Centralised versus decentralised

I was quoted in a recent article about bringing power to sub-Saharan Africa: "How do you bring electricity to 620 million people?" The journalist, Tom Jackson, did a good job of summarising my position (although I am mildly annoyed that he didn't send me a copy before publication; something I asked for). That being said, some additional context never hurts and so I thought I'd publish my full email response to his questions.

Two minor footnotes: First, this was framed as a "centralised versus decentralised" debate. There are of course many variations on the decentralisation theme. (Do you really mean distributed generation, rather than transmission? Does this include microgrids? Etc.) Given the way the questions were asked, I simply took it to mean the absence of a centralised electricity grid. Second, when I talk about first-best and second-best alternatives, I don't quite mean in the strict economic sense of optimality conditions. Rather, I am trying to convey the idea that one solution is only really better when the other is unavailable due to outside factors.

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Why are grids still vital? Why is a functioning electricity grid necessary for economic growth?

These two questions are more or less the same, so I‘ll take them together. Large, centralised grids constitute the most efficient and cost-effective way of delivering (and consuming) electricity in modern economies. Not only are decentralised options substantially more expensive and (generally) less reliable, there’s no intrinsic reason to believe that they will be better at delivering a clean energy future.

Is the centralised argument being lost in places like SA where the grid is so poor and not being improved?

I wouldn't say that South Africa’s present electricity woes are the result of grid failure. Rather, the problem is primarily one of generation capacity and government mismanagement. On that note, the grid is the one component of the electricity system that is best thought of as a “natural monopoly”. (The other components of the electricity value chain – i.e. generation and distribution – should then be left to competitive forces.) Your question highlights an irony. Eskom’s mismanagement on the generation side (huge overspends and delays on the Medupi and Kusile power stations, etc.) are undermining confidence in its ability to manage a centralised grid, the one aspect that government can legitimately claim needs to be operated as a regulated monopoly.

That all being said, Eskom is falling behind the required investment goals for maintaining an adequate grid infrastructure into the future. A deficient grid network has also constrained economic growth in many other developing countries, from Nigeria to India. And, yet, this is not to say that the decentralised alternative offers an intrinsically superior solution. A grid system remains the first-best option. Decentralised solutions are really a second-best option in the absence of the former. The distinction is crucial.

What role for de-centralised solutions?

I think that decentralised solutions will remain a second-best, niche alternative for the next few decades. There are several things that cause me to take this position, of which intermittency and local storage are probably the most pronounced. Now, there do happen to be a number of exciting developments on the storage issue, but nothing that I would expect to fundamentally change the equation. More to the point, I believe that the resilience of a decentralised generation system will fundamentally require a functioning grid. The increased intermittency and smaller scale of decentralised power production will necessitate excellent access to similar, small-scale generation in other regions. This can only be achieved through a robust grid network. (An example may help to make my point: Germany’s much-fêted Energiewende was supposed to involve a fundamental shift towards the decentralised paradigm. What we've seen in practice, however, is that the Germans are investing hugely in extending their inter-regional grid capacities to places like Norway, whose hydropower resources offer the most cost-effective means of accommodating the intermittency of wind and solar.)  Similarly, the parallels that people inevitably draw between a dentralised electricity system and the communication sector (i.e. where fixed-line telephones were leap-frogged by cell phones) are misplaced. Beyond various other differences, cell phones networks are fundamentally centralised in nature: Cell phone towers are the grid equivalent of the modern-day communications sector.

I should probably conclude by saying that I fully support experimentation with decentralised systems. I just wouldn't want to put my own money on it. 

Links and happenings

Busy times for yours truly over the last two weeks. Here is a list of things that I've been doing, plus one or two items that I spotted on ye olde internet.

1) I moved apartments! More or less the same size as our old place, but more comfortable and modern. Here is a little photo taken from the (car-free) route that I cycle to school everyday. Not too shabby, eh?

2) I had the pleasure of acting as moderator for the inaugural TEDxBergen conference. (My school has actually been hosting TEDx events for a while, but they've now expanded to include the other educational institutions in the city.) The speakers were all very interesting, with two or three in particular being excellent. I believe the video(s) for the event will be made available shortly, so I'll link to them then.

3) I gave a lecture on shale gas (and fracking) to the master's class in Petroleum Economics this week. My slides are here!

4) On a more prestigious note, two Nobel laureates recently gave lectures at my school. (i) As I pointed out on Twitter, Chris Sims is sounding an awful lot like an MMTer /Post-Keynesian lately. (ii) Finn Kydland makes a provocative claim that we are more resilient to energy price hikes today than we were in the past. His argument is that the adverse economic effects of the 1970s' oil shocks largely manifested themselves as inefficient tax rises due to the monetary and fiscal systems of the time. This in turn caused investment and employment to fall. I'm entirely not sure about this story -- the declining energy intensity of our economies would seem to play a bigger role -- but it's an interesting idea.

5) As predicted, some people are using the terrible events at the Westgate Shopping Mall in Nairobi to disparage "interventionist" foreign policy. I'm not saying that they don't have a point -- although, the ongoing anarchy in Somalia is certainly destabilising to the area and has negatively affected Kenya's economy. I'm saying that if blowback is the measure by which policy is to judged, then consistency dictates that one should make equally narrow arguments against (say) liberal immigration policy, subsidy revocation or economic austerity. What's sauce for the goose, is sauce for the gander after all.

6) To my American friends that have to suffer through the asinine politicking of the Republican party and the twilight-zone-thought-vacuum of Fox News, you have my sympathies.

Climate, economy and ladies

As a postscript to the previous entry, here's a quick story about a newspaper interview that I had last week. It was with one of the major broadsheets of the region and related to the launch of our new website.

The interview itself went pretty well, I thought. The journalist was mostly interested in discussing our aims, as well as how we perceive the public's general understanding of environmental issues from an economic perspective.

At one point, he asked the inevitable question of how I ended up in Scandinavia all the way from Cape Town. I told him that it was mostly down to my interests in these very issues. You'd be hard pressed to find a country that has a better track record of managing its natural resources than Norway. It didn't hurt that I was also lucky enough to receive some generous funding offers.[*]

However, I went on to tell him a joke that I had heard from another Southern Hemisphere expat upon arrival, which is that people like us usually find ourselves in Norway for one of two reasons: Oil or women. It was a throwaway line of course (and quite obviously a jape), and I didn't think much more of it...

I suppose it reflects my media naivete then that I was surprised[**] by the headline that ran above my interview the next day: "Climate, economy and ladies".
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[*] E.g. For those of you thinking about doing a PhD -- but can't bear the thought of scraping by on a measly tuition stipend for four/five years -- consider this: Doing a PhD in Norway is treated as a job and you are paid accordingly. That is, your salary has to be somewhat comparable with what a Master's graduate could typically earn outside of academia. Accepted PhD candidates are thus awarded a "research scholarship" which currently amounts to around US$71,000 per annum...
[**] Mind you, probably not as surprised as my (non-Norwegian) girlfriend.