Onslow cost

It was obvious from the start that Lake Onslow was a bad idea. 

Energy News reports on the latest:

A recent Infrastructure Commission technical paper concluded that the proposed Lake Onslow pumped hydro scheme can’t provide New Zealand with a cost advantage until 2037.

It also found that any advantage it does provide won’t be long-lasting “unless the cost to build it is substantially below $10 billion”.

That was before Energy and Resources Minister Megan Woods announced via a Cabinet paper that the P50 cost estimate – a mid-range probability – for Onslow would be $15.9 billion.

She concedes that neither Onslow nor the New Zealand Battery Project’s alternative portfolio option meet standard value-for-money criteria.

“Both have large capital costs early in their lives, with benefits realised over a long horizon,” she writes in a recent Cabinet paper.

“However, it is clear that the options could make a significant contribution to addressing New Zealand’s dry-year problem and providing a secure and decarbonised electricity system.”

I wish iPredict were still here so we could bet on whether this thing goes ahead. It clearly shouldn't. But government's spending a few hundred million on the darned feasibility study and governments have a hard time dealing with sunk cost issues.  

Ah, there's the RUB

A hectare of land on the fringes of Auckland gains almost $13 million in value if it flips to urban zoning, after netting out land development costs. 

From the Infrastructure Commission's latest report:

Figure 3 shows what these differences mean in dollar terms. In Auckland, urban-zoned land is now valued at a premium of nearly $1,300 per square metre relative to nearby rural-zoned land, up from a premium of less than $200 per square metre a decade before. For a 500 square metre residential section, that’s a cost of over $600,000.

Easing up the rules so people can build downtown and in the inner suburbs is great. But the land price gradient for the city should be grounded in paddock costs at the city fringes. It isn't. So land prices throughout the city wind up being out of whack. 

If you want housing affordability, you need to allow cities to grow up and out.

The zoning rent just inside the Auckland boundary is running at $1.3 billion per square kilometer. 

Missing iPredict

Sam Sachdeva's piece on Vic Uni's grilling at CFTC makes me miss iPredict and lament that the Vogons are everywhere.

CFTC argues that Vic Uni ceded effective control of the market to Aristotle, the company contracted to handle AML and payment processing, and that some of its contracts went beyond the scope of the no-action letter. It didn't like contracts on the number of Trump tweets, or on whether Hunter Biden would be charged. 

It's a shame. Prediction markets make the world a better place. And it's looking likely that we'll lose another one. 

The Sachedeva piece is currently gated, but may ungate in a few days by pulling the /pro from the URL.

Service exports and the NZ current account

I've never worried much about current account balances. If you have a flexible exchange rate, it sorts itself out. 

But my excellent colleague Bryce Wilkinson points to one of the reasons for the current large current account deficit.

Just look at this.

Service exports, as percent of GDP, dropped to levels we haven't seen since the 70s. 

Borders closed in 2020 - for good reason.

Mid 2020, the Universities had decent plans for running their own quarantine facilities - or at least ones that could be built on. Government said no. International student numbers collapsed. Before Covid, we had around 120,000 international students. In 2022, less than 15,000. [Note that those numbers won't just be university though.]

Every course taught to an international student is the export of a service. International students paid ridiculously high fees that cross-subsidise domestic students and research. And contribute to the export of service figures that feed into the current account numbers. 

We put up a proposal for scaling MIQ. Shift MoH/MBIE from running the system to setting and enforcing standards, and let the system scale up. There was incredible opportunity. We could have been *the* place where students still had in-person lectures. And where professionals able to work remotely could move, work, live freely, get paid by their home-country employers while contributing to the economy here. 

Government said no.

International tourism ended. Every dollar spent by an international tourist was the export of a service. 

Anyway, just a bit of backstory on why the current account numbers are as they are. 

Afternoon roundup

The worthies, on the closing of the browser tabs

• I still have great difficulty understanding why it is worse to draw up to 5000 cubic meters of water per day from an aquifer to put into bottles for people to drink than it is to run the same amount of water through cows.


• We have a desperate shortage of nurses. Meanwhile, the Nursing Council is blocking a nursing school from training new nurses. It's just nuts that ComCom is likely going to waste its next market study on a populist beat-up on bank mortgage interest rates. The opportunity cost is high.


• Lianne Dalziel on the review into the Auckland cyclone response. Good thoughtful piece from someone who's been there [should ungate tomorrow by removing the /pro from the URL]. 


• Transpower's increased the expected amount of solar generation coming onto the grid by 2030. In 2020, they expected about 1 GW by 2030. Now they expect over 7 GW. Wow. 


• Ice cream is associated with lower risk of diabetes. Unsurprisingly, the NZ public health people aren't having a bar of it - their latest recommendations on diabetes stick to the ban-and-tax stuff. Why not make ice cream part of school lunches? 


• Good summary from Pattrick Smellie on the work that Robin Oliver commissioned from Sapere looking at effective tax rates (average and marginal) across different income bands and family situations. I had a chat with Robin about that work yesterday. 

Level playing fields

It is possibly possible to grow bananas in New Zealand. In greenhouses. At great expense. 

Suppose that New Zealand had no way of importing bananas. For purposes of the thought experiment, the things just rot in transit.

So we have a banana industry here growing bananas at high cost. 

Then, an innovation! Bananas become tradeable and imports are possible - and no biosecurity issues. The boats start landing, laden with the tasty luxury.

Local industry complains. Production costs here are very high compared to islands where there is no need for greenhouses. Surely that kind of competition is unfair to local producers. The playing field should be leveled. The New Zealand government should provide subsidies to offset the unfairness of foreign climates.

We'd be nuts to do that, right? The ability to import low-cost bananas means that banana-producers here can shift to doing other, more valuable work. And we all get to eat more tasty bananas. Or not, depending on our preferences. 

Complaining about foreign subsidy regimes makes as much sense as complaining about foreign climate for growing bananas. With one difference. If it were possible to get an international treaty banning climates good for growing bananas, that would be terrible. It would hurt others to no overall benefit. 

But if we could get an international subsidy-control regime, like an arms control treaty, banning subsidies on films, or on video game production, that would be to the good. 

Dileepa Fonseca goes through some of the pleading for video game subsidies over at BusinessDesk ($). The Australian subsidies are claimed to be on the order of 40-45%. Just ridiculous. 

The climate for growing bananas abroad is a lot better than in NZ for reasons entirely outside the control of the NZ govt or NZ producers; we oughtn't subsidise banana-growing here to match it. 

The climate for growing video-games is better in Oz because the Australian government has the equivalent of a giant subsidised greenhouse. They're showing no signs of wanting to tear the thing down. It would make a ton of sense for NZ to try to lead international agreements against these kinds of subsidies - in videogames, and in film, that just induce industries to flip jurisdiction in pursuit of subsidies. 

But it doesn't make sense to subsidise our own greenhouses. If Oz wants to throw ridiculous amounts of money at videogame making, it just doesn't make sense to try to keep up. The industry here will shrink; resources will be released to work in other sectors. Stupidly, one of those sectors will be the subsidised NZ film industry. 

Dileepa quotes industry giving the standard line that taxes paid by workers in the subsidised industry could wind up being higher than the amount of the subsidy. But that's completely irrelevant. Absent the subsidy, people would work in other industries where they'd pay taxes. If we extended that argument generally, it would mean giving every damned company a subsidy of up to a dollar less than the amount of tax paid by its workers. It's nuts.

He also has a bit from me:

However, there are many who are deeply sceptical, critical, or both, of the benefits of such rebates and offsets. 

NZ Initiative chief economist Eric Crampton acknowledged the Australian scheme could see gaming jobs shift across the Tasman, but he said this was an argument for NZ to advocate that Australia remove theirs not that NZ taxpayers match their contribution. 

“Getting into subsidy races would be a terrible mistake. If an industry can only thrive here if it is heavily subsidised, should it really be based here? “Or should the workers and capital that it would be using instead shift over to industries that can do well even without subsidies?” 

Crampton also said it would be a mistake to participate in a subsidy war with countries that had deeper pockets. 

He said film industry subsidies enabled more highly skilled domestic film production and this was the major benefit he accepted came from such subsidies rather than other oft-touted aims like employment. 

But Crampton also said film subsidies were expensive and NZ's experience of using them showed such measures had no real endpoint. 

“And we then wind up in the bizarre situation in which we have subsidised training programmes to encourage kids to pursue careers in the film sector rather than other industries – careers that can only be viable here if large subsidies to the industry sector continue. 

“Every year we subsidise the training of the next set of hostages to be held to ransom against any threat of ending film subsidies.”

I should have said "held AS ransom". Doh. 

Anyway: don't get stuck in more subsidy traps, like we're stuck in with film.  

Vigilante grandmothers

I hate that it's come to this, but I do love the story.

Instinct took over when a grandmother on an early morning coffee run in Cambridge noticed a ramraid in progress on the main street.

She wasn’t having it, not at 5.30am on Easter Monday.

“I just thought, right, this is not happening,” the 63-year-old, who spoke on the condition of anonymity, said on Wednesday.

She had all her family staying for the long weekend - her eight grandchildren and three of her children – and had earlier nipped down to BP for coffee beans.

Coming back down Victoria St without her phone (it was lost on the couch) she noticed a white car rammed into the Spark store, a getaway car and someone with a mask on.

“I crossed the median, there was no-one around - it was like a ghost town – and just rammed his car.”

The offenders, who she describes as youths, came running out of the shop, yelling.

“It was quite hilarious. One rather chubby guy, he fell over, he was in jandals. I saw his builder’s crack.”

She started to feel a little concerned as her car, a Toyota Rav4, wouldn’t go into reverse.

“But then it did, I had my horn going, and they were still getting in the car, so I rammed them again, and I pushed them up onto the garden. I just didn’t want them to get away.”

They did, however, break free so she chased them up Victoria St onto Hamilton Rd, where they did a u-turn and went up Grey St.

“I had my horn going for about maybe 10 minutes. They then went down a one-way street, I followed them, and I was thinking, oh gosh this is not good. I was starting to lose my braveness and I lost them.”

She went to the police station, which was closed, so waited at the Spark store where a passing woman called the police after hearing her story.

The whole drama was then relayed to her husband.

“He has never done anything wrong ever, never had a speeding fine, nothing. I rang him up and told him the story in a crybaby voice, and he said, I will come down ... I looked at him walking down the road, and he put his arms up, and I fell into his arms and he said, don't worry darling. I think it’s worth it.”

The family made her bacon and eggs for breakfast, and the coffee beans were put to good use.

“I have seen my friends in jewellery shops, they’re off work for a week because of what these young kids are doing,” the woman said. “They don’t care, they're not frightened. And no-one is doing anything. I think I always knew if I saw something I would stop it.”

She has suffered a few sleepless nights and the impact hurt her back.

Her Rav4 was wrecked and at the local panel beaters. She’s unsure if insurance is going to cover the repairs.

“It costs you to be brave, it costs you to stand up to these kids. It's cost me a few sleepless nights, it’s cost me the damage to my car, but I will happily do that because they can’t do it any more. Well, not in Cambridge.

“We are all sitting back waiting for the Government to do something. Well, it’s not going to happen and the police’s hands are tied.”

If she winds up being out of pocket on the panelbeating costs, I hope someone sets up a donation fund. I'd chip in.  

Afternoon roundup

A long-delayed closing of the browser tabs:

• A compilation of the Official Information Act requests that Health New Zealand ignored or delayed. I doubt anything gets fixed without penalties for OIA non-compliance.


• CarbonNews ($) reports more investments into Ruminant BioTech, which has a slow-release bolus that massively reduces cattle methane production. 70%. If this thing winds up being able to be delivered at a reasonable price-point, that's agricultural methane emissions solved. Nitrates will still be a problem. But 70% reduction is well beyond any of the targets for long-lived gas reduction. 


• Who is Dril?


• Learning from Houston's townhouse reforms.


• If you take away combustion's harms, there's no particularly good reason to worry about people enjoying nicotine. Do you complain about their caffeine? The excellent Clive Bates. 


• And on the same topic, note too the speech by UK Minister Neil O'Brien on avoiding NZ-style prohibitionist approaches.

  Now of course some would go further - to stop people to start smoking in the first place. The Khan Review last year advocated the New Zealand approach - a full phase out of smoking, with the age of sale increasing over time to cover all adults.
  This would be a major departure from the policy pursued over recent decades which has emphasised personal responsibility and help for people to quit. And it is the help for current smokers to quit that we want to focus on. 

• An older piece by Pete Boettke that I'd missed on the genius of Armen Alchian. Certainly one of the Pantheon of the Econ Gods. Really important points on markets as a filtering tech. It doesn't matter if people are stupid, obnoxious, or daft. You can still model them as rational and the model tracks because that's what survives. Read!

And in honour of the Boettke piece...

Presenting...

GMU Balenciaga -- Economics with attitude 😎 pic.twitter.com/wzWiOnnd73

— Samuel Hammond 🌐🏛 (@hamandcheese) April 9, 2023

Stupid government tricks

Before we get to the latest from Energy News, a few aide memoires.

1. The NZ Govt, in 2020, declared a Climate Emergency
2. The NZ Govt is holding to a 100% renewable electricity target, despite being advised that the last couple percent are impossibly expensive and will hold back progress toward Net Zero by making electricity way too expensive. 
3. The NZ Govt set policy to prevent 'highly productive soils' from being put to other use. Submissions emphasizing that this mostly prevented conversion of dairy paddocks were ignored. 
4. The NZ Govt really doesn't like dairying on the Canterbury plains. It isn't just the methane, it's also the effects on aquifers and river quality. 

Putting all of that together, you'd think that one of the very best things that anybody could do would be to take a dairy paddock and turn it into a solar or wind farm. That it would be the kind of thing that the government would be just throwing cash at, even though there's no need to do so. 

Right?

And now, the latest from Energy News. 

Selwyn solar project declined consent

Jacob McSweeny - Wed, 5 Apr 2023

The Kea X site in Brookside

A major solar farm proposed in Canterbury has fallen foul of new planning rules designed to protect productive land.

Selwyn District Council’s appointed commissioner Anthony Hughes-Johnson KC declined Kea X’s application for resource consent for a 160 megawatt solar farm on the basis it should have been publicly notified but wasn’t.

Hughes-Johnson says given the size of the land – 258 hectares – and that it was highly productive with good soils, the consent application should have been open to more public scrutiny.

“I have formed the view that there is a wider effect which requires consideration, namely the effect on the district and the region of the loss of the opportunity for full productivity as a substantial area of land over an indefinite term,” he says.

Kea X – owned by parent company Kea Energy – wants to build a 160 MW solar farm in three stages across 258 hectares of rural farmland about 16 km southwest of Rolleston.

The company hoped it would launch stage one of the development – which would have generated 13.7 MW – this year. The second and third stages were expected in 2024 and 2025.

Managing director Campbell McMath says he’s not sure how the decision will affect those timelines, but the company will try again for the consent.

If you read the whole thing, you'll see that the land is currently being used as dairy paddock. The National Policy Statement on highly productive land gets cited in the decision. Remember that NPS-HPL mostly protects dairy paddocks. 

They'll try again for the consent, but it'll be a more drawn-out process. 

Government is just the word we use for the things we choose to do together. Like blocking the conversion of a dairy paddock on the nitrate-rich Canterbury Plains into a solar farm in a climate crisis.

Peltzman Revisited

Casey Mulligan checks up on the old Peltzman work on the opportunity costs of FDA delays.

FDA shifts to encourage competition in generics added a lot of value. Mulligan runs some Cournot models showing that while the first generic's entry may reduce overall welfare, additional ones help. The basic intuition is that the first generic doesn't do a lot to reduce prices in a Cournot game, but does reduce the return to the initial innovation. Later entrants push down prices to consumers to provide net benefits. 

Scott Gottlieb seems to have been an excellent appointment:

Three related changes occurred in 2017. By May 9, Scott Gottlieb was nominated and confirmed to head the FDA. He had been an outspoken critic of the FDA’s slow approval process, which he described as “evading the law” (Gottlieb 2010). He immediately told Congress that his FDA would prioritize competition (US House 2017). In June, the FDA (2017a) announced the Drug Competition Action Plan with procedural details published in November (FDA 2017d). The FDA (2017c) immediately promulgated, and subsequently maintained, a list of drugs with no blocking patents or exclusivities but still no approved generics. Section 801 of GDUFA II, which became law in August 2018, instructs the FDA to prioritize the review of drugs with no blocking patents or exclusivities that have three or fewer ANDAs or NDAs already approved. On paper at least, the FDA appeared to be looking toward competition rather than purely bureaucratic metrics such as numbers of applications and approval times. 

Table 1, based on the FDA’s Orange Book listing of approved NDAs and ANDAs, shows approvals at a higher rate during Gottlieb’s tenure as compared with either the 2 years before it or the 2 years after it. Before Gottlieb’s leadership, and therefore also before GDUFA II, the FDA averaged 54 approvals per month (1,286 for the 24 months). The average was 73 per month during Gottlieb’s tenure (through April 2019) and 61 in the subsequent 24 months.7 Table 1 also shows that FDA approvals of new drugs were also high during his tenure. The corresponding approvals for biosimilars and biologics are from the FDA’s Purple Book; they are a large share of expenditures on physician-administered drugs but a small share of retail prescription drugs.8 

Drug market performance appears to reflect additional competition. Berndt, Conti, and Murphy (2018) find that, as of April 30, 2017, Teva Pharmaceutical owned 1,611 ANDAs of about 10,000 in existence. The second largest owner was Mylan Inc., with 668 ANDAs. Teva’s stock crashed in the summer of 2017, with its chief executive officer reporting that the company would henceforth be less profitable owing to “greater competition as a result of an increase in generic-drug approvals by the U.S. FDA” (Sheetz 2017). Real retail prescription drug prices fell 1.5 percent during Gottlieb’s tenure, as compared with a 3.7 percent increase in the prior 2 years and a 5.1 percent decrease in the subsequent 2 years.9 These findings are consistent with the hypothesis that GDUFA II, Gottlieb’s management, or some combination thereof increased drug-market competition by reducing entry barriers.

Mulligan also goes through the benefits of project Warp Speed. Every 6 months' delay in getting the vaccine out had social cost of just under half a trillion dollars - just on mortality. 

Evening roundup

The closing of the tabs:

• By 2030, Canada's carbon tax and carbon dividend combo might have households seeing a net loss, rather than net gains, because high carbon prices are by then expected to reduce economic growth and household incomes. Of course, it would be even worse without the dividend. 


• An excellent visualisation of Wellington Council's proposed budget. So you can see that they're planning on spending $4.8m on the Khandallah swimming pool upgrade, as compared to $17.4m on wastewater network renewals. Spending on the library and on Town Hall are very large relative to spend on the wastewater pipes that keep failing. And they're expecting to spend about $10m more on running the new expensive convention centre than they'll receive in revenues from it. 


• Kate MacNamara goes through the government's spend on the Three Waters programme. 


• Didn't get a chance to submit on the Therapeutic Products Act. It really doesn't look good. Right now, doctors can prescribe medicines that aren't approved in NZ and patients can privately import them. Looks like that will end. Getting a "Must approve if two other countries have approved" rule will really matter if this goes ahead.

MfE's circular goals

"The circular file" used to be a euphemism for the garbage can. "Oh, yes, I did get your useless memo. I put it in the circular file." 

Was reminded of it when reading the reporting on the Ministry for the Environment's latest Circular Aotearoa paper. 

Energy News writes:

The Government is wary of waste-to-energy schemes conflicting with its wider goal for a circular bioeconomy.

Environment Minister David Parker has announced an overhaul of waