Category Archives: Government

BREXIT – What Deal?

univestBREXIT – What Deal?

When David Cameron elected to engage in a referendum regarding UK membership of the EU his pronouncement was that he would seek much needed fundamental reform to the EU, or support an ‘out’ vote. These reforms included substantial issues such as curtailing the role of the European Court of Human Rights in UK determinations, to scrap the Human Rights Act, reclaiming sovereignty for both our parliament and our judicial system, and to have sanction over immigration into the UK.

What he achieved is zero reform; only some tweaking at the fringes which, until written into Treaty are no more than what the Courts call mitigating circumstances in determinations, the existing Treaty being the fundamental basis on which they will make determinations. Few, if any of the EU leaders who agreed this tweaking will be in office when the next Treaty is discussed, and the European Parliament can most certainly vote down any, if not all of the concessions. Thus why the ‘deal’ is already in the dim past of the EU referendum debate.

As a trained negotiator I have an unease about the lack of any substance to the ‘deal’ as Germany most certainly needs to keep us within. Did Cameron not have the heart for such a negotiation? Is there a deal behind the scenes regarding the future of Cameron? Was he the wrong man to negotiate? History may tell us the answer, but until then we must accept that the ‘deal’ does not remotely meet with the initial basis of the referendum.

I am not going to debase my discussion by using speculative monetary values, or the use and abuse of statistics. As it is clear to see in the media the business and financial community are divided on opinion based on their specific vested interests – thus irrelevant. As argued in previous blogs this debate is about the future of the people in the UK. All of the economic and political arguments pale against the right outcome for the British way of life. Business and finance will continue regardless of the choice made in June. As one dear lady so elegantly put it in a Jeremy Vine interview last week, ‘so-called experts built the Titanic, but not the Ark’.

I do not believe the people of the UK will engage with the current political and business debate. So let us bring the argument down to a reasonable comparator argument that anyone can understand. Our base will be a recently new golf club where the charter debenture holders (the people who essentially financed the building of the club) sought preferential treatment as part of their contribution. This creates a two-tiered system of membership even though much of their initial investment has been redeemed through subsequent debenture sales. What will happen over time is policy committee members will change, and privileges of the charter members will become fuzzy, and erode, until they have no more privileges than any other member, i.e. harmonising rights to all members. This is what will most certainly happen in the EU. Fuzzy memberships such as Norway, the UK, and Switzerland will be tolerated in the short-term, but over time the boundaries will be eroded until they are eradicated. In Political Risk parlance this is called creeping expropriation. If the UK elects to remain an EU member it will most certainly not retain any special status over time.

The generally accepted current situation of the EU is fragile, and in need of serious reform. So what is the future if the UK votes to remain within – uncertainty. What is the future if the UK votes to leave the EU – uncertainty. So what is the difference – control of the uncertainty. The UK is not a Switzerland or a Norway. The UK is the 5th largest economy in the world – and carries much power and influence in the world in its own right (as endorsed by the German Foreign Minister on Radio 4).

Let us look at uncertainty, again in an easily understandable form. Uncertainty is as much part of life as day and night. The obvious relevant examples are life-changing decisions to get married, have children, or God forbid – divorce. They all require uncertain adaptability, but are all undertaken with the hope to a better future. For a while they can be a struggle, but the outcome is generally worth it. Ask any woman who has gone through labour, but yielded a healthy baby – the pain of labour is soon forgotten. A BREXIT includes a 2 year ‘grandfather clause’ where all of our existing relationships with the EU continue giving time to agree alternatives such as free trade agreements. The UK will see some immediate benefits in that the irksome elements of the Human Rights Act can be ignored, immigration can be brought under control, and our transport infrastructure can quickly progress without the interminable interference of Brussels. Therefore, our uncertainty has a short-term safety net which negates the scaremonger argument that the short-term will be turbulent; but does have some valuable upsides. The UK successfully recovered from 2 World wars without help, so a relatively simple exit from the EU should be a breeze. I would suggest that most people will not feel any immediate difference.

There is one element of the uncertainty that I have yet to see any comment. What is likely to happen to the EU without the UK as a member. There are a number of relevant uncertainties. Other net contributor countries could see the UK exit as a sign that the current EU model is really broke, and thus elect to do the same – especially as the EU will have to increase contributions of other member States to fill the vacuum left by the considerable contribution by the UK. The right-wing elements of France could rise and depose the French Government. France has much to lose by a UK exit. Where were these concerns in the deal negotiations – or wasn’t the threat of the UK leaving a serious consideration?

If Germany can find the means to support the Eurozone then it will more rapidly consolidate its hold over the Euro countries – and the people of the UK will be thankful that they departed. Of course we still have the Greek issue which will most certainly be a thorn in the side of Germany – will this lead to conflict within the Eurozone? We have seen that the poor response by Germany to the economic situation in the Eurozone when they refused quantitative easing some 4 years ago. The too little – too late plan by the ECB yesterday was greeted with derision by the markets.

The UK has a proud history as the banking centre of the world boasting excellence in financial capability (even when Labour are in Government), and the ability of the UK to rise from both the irresponsible spending of the last Labour Government and the financial crisis lays testimony to the intelligent and speedy response to such events. Should this be sacrificed to the incapable Eurozone mandarins who clearly do not have the experience, or the global market understanding?

In summary BREXIT will yield uncertainty whichever way it goes. Therefore, the issue is whether or not the people of the UK want control over such uncertainty, or do they want to surrender decisions to Brussels – unaccountable to the people of the UK, and not so interested in preserving the British way of life.

 

 

The Foundation Stones of the BREXIT issue

img1The Foundation Stones of the BREXIT issue

Before embarking in any detail blogs regarding the political and economic merits relating to BREXIT I would like to consider the environment leading to this referendum.

I think what is happening in the USA at this time allows us to sit back and observe what happens when the people feel that politics is stagnant, and thus irrelevant. If we use a simile of the US Congress and the House of Representatives as two conflicting factions of Europe, and President Obama as the people wanting to move forward in their lives but stifled by the conflict, then we can understand why Donald Trump is doing so well. My view is that the European Commission has lost sight of the problems in Europe being more interested in the degree of curvature of a banana than the real problems of economic inequality, global instability, and now the refugee crisis. Indeed, the refugee crisis demonstrates the difference between out-of-touch grandstanding vision, and reality.

In the late 1970’s, my mentor, Walter Wriston, and probably the most influential banker in the world at the time responded to my question regarding the political influences on deregulation of financial services and global capital flows (Big Bang in 1986) by stating that politicians come and go. Business drives economic prosperity, and the banks are the enduring stable force to ensure the required liquidity to facilitate global trade. I have never forgotten his response, essentially because it has shown over the years to be the case. I was also taught by him that there are two factors in global business decision making; inevitability, and consequence. To him (in 1979) deregulation of financial services was inevitable, with timing being the only consequence of interference from politicians.

I had the opportunity to attend a presentation to senior bankers by Jacques Delors when President of the European Commission. He was expounding ever closer European union in his attempt to convince senior bankers of the merits of forcing European federalism upon the UK. I suggested to him that businessmen, rather than politicians, would drive any unity in Europe, if deemed beneficial, while the politicians were still talking about it. Even his (French) economic adviser could not dispute the reality of my comment. It was interesting last week to see how few of the CEO’s of major corporates in the UK were prepared to openly endorse the views of David Cameron regarding BREXIT.

My opinion from many years of experience throughout the world is that the EU model is broke. The Cameron negotiations demonstrated that there is no appetite from vested interest parties to fix it other than tinker at the edges. In recent years the faults in the USA federal model have clearly demonstrated how damaging such models can be to the people when vested political interests can completely stifle the function of Government, and thus damage the lives of the people it is there to protect. Therefore, the only other route is to let the EU empire fall, and then remodel into something more worthy of consideration by the people. Does the UK want to be part of this (inevitable?) decline when it has other options? I think that a risk analysis would err on the side of caution, i.e. stand outside as a spectator and watch. And let us not forget that the Greek crisis revealed another truth – that the big decisions were made in Berlin – not Brussels.

