Christopher Balding on the real risk in China

by on August 28, 2012 at 1:45 am in Current Affairs, Economics | Permalink

In the past 5-8 years, and especially the past 3, China has built an enormous amount of stuff that nobody wants, needs, or uses.  Fueled by a lending boom that began in late 2008 and tripled total lending in 2009, Chinese government at all levels has been spending money like a drunken sailor on leave.  What should scare people however, is just how poorly this money has been spent.  To give you a few examples:

  • The Beijing government admits that 50% of apartments sit empty.  A similar number is found in most major cities in China, not to mention the entire cities that sit empty.
  • After major investment in wind power generation, most wind power capacity was incapable of generating power because…..it was not hooked up to the grid.
  • Housing price to income ratios that would make a California real estate bubble blush.  The average home price to income ratio peaked around 12 in California.  The China Daily (the Communist party mouth piece) speaks regularly of ratios in excess of 25.  One recent article noted that the average price per square foot in Beijing was nearly $300 while monthly per capita GDP was only $435.  That means using the long term global average for the income to housing price ratio, the average Beijinger should be able to buy a 7.6 square foot apartment.
  • Industrial capacity utilization that is officially at 60%.  (If you believe the official numbers I have a 7.6 square foot apartment I’d like to sell you)  This is driven by state owned banks and enterprises that over invested in 2009 due to the stimulus fueled lending boom.

His full post is here.

1 Ernie August 28, 2012 at 2:45 am

the story says “Beijing Alone Has 50% More Vacant Housing Than The US” NOT that 50% of Beijing’s apartments are empty. Or did that come from the google translated gibberish?

2 Niklas Hägg August 28, 2012 at 3:07 am

Wow, how narrow minded the writer is. Everyone know that it is the future of Greece that decide outcome of the world economy. Ehh… right?

3 Thomas August 28, 2012 at 3:37 am

The “50 % of apartment sits empty” is highly doubtful: The way I read it, the Chinese original says they checked 3.8 mn households to see if the apartments are empty. It doesn’t imply that they found it to be empty. (qualifier: am not a native speaker)

4 doudou August 28, 2012 at 12:33 pm

second this.

5 philemonloy August 30, 2012 at 2:01 am

Actually, the original news report does say that the PSB has “verified’ 3.8 mn units as vacant (and they are so understood in subsequent commentary as well). Except that in a follow up, the authorities admitted that the number is subject to revision as there is still much uncertainty–they were basically marking as “vacant” any unit with no one home when the surveyors showed up! If the number is correct, it will still amount to only (sic) about 30% of available units, rather than 50%. But there is much doubt about the number. I left a comment on Scott Sumner’s about this (plus link) as well. (Qualifier: yes, I do read Chinese.)

6 Thomas August 28, 2012 at 3:39 am

The “60% industrial capacity utilization” link leads to an article about property prices – no mention of capacity utilization as far as I can tell…

7 8 August 28, 2012 at 4:20 am

The figure for empty homes in Beijing is overstated and was quickly rebutted (the same day) by the government. The survey takers recorded a home as empty if no one answered a knock at the door. No one knows how many empty homes there are, though in a recent interview Andy Xie put the number at 20 million (for all of China).

8 economist1 August 28, 2012 at 1:00 pm

If we are worried about an employment slowdown in China, doesn’t this show that unemployment is not too bad? Most people have no one unemployed in their household sitting at home.

9 Tomasz Wegrzanowski August 28, 2012 at 4:55 am

Home price to income ratios mean something very different when incomes are increasing by 10% a year. These houses will stay there for decades.

10 Adrian Ratnapala August 28, 2012 at 4:56 am

From the origional article: Small tanks and rows of paddy wagons line the street under the Starbucks every night.

What to they put in the coffee over there?

11 economist1 August 28, 2012 at 1:00 pm

File this under- cops are the same all over the world

12 widmerpool August 28, 2012 at 5:19 am

What do the empty apartments actually mean? People from all over Russia buy apartments in Moscow as ‘investments’ and many of them are empty. On my street in central Moscow three new buildings were built about 10 years ago with apartments costing $5000-7000 per meter. All the apartments are sold but pretty much no one lives there or ever has.

13 JWatts August 28, 2012 at 11:09 am

“. On my street in central Moscow three new buildings were built about 10 years ago with apartments costing $5000-7000 per meter. All the apartments are sold but pretty much no one lives there or ever has.”

A 10 year old investment with 0 return is close to a complete loss at a reasonable rate of return.

