the universities. Some must be spent on blue sky research, but it would seem perfectly reasonable for some of this funding to address more practical issues questions around our energy policy, to help inform the public and policy makers. For example, an Irish specific study on property prices in the vicinity of wind turbines could be persuasive.

This is a totalitarian attempt to control all arms of the State and the media for the benefit of a small number of companies and investors. While they espouse the benefits of an informed debate, its clear the agenda should be restricted to the benefits of wind only. There seems to be a belief that publicly funded bodies whose role is to act in the public good, exist for the benefit of well funded lobby groups. The ESRI, who got things badly wrong during the boom years (remember that stuff about "soft landing") would do well to steer clear of supporting another bubble. 

And it is hard to fathom how anybody could claim that the current energy policies are "affordable". Affordable to whom exactly ? 

In the wake of the Paris attacks, we have heard a lot about freedom of speech. Orwell laid down the benchmark for freedom of speech  "If liberty means anything at all it means the right to tell people what they do not want to hear. The common people still vaguely subscribe to that doctrine and act on it. " So have we moved any further on since the 1940s ? Do our institutions and press listen to that which they do not want to hear ? Well, one can read this article for example and make up their own minds :

http://the-law-is-my-oyster.com/2014/12/08/how-many-pr-consultants-does-it-take-to-change-a-light-bulb/

And what about that great form of government which, when other nations lack in it, we are so quick to criticize them for - democracy. Well, actually, Orwell's classic tale "Animal Farm" is uncanningly like the wind programme initiated in Ireland and the EU. In Animal Farm, the pigs decide and the animals have to toil building windmills. In our case, we may not have to do physical labour, but already a third of our electricity bills (according to the Irish Academy of Engineering) goes to funding this programme. So we in our own way are toiling to build these windmills. 

“No one believes more firmly than Comrade Napoleon that all animals are equal. He would be only too happy to let you make your decisions for yourselves. But sometimes you might make the wrong decisions, comrades, and then where should we be?” - Extract from Animal Farm

Most of the democratic processes, in relation to the renewable energy programmes, have been bypassed at EU level and at an Irish governance level. UNECE Meeting of the Parties ruled, in July 2014, that appropriate levels of public participation were not met when the Irish government adopted their National Renewable Plan :

(a) That the Party concerned [the European Commission], by not having in place a proper regulatory framework and/or clear instructions to implement article 7 of the [Aarhus] Convention with respect to the adoption of National Renewable Energy Action Plans (NREAPs) by its member States on the basis of Directive 2009/28/EC, has failed to comply with article 7 of the Convention;

(b) That the Party concerned, by not having properly monitored the 
implementation by Ireland of article 7 of the Convention in the adoption of Ireland’s 
NREAP, has also failed to comply with article 7 of the Convention;

(c) That the Party concerned, by not having in place a proper regulatory 
framework and/or clear instructions to implement and proper measures to enforce article 7 of the Convention with respect to the adoption of NREAPs by its member States on the 
basis of Directive 2009/28/EC, has failed to comply also with article 3, paragraph 1, of the 
Convention;

http://www.unece.org/fileadmin/DAM/env/pp/mop5/Documents/Post_session_docs/Decision_excerpts_in_English/Decision_V_9g_on_compliance_by_the_European_Union.pdf

The provisions of the Aarhus Convention and EU/Irish Environmental Law are not some box ticking or red tape exercise that gets in the way of progress. They are there to ensure that independent experts and the voice of the public (who are both the financier and host for these projects) get their say. This is even more pertinent for environmental projects as it is enshrined in Irish legislation that the citizen owns the environment, not the State. 

The position taken by EU and Irish officials to those who question the purpose of their projects has been plain anti-democratic. In some cases it has gone to the bizarre. One EU official when questioned about the carbon emissions savings from a renewable project responded:

“If we were to take instead of a 110 m high wind turbine a 110 m high 

metal statue of Mickey Mouse, you would not be expected to do a detailed 

carbon assessment on that, so why do you expect a detailed carbon 

assessment for the wind turbine?" (from UNECE records)

The bottom line is that such information does not exist.

When these compliance issues are taken up with the Irish authorities, the response is often, that this is not the correct forum and that one needs to take a case in the High Court. In otherwords, make it up as you go along. The document below, prepared by Pat Swords, a chemical and environmental engineer, documents some of these failures of the Irish authorities to deal with substantive and compliance issues :

http://www.unece.org/fileadmin/DAM/env/pp/compliance/Pre-admissibility_communications/Ireland_European_Platform/frComm_response_to_Committee_s_questions_01.12.2014.pdf

The pigs have decided whats best for all of us and its no use complaining. So do we have a fully functioning democracy in Ireland or indeed the EU ? Well, there's more chance of Ireland winning the World Cup than Irish citizens getting a fair hearing at EU level. Democracy only exists for those who the EU officials favor, just like in any dictatorship throughout history. But the whole point of democracy is that it exists for everyone and not something to be applied arbitrarily. Indeed, the EU are still fighting UNECE's decision above. So we have a crisis of democracy and the outcome is uncertain. It's not exactly 1984 but it's one step closer.

The Green Bubble - are we heading for another crash ?

London financier warns of impending Green Bubble 

In an earlier blog, I showed that there are clear signs of an energy bubble in Ireland. In the above video, Per Wimmer speaks about an international green bubble. With banks leveraging up to 80% of the green industry, are our banks once again over-exposed to an over subsidized sector ?

We have around 2,000MW of wind energy in Ireland and it costs around €1 million to install a MW of wind. So that works out at a total capital cost of €2 billion. My own investigation into company accounts in Ireland shows that the 80% leveraging figure applies in Ireland too. This means Irish and EU banks are exposed to €1.6 billion in loans to the wind industry in Ireland**. The means to repay these loans is entirely dependent on REFIT, PSO and the other subsidies for wind energy which the consumer pays through electricity bills that are among the highest in Europe.

There are so many similarities between the green bubble and the credit bubble that it's almost scary - Per Wimmer

Investors in property were able to avail of a myriad of tax reliefs throughout the housing boom and once again investors in wind energy can also receive tax relief in the form of EII (Employment and Investment Initiative).  The housing boom was characterized by disproportionately high property prices and the green boom is likewise characterized by our disproportionate high electricity prices. There was a strong reluctance from commentators and the media to report independently and fairly on the housing boom. We can also see a very similar Group Think mentality with regards to wind energy.

Another interesting similarity is the lack of regulation. We have an energy regulator who is powerless to prevent the high electricity prices and green subsidies / levies, unlike in the UK where he can at least hold energy companies to account. And whilst the lobby groups main complaint during the boom was "too much financial regulation", in an Irish Wind Farmers Association / AIB document titled 2020 Energy Finance, it is stated that "to unlock more [wind energy] funding we need to remove regulatory barriers".

The only attraction for banks is the guaranteed income from wind energy in the form of subsidies, but how long realistically can households and industry keep funding this ?  As Per Wimmer points out, this is hardly sustainable green energy. In the latest PSO Levy Decision Paper, the regulator pointed out that cheap gas prices resulted in a lower wholesale price. But what will happen when the price of gas rises in tandem with the rise in wind energy subsidies in the next few years ?

Are we going to see another financial collapse or will we keep feeding the beast ?