lunes, 13 de junio de 2016

The perfect storm in the Spanish power market

Very low prices in the power market

The first months of the year prices in the daily wholesale power market (MIBEL), also called the “pool”, have been much lower than in any of the years before, as one can see in fig. 1, which shows monthly pool prices in the period ranging from January 2012 to May of this year.


Fig. 1: Pool price behavior between January 2012 and May 2016.

Of course there have been periods with very low prices (lower than 40,00 €/MWh) before, like March and April 2013 and February to April 2014. The difference between mentioned periods and the current situation however is the extremely long time the low prices have managed to prevail (the mean price in May found in 28,00 €/MWh its absolute upper bound).  This situation has lead to great concern in the power business and it is feared it could mean the beginning of a long term tendency of low prices.

In order to know if there are objective reasons for this concern one needs to analyze the facts. In an article published already in May 2015 in the Spanish online magazine “El Periódico de la Energía” (http://elperiodicodelaenergia.com/una-nueva-oportunidad-para-la-energia-solar-en-espana/, English version on jfbakker1963.blogspot.com.es/2014/08/solar-pv-and-stabilization-of-spains.html) I explain the factors that exclusively determine the price on the Spanish power market (pet en €/MWh), which are the Brent crude oil price (poilt in €/barrel) and the supply of power from 0 cost energy sources to the system (εt in %). In Spain 0 cost energy source traditionally have been water power and subsidized renewable energy, the vast majority of the latter consisting of wind energy (75%). In the article I also explain why these sources behave like 0 cost energy sources.

The relationship between the pool price on the one hand and the determining factors on the other is described by equation (2) of the article in the case of monthly data: pet = 0,57poilt – 93,46εt + 58,34. However, this is the equation as it appears in the article, when 2015 and 2016 data were not available yet. The equation that takes these data into account is the following equation (2’): pet = 0,57poilt – 95,85εt + 59,16. The coefficient of variable εt as well as the constant vary slightly, but the differences are so small that they can never be sufficient to be determining.

Let us now fill in the values of the crude oil price and the share of 0 cost energy sources in equation (2’). You can see the results in the table in fig. 2.

Variable
january
February
March
April
May
poilt
28,24
28,80
33,56
36,30
43,47
εt
51,68%
51,43%
49,58%
52,54%
53,84%
pet according to (2’)
26,69
22,76
27,13
23,93
26,39
pet real
38,72
29,15
29,36
25,56
27,31
Fig. 2: Pool prices according to equation (2’) and true prices.

Apart from January 2015 there is little difference between the price predicted by equation (2’) and the true price. The graphic in fig. 3 shows once more the extreme exactness with which equation (2) explains the behavior of the pool price.

Fig. 3: Pool price predicted by equation (2’) (orange curve) versus true price (blue curve): the two curves are practically identical, which proves the extreme accuracy with which equation (2’) explains the behavior of the pool price. Oil price behavior (green curve) and the share of 0 cost energy sources (green bars) are also shown.

The graphic in fig. 3 clearly shows how the low crude oil price coincides with an extraordinarily high share of 0 cost energy sources during the months of January to May of this year, proving once again that the low pool prices registered in the same period are exclusively due to these factors: the perfect storm.

The pool price in the future

Knowing now the reasons behind the low pool price in the first five months of this year, the question whether the perfect storm might initiate a new tendency of low prices in the Spanish power market should be answered by a resolute “no”. The reasons are as follows:
  1. The oil price is rising again.
  2. The high share of 0 cost energy sources is a strictly seasonal phenomenon.

The oil price crash of last year is due to an excess supply caused on the one hand by the economic stagnation in some big countries, basically India and China, and on the other by true trade war very difficult to conceal between the OPEC and Russia, Canada and the USA (the last ones former large shale oil producers). However, oil producing countries, whether belonging to the OPEC or not, perfectly aware that low oil prices are in nobody’s interest if this situation takes too long, have already begun to eliminate the excess supply and like this solve the problem.