14 widmerpool August 29, 2012 at 4:39 am

Well, they have at least tripled in price, even allowing for the last four years.

What I am really asking is are these empty apartments signs of a glut, or are they a sign that the Chinese also distrust banks and governments and think that everything goes sideways at least they will still have an apartment?

15 Boonton August 28, 2012 at 6:42 am

Let’s leave aside what looks to be a issue with a mistranslated source document. Let me ask how is this bad from a macroeconomic POV? The Austrians could probably cite these as examples of ‘malinvestment’ resulting from a bubble. But where exactly is the ‘mal’ in the investment?

If tomorrow we woke up to discover an entire windfarm had been set up somewhere but wasn’t hooked up to the grid, we wouldn’t bemoan our fate. We’d say let’s buy a few kilometers of wire and hook that farm up! (Well maybe the Republicans in Congress would consider it better to let the windfarm rot rather than ‘wastefully spend’ money on wire to hook it to the grid). Likewise a huge number of Chinese live in poverty still. Why is it a bad thing that there’s lots of apartments in Beijing?

From a macro point of view, these are positive things. Yes for the individual investor it’s a disaster. If you spend $5K per apartment to build them but can only sell them for $3K, you’re bankrupt. But your bankruptcy becomes another investors gain as he buys your apartments at the auction for $2500 and makes $500 profit per unit….as well as everyone else’s gain as rents in a high cost city go down slightly.

16 8 August 28, 2012 at 7:10 am

It’s bad for the same reason subprime was bad: debt financing.

17 Boonton August 28, 2012 at 10:20 am

From the individual point of view yes it was bad. If you’re a bank that made a $500,000 loan to build a house for someone with an income of $40,000 a year for a home that can’t sell today for more than $300,000…that’s bad for you. Likewise if you’re the chap who took that loan, you’re probably not thrilled either. But for the economy has a new McMansion. The bank’s and individuals loss is someone else’s gain when they walk into a foreclosure auction and pick up a great asset for $250,000. At that price the home probably will yield a great return for a landlord and will be a very safe loan for a responsible bank to make to someone.

Again I ask our Austrian friends, where’s the ‘Mal’?

18 ad*m August 28, 2012 at 10:33 am

I have this great website to sell to you, http://www.pets.com. Tens of millions of $ were put into it, but you can have it on the cheap. It’s a steal!

19 Tim August 28, 2012 at 10:42 am

Pets.com was just early, not wrong.

Amazon alone probably sells enough pet food online that you could make a viable standalone business out of it.

20 Boonton August 28, 2012 at 1:18 pm

The website itself cost next to nothing, it’s just a domain name. Everything else they spent money on became and asset to someone else. For example, unsold inventory was probably gobbled up by other retailers. the customer list probably got sold. Perhaps Amazon and other companies tapped some of the coding and so on. A lot of that tens of millions was consumed on advertising, pay, and so on. But that’s not a malinvestment, whatever was consumed is no longer an asset in the current economy.

21 ad*m August 28, 2012 at 9:27 pm

pets.com got $55 million VC funding in 1999:
http://www.sfgate.com/business/article/Startups-Fetch-Record-Financing-Kestrel-and-2913482.php

“Pets.com was just early, not wrong. ” – those 55 million are gone forever, and were not used to invest in solar (just joking). There is your Mal.

I am in my third startup and you dont seem to know much about investing in general or startups specifically.

22 Mike in Qingdao August 28, 2012 at 11:10 am

You are assuming that property markets will clear and that people will live in those apartments eventually. I am not so sure about that.

23 Boonton August 28, 2012 at 1:18 pm

Even if they aren’t they can be torn down and the building materials recycled.

24 Bernard Guerrero August 28, 2012 at 2:36 pm

The “mal” is in the destruction of the existing patterns of reward embedded in the social structure. Say I have calls-on-resources that can be used to, say, a) create an apartment or b) finance the creation of a new piece of game software. Say that there’s enough actual demand for b) so as to justify investing in it on a discounted cash-flow basis, but not so for a). The market for apartments is glutted. Now, it’s true that regardless of whether I pick a) or b) to invest in, some capacity to address a need has been created, either a new game to spread enjoyment through the land or an apartment which will provide housing for some folks.

However, if I stubbornly insist on investing in the apartment despite the price signals being sent by the market, it is still mal-investment. I have devoted scarce resources to the creation of a good that, based on the existing distribution of wealth, nobody wants. Sure, somebody will undoubtedly be willing to take it off my hands at the bankruptcy liquidation for a song, and will consider themselves lucky to do so. But I have perversely destroyed the information about resources availability, productive capacities and the distribution of wealth embedded in the system of prices.