Business will always find a way to trade, and thus survive. Thus BREXIT is only about the people of the UK, and their influence over decisions regarding their own future.

To Be, or Not to Be (in the EU)? That is the question

img1To Be, or Not to Be (in the EU)? That is the question

At last we have a definitive timeline to determine our future. Do we want to be ruled by a Germanic invasion of Europe for the third attempt in a hundred years, or do we rely on our historic past and save Europe from a model that was broke the day the Euro was introduced?

Having not yet analysed in full the proposed deal agreed by David Cameron last week, I can only comment on what he says he has achieved, having twice listened to his claims. The first alarm bell was the excessive use of Aristotle pathos during the Andrew Marr interview Sunday morning. Invariably a sign of a weak argument.

Let us quickly deal with benefits as this is only window dressing at just £30m or thereabouts per year. The UK net membership contribution is some five times this amount per week – some £2 per head of every man, woman and child in the UK. And what about the money sent to support families in places such as Africa, India and Pakistan every year. Add to this people from places such as Switzerland who come here to retire to take advantage of our NHS, our subsidised travel costs for pensioners, and our substantially lower cost of living – what have they contributed to our country? I would argue that child credits should be paid to every worker at the same level assuming they are paying UK taxes. The fact that their children are in another country should be seen as a saving as they receive their education and healthcare outside of our system. If these children lived in the UK then they would not only receive child credit but also incur costs for education and healthcare. This would amount to considerably more Government support than £21 per week. People who come here only to sponge on our benefits system, or even our NHS, should most certainly be refused entry.

His scaremongering essentially revolves around trade and defence. I found it bizarre that he puts our membership of the EU on the same context as our membership to the UN, NATO, G7, etc. This is comparing apples and bananas. We sit at the top table at the UN, NATO, G7, etc whereas we are a secondary player in the EU, tolerated primarily because of our historic influence in the world, and our substantial contribution in membership fees (without which the EU is likely to collapse). Last week the German Foreign Minister, speaking on Radio 4, clearly stated that the UK leaving will substantially reduce the influence of the EU in the world. He recognised that the UK is a primary driver in global influence of the EU, and we would most certainly retain our influence. We are the fifth largest economy in the world, and we benefit from an historic trans-global approach to the world. I find the EU extremely introspective. Ask someone in China where is Brussels, and then where is London – the easiest example to support my argument.

As for trade, we constantly hear from politicians wishing to stay within the EU that the EU is our largest trading partner, and indeed some claim that the EU is the largest trading bloc in the world. Rubbish and rubbish. We import some £300 billion per annum in goods and services from the EU – about two months worth of our overall trade. We sell considerably less to the EU. Our largest investment market is the USA, and we would be far better served in exports by nurturing our Commonwealth nations who constitute some 1.85 billion people as against some 340 million people in the EU. Politicians in the EU would impose trade barriers against the UK at their peril – of their own corporate leaders. Ask the USA, whose corporates are still trying to recover from the ill-considered trade barriers set by the USA in the 1970’s and 1980’s.

Our finance sector is another scaremonger tactic. I found the statement, purportedly from HSBC, that should the UK leave the EU then they will have to establish investment banking activities in Paris as ludicrous as moving their headquarters back to Hong Kong. They might decide, as is normal practice in banking, to establish themselves within a market – but Paris? I also do not expect Deutschebank to reduce its presence in the City of London any time soon as the EU will need the capital raising capability of the City.

What Cameron did not achieve is any real movement in our sovereignty, as it is referred to, and the primary reason declared for Boris Johnson electing for the out of Europe campaign. Our legal system is considered as one of the best in the world, especially for trade and finance – and thus the dominance of the City of London. Its strength is that it grew with the market, and continues to rapidly evolve as is required to meet new challenges – and it is trusted. The continuing imposition of EU law can only impede our ability to retain this dominant position, and thus the dominance of the City – as has been attempted twice during my life as a banker. Germany has never been trans-global in its finance policy, and is invariably behind the curve on matters economic. For example, they dithered for some 3 years about quantitative easing meaning everyone within the Euro suffered.

The only applause to Cameron is for forcing the EU to agree a new deal in time for the referendum to occur whilst Angela Merkel is still in her final weeks of office. Politically well played – that is until Merkel’s response to the refugee crisis went sour. Had Merkel not lost her support within Germany she would have done whatever necessary to avoid the EU collapsing on her watch. There are now whispers that two other net contributor countries are considering following our lead out of the EU. Will the unelected grey suits in Brussels get the message? Today my vote is for Rule Britannia.

More to follow as the detail evolves.

German Domination of Europe – When will they learn that there is a better way

German Domination of Europe – When will they learn that there is a better way

The poignant D Day events of last Friday reminded me that this year is also the centenary since the start of the First World War, or the Great War as it is more commonly known. Although I have many good friends in Germany, and hold absolutely no prejudice against the German people of today, it occurred to me that, for 100 years, the elite of Germany have attempted to mould Europe in their own image, initially through two catastrophic world wars, and currently through self-serving political and economic influence within the European Union.

It cannot be disputed that the engine-room behind the introduction of the Euro was Germany, and in spite of the so-called stringent rules of entry into the Euro, Germany allowed such rules to be significantly relaxed to allow countries to participate where compliance with the entry rules would result in such countries otherwise unlikely to qualify for entry for years to come. It is no secret that Germany has significantly prospered under the Euro – at the expense of the other member nations. These nations now seek financial support, and the German Government have a hard time selling these bailouts to the already over-taxed German people, albeit a problem created by Germany in its self-serving quest for the domination of Europe.

Sometimes I reflect that Germany, having left Europe devastated in 1945, forgets that much of their subsequent prosperity was built on their substantial participation in the Marshall Plan (whereas the United Kingdom, as victor, did not qualify for any such support and has been required the swallow the cost of the wars, and rebuild using its own resources). As with the so-called super-model of Japanese prosperity in the 1980’s I do not subscribe to the German economic model of today, and certainly would strongly oppose this model being at the centre of the European Union. The current German economic model has a fundamental incestuous instability at its core, just like the proverbial pack of cards, and just as with Japan before its economy collapsed.

And this week the German elite are flexing their self-serving muscle again by instruction Angela Merkel to support a tame federalist like Jean-Claude Juncker as European Commission president, a move that is counter to the fundamental reforms needed by all donor nations – except Germany.

I have just noticed a news headline  ‘German chancellor Angela Merkel has cautioned David Cameron not to use threats of a UK exit from the EU in his campaign to block a federalist candidate from taking the helm of the European Commission.’

Without these reforms my view is that the UK should not threaten to leave the EU, but make it very clear to Germany through the promised referendum that the people of the UK do not see their future dominated by the German vision of Europe. Maybe then the UK will have to pick up the pieces of an imploded Europe for the third time.

A New Multilateralism – Realisable or Wishful Thinking?

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A New Multilateralism – Realisable or Wishful Thinking?

I listened to the Richard Dimbleby Lecture on Monday evening with expectation of some new thinking on the way forward. The lecture was called ‘A New Multilateralism for the 21st Century’ and was presented by Christine Lagarde, incumbent MD of the IMF. My initial reaction was that it presented some interesting ideas, but I couldn’t quite put my finger on the relevance of these ideas. So, on Tuesday, I printed off the transcript of her speech from the IMF website. Having now studied this speech in some detail I find it endorses my view that the multilateral institutions of which she leads the IMF are essentially out of touch with the real problems that we face in the 21st century.