The share of 0 cost energy sources is always higher the first months of the year than in summer and in autumn. The reason must be sought in the particular climate on the Iberian Peninsula with its dry summers without any rainfall, plus the limited capacity of the reservoirs to store water. After summer, always hot and dry in which a lot of water is used, rainfall starts again in autumn. The reservoirs are getting filled again with water, a process that usually takes a couple of months until they reach 100% of their capacity, which usually happens between January and March of the following year. Only after reaching 100% of their capacity the reservoirs can release water and like this, generate electricity. However, the main reason for the existence of the reservoirs in Spain is storing water for domestic and agricultural use, so the release of water cannot be unlimited and usually ends when summer arrives. Only the North of Spain and Portugal escape from this pattern as they are regions with a more maritime climate with rainfall all year round.

The seasonal behavior of the availability of 0 cost energy sources is clearly visible in fig. 4, which shows a breakdown of this energy type into its two components water power and subsidized renewable energy.
Fig. 4: Availability of water power (blue) and subsidized renewable energy (green). One clearly sees how the availability of water power is concentrated in the first half of the year.

Finally it must be remarked that subsidized renewable energy will gradually disappear from the market because of RD 413/2014 (the energy reform of June 2014). It is expected that 2034 will be the last year that any subsidized renewable energy power plant will receive subsidies.

The effects of “Real Decreto 413/2014”

Real Decreto (Royal Decree) 413/2014 caused real turmoil in the renewable energy business as it reduced feed-in tariff payments to the subsidized renewable energy sector substantially. In the article published in May last year I argued that RD 413/2014 was contributing to the stabilization of prices in the power market. It would be interesting to find out if this hypothesis keeps on being valid now that prices have fallen so deep.

RD 413/2014 reduced renewable energy production entitled to recieve feed-in tariff payments by 39%, while before the approval of this Royal Decree (June 2014) all renewable energy produced in Spain recieved feed-in tariff payments. If one wants to know what would have happened to the pool price if RD 413/2104v had not been approved, one has to fill in for variable εt of equation (2’) the share of all renewable energy produced (the so called “Régimen Especial) instead of only the subsidized part, adding to it the share of water power.

Variable
January
february
March
April
May
poilt
28,24
28,80
33,56
36,30
43,47
εt
74,90%
74,53%
71,85%
76,14%
78,03%
pet according to (2’)
3,49
4,17
9,45
6,91
9,19
pet real
38,72
29,15
29,36
25,56
27,31
Fig. 5: Electricity prices in 2016 if RD 413/2014 had not been approved.

Fig. 6: Difference between the true prices (blue curve) and the hypothetical prices as they would have been without the approval of RD 413/2014 (curve in wine red).

Both in fig. 5 and in fig. 6 one can clearly see that prices in the wholesale power market would even have been much lower (oscillating around 5,00 €/MWh) than if RD 413/2014 had not been approved.

The power market and the new energy model

Although the way one has made an end to feed-in tariffs to renewable energy is debatable, and one can even question its legality, there is no doubt that RD 413/2014 is contributing decisively to the stabilization of the prices in Spain’s power markets, both the wholesale market and the end user market. In the end user market prices are falling slowly now, in line with the decrease in subsidy payments.

It is evident now that subsidizing the price through feed-in tariffs was not the right way to promote the much needed transition to a new energy model based on renewable energy sources (foreseen for 20150). One may even say it has turned out to be a complete failure: it made wholesale prices collapse, it made end user prices more than doubled because of the feed-in tariff payments, and above all, it has not contributed to establish a powerful leading R&D based industry around renewable energy development.

The transition to a new energy model can only be carried out successfully if it is based on new renewable energy power plants with sufficiently low construction and operation costs that they can compete on the power market under equal conditions without needing subsidies or whatever other type of official financial support, which in Spain is already the case for solar photovoltaic power. In order to achieve this purpose, price stability in the power market is turning out to be crucial now.

The success of RD 413/2014 as far as its stabilizing effect in the power market is concerned, invites to continue developing policies that go in that direction. The purpose is obviously not to introduce more legal uncertainties for those who put in a lot of money in subsidized renewable energies in the past, but it is imperative to start thinking of ways to isolate all subsidized energies (not only the renewable ones) from the power market in such a way that they stop having a negative influence on the power price.

Finally it is necessary to approve some essential measures in the tax and administrative areas in order to promote the development of unsubsidized renewable energy, all to be applied only to new unsubsidized renewable energy projects:
  1. Exemption of the Electric Power Production Value Tax which charges a 7% tax on the turnover of the power plant (Law 15/2012).
  2. Exemption of a whole range of mainly local and regional taxes which charge a tax on the investment in new power plants.
  3. Reduction of Corporate Tax from 25% to 20%.
  4. Support bank loans used to finance renewable energy plants with government guarantees.
  5. Self consumption completely free of any tax or legal barriers.

The goal is to start the energy transition as soon as possible and carry it out as fast as possible. The new government that will come out of the general elections to be held on June 26th, will have to take this task very seriously. 

Sources

jueves, 19 de febrero de 2015

And the solution is... freedom!

Crisis in Spain's public education system


The title of this article may suggest it is about the desire of large minority groups and perhaps even small majority groups in the many peripheral regions in Europe to become independent, but nothing is less true. This article is about education: to be precise it is about the public education system in Spain, which without any doubt is not passing through its best moments nowadays. 

Fig. 1: Drop-out rates in various European countries in 2013; the figure for Spain in yellow. Source: Eurostat (http://epp.eurostat.ec.europa.eu/portal/page/portal/eurostat/home/). 

To begin with, the drop-out rate (students leaving the education system prematurely without finishing their studies) is with 23,6% (2013 figure) among the highest in Europe; only in Turkey the situation is worse (see fig. 1). The gradual decline of the drop-out rate since 1992 may not serve as an excuse: it is still twice as high as what may be considered acceptable (12% at the very most) for an efficient and properly working education system. Besides, fig. 2 clearly shows how the increase in the drop-out rate coincides with the real estate boom that Spain lived from 2000 to 2007 when it ended abruptly with the outbreak of the economic crisis: it was very easy then to find work in the construction business which is suspected to have worked as an escape valve for unmotivated students.

Fig. 2: Behavior over time of the drop-out rate in Spain. Source: Eurostat.


The PISA (Program for International Student Assessment) reports show a similar picture: systematically Spain lags behind in all three skills examined in the program (reading, mathematics and natural sciences) as compared to other developed countries (see fig. 3). The PISA investigation is carried out by the OECD every three years, and between 2000 and the last time it was done (in 2012), there had not been any improvement at all in Spain’s case.

Fig. 3: Results of the PISA reports, carried out between 2000 and 2012 with three year intervals in some OECD countries; the results for Spain in yellow: only Italy, Mexico and Turkey perform worse.

The many complaints students, parents and teachers alike have about Spain’s educational system seem to confirm the naked figures: underqualified teachers who do not master at a sufficient level the subjects they are supposed to teach (English teachers who do not speak one word of the Queen’s language are not an exception), teachers who give classes in subjects they have not been trained for (religion teachers giving French classes, mathematics teachers giving religion, etc.), lack of discipline, lack of motivation among students, teachers and school managements alike, lack of resources and an extreme ideologization in many of the 17 autonomous regions in which Spain is divided administratively, the only purpose of which seems to be that students become perfect socialists, nationalists or whatever other type of “ist” there may be.

Fig. 4: Spending (public and private) on education per student (€) in 2011; the figure for Spain in yellow. Source: Eurostat.

Especially the complaint of lack of resources is striking, as spending on education per student in Spain is in line with other developed countries in Europe, as fig. 4 shows.


If we now compare spending on education per student with two parameters that are generally used to measure the success of an education system, the drop-out rate and the youth unemployment rate, we see that Spain is scoring frankly very bad (fig. 5).

Fig. 5: Educational spending per student (in 100 €, in dark green) compared to the drop-out rate (in %, in dark blue) and the youth unemployment rate (in %, in pale blue) in 2013; figures for Spain in red, orange and yellow. Source: Eurostat.

The low drop-out and youth unemployment rates of many Western European countries are as expected given their high spending on education per student, while the high values of these rates of a country like Turkey also is according to the rules of logic, given its low educational spending. However, the equally low values of these rates of many Eastern European countries compared to their low spending on education per student, deny the existing of a direct relationship between spending on education and the success of it. In any case, Spain’s spending on education per student should result in both far lower drop-out and youth unemployment rates than registered up to now.

The relative irrelevance of the school system

If there is no clear relationship between spending and success in education, then what are the factors which determine whether an education system is successful or not? In the countries which are doing well in education there is no clearly predominant system that might explain their success. The German and Dutch speaking countries all have highly diversified systems in the sense that students are kept within the same type of school only for a limited number of years, usually coinciding with what is called the primary stage of education ranging from six to twelve or fourteen years.

For the secondary stage of compulsory education a variety of school types is offered students can choose from according to characteristics, interests and intellectual capabilities, the intellectually most demanding of them giving direct access to university after finishing this school type successfully. Vocational training is available as from the last year of the primary school period in order to give the least motivated students the opportunity to receive a thorough secondary education while at the same learning a profession that enables them to find work quickly after finishing studies, which normally is the case because of the close collaboration with business which makes that students acquire the skills demanded by their future employers. It is not surprising that youth unemployment in these countries tends to be very low (in general under 15%).

In Scandinavian countries on the contrary, Finland included, students are kept in the same school type until the end of the compulsory school period which in all countries involved is established at sixteen years. Drop-out rates are about the same as in the German and Dutch speaking countries with the exception of Norway, which has a high spending, but a higher drop-out rate than what might be expected according to its spending. Youth unemployment tends to be higher (see figures for Sweden and Finland) as it is found to be more difficult to come to a successful integration between education and business in vocational training if students remain isolated from the outside world until the relatively high age of sixteen years.

Fundamental differences between countries

The question now is what do successful countries (Northern and Central Europe) have in common as opposed to notoriously underperforming countries like Spain, France, Italy or Greece (the last country has a youth unemployment rate of 58,30%)? The difference seems to reside in the heavy involvement of the state in day to day decision making, as the table in fig. 6 shows.

Issue
Power of decision

A, B, CH, D, DK, FIN, L, N, NL, S

E, F, GR, I , P

The school children attend.
The parents while pupils are minors.
The state.
Human resources (hiring teachers).
The school.
The state.
Teaching methodology, philosophy and focus.
The school.
The state.
Admission of students.
The school, though the state guarantees schooling to all pupils under 16 years of age.
The state.
Disciplinary issues.
The school.
The state.
Finance.
The state.
The state.
Teachers’ reward system.
Fixed salary according to age and experience plus incentives.
Fixed salary according age and experience.

Fig. 6: Main differences in decision making on issues affecting organization and every-day life at school between successful and underperforming countries.

In the table in fig. 6 we see that the decision on certain key issues which determine the way the school system is organized and how it works on a daily basis, in the case of successful countries is taken by the parents and the schools themselves, while in underperforming countries it is the state which takes all important decisions.

The way to a successful education system seems to be the following: assuming that parents always want the best for their children, they will always send them to the schools they think their children will receive the best education given their intellectual characteristics. If at the same time it is the schools who decide about human resources, hiring and firing (if need be) of teachers, pedagogical issues like books, teaching methods, philosophy and religious issues, disciplinary issues and admission of students, school boards generally will take those decisions which they think are best for their schools. Like this schools will try to distinguish themselves with respect to other schools in order to attract the students they believe will perform well at their school.

Like this a sort of a market is created in which schools compete for getting the students they want to have while at the same time parents can choose. The education system in successful countries is not a true market as there is no money involved. In none of the countries considered successful, parents have to pay extra to send their children to the school of their choice as finance of the school system is guaranteed by the state. The competition is for the ideal students rather than the richest ones.

At the same time, in successful countries a teacher receives a reward consisting of a fixed salary according to his age and experience, which in all cases is higher than in any of the underperforming countries considered, while at the same time he gets incentives for good performance. An underperforming teacher can be fired, though in general he is given the opportunity to search for another school where he might perform better in order to save him the humiliation of an official dismissal.

Decision making in the Spanish school system

In the Spanish school system the State is involved in every aspect of decision making. First of all, in many of the so called autonomous regions, parents cannot freely decide which school to send their children to: usually it is determined by the place you live or work. If you live in a neighborhood with a school you do not like as a parent, you cannot send your child to the school of your liking though it is only 500 meters further away.

Second, the state is involved in all aspects of decision making in the school: the books to use and the method to apply is decided from above, they are uniform for all public schools, the school board has no decision making power about the teachers who work at their school, while in may autonomous regions school boards cannot even take disciplinary measures against badly behaving students.

Special attention disserves the way the Spanish state trains and selects its teachers. Teachers in Spain have the status and are treated as civil servants. To become a civil servant one has to pass extremely difficult exams which require learning entire books by heart. Normally applicants take up to four years to pass these exams. However, once you are part of the civil servants body, you cannot be dismissed and you have you salary guaranteed for life as you virtually become owner of your job position.

Studying to become a civil servant promotes qualities like extreme concentration, memorization and the ability to be alone and isolate from the rest of the world. They may be the desired qualities for people whose professional future does not consist of anything else than putting stamps on forms day after day, year after year, but it is not how one expects a teacher to behave. On the contrary, a good teacher must be a good communicator, be very imaginative and have well developed analyzing and synthesizing skills rather than strong memorizing qualities. If on top an underperforming teacher cannot be dismissed as a civil servant, one can doubt if the right people are in Spain’s national teacher force.

Freedom of choice and freedom of management

It is clear that Spain’s national education system at this moment is victim of a set of laws, rules and behavioral patterns that may have worked in the past, but which now only seem to produce failure and frustration. To escape from this true “locked-in” situation and to converge to a successful school system, one should focus on freedom of choice for the parents and freedom of management for the schools rather than losing time with secondary issues like religion or not, the age at which specializations are allowed or the government body that should have the “competence” (organizational decision making power) about educational matters.

Leaving the decision about which school to send their children to the parents is crucial, while at the same time issues regarding the philosophy, pedagogical methods to use and the school’s teacher force should be left to the school boards and not be taken by government officials not involved in daily school life. This will allow schools to distinguish themselves from others and even specialize if necessary or desirable. Both freedoms exercised together will give rise to a healthy competition between the schools. At the same time having the freedom to decide about the books to use will break open the monopoly of the publishing company that now holds this privileged position and create a market for school books with the unavoidable and necessary reduction of their price and the improvement of their quality. It is also essential to make an end to the compulsory use of regional languages in certain autonomous communities at the expense of the Spanish language, as it will be the schools themselves who decide about the language to teach in.

Applying ordinary labor market conditions to teachers will be more difficult because of their civil servant status. However, in spite of this limitation freedom of selection at the school level can be introduced. Instead of designating just one teacher when a vacancy becomes available, the government could send a selection of available candidates who match the school’s criteria. Like this the schools can select the candidate who they think is best, which undoubtedly will improve the level of the teacher force, as well as their motivation.

Foreign languages

Freedom in teacher selection definitely is necessary to solve the eternal problem of teaching foreign languages at Spanish schools. It is a well known fact that the Spanish education system, and Spanish society as a whole, is hopelessly failing at this point. To limit ourselves to the English language, the domination of which is widely considered essential to have access to well paid jobs and a successful professional career, it is unacceptable that almost all of the English teachers currently working at Spanish public schools are chronically underperforming: many of them are not able to express themselves properly in that language, let alone teach it.

As the current selection method of teachers apparently does not work, the only way to solve this problem is a radical one: the Spanish public school system should make its doors widely open to teachers from all English speaking countries as well as other countries which are well known for the excellent quality of their English as a second language like the Netherlands, Belgium and the Scandinavian countries. Only a minimum of teaching skills to give English classes, as well as a minimum knowledge of the Spanish language should be required, in which diplomas and degrees issued by their home countries should be sufficient, without the need to validate them according to Spanish equivalents.

At the same time Spain should change some cultural habits with respect to foreign languages. In spite of Spaniards themselves being friendly and open minded people, the Spanish culture is a closed culture in the sense that it avoids and bans influences from abroad. Books and magazines in other languages than Spanish are very difficult to find while the only language one hears on Spanish television, is Spanish: all series, movies and other spoken text in foreign languages is dubbed into Spanish spoken text. Like this it is quite usual that a young person does not hear the English language as it is actually spoken until he is 15 years old: in general too late to get to a complete proficiency in the English language.

However, if a child gets used to the sounds of a foreign language by hearing it on television and in the cinema understanding what is said by reading the subtitles at the same time, learning it will be much easier once he starts studying it in a structured way as he is already familiar with the language. It is a proven fact that the level of English in non English speaking countries in which television is subtitled is much higher than in countries with dubbed television and cinema. Dutch, Belgians and Scandinavians (all with subtitled television) speak their English far better than Germans (with dubbed television); the Portuguese and the Greek (with subtitled television) speak better English than their Spanish neighbors, Italians and the French (all with dubbed television).

Modern TDT allows television to be broadcast in a double signal, a dubbed one and a subtitled one, which is exactly the case at this moment in Spain. However, the dubbed channel is still the default channel and if one wants to change to subtitled television, one can do so using the remote control of the television set. This makes the change from dubbed to subtitled television very easy: one only needs to make the subtitled channel the default one. However, this would have to be imposed by law supported by as many political parties as possible as no publicly or privately held television channel would do this on its own initiative, afraid as they are of losing audience. The protests from television watchers will be massive. However, for the sake of the future of our children a radical measure like this is, in my view, more than justified.

Vocational training

An educational reform is not complete without upgrading the vocational training system, called “formación profesional” in Spain. Any country with a competitive economy, characterized by high wages and low unemployment, needs a highly diversified vocational training system at different intellectual levels. Spain is missing a system like that and instead, 40% of high school students end up at a university while in countries like the Netherlands, Belgium, Austria, Finland, etc. this percentage is around 20%; the remaining 80% attends vocational training programs.

A successful vocational training system is characterized by the close cooperation between vocational training schools and business, with no interference of government bodies, trade unions or employers’ associations, neither in the organization of training courses, nor in their management, as is the case in countries with successful vocational training schemes like the Netherlands, Germany or Switzerland. Already in 2012 the government decided (Royal Decree 1529/2012) to evolve to a system like in mentioned countries to improve Spain’s vocation training system. In august last year the government made an end to the monopoly trade unions and employers’ associations enjoyed in receiving subsidies to organize vocational training courses, much needed after occurring several corruption scandals in which trade unions and several training companies alike are suspected to have embezzled hundreds of millions of Euros over the last decades without organizing one single training course.

However, a vocational training system according to the Dutch, German or Swiss model will never perform satisfactorily if two other conditions are not met which are entry barrier free self entrepreneurship, especially self employment, and a labor market that does not discriminate between fixed and temporal employees, but that is a completely different debate.

Sources