To put it another way, imagine applying a very high tax in the form of a levy on wealth and then spending the proceeds on a program to create pet rocks and distribute them to the populace, gratis. Very soon, every citizen will have more pet rocks than they know what to do with, and the price is right – free! All to the good, under the theory you outline above. Somebody, possibly many somebodies, gain in some way from getting a lifetime supply of free pet rocks. People building walls or filling the bottom of the fish tanks, I suppose. But we’ve warped the price system, thereby warped the actual production of goods and services, and we’ve destroyed the social reward system implicit in the pre-existing distribution of wealth.

25 Boonton August 28, 2012 at 4:13 pm

The ‘information’ part of your argument, I suspect, isn’t worth all that much. Whose to say ten years in the future game software won’t be considered a silly fad fit only for immature people and as a result many huge game companies go belly up? It happened before, look at all the arcades there were in the 80’s that suddenly seemed to just vanish less than ten yars later.

If wants were static, then ‘information’ would be guiding us to the right place but they aren’t. Even so, the effect of you insisting today on another apartment rather than more game software would be to make the return on game software investment greater and the return on apts lower, thereby making the ‘information signal’ all the more blaring.

If we ‘drop into’ a world where such ‘malinvestment’ had been made in the past, the effect would not be a recession but rapid economic growth because it would be easy to see where ‘good’ investment was needed. Individuals who had bet their 401k’s on Chinese apartments would, of course, suffer greatly but investors who hadn’t bet on the apartments would see excellent returns to be made in game software investment.

26 Alex K. August 28, 2012 at 8:26 am

“If tomorrow we woke up to discover an entire windfarm had been set up somewhere but wasn’t hooked up to the grid, we wouldn’t bemoan our fate.[…]From a macro point of view, these are positive things.”

Then maybe there is a problem with the way accounting is done in the macro point of view.

Assuming that after adjusting for the bull**it statistics China is still growing by more than 5% per year, investing in something that is actually integrated in the real economy will double its value in about 15 years. Ghost wind farms may very well lose half or more of their value in that period, due to capital depreciation. Even ignoring the de-leveraging aspect of a real estate bubble burst (which might be the most formidable risk) investors in real estate will also lose serious money.

So, instead of doubling the investment (for instance, by taking money out of real estate investment and putting it in smart-grid projects) you lose half of the investment — even if we ignore that in a credit economy coordinated loses can be devastating to the economy far above the loses of the bad investments.

This problem is supposed to be compensated by the magic of the multiplier — investors and consumers are supposed to open their wallets once they see all those people at work on idle wind turbines.

Maybe this is so, but an economic account that takes seriously the structure of investment and uses more than just a poorly computed, a-theoretical “aggregate investment value” would be far more convincing.

27 Boonton August 28, 2012 at 10:25 am

I agree with you that the ‘ghost wind farm’ may result in the pace of new investment being slowed down. If you see some investor loose a billion dollars on it, and you’re managing a multi-billion dollar investment fund, you may decide that future proposed China investments will require extra scrutiny.

But if these investments were stupid to begin with, wouldn’t you want investors to start getting smarter about it? And it doesn’t change the fact that the wind farm itself is a useful asset. As yourself this, would China be better off as a nation if a meteor struck that ‘ghost wind farm’ and wiped it out tomorrow?

Again I think the benefits of financial collapse for actual GDP are being ignored here. What better news could there be for a start up power company than to hear that there’s a really cheap windfarm out there that just needs the investment of some powerlines? What could be better for a new start up company than to hear there’s a ‘ghost city’ filled with brand new skyscrappers and residential buildings that can be had for a song?

28 Mike in Qingdao August 28, 2012 at 11:13 am

But it can’t be had for a song, because nobody is willing to admit losses. Markets are not clearing.

29 Boonton August 28, 2012 at 1:20 pm

Then the banks or firms that own the ‘ghost city’ can rent the buildings out rather than sell them forcing them to be marked down to market. Even if they don’t want to admit the loss, better to have some cash flow from the ‘bad asset’ than zero.

30 charlie August 28, 2012 at 11:24 am

It is dark wind, not ghost wind.

31 derek August 28, 2012 at 11:20 am

I don’t think you quite realize how badly things can go. Is there wind where they built the wind farms? A serious question; the election in Germany where Merkel gained power, one of the issues was the building of windmills where there wasn’t wind.

