European Energy Markets

ON JUNE 16th something very peculiar happened in Germany’s electricity market. The wholesale price of electricity fell to minus €100 per megawatt hour (MWh). That is, generating companies were having to pay the managers of the grid to take their electricity. It was a bright, breezy Sunday. Demand was low. Between 2pm and 3pm, solar and wind generators produced 28.9 gigawatts (GW) of power, more than half the total. The grid at that time could not cope with more than 45GW without becoming unstable. At the peak, total generation was over 51GW; so prices went negative to encourage cutbacks and protect the grid from overloading.

The trouble is that power plants using nuclear fuel or brown coal are designed to run full blast and cannot easily reduce production, whereas the extra energy from solar and wind power is free. So the burden of adjustment fell on gas-fired and hard-coal power plants, whose output plummeted to only about 10% of capacity.

These events were a microcosm of the changes affecting all places where renewable sources of energy are becoming more important—Europe as a whole and Germany in particular. To environmentalists these changes are a story of triumph. Renewable, low-carbon energy accounts for an ever-greater share of production. It is helping push wholesale electricity prices down, and could one day lead to big reductions in greenhouse-gas emissions. For established utilities, though, this is a disaster. Their gas plants are being shouldered aside by renewable-energy sources. They are losing money on electricity generation. They worry that the growth of solar and wind power is destabilising the grid, and may lead to blackouts or brownouts. And they point out that you cannot run a normal business, in which customers pay for services according to how much they consume, if prices go negative. In short, they argue, the growth of renewable energy is undermining established utilities and replacing them with something less reliable and much more expensive.

The Economist Article

Cap and Trade Benefits Connecticut

Connecticut’s commitment to the regional cap-and-trade system and subsequent investment in energy efficiency bolsters the economy, even as power plants shell out cash for their air pollution.

In the first three years of the 10-state Regional Greenhouse Gas Initiative, Connecticut’s state government received $51.7 million of the $913.3 million awarded throughout the region. Connecticut invested 73 percent in energy efficiency initiatives; 23 percent in renewable energy projects; 5 percent on offsetting air pollution; and 1 percent on clean energy education for teachers and students.

Because of energy efficiency, the impact on Connecticut’s economy outpaced the average of the 10 states in the regional initiative, according to an economic impact study of the Northeast’s cap-and-trade system, performed by the Boston-based Analysis Group.

The Article

2011 Corn

A number of factors combine each year to determine the U.S. average corn yield. Among those factors, temperature and precipitation during July are the most important. Crop yield models have long confirmed the large yield impact of July weather. The most favorable weather conditions in July in the heart of the corn belt consist of temperatures that are modestly below average and precipitation that is about 25 percent above average. These are the kind of conditions that were experienced in 2009 and contributed to the record high U.S. average yield that year. Historically, such conditions over large areas have been rare.

Weather conditions in July (and earlier) in 2011 have been far from ideal in many areas. Planting was late in portions of the eastern and northern corn belt. Southern portions of the U.S. have experienced hot and generally dry conditions for an extended period. The central and northern growing areas have experienced widely varying weather conditions during planting and the early part of the growing season. These widely varying conditions have been reflected in the USDA’s weekly Crop Progress reports which report crop condition ratings. As of July 10, the lowest crop ratings were reported in Texas, North Carolina, Kansas, and Ohio. The highest crop ratings were in Iowa, Kentucky, Nebraska, and Tennessee.

The continuation of high temperatures in southern areas and the expansion of hot weather to much of the corn belt this week raises additional concerns about corn yield. The high temperatures in the corn belt are occurring during the reproductive stage for a large portion of the crop. There is some indication that the intense heat will begin to moderate in many areas by the upcoming weekend. Still, average July temperatures in the corn belt may rank among the highest since 1960. In addition to the high temperatures, corn yield potential may be threatened by the expanding area of dryness over the last few weeks. For the first half of July, precipitation was well below average in large portions of Illinois and Indiana. Portions of southeastern Iowa, northwest Ohio, and eastern Michigan have also been relatively dry. Precipitation over the past 30 days was below normal in large portions of Iowa, Illinois, Indiana, Ohio, Michigan, Pennsylvania, and southern Wisconsin.

Less than favorable July weather in many areas has reduced corn yield potential in those areas. The overall impact on the likely U.S. average corn yield will be influenced by weather conditions in the last week of July and in August. Some indication of the impact will be revealed in the weekly crop condition ratings. Overall ratings for the week ended July 17 may not decline substantially, but declines could be reported for the week ending July 24 as a result of high temperatures and the lack of widespread precipitation.

The importance of the 2011 U.S. corn yield is underscored by the USDA’s projection of record consumption of U.S. corn during the 2011-12 marketing year. The most recent projection, released on July 12, forecasts consumption at 13.5 billion bushels, 195 million bushels above expected consumption during the current marketing year. Stocks at the end of the 2011-12 marketing year are projected at 870 million bushels, or 6.4 percent of projected use. Based on the forecast of 84.9 million acres to be harvested, a yield below 156.5 bushels would force a reduction in the projected level of consumption. A continuation of relatively high livestock and ethanol prices, along with growing Chinese demand, suggests that high corn prices would be required to curtail consumption.

For now, the corn market is reflecting modest concerns about the size of the 2011 crop. December 2011 futures recovered by more than $1.00 from the low on July 1, but are currently about $.50 below the high reached on June 9. Prices will continue to reflect weather conditions, weather forecasts, and crop condition ratings. As indicated last week, the nature of the 2011 planting and growing season creates a large amount of uncertainty about the size of the 2011 corn crop. Small inventories and strong demand increase the importance of crop size. As always, the USDA’s August production forecast will be highly anticipated as it will establish a benchmark for forming production expectations. That report may have added impact this year due to the possibility of adjustments to the harvested acreage forecast.

It almost goes without saying that corn prices will continue to trade in a wide range. All of the uncertainty makes it difficult to judge the overall price direction, but it appears there is more production risk than currently reflected by the corn market.

Issued by Darrel Good
Department of Agricultural and Consumer Economics
University of Illinois

Two Troubling Issues

In trying to develop our business plan for a Rhode Island Farmland Fund, I’ve been interrupted today by two friends….with news from other friends…that reinforce two of my biggest cultural anxieties. The first is an excerpt from John Phipps whom I consider a voice of reason in the industrial agriculture community. He is speaking about the current debate on the national debt ceiling:

I think many assume there is a script somewhere and the actors are just peaking the dramatic tension. I do not. I think we are being led by badly misinformed, power-motivated politicians who would just as soon push the economy back into recession on the gamble it would be blamed on their opponent.

Because we really don’t know how this failure would play out, there seems to be a curious sense of “Let’s find out!” floating around DC-wannabees. After all, if it goes very badly there will be plenty of mud to be splashed on everyone, and perhaps more of it will stick to the other guy. If you are currently out of power, there could be a “What do we have to lose?” mentality.

The other was an email from Peter Gengler with a link to an article on global warming driven by the thought of Bill McKibben:

Article

McKibben speaks about the need for radical action on carbon emissions.

Jeremy Grantham

A very important analysis by Jeremy Grantham.

Summary of the Summary: The world is using up its natural resources at an alarming rate, and this has caused a permanent shift in their value. We all need to adjust our behavior to this new environment. It would help if we did it quickly.

Link to Article

For Rhode Island folks – the one’s I’ve been badgering about real estate appraisal – I’d suggest we approach real estate values in terms of the broader, data-driven analysis that is Grantham’s bent – research on historical trends in not only real estate, but relevant commodities, transportation, food economies, energy, climate change (sea level rise), and population demographics.