Back in the 1970’s, during the oil boom, individuals in the Middle East were accumulating vast amounts of US Dollars in cash because Western banks did not want it. Indeed I remember Swiss banks charging up to 3% p.a. to take these deposits. I actually walked into a room in a palace and saw a pile of US Dollars, and was told that this pile amounted to USD 1 billion. In an attempt to give some visual impression of this pile I am reliably informed that a standard 40ft sea container will hold USD 1 billion in fresh print USD 100 denomination bills. This money was not participating in any economic benefit whatsoever, and there was no possibility that the owner could reasonably consume these funds in their lifetime. Yet just one mile away there were ordinary working people struggling to find the money for their next meal. It occurred to me that if these funds were deposited with SAMA, and used productively producing even a nominal return, such return could be used productively to provide food for these people without any degradation to the original money. Yet the owner had no interest in such a proposition, and was content to accumulate yet more piles to look at.

Unfortunately this sorry tale has since increased in propensity, and as we saw a few weeks ago, Oxfam calculated that the 85 richest people have the same wealth as the bottom half of the World’s population. Christine Lagarde added that the richest 1% in the USA captured 95% of all income gains since 2009, yet the number of people in the USA needing food parcels to survive is now reaching pandemic proportions. She further states that in India the net worth of the billionaire community increased 12 fold in the past 15 years, enough to eliminate the poverty of that country twice over. So why has she not rationalised this into the real threat to the World Order in the 21st century?

We have seen so many billionaires created out of emerging economies such as the former Soviet Union, China, and India, sapping vast amounts of sovereign assets. The rapid nature of such wealth creation should arouse suspicion. However the point that I make is that somehow a few own wealth beyond any reasonable expectation of spending throughout their life. Many will say that they invest much of their wealth, but this only increases their existing wealth. Having met a number of these oligarchs their primary objective is to continue to increase their wealth, usually at the expense of others.

What about if each billionaire set aside USD 1 billion for investment and applied just the income to relieving poverty.

In 2013 an investment return of 15%+ was easily achievable. This would provide in excess of USD 150 million from each billion invested. The billionaire has not lost their capital, but much could be achieved with the income stream. Of course a few of these billionaires are already philanthropic and names like Bill Gates easily come to mind, and who clearly understands that he does not need such vast wealth, so uses his business judgement to make every dollar count in his selected beneficial projects.

Having brushed along with the World Bank, the IMF, and the UN for over 30 years I would suggest that they are political institutions populated by political appointees and academics who have no idea about the real world. I have witnessed a number of World Bank projects which did no more for the recipient country than to provide work for a donor country corporate, create an inappropriate monster that, within 5 years, was derelict leaving the recipient with sovereign debt but with no value to show for it. I have also seen appropriate solutions costing a fraction of the price of the expensive inappropriate concrete alternative discarded because the amount of the appropriate solution did not warrant World Bank intervention. It is interesting that Christine Lagarde acknowledges that it was the fast response of the G20 that stopped the world descending into meltdown 5 years ago rather than the institutions such as the World Bank and IMF founded to deal with such events. I think that this is a good template to use in stating that the current multilateral institutions are not good at delivering effectively solutions.

Although I am clearly in support of the outcome of Bretton Woods, we should also remember that not enough people there were visionary enough to accept all of the ideas of Keynes, and which were subsequently quickly adopted as catastrophe loomed, e.g. removal of the gold standard. Other than those wearing rose tinted spectacles no-one would suggest that the institutions that emerged remotely fulfil their ambitious mandates. I have already mentioned the lack of effectiveness of the World Bank and the IMF, and the UN is little more than a toothless talking shop today – Bosnia being a classic failure.

Christine Legrande suggests that the multilateral outcome of Bretton Woods produced ‘unprecedented economic and financial stability …. Disease eradication, conflict diminished, child mortality reduced, life expectancy increased, and hundreds of millions lifted out of poverty’.

Do we not count Korea, Vietnam, Congo, Sudan, Yugoslavia, Israel, Egypt, Lebanon, Iraq, Afghanistan, Syria …….etc as conflicts? All consumed the lives of many thousands of people including Western soldiers, left chaos and destruction in their wake, and they are still very much in our minds today. When was the last time that the USA was conclusively successful in any serious military conflict? Therefore Europe and the USA may have seen peace and prosperity since Bretton Woods but how many thousands of American and European soldiers and civilians have died in the name of preserving this peace?

To suggest that Europe has been conflict free is also short-sighted. In the past 6 years Europe has been involved in an economic war. Not too many people killed with bullets and bombs, but many have become disenfranchised, lost everything, displaced, and descended into poverty. Is this not symptomatic of a conventional war? When the vision of a European Union was first put to the people the rhetoric promised peace and prosperity for all citizens. I accept that the banking crisis made a bad situation worse, but how many European politicians in France, Greece, Spain, Italy, Ireland and the UK breathed a sigh of relief that they could hide their failure to create a credible EU behind the banking crisis?

Let us examine the two reference dates that she used, i.e. 1914 and 1944. She suggests that prior to 1914 the birth of the modern industrial society brought about massive dislocation between protectionist nations, and inequality between the ‘haves’ and ‘have-nots’. Take away the country boundaries, essentially the impact of the digital age, and what is different today?

So where do I see the powder kegs of the 21st Century? Perhaps controversially I do not see the North-South Conflict as a major threat. An implosion within the Islamic community is more likely with primarily Sunni against Shi’a. If you think about it, most of the current conflicts involve the Islamic nations, and are driven by extreme religious division. The intervention by the West in some of these conflicts in the name of protecting the West has no logical outcome. These people have no regard for Western democratic values, or of secular tolerance.

At one end of the spectrum we have the blatant inequality of the distribution of wealth. We are experiencing 2 critical phenomena, both of which are counterproductive to a peaceful, all inclusive world. We have individuals and corporates accumulating vast wealth to the point where the resulting power exceeds that of some major nations. Albeit a few of these have taken a philanthropic stance we should note that such philanthropists are mostly from Western countries. Many of the new billionaires are from emerging or developing economies where democracy does not really mean very much, and a market society is the norm, i.e. everything has a price, even social and civic values. All we need is a charismatic megalomaniac, as depicted by the Carver character in the James Bond movie, ‘Tomorrow Never Dies’, to cause chaos and suffering for many throughout the world. Unfortunately Western civilisation has degraded over the past couple of decades towards a market society thus adding a significant sting to the ever increasing differential between the ‘haves’ and ‘have nots’. For example diminish the rights of the ‘have nots’ to education, justice, political influence, and healthcare because they have no money and you have a significant pool of would-be terrorists for our megalomaniac to exploit because they have nothing else, and nothing to lose.

Then we have corporate greed. So what can the people see? During the past 6 years the people have become very aware that their corporate executives have suppressed the salaries of the workers (the value drivers) to below inflation levels whilst increasing their own already attractive remuneration by some 40% average, and which has been allowed by investors because dividends have been maintained to these investors. So the people at the top have handsomely profited whilst real income to the workers has diminished. So much for sharing the pain. In addition these executives are immune to any accountability should they fail. Have any of the avaricious people who profited from the banking crisis been prosecuted, or had their ill-gotten gains repossessed? The banks themselves are being penalised by regulators who should have been more alert to the problems in the first place, and some of these funds do go to Government coffers. But these large fines diminish the capital of the banks, and thus inhibit their capability to finance the very enterprise we need to re-energise the employment market, i.e. they inadvertently stifle recovery, increasing disenfranchised young entrepreneurs.

At a micro scale we can look at the fate of RBS under Fred Goodwin. He was a megalomaniac trying to build the biggest bank in the world. Everyone I spoke to in the City of London at the time leading up to the acquisition of ABN Amro agreed that the terms of that deal, at twice the price that anyone else was prepared to consider, was insane. Yet no-one stepped in to stop him. How much pain, and destroyed lives has RBS caused to many thousands of people. But Fred Goodwin is made for life financially; so well in fact that sticks and stones may break his bones, but he will not lose a night’s sleep over the names that he is called.

At the other end of the spectrum we have the demographic issue. We have already seen a growing view amongst the young generation of workers that their taxes should not be funding the pensions and healthcare of the graying generation. The younger generation see that they have to pay taxes to support the pensions of an ever increasing graying population, and being told that they also have to contribute a significant proportion of their disposable income to their own pension provisions as State pensions will slowly but surely phase out by the time they retire. All of this at a time when real incomes are diminishing in real purchase power terms. Rightly the graying population state that they have paid their taxes, in the form of a special National Insurance tax specifically for the right to a State pension and healthcare, throughout their working lives and thus their State pension is rightfully theirs. The problem is that successive Governments have not ring-fenced these contributions over the years, preferring to spend it in the hope that future generations with continue to fund the requirement; a little like a Ponzi scheme. Add to this the migration of young labour where they have no historic interest in the local graying population, and expect to be able to send money home to support their own aging family, and we have potential serious discourse and unrest. Bring both of the above phenomena together and we have a powder keg just looking for a fuse.

So from where can our fuse emerge? Our fuse already exists in the form of the global internet, social networking, and twitter. Christine Lagarde is right in that the Arab Spring was fuelled by the galvanising of the people through media such as Twitter and social media. But likewise these facilities can also be used to fuel discontent and confusion. Great philosophers such as Aristotle, Kent and Hume have all commented on the importance of gossip to the masses, and our lesser quality media thrives on this obsession. So the touch paper is a disenfranchised charismatic individual or group exploiting the power of gossip through Twitter and social networks. We have seen the impact of disenfranchised ‘have nots’ in riots in many cities over recent years. It is when all of these groups can be galvanised together that we need to be concerned.

Are we at a collision point between socialism and capitalism, and is the global energy business driving this collision?

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Are we at a collision point between socialism and capitalism, and is the global energy business driving this collision?

Two events have occurred over the past few weeks which appear to encapsulate an observation that I have been considering for some time, i.e. whether or not capitalism has moved to the extremes of greed, and socialism has no answer to counterbalance this behaviour. Politicians and the media would have you believe that banks are the ultimate in capitalist greed. Whereas I have serious reservations about the activities in certain banks, I feel that the major energy companies from oil & gas production through to energy generation consider their power above that of politicians at the highest level, and that of the major trade unions. If my observation bears credible scrutiny then who are the winners, and who are the losers.

The two events that I would like to use in this debate, because they encapsulate the major drivers in this debate, albeit not the only events of concern, are the Grangemouth Refinery & Petrochemical plant debacle in Scotland, and the UK Parliamentary Committee meeting with the major UK energy companies this past week.

Perhaps a little background on the energy footprint in the UK will assist readers not familiar with the situation here.

According to Ofgen, the energy regulator, the UK has installed capacity for electricity of some 73GW of conventional generation and 9GW of renewable with ACS peak demand expectations around 60GW. Uncertainty around government policy (UK and EU) and future prices continues to limit investment in conventional generation and no new plant is expected before 2016. In the UK it is  estimate that around 1GW of new gas plant will come online before the end of the decade and the installed capacity of wind power will possibly more than double over the same period albeit that this must surely now be in question. In any event, given the variability of wind speeds, they estimate that only 17% of this capacity can be counted as firm (i.e. always available) for security of supply purposes by 2018/19.

More than 2GW of LCPD opted-in plant have also closed or converted to biomass since October 2012, resulting in less pollutant plant but with significantly reduced capacity. Around 0.5GW of nuclear capacity is reaching the end of its technical life and is expected to close by 2014/15, though extensions now have to be considered. Around 2GW of CCGT plant should be retired by 2018/19 for the same reasons, but will this happen?

As installed capacity falls in the next few years, all else being equal, prices can be expected to rise and it is possible that this will lead plant, especially coal fired, that is currently mothballed to come back online to keep prices affordable.

According to National Grid, the expected drop in peak demand is mostly due to increased energy efficiency in the domestic sector and increased Demand-Side Response (DSR) insulation of buildings, etc. I consider this to be a convenient explanation politically where the truth may be more damning.

For completeness the interconnection capacity between the UK and mainland Europe and Ireland is currently 3.8GW. Assumptions about the likely direction and size of interconnector flows therefore have a significant impact on the calculation of the risks to the UK security of supply.

Ofgen expect that, in a situation of tight margins (please), ahead of mitigation actions being implemented, prices would rise resulting in higher interconnector flows into GB. However, GB is not the only European country expecting de-rated margins to fall in the next six winters. France, Ireland, Germany and Belgium are also facing security of supply challenges, and have very similar patterns of demand and supply availability.

As for gas, DECC reports suggest that gas consumption reached a record high in 2004 of 1,125 TWh. Since then, consumption has seen an overall decline, and in 2012 total gas consumption was 845.6 TWh, around 25% below its 2004 peak. These longer term trends are driven by commodity prices, energy efficiency and, for domestic use in particular, temperature. However domestic demand in 2012 was high, up almost 16 per cent on 2011, reflecting the colder, protracted winter, but gas demand for electricity generation fell by almost a third to 214 TWh largely as a result of coal replacing gas use due to high gas prices.

UK gas production peaked in 2000 and has since been declining. With declining production the UK has become increasingly reliant on gas imports to meet demand. Since 2000 net imports have steadily increased year on year, with the exception of 2011 which saw a 3 per cent decrease on the previous year’s level. The recent fall in imports can be attributed to the reduced gas demand from electricity generators, being replaced by coal.

Imports of Liquefied Natural Gas (LNG) through the two terminals at Milford Haven remain substantial, but their shares of total imports have dropped from 46% in 2011 to 27% in 2012. Demand for LNG on the global market remains strong but the UK has a diverse pipeline infrastructure (from Norway, the Netherland and Belgium) and the proportion delivered through each route will depend on global market conditions.

It is probably also worth noting that Europe, as a whole, has over capacity in crude oil refineries. The UK has 7 refineries. According to HIS Purvin & Getz Research Group the UK imports 47% of its diesel fuel, and 50% of its aviation fuel. However the UK has a 20% surplus of petrol which it exports.

Now let us look at the politics. In March 2007, the European Council agreed to a common strategy for energy security and tackling climate change. An element of this was establishing a target of 20% of the EU’s energy to come from renewable sources. In 2009 a new Renewable Energy Directive was implemented on this basis and resulted in agreement of country “shares” of this target. For the UK, by 2020, 15% of final energy consumption – calculated on a net calorific basis, and with a cap on fuel used for air transport – should be accounted for by energy from renewable sources. There was much grandstanding by the politicians at the time, especially directed towards the USA, indicating that Europe was a good citizen of the world, and would be a leader in the climate change revolution, setting targets that many reasonably minded people thought optimistic. However there followed much uncertainty surrounding the implementation of this and and other market reforms thus having as much impact on plant investment and retirement decisions as the expectations of the impact of evolving energy prices. This uncertainty means energy companies suffer much frustration of their long-term strategy through muddled energy policy, or indeed the lack of any definitive energy policy by various governments.

On the other hand the USA refused to sign up to Kyoto and, other than a little dancing at the edges, ignored the grandstanding of Europe and other countries and allowed the market to determine the future. The USA gets many things wrong, especially much of its foreign policy, but when it comes to protecting its own market it invariably gets it right. Developing new technologies and techniques such as fracking, the USA is now energy independent, energy prices are around 20% less than Europe, and they can export enough cheap fuel to disturb the markets in Europe.

In the UK the previous Labour government blindly signed up to all of the EU energy initiatives, could not fund these initiatives through already excessive taxation, so the current leader of the Labour Party, then Energy Secretary, came up with stealth taxes in the form of environmental and social levies to be collected by the energy companies from the domestic consumer, currently £117 per household, to fund these initiatives making a number of people in the renewable energy market very rich without delivering any tangible value today, or tomorrow. We now have a coalition government where the predominant Conservative Party want to repeal these stealth taxes and no longer subsidise renewable initiatives from public money but find themselves frustrated by the minority Liberal Democratic Party who see some value (to them) of continuing to wave the environmental flag. In addition the Labour Party, who created these woes for the consumer now wants to go to the dark ages of socialism and freeze energy prices. Maybe a good soundbite for the uninformed, but ridiculous in the world of global energy markets.

So let us review the Grangemouth debacle. As I said refining capacity in Europe exceed demand. Furthermore cheaper energy supplies are being imported from the USA. The management of Grangemouth, owned by INEOS, (the refinery can process some 210,000 barrels of oil per day) claimed that they are losing some USD 8 million per month fuelled partly by US imports where USA refineries pay some USD 15 per barrel less than UK refineries. The management, knowing that they need to invest some £300 million in the plant, decided that they could no longer afford to run the plant with the then operating costs. They put a package of pay and pension reforms to the 800 or so workers. In essence the UNITE union, one of the largest remaining trade unions in the UK (Margaret Thatcher saw off most of the trade union power in the 1980’s) applied its usual socialist dinosaur approach threatening strike action. The refinery management refused to accept revised terms from, or to spend 3 months negotiating with UNITE (giving the Government 3 months to find an alternative buyer) so INEOS, who had already safely closed the plant facing the threat of a strike then announced that they were going to close it. Both the UK Prime Minister, David Cameron, and First Minister of Scotland, Alex Salmon, quickly came into play to rescue this situation. We can only speculate on what happened behind closed doors but the UNITE union completely caved in and announced that they would recommend acceptance of the INEOS terms for its members, and it was clear that INEOS had been offered some government deal towards the required investment in the plant.

What we saw during the Grangemouth debacle is an example of how commercial reality surpasses political and trade union power. It was suggested that the loss of this facility would have been devastating for the Scottish economy, and they complain about banks being too big to fail.

Then we look at the Parliamentary Select Committee interrogation of the ‘big 6’ energy companies bosses, having raised energy tariffs by some 10% average to domestic consumers against wholesale price increases of just some 1.8%. The only reasonable summary of this session is too much grandstanding by the political panel, and total indifference by the energy bosses suggesting that the high price of energy was down to the stealth taxes mentioned above. I understand that the UK domestic consumers pay the highest energy costs in the European Union. One interesting analysis on a news broadcast was that British Gas had increased their profit from £45 per customer just 5 years ago to £95 per customer today. Apparently they need these profits to satisfy investment returns for their shareholders.

So who are the winners, and who are the losers.

Winners

  • The capitalist (foreign) owners of Grangemouth
  • The capitalist owners of the major energy companies
  • The capitalist owners of the renewable energy companies who will be long gone with their accumulated wealth before the reality of this folly is known
  • It will be interesting to know who claims the victory of Grangemouth, especially with the up-coming Scottish Independence vote: David Cameron claiming a victory for a United Kingdom, or Alex Salmon who wants Scottish Independence.
  • The environmental lobby thanks to the short-sighted view of the Liberal Democrat coalition leader

Losers

  • The domestic consumer who has to bear the cost of the bailout of Grangemouth because of a dinosaur socialist union leader.
  • The domestic consumer who has to pay the cost of the increased energy tariffs, which could be indirectly attributed to the lack of energy policy by governments
  • The domestic consumer who has to bear the socialist imposed stealth taxes for renewable energy policies that are far too optimistic, expensive, and will prove to be a waste of resources. It should be noted that the socialist principal of payment according to what you earn was ignored thus betraying their core socialist vote.
  • The domestic consumer who has to pay for price increases to corporate energy users as they will pass their increases on to the consumer in the price of their goods/services.
  • The domestic consumer who will have to bear the cost of frantic, last minute efforts to maintain supply because of the lack of any firm energy policy.
  • It is claimed that reduction in demand is mostly due to the energy efficiency in the domestic consumer market. To some extent new technology and insulation will have an impact, but I fear that cost means that many domestic consumers cannot afford to heat their homes, and thus go cold. Thus the losers, again, are low income and pensioner domestic consumers – a direct reflection of capitalist greed.

I think that it was Socrates who observed that intelligent people discussed ideas, moderately intelligent people discussed events, and the vast majority, the uninformed, share gossip. Our largest selling newspapers, and to a degree some news channels, and political hype thrive on sensationalised gossip including important issues of energy policy – apocalyptic climate change gossip spread by brainwashed environmental campaigners sell more copies and buy more uninformed votes than mundane realities. There is a flaw in democracy if the noisy uninformed minority can unreasonably influence the uninformed, the impact of which is a substantial negative impact to the silent majority. It is an unquestionable fact that people united can make change happen. Therefore the people need to be properly and honestly informed.

Ironically all of this dithering means that the future is a return to non-other than the fuel which started the industrial revolution –Coal – because it is plentiful, and it is cheap, – look at Germany’s preferred fuel.

I would be very interested to hear how the above events in the UK would have played out in other countries, not least Germany and France.

References:

Ofgen Electricity Capacity Assessment Report 2013

Various DECC reports

HIS Purvin & Getz Research Group

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FUTURE ENERGY GENERATION – Why are our major oil & gas companies, apparently under threat by the environmental lobby, not diversifying into energy generation as part of their future strategy?

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FUTURE ENERGY GENERATION – Why are our major oil & gas companies, apparently under threat by the environmental lobby, not diversifying into energy generation as part of their future strategy?

Having watched with interest over the past weeks discussions relating to the strategic development of future energy generation I noted one discussion that questioned if the major oil & gas companies today would be the energy companies of tomorrow. This question did not arouse much discussion, but then I thought that if we beg the question of why these companies have not already diversified into the energy generators of today we might have a more interesting debate. After all they have both the Balance Sheets and the income generation to engage in energy generation, and they have the environmental lobby trying to drive them out of the business of fossil fuel production. So why have they not, at least, diversified their activities, but continue to pursue ever more costly development of fossil fuel production?

Looking at the business model of the major oil & gas companies such as BP, Exxon, Shell, etc. they all engage in exploration, development, production, refining, wholesale and retail distribution of fossil-based products. Thus their business model fully accommodates the substitution of power generation (even nuclear as a means to offset the fossil fuel debate) for refining which then provides for both wholesale and retail distribution of electricity. The companies have both the Balance Sheets and income profile (cash flow) to support the development of new primary generation capacity using the new generation of nuclear reactors, namely thorium reactors, as a logical diversification away from fossil fuels.

Before anyone raises the fact that these companies, in various degrees, have invested into renewable energy projects I would suggest that an intelligent review of their capital commitment to such projects is less than their annual promotional costs, and would further suggest that these projects are undertaken as part of their promotional costs, taking full advantage of all available government grants and subsidies, in order to create the illusion that they care about the impacts they may, or may not, be contributing to climate change. Of course we must remember that such impacts are not as yet reasonably proven, and are essentially propaganda by bodies fronted by the UN IPCC committee.

So why do these companies not take the environmental lobby seriously? Why do they continue with the ever increasing cost of developing ever more expensive fossil fuel recovery, yet do not spread their risk into other sources of energy?

Could it be that the latest IPCC climate change report provides a significant clue as to why these companies do not see the need to contemplate energy generation as part of their business strategy. Indeed could the advent of successful fracking for both oil and gas provide an even stronger foundation to the forward strategies of these companies in that the net production costs of recovering fossil fuels is getting cheaper? And the quantum of fossil fuel recoverable reserves has never been in doubt other than by the doomsayer environmentalist activists.

Why do these major oil & gas companies not see the need to diversify into energy generation even though such activity fits within their existing business model? I would suggest that they understand the business of energy, and their fundamental involvement in secure supply of fuel for the foreseeable future – much to the chagrin of the environmental lobby. These companies know that they will maintain their position as the primary source of fuels for generations to come, regardless. They are the only consistent source of fuels for primary energy generation, especially now that the nuclear program has been stalled by the unrealistic (but understandable) reaction to events such as the Fukushima incident. They are likely to have to find ways of reducing the hostile emissions of fossil fuels but, as with the creation of solutions such as the syntroleum process to remove the sulphur content from natural gas thus providing clean feedstock diesel fuel, they will find cost-effective solutions to other emission issues.

I share their confidence – that is until either/or thorium reactors and fusion reactors provide a significant commercial alternative. Other initiatives such as hydrogen fuel cells are unlikely to be cost effective enough to replace internal combustion engines. Indeed there are cheaper and much cleaner fuel alternatives that can be used in the existing internal combustion engine – if the powerful oil & gas interests will let such fuel alternatives see the light of day, even though they are the logical producer and distributor of these alternate fuels.

The major oil & gas companies are formidable political lobbyists. They will ensure that the revelations of uncertainty in the latest IPCC climate change report will set back the climate change/fossil fuel debate by decades, and I expect to see political support of the environmental lobby begin to cool. Indeed politicians in need of votes are likely to slowly but surely defuse the debate by asserting the current lack of reasonable evidence. Germany has irrationally indicated its lack of support for nuclear, not by reference to renewable alternatives, but to a return to coal of which they have significant reserves. Thus I propose that fossil fuels are the preferred reliable source of primary energy generation for the foreseeable future, and as such the major oil & gas majors are in no hurry to diversify.

IPCC Fifth Assessment Report on Climate Change 2013: Does the lack of media interest indicate that this group have cried ‘wolf’ once too often?

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  IPCC Fifth Assessment Report on Climate Change 2013: Does the lack of media interest indicate that this group have cried ‘wolf’ once too often?

The 5th Assessment Report on Climate Change was published last week, but did anyone notice? Where were the media? Scant reference in the visual and radio media, and very little in the printed press – the London Evening Standard, having the lead over the daily newspapers, had all of 2 column inches on page 4. Have these climate change disciples cried ‘wolf’ once too often, and no-one believes them anymore?

Intrigued by this lack of obvious interest, even by the serious news stations, I waded through the 36 page report summary, and the press release, over the weekend to see what it had to say – the full report is a real tome. The striking feature throughout this report is the obvious desperation to convince the reader that this time they have it right. They have better observation techniques, better data, blah, blah, blah. However, without boring the pants of one and all, the essence is that mankind is a major contributor to global warming (around 50% – compared with the 99%+ stated in 1999) with a 90% degree of confidence. It also indicates that some 9,000 scientists around the World agree with the findings of this report. So what does this really tell us?

Many moons ago in another life, when I started my training as a scientist at the Atomic Energy Research Establishment, we were given a number of books that we should treat as lifelong companions in our pursuit of truth. One of these was called ‘The Use and Abuse of Statistics’ and was intended as a constant reminder that the data must paint the picture, and not used or abused to create the picture that one would like the data to paint (e.g. in order to receive continued funding). I still have this somewhat battered book as I found it very useful when studying the data presented by the ultimate protagonists of such abuse – Politicians. Obviously this book defines how data can be presented to fit the required message, and the difference between relative levels of ‘confidence’ and ‘certainty’ as there is a big difference between confidence and certainty. You need to have a very clear idea of these classifications in order to make any sense of this IPCC report. I also know how frustrating it is when there is an unexplained hole in the data when you are under pressure to present your findings. Do you mention the hole, or assume it of little relevance and ignore it.

Let us consider a typical statement in this report: “The atmospheric concentrations of the greenhouse gases carbon dioxide (CO2), methane (CH4), and nitrous oxide (N2O) have all increased since 1750 due to human activity.” The first part of this statement is probably a true and accurate – even an objective statement. But then the integrity is shattered by the second part of the statement i.e. “due to human activity” which indicates a level of certainty which can only be interpreted as desperate arrogance – it needed a qualification such as ‘probably, primarily, likely’ to be acceptable without absolute proof to the contrary. The remainder of this paragraph does not support the indicated certainty.

Just as a comparison on a Universe basis (as in climate change) I asked an astrophysics friend who had worked on the Mars Voyager mission if they would have launched Voyager with only a 90% degree of confidence in their calculations that Voyager would reach Mars – absolutely not. They needed to be better than 99% degree of certainty subject only to cosmic collisions that could destroy Voyager.

Let me be clear in that I fully accept climate change. Indeed the climate is constantly changing, and we are familiar with the climate change over the past 10,000 years since the last ice-age since when we are told that sea levels have risen some 110m and thus cities that were once on dry land are now beneath the sea. We are also told that there is evidence that sea levels have been some 10m higher than they are today in past history so our climate is a continually evolving system. My reservations are to what extent mankind influences changes in climate versus natural change as the earth continues to evolve. Leaving mankind to one side for a moment we are told that changes in the activity of the sun will render earth uninhabitable by humans in some 140,000 years’ time in any event. If science revealed with substantial levels of certainty that the behaviour of mankind was impacting climate change by, say 30%, then I think that mankind needs to be creative and resolve this influence. What I do not accept is that the arrogance of mankind can suggest that the full force of mother nature is a known and fully understood process, and that man has the capacity to change it, even unwittingly – something akin to King Canute standing before a tsunami.

Why did this report need to state that some 9,000 scientists agree with the content of this report? Do we know how many scientists disagree with this report, or even if some 9,000 scientists is a representative group in the global scientific community. Do we remember that when Copernicus (1473 – 1543) developed his treatise on a heliocentric model of the universe with the sun at its centre he was so afraid to publish that the first copy was placed into his hands on his death bed. When Galileo (1564 – 1642) assumed the mantle on behalf of Copernicus, and added description of the orbits of other planets such as Venus and Neptune he was branded a heretic and committed to house arrest for the remaining 9 years of his life. In the 15th century Christopher Columbus found it difficult to find a crew for his historic voyage of discovery because the general belief was that the earth was flat and thus he would sail over the edge into iniquity. History shows that the view of mankind, based on lack of real knowledge over arrogance, can lead to serious misunderstandings. This is where I see the claims of mankind’s influence over climate change today.

What this IPCC report really indicates is that, since their first report in 1999, there has been a number of step changes in thinking and understanding of the complexity of the problem – but without enough understanding to define a universally accepted solution. This is progress, but the contra argument is that we are still in an embryonic stage at the front-end of the curve of discovery. But the frenzy caused from the imposition of such imperfect science has reaped havoc in energy policy throughout the World, and thus my reference to crying wolf.

Using the UN to put their weight behind emotive propaganda regarding climate change has provoked responses from the environmental lobby that has delayed political decisions regarding replacement of current energy generation stock. Surely the UN has enough problems dealing with the issues relating to the essence of its being. Furthermore the people are being taxed to fund clean energy policies for which, to date, there is no proven argument as to the urgency. Blue skies science has traditionally been funded by benefactors, philanthropists, etc and so should climate change science until such time as the evidence is irrefutable. Public funds should not be invested in such embryonic science or technology. I have absolutely no problem with development of new energy technologies as this would be against my fundamental scientist instinct. However, as shown by our wind power investment, there is no payback in any respect to the people whose taxes, in whatever form, are used to develop such technologies so they get a double whammy with also trying to manage their lives in this period of austerity.

As for the IPCC report predicting what will be in 100 years from now I can only comment that had we asked the most eminent progressive thinkers of their time 100 years ago (before World War I) what the World would look like today, how wrong would they have been? My concern, and should be the concern of every one of these 9,000 scientists, is what do we need to do today in whatever reliable form to ensure that we can provide the required energy capacity needed in 10 years’ time to safeguard the momentum of mankind. What we do not need is energy starvation with the ensuing likely chaos and anarchy – even from those banging the drum about clean energy today. And please let us stop kidding ourselves that wind and solar can play any primary part in such delivery.

The irony of energy policy delay in much needed high capacity base load energy generation (as I will argue in a blog already in progress) is that the beneficiaries of these delays will be none other than the fossil fuel production companies – home goal for the environmental lobby.

Perhaps a glowing example from history from which we should learn is the story of the Mayan civilisation from around 2000BC – AD250. The mathematical and astronomy skills of this ancient civilisation are well known, and form part of our calendar today. There are many theories as to how this highly advanced civilisation suddenly collapsed. Their scholars spent most of their time observing the universe, and even lived high in the trees or on platforms never really taking much notice of life on the ground. The popular view to their demise is that their population exceeded the carry capacity of their environment, exhausting agricultural capacity, over-hunting, and converting their forests into cropland thus reducing evapotranspiration and thus rainfall leading to a lack of water. Are we focussing on the wrong end of the universe? Should we take our heads out of the clouds and look to how we manage the fundamentals of life such as food, water, energy, etc. Certainly the research needs a watching brief on the impact of human activity but do we really need to continue with the massive costs of this climate change circus when there are more pressing matters right under our noses?

 

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NUCLEAR REACTORS – Are the new generation worthy of our trust?

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NUCLEAR REACTORS – Are the new generation worthy of our trust?

Why should people put their trust in nuclear energy production in light of recent accidents and the problems of dangerous, long half-life hazardous radio-isotopes that have to be stored in underground bunkers for many years? Having referred to ‘new generation reactors’ in my blog ‘ENERGY – What does the future hold?’ I have been challenged to explain my view that nuclear is the cleanest safe form of base load energy generation.

Firstly there are two basic forms of nuclear reactor – ‘fission’ and ‘fusion’.

Nuclear fission, generally known as a chain reaction, is a process in which neutrons released in fission from an unstable heavy isotope such as uranium causes additional fissions in at least one further nucleus. This nucleus in turn produces neutrons which then go on to cause further fissions. This process can be controlled (nuclear power) by absorbing some of the neutrons thus preventing them causing further fission, or uncontrolled (nuclear weapons). The nuclear chain reaction releases several million times more energy per reaction than any known chemical reaction. This is the process used in current nuclear reactors.

Nuclear fusion is a nuclear reaction in which two or more atomic nuclei are rammed together at a very high speed to form a new atomic nucleus. During this process, matter is not preserved because some of the mass of the fusing nuclei is converted to photons (enormous amounts of energy at incredibly high temperatures). The energy that the sun emits into space is produced by nuclear fusion reactions that happen in its core due to the collision of hydrogen nuclei forming helium nuclei. The problem to be overcome by the Ifer project is the containment of this vast energy to allow it to be harvested. I cannot comment further on this subject other that suggest a look at the Ted lecture by Taylor Wilson (link at end of blog).

The current types of nuclear fission reactors use specific fissile isotopes to make energy. The 3 most practical ones are:

  • Uranium-235, purified from mined uranium. Most nuclear power to date has been generated this way.
  • Plutonium-239, transmutated from Uranium-238, refined from mined uranium. Plutonium is also used for nuclear weapons.
  • Uranium-233, transmutated from Thorium-232, refined from mined thorium.

The new generation reactors are the generation III uranium-235 and plutonium-239 fuelled reactors which incorporate evolutionary improvements in design developed during the lifetime of the generation II reactor designs. These include improved fuel technology, superior thermal efficiency, longer life (60+ years), passive safety systems (they close down themselves, if necessary), and standardized design for reduced maintenance and capital costs. The first Generation III reactor built was at Kashiwazaki in 1996.

By way of example the contrast between the 1188 MWe Westinghouse reactor at Sizewell B in the UK (generation II) and the generation III AP1000 of similar-power illustrates the evolution from 1970-80 types. First, the AP1000 footprint is very much smaller – about one quarter the size, secondly the concrete and steel requirements are less by a factor of five, and thirdly it has modular construction. These modules comprise one third of all construction and can be built off site in parallel with the on-site construction.

However these reactors still produce long lasting, albeit less, hazardous radioactive waste.

The International Atomic Energy Agency claims that the world currently has 442 nuclear reactors. They generate 372 gigawatts of power, providing 14pc of global electricity. They say that nuclear output must double over the next twenty years just to keep pace with the rise of the China and India. If a string of countries cancel or cut back future reactors, let alone follow Germany’s Angela Merkel in shutting some down, they will most certainly shift the strain onto gas, oil, and coal. Since the West is also cutting solar and wind subsidies, we can hardly expect these industries to plug the gap – even in the unlikely event that they could.

What is more, nuclear power generation is under intense scrutiny due to the recent Japanese disaster (see my thoughts on this in my ‘ENERGY – What does the future hold?’ blog). Nuclear programs across the world are re-evaluating regarding their future power source with politicians hiding behind citing safety concerns. Solving the real and perceived dangers of nuclear power is critical to future investment. However perspective would argue that, setting aside what may emerge from the Fukushima disaster, (as yet none of some 15,000 deaths are linked to nuclear failure) there has never been a verified death from nuclear power in the West in half a century.

The exciting new development, however, is the Liquid Fluoride Thorium Reactors (LFTRs) – albeit work started in the 1960’s – 1970’s primary at the Oak Ridge National Lab’s (ORNL) in the USA, but abandoned because it does not produce weapons-grade plutonium. LFTRs have distinct safety, environmental, and economic advantages over uranium-based and solid-fuel nuclear power. It has a higher neutron yield than uranium, a better fission rating, longer fuel cycles, far safer, substantially lower construction costs, and does not require the extra cost of isotope separation. As a happy bonus, it can burn up plutonium and toxic waste from old reactors, reducing radio-toxicity, and acting as an eco-cleaner.

Over the past decade Oak Ridge National Lab’s (ORNL) LFTR research from the 1960s–1970s has been revived in various global programs. A private Japanese company is seeking funding for a LFTR called FUJI. Canada is researching a fast-breeder LFTR design in their current CANDU research. Thermal LFTRs are part of the generation IV reactor research in France. China announced a LFTR development program in February 2011. At the U.S. federal level, Senators Harry Reid and Orrin Hatch support providing $250 million in federal research funds to revive the ORNL research and draft specific resolutions. This has all passed unnoticed – except by a small of band of thorium enthusiasts – but it may mark the passage of strategic leadership in energy policy from a potentially inert and status-quo West to a rising technological power (China) willing to break the mould.

The greatest advantage of LFTRs is that there is very low chance of a catastrophic, explosive meltdown like Chernobyl, or a partial meltdown like Japan’s Fukushima-Daiichi or Three-mile Island in Pennsylvania. In the event of an earthquake or other disruptive event, a simple freeze drain plug would melt, allowing the fissile material to flow into a containment chamber where the system could be air-cooled. Electricity and active controls are not required for this process. LFTRs operate near atmospheric pressure with little possibility of a containment breech or explosion. By using air cooling, instead of pressurized water, hydrogen gas, which caused the explosions at the Fukushima-Daiichi site, cannot be produced. The liquid fuel allows for online removal of gaseous fission products, such as Xenon, for processing, thereby these decay products would not be spread in a disaster. Furthermore, fissile products are chemically bonded to the fluoride-salt, including iodine, caesium, and strontium, capturing the radiation and preventing the spread of radioactive material to the environment. Former NASA scientist and thorium expert Kirk Sorensen (see link to his Ted lecture below) notes that because LFTRs operate at atmospheric pressure, hydrogen explosions as happened in Fukushima, Japan in 2011, are not possible. “One of these reactors would have come through the tsunami just fine. There would have been no radiation release.”  Meltdown is impossible, since nuclear chain reactions cannot be sustained, and fission stops by default in case of accident.

Just as an illustration that there is no perfect safety the Didcot Power Station (coal fired) was being built whilst I was at AERE, Harwell. The ground upon which the 500MW turbines were being installed was not the firmest. Thus we computed the likely impact should one end of the turbine casing drop 2cm causing the turbine to leave its mounts whilst at full load. We computed that it would cut a channel all the way to Cornwall (around 100 miles or 160km) before coming to rest.

Professor Robert Cywinksi from Huddersfield University said thorium must be bombarded with neutrons to drive the fission process. “There is no chain reaction. Fission dies the moment you switch off the photon beam. There are not enough neutrons for it continue of its own accord,” he said. Professor Cywinski, who anchors a UK-wide thorium team, said the residual heat left behind in a crisis would be “orders of magnitude less” than in a uranium reactor.

The earth’s crust is estimated to hold some 80 years of uranium at expected usage rates. But thorium is as common as lead. America has buried tons as a by-product of rare earth metals mining. Norway has so much that Oslo is planning a post-oil era where thorium might drive the country’s next great phase of wealth. Even Britain has seams in Wales and in the granite cliffs of Cornwall. Almost all the mineral is usable as fuel, compared to 0.7% of uranium. There is enough to power civilization for thousands of years.

It is nearly impossible to make a practical nuclear bomb from a thorium reactor’s by-products and thus of no interest to rogue Governments or terrorists. According to Alvin Radkowsky, designer of the world’s first full-scale atomic electric power plant, “a thorium reactor’s plutonium production rate would be less than 2% of that of a standard reactor, and the plutonium’s isotopic content would make it unsuitable for a nuclear detonation.

The quantity of construction materials is reduced because large cooling towers and containment structures that handle high pressures are not needed. LFTRs operate at high temperatures allowing use of higher-efficiency Brayton nitrogen generators rather than steam generators, raising thermal efficiency from 35% to ~50%.

At the end-of-use phase, significantly fewer radioactive materials remain. LFTRs produce one ton of spent radioactive fuel per GW year. The volume of waste products from a LFTR is approximately 300 times less than that of a uranium reactor. The fissile waste is 83% spent within 10 years and below background levels in approximately 300 years. Conventional nuclear reactors take thousands of years to decay. LFTRs therefore eliminate the need for a multibillion dollar containment facility.

China’s Academy of Sciences said it had chosen to develop a thorium-based molten salt reactor system not least because the system is inherently less prone to disaster, and the hazardous waste will be a thousand times less than with uranium. So the Chinese will soon lead on thorium technology, as well as molten-salts. They are doing mankind a favour.

It has come as a surprise to most to learn that such an alternative has been available to us since World War II, but not pursued because it lacked weapons applications. Others, including Kirk Sorensen, agree that “thorium was the alternative path that was not taken”. According to Sorensen, during a documentary interview, he states that if the U.S. had not discontinued its research in 1974 it could have “probably achieved energy independence by around 2000”.

Summarizing, thorium can provide a clean and effectively limitless source of power whilst allaying all public concern—weapons proliferation, radioactive pollution, toxic waste, and fuel (uranium and plutonium) that is both costly and complicated to process. Nobel laureate Carlo Rubbia of CERN, (European Organization for Nuclear Research), estimates that one ton of thorium can produce as much energy as 200 tons of uranium, or 3,500,000 tons of coal. Coal, as the world’s largest source of carbon dioxide emissions, makes up 42% of U.S. electrical power generation and 65% in China.

From an economics viewpoint, U.K. business editor Ambrose Evans-Pritchard writes that “Obama could kill fossil fuels overnight with a nuclear dash for thorium,” suggesting a “new Manhattan Project“, and adding, “If it works, Manhattan II could restore American optimism and strategic leadership at a stroke”.

So where should our trust lie, in technology that can answer most of the problems, or politicians who have ignored this technology firstly because it could not produce weapons-grade plutonium, and then to win favour (votes) with the environmental lobby. I am reminded of the ending dialogue in the film ‘Three Days of the Condor’; a film about securing energy resources for the USA, and starring Robert Redford. The essence of the conversation is what would happen if the lights went out and the fuel pumps ran dry. The CIA chief stated, quite correctly in my opinion, that the people would look to the government to restore power and fill the gas stations quickly, and they would not care how it was done. I asked an ecology activist what she would expect to happen if we did not have enough reliable base load capacity. Her reply was that people would have to learn to use less energy. I think the CIA chief was much closer to reality, and thus we must trust the technology – it is probably safer than self-serving politicians.

Links:

Taylor Wilson: Yup, I built a nuclear fusion reactor

http://www.ted.com/talks/taylor_wilson_yup_i_built_a_nuclear_fusion_reactor.html

Kirk Sorensen: Thorium, an alternative nuclear fuel

http://www.ted.com/talks/kirk_sorensen_thorium_an_alternative_nuclear_fuel.html

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Is there an alternative quality structured product that can achieve ‘Help to Buy’ without a Government guarantee?

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Is there an alternative quality structured product that can achieve ‘Help to Buy’ without a Government guarantee?

We saw in the FT on 13th August an article ‘Ministers deny loan guarantee scheme will cause UK housing bubble’ which challenges the logic of the government providing guarantees for the Help to Buy program.

This got me thinking about the current mortgage lending situation as I am also aware of the dynamics of generating a 20% – 25% deposit to qualify for a mortgage – just saving will not work as annual property inflation keeps moving the goal posts further away whilst wasting valuable cash flow for rent. I have developed an idea that I would like to share with you that removes the need for any government involvement but would achieve the same intent, increase quality lending by banks, and provide a quality product for asset-backed securitisation purposes.

My idea is based on inheritance capital tied in fixed assets, i.e. the parents/family having capital value locked up in a home with little or no mortgage but not enough free liquidity to assist siblings with deposit requirements. Existing equity release products have rightly attracted much distrust.

I have used as a template: first time buyers, couples up-scaling for a family, and moving for career choice purposes, albeit not limited to these. Their parents could be still working, or have retired, but they have more than enough income for their living needs, but not enough liquidity to assist their siblings. Thus the inheritance that would go to their siblings consists mainly of fixed assets in property which can only be realistically liquidated upon the demise of the parents. There is the possibility to create a quality equity release product that might also be very tax efficient for inheritance tax purposes.

The product includes a mortgage extended to the parents for the amount of the deposit required by the siblings. Assuming that this mortgage amount (including any existing mortgage) is significantly less than 50% of the property value and is easily serviced by the parents from their existing income the lending bank have a quality mortgage. Assuming that the couple can easily service the remaining 75% – 80% of the property mortgage that they need then the bank has essentially lent 100% but has 2 or 3 quality assets and income streams to service the debt we have a package that can easily be securitised should the lender need to free capital. This also allows the couple to use whatever capital they do have to furnish their new home without reverting to expensive credit card repayments.

If the financing for the parents is interest only, i.e. the capital amount would be repaid once the mortgaged property is sold as part of the estate liquidation during probate – we have a valuable inheritance tax planning product.

One ideal use of this product would be the situation where 2 young people intend to get married, would like to buy a home to raise a family but cannot afford the 20% – 25% deposit. Both sets of parents own properties of suitable value, but without enough cash assets to help this couple to achieve their dream home, albeit enough income to service a mortgage on their existing properties. Each set of parents could provide 25% between them through a re-mortgage on their own properties and thus give the couple the best wedding present they could wish for. This type of product has great social value as it allows the parents to give a good start to the adult life of their siblings; a concept very much part of the culture in a number of societies around the world.

If all 3 mortgages are tied together as a high quality lending both in terms of debt to equity (asset security value) and debt service capability we have a high quality package for asset-backed securitisation purposes.

If the government wanted to encourage this type of parental support they could give tax relief to the parents on their mortgage interest payments.

Does this make sense as a quality lending product, as it would be less visible than the proposed Help to Buy government scheme (thus removing fears of housing bubbles), and would be a valuable social product.

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