And you do know that for these types of systems you require the equivalent generation capacity in some technology that can be brought on line on demand. And this type of equipment doesn’t tolerate being off and unmaintained for long.

And by your logic Detroit would be a destination of choice, all this empty land, cheap housing.

Bad ideas are best nipped in the bud. Usually free market capitalism does that very well. We are seeing the hallmarks of central planning. I won’t add ‘gone amok’, since it is to be expected.

32 Boonton August 28, 2012 at 2:28 pm

No wind? Really? Can you tell me where on earth there is zero wind ever?

You might mean the wind isn’t optimal, but then so what? The question isn’t if we could build a time machine go back to the process that decided to put a wind farm on spot X would we still do it. The question is now that we got a wind farm on spot X is does that wind farm represent a positive asset or not. It is my contention that it is almost impossible to respond that it’s not.

“And by your logic Detroit would be a destination of choice, all this empty land, cheap housing”

And it is. Certainly empty houses in Detroit are stipped for scrap metals. Certainly if you have any need to rent large industrial spaces Detroit is a lot more affordable than, say, Jersey City.

33 Firat Uenlue August 28, 2012 at 7:19 am

How is it bad that China actually builds things it will need on its way to becoming a prosperous and clean nation? Those wind-farms? They need them to power their economy in a clean fashion, even despite massive increases in solar and wind output they will still burn more coal within the next few years. So what, hook them up to the net, and guess what, developing a smart grid is another priority.

The apartments sit empty and quite a few have been shoddily built but what do you want China to construct if not housing for the biggest wave of urbanization in human history? Did you know that renting in Mumbai is more expensive than in Beijing? How come nobody mentions the Indian real estate bubble? I for one would be glad if prices came down (live in BJ currently and will move to Mumbai soon…)

None of people that sell me baozi on the way to work every morning are even in the market for a home, rich people have little alternative but to put their money in real-estate, are prices too high? Yes, will there be losses, yes. Does China need housing? Yes! If you are looking for a new “bubble” check out commercial real estate in places like Chengdu. There are a lot of shenanigans going on over here and there is vast inefficiency but even an inefficient infrastructure project is more beneficial for a developing nation than an efficient welfare system. As long as the peasant construction workers continue to provice surplus labour for government projects China will find ways to extract money from them (and others) to pay for development, those people who have far less consumption power than they actually should have? They provide the “surplus” with which the future is paid for. Adequate compensation in line with productivity is second to extracting surplus labour value in order to build a shining future (this is where the Communist aspect comes back again….). Obviously not an enticing propostion for any libertarian but that is the way things are here and people better get to grips with that. Labour conditions in Park chung-hees SK were atrocious, the World Bank refused to give a loan to the Koreans when they wanted to build up a shipbuilding industry, economists thought they were nuts when they build a highway between Seoul and Busan. Obviously China has destroyed a ton of capital and nobody in his right mind should trust NPL stats or other bank data but the path seems promising. One caveat, local and provincial governments might repeat the happenings of the 1980s and gorge on credit, this time in order to protect local industries or GDP growth rates. Just as an anecdote, China wants to big in new energy vehicles and every demonstration city has opted to choose local suppliers for providing the cars.

For somebody who believes in the success of the Mexican economy you sure know how to put a dampener on the Chinese economy. I sent you my ebook a year ago, give it a try 😉

34 ThomasH August 28, 2012 at 10:47 am

If savings are not invested in high yielding projects, future income will be lower than otherwise. It happens in the best of policy environments Why should this scare people?

35 JWatts August 28, 2012 at 11:33 am

First, thanks for reporting on the wind farms in China not being hooked up. It’s essentially common knowledge but very rarely stated.

“If tomorrow we woke up to discover an entire windfarm had been set up somewhere but wasn’t hooked up to the grid, we wouldn’t bemoan our fate.”

If it was ‘free’, no we wouldn’t. If it represented over $100 billion in assets, we might be concerned however.

The wind farm situation in China is worse than most people realize.

First, to be useful wind turbines have to be well sighted. You can’t just plop them down willy nilly. You have to make sure they are individually placed to catch the most reliable wind and not to be in a wind shadow from other turbines, hills, trees etc. Does anyone really think that a developer who was building a wind farm that didn’t have any sizeable grid connection bothered with proper sighting? Or were they more likely to just place them in the most convenient spot? Poor sighting, can destroy the economic value of a turbine.

Two, wind farms in cold climates (Mongolia for example) require heating during the winter, so when the wind isn’t blowing they actually ‘draw’ power off the grid. If they aren’t connected to the grid they aren’t being heated during the cold periods.

Three, wind turbine are expensive, sophisticated machines. The equivalent of modern computer controlled locomotives on stilts. They require regular maintenance. If you placed 100 locomotives (or cars, etc) in a field then ignored them for 3-5 years, how well do you think they would work when you went to use them?

Fourth, wind power is intermittent and you can’t just hook it up to the grid and get free power. Ignoring available hydro-electric reserves, wind turbines biggest benefit is saving natural gas. In other words, you power down natural gas plants when the wind is blowing and power them up when it’s not. You can’t do that with coal plants, because the power up/down cycle is measured in the tens of hours and the wind up/down cycles are often far shorter than this. Nor can you do it with Nuclear where the cycle is measured in days. China is mostly coal. So odds are, even if the Chinese hooked all the barren wind fields up to the grid tomorrow, a large percentage of the turbines would just be idled.

Wind power in China seems to be a near text book case of mal-investment by a command economy.

36 Mark Thorson August 28, 2012 at 1:25 pm

Yes, it’s not just “Chinese experts” who say that grid stability is threatened when more than 10% of the energy mix is windpower. That’s the figure used everywhere. Until someone develops an efficient way to store large amounts of power, the unreliability of wind and solar severely limits their use because of the need to back it up with reserves that can be brought on-line on short notice.

Jack Kilby may have had it right when he invented a solar cell that made hydrogen directly. That avoids the need to be part of the grid energy mix.

Another approach is to have more high-power consumers such as water heaters and environmental heating and cooling under controls that can be remotely turned off during demand spikes or generation dropouts, as is done on a small scale now. That allows postponing some consumption for several minutes to allow time for more reserves to be brought on-line. If all large heating/cooling energy sinks were under such control, a larger fraction of the generation resources could be wind and solar.

37 Firat Uenlue August 28, 2012 at 1:39 pm

From the excellent China Greentech Report
http://www.china-greentech.com/

” By 2020, installed capacity of wind, solar and biomass power is targeted to more than quadruple, from less than 50 GW in 2010 to more than 200 GW in 2020″
Total power capacity will be around 2000 GW, so roughly ten per cent from renewables ex-hydro which will contribute another 400 GW if I am not mistaken.

As for connections to the grid:

“Connecting Intermittent Power to the Grid
State Grid has largely addressed problems with wind farm connections, but still cannot absorb intermittent energy in some regions, requiring new solutions such as UHV construction to transport power elsewhere.
Despite huge growth in new wind installations since 2008, nearly 100% of all completed wind farms are now connected to the grid, compared to only two-thirds in 2008. The problem has shifted to excess intermittent supply, because the windiest regions cannot absorb significant power fluctuations without posing problems for grid stability and reliability. New UHV power lines will partially address the problem by shifting power elsewhere; by 2015 China will invest RMB 500 billion (US$ 77 billion) to construct 40,000 kilometers of UHV transmission lines.”

Renewable energy in China is far from a text-book case study in malinvestment, in fact China desperately needs renewables as any glance at its energy demand would suggest. Or is anyone seriously suggesting they dig out even more coal? As for shale, China has just loosened private investment into this sector and obviously, if it can be used, will be sure to make proper use of it within its energy mix. There is a lot wrong with China but investment in clean energy? No.
Rather than making a staw-man case, as some people here seem to do, it makes more sense to have a look at the actual data and future plans.

38 JWatts August 28, 2012 at 2:36 pm

“Rather than making a staw-man case, as some people here seem to do, it makes more sense to have a look at the actual data and future plans.”

No one here has made a strawman argument. Building wind turbines whose power can’t be effectively used is wasteful mal-investment. A wind turbine sitting idle is not ‘clean’ or ‘green’ technology.

The latest wind production figures I’ve found for China are from 2009.

http://en.wikipedia.org/wiki/Wind_power_in_the_People%27s_Republic_of_China

Capacity: 25.1 GW
Production: 25,000 GWh
That’s 25,000GWh/8,760h/25.1GW = 11.3 % capacity factor

That’s horrid. Wishful thinking doesn’t change it. For perspective the US managed 29% capacity factor in 2011. I don’t want China to stop building wind power, I want them to not give it a bad name.

39 Firat Uenlue August 28, 2012 at 9:43 pm

All you have to do is read the comment stream and you would think Chinese apparatchicks are constructing wind mills for fun in the coldest parts of mongolia with no access to the grid, never mind road access. The part about a coordinated decades-long plan taking time to fully seems lost as well, but hey, it is easier to yell central planning. Capacity suffers from e.g. insufficient transmission lines and so far increasing capacity was given priority over making sure the wind power actually ends up in the grid. Capacity in 2011 was 63 GW, with 40.2 TWh produced. Nobody is denying problems with China only recently being in the game for clean tech that is inevitable, but at the same time they are working on solutions and one of them is to increase the capacity factor, they need to find ways to make better use because the alternatives are not pretty.

40 JWatts August 29, 2012 at 10:47 am

“Capacity in 2011 was 63 GW, with 40.2 TWh produced. … but at the same time they are working on solutions and one of them is to increase the capacity factor,”

2011 capacity factor from Firat’s stats: 40,200GWh/8,760h/63GW = 7.3% capacity factor
2009 capacity factor 11.3%
2011 capacity factor 7.3%

Your own stats contradict your assertion that they are increasing the capacity factor. So how sure can we be that this is really the case? Or is it more likely they are just building capacity regardless of any benefit, purely to his some arbitrary central committee goal? I’m not just mindlessly yelling central planning. The evidence supports the assertion that they are overbuilding wind capacity irrespective of the goal of actually producing much ‘electricity’.

41 JWatts August 29, 2012 at 10:49 am

Horrible formatting above, why doesn’t this software have a preview button?

2009 capacity factor 11.3%
…………………………………………………………………………………………………………
2011 capacity factor 7.3%

42 Boonton August 28, 2012 at 3:07 pm

“Yes, it’s not just “Chinese experts” who say that grid stability is threatened when more than 10% of the energy mix is windpower”

Storing surplus power is a technology that’s over 100 years old, it’s called batteries. And the grid’s ‘stability’ is not threatened by windpower. If it was then electric companies would pay 50% of us to be night owls because the largest swing in electric usage comes when we go from day to night.

Just be clear no ‘invention’ is needed to store surplus power. All that needs to happen is the differential between the price of power generated at peak demand times versus low demand times be greater than the cost of storing power in batteries. If that happens you can have busnesses that consist of just giant warehouses of car batteries charging during low priced hours and selling it back during high priced hours.

43 JWatts August 28, 2012 at 3:36 pm

Storing grid power via batteries is not economical. Indeed, it’s not cost effective even on the scale of a single large building. Have you ever noticed that the backup power for Hospitals are either diesel or natural gas generators?

44 Boonton August 28, 2012 at 4:01 pm

Backup power for hospitals has less to do with the price of electric power than with the reliability of the grid.

Its another fallacy to simply declare something is ‘not economical’. Why is it not economical? Because take when electricity is at its peak price and subtract its cost at its min price. That differential is the most revenue you can make by storing electric power in batteries for resale. If that differential is greater than the cost of such an operation, it’s economic. If not, then its not.

If different usage or generation patterns increased the differential between the two prices, then battery storage becomes economic. The fact is there’s a rather large difference between daytime usage and nighttime usage, nonetheless ‘the grid’ has evolved so that it accomodates it without making a difference so large as to make industrial battery storage economical. That should tell us the fears of wind ‘destabilizing’ the grid are nonesense.

45 Mark Thorson August 28, 2012 at 3:46 pm

Batteries only give back something like 70% of the energy put into them, so that’s a lousy solution. Pumped storage gives back about 80%, and it is a technology that has been installed at a few sites in the U.S. to help support energy grid stability, but it’s also not a good solution otherwise it would be more widely used. Batteries have only been used on the grid in the U.S. on a small scale for experimental purposes, and they will remain that way unless there are major advances in batteries.

46 Boonton August 28, 2012 at 4:06 pm

Use your 70% figure. Say the high price is $100 and the low price is $50. At $50 per unit, you buy 10 for $500. At $100 you sell 7 for $700. Tada, it’s economical.

47 Mark Thorson August 28, 2012 at 5:13 pm

You neglect the cost of the batteries themselves. Most batteries are only good for several hundred charge/discharge cycles. The batteries used experimentally on the grid have a charge/discharge lifetime of about 2000 cycles. That’s another reason batteries can’t compete with pumped storage for stabilizing the grid.

48 Boonton August 28, 2012 at 5:24 pm

Fair enough, but as you can see another way to look at the ‘problem’ is the differential in pricing. If the peak time prices were higher then the difference between the two would increase. At some point even conventional batteries as a business of “buying low, selling high” would be economical.

To put it another way, wind can’t ‘destablize the grid’. The worse that could happen is wind provides the market with power at the time when it is least needed. That would simply drive the price on off-peak electric down thereby increasing the differential.

49 Mark Thorson August 28, 2012 at 6:19 pm

Under your scenario, wind wouldn’t destabilize the grid if it has 100% battery coverage for dropouts. That isn’t going to happen without major advances in battery performance. Existing wind and solar on the grid is covered by the spinning reserve in natural gas turbine plants. This is the reserve available in gas turbines operating below full capacity, which only need to throttle up to cover the shortfall when the wind stops blowing. Natural gas is the most expensive source of fossil-fuel electricity, so you don’t want to have too many of these plants operating. That limits how much wind and solar you can back up with natural gas. 10% is about the limit, and that will remain the case without some technology that doesn’t exist today.

50 JWatts August 28, 2012 at 6:44 pm

“That limits how much wind and solar you can back up with natural gas. 10% is about the limit, and that will remain the case without some technology that doesn’t exist today.”

I believe the commonly stated limit is around 20% for wind. Solar tracks A/C use pretty well so it can definitely be used to shave off peak sunny day power. But still barring a change in the underlying economics of US power production the limit is probably around 25%. And that’s assuming the current generous amount of subsidies continue indefinitely. At the 25% level, yearly Federal subsidies would be probably greater than $50 billion per year.

Boonton’s argument is fundamentally correct in that if you charge enough for electricity then you can power the entire grid off of renewables. However, I doubt most American’s are willing to pay 3x their current price in electricity which is about the level that would be required.

51 Boonton August 28, 2012 at 10:27 pm

I suggest consulting figure 1 on http://www.fsec.ucf.edu/en/publications/html/FSEC-PF-369-02/

Granted it’s only central Florida but I’d imagine you’d see similiar patterns on most grids.

At the most extreme low, you’re about 0.7 or so KW’s between 2 am and 5 am. This shoots up to a bit less than 4.0 between 3pm-6pm or so. That by itself is a pretty huge swing in demand. Solar clearly wins here as it’s peak generating capacity lines up pretty well with peak demand.

It is true the most efficient way to produce electric power is constant, steady ‘baseline’ generation. Clearly once you get a huge vat of water boiling from a massive coal or nuclear plant, it’s best to just keep it going rather than switching it off and then on again. Now what you’re trying to claim is that wind will ‘destabilize’ the grid by making the power generation too variable. But clearly there’s already quite a bit of ‘swing generation’ built into the system, as you pointed out no one is doing any serious battery-storage option.

If huge variability is such an important factor, it wouldn’t be there. Electric companies would find it profitable to force demand to be more even. They’d charge steep rates during peak hours, pay businesses big bucks to run power hungry operations on late night shifts etc. They don’t.

So I can’t find any good stuff on when ‘peak wind’ typically is during a day but I think it’s a leap to assume the windest time just happens to be during the 2AM-5AM super low in electric demand. Let’s just say it is, though. That shouldn’t impact ‘swing’ generators much. They typically won’t be in demand anyway. If anything it might hurt the huge ‘baseload’ generators but such generators make good money during the day anyway. To me it sounds like the frets about ‘destablizing’ the grid are coming only from a central planner’s point of view. Wind would simply be another ‘swing’ producer competiting with other swing producers. Wind’s difference is that since you can’t control when the wind blows, sometimes you’ll end up ‘producing’ when rates are really cheap rather than producing when rates are really high. But since it doesn’t really cost much for wind to produce (a gas turbine, for example, needs to start burning gas to work….if it gets breezy at 3AM the guy who owns the windmill isn’t getting a bill for the wind).

Perhaps most damming of all, if wind was such a problem the market would quickly present a solution. Big operatators on the grid would pay wind owners to simply disconnect during off-peak hours and not sell their output.

52 Mark Thorson August 28, 2012 at 11:33 pm

Figure 1 shows why you can’t have more than about 20% nuclear in your energy mix. (France does, but they export huge amounts of electricity to their neighbors at night, and they’ve got the world’s only nuclear peaker plants.)

Some of your assumptions are wrong. Many large industrial customers for many years have had rate plans that charge less for off-peak usage, implement mechanisms for the utility to cut off power if they get squeezed during peak demand, or both. For the last decade or so, there have been research projects and pilot programs to roll out smart meters, demand-based pricing, and utility-controlled deferment of consumption (through smart appliances). This is definitely the trend in the industry, and ultimately it will increase the amount of intermittent power (wind and solar) that can be tolerated in the energy mix. The main motivation, however, is to help utilities cope with peak demand. In parts of the mid-Atlantic region and Southern California, the limiting factor on electricity availability is congestion of the transmission corridors, and levelling the peaks is one of the few things you can do to avoid blackouts/brownouts when getting more power off the grid is not an option.

53 Boonton August 29, 2012 at 12:53 pm

Some of your assumptions are wrong. Many large industrial customers for many years have had rate plans that charge less for off-peak usage

Yes but the fact that the demand curve slides so far down late at night tells us that electric companies do not find it a huge problem, other wise they would adjust the rate plans so dramatically that the lull would disappear or flatten out much more.

The dramatic swing in hourly demand demonstrates that the grid can accomodate quite a bit of variation already. It’s hardly a given that production must match demand, differential rates can be used to alter demand just as different mixes of baseline and swing geneartors can be used to produce a supply that varies dramatically during the day.

In parts of the mid-Atlantic region and Southern California, the limiting factor on electricity availability is congestion of the transmission corridors, and levelling the peaks is one of the few things you can do to avoid blackouts/brownouts when getting more power off the grid is not an option.

considering the US spans 3+ timezones I wonder if better transmission corridors could be used to help spread out supply even more.

54 Mark Thorson August 29, 2012 at 5:01 pm

Getting more customers for electricity at night is not a big concern at the utilities, so little to no effort is made to level out demand valleys. Meeting peak demand for winter heating and summer air conditioning is a big concern, and that’s where a great deal of research has been spent. Levelling the peaks hasn’t occurred yet because the technologies are only just beginning to be rolled out beyond large industrial customers. Over the next 10 years, I expect to see enormous progress in getting smaller industrial customers and ultimately residential customers to be outfitted with technologies that implement variable rate schedules and utility-controlled deferment of consumption.

Again, this is mostly to move consumption off of the winter and summer peaks, but the same technologies might be used to accommodate more wind and solar on the grid. Certainly, the prospect is much greater for these technologies to make intermittent sources of power viable than it is for existing battery technologies.

55 Boonton August 28, 2012 at 3:03 pm

“If it was ‘free’, no we wouldn’t. If it represented over $100 billion in assets, we might be concerned however”

This is the sunk cost fallacy. If it cost $100B in the past then the error was also made in the past. Today the economy has a wind farm. Fretting over the $100B is valid but only if you keep it in context. The ‘cost’ is not incurred in real terms but in the form of opportunity cost. China’s GDP could have been higher and its future growth higher if, five years ago, the $100B windfarm was put in a better spot. But if you’re going to go there then how much higher would China’s GDP be if Mao had adopted market reforms of the 1980’s and 90’s 40 years before?

56 JWatts August 28, 2012 at 3:40 pm

“This is the sunk cost fallacy.”

It’s not a sunk cost fallacy when they are still building them. Indeed, if anything the building rate has increased dramatically in the last two years. If it was a one time write off it wouldn’t be nearly as bad. It’s an ongoing waste of resources.

57 Boonton August 28, 2012 at 4:05 pm

Malinvestment as used by Austrians, if it means anything, means that poor investment choices in the past are causing your GDP to decline today. To make that work coherently, an investment needs to be more than just poorly thought out, unprofitable or a loss. It has to be so bad that it costs you money even today just to have it around AND you can’t even get rid of it without having to invest more money.

One plausible example might be the Chernobyl nuclear reactor which costs money today because the containment of its ruined core has to be monitored and maintained but as expensive as that is it’s still cheaper to do than to try to really dismantle and get rid of the whole thing.

58 Eva August 28, 2012 at 12:19 pm

If that many apartments were really sitting empty, you’d expect the price to go down.

59 Brett August 28, 2012 at 3:17 pm

That means using the long term global average for the income to housing price ratio, the average Beijinger should be able to buy a 7.6 square foot apartment.

Hey, they can sit down!

60 Cindy August 30, 2012 at 5:43 pm

Only checked the first bullet point “The Beijing government admits that 50% of apartments sit empty. A similar number is found in most major cities in China, not to mention the entire cities that sit empty.” The link provided (and the news in Chinese) talked about very different things. Not sure where “similar numbers” are found. This guy needs to get his facts straight before weighing in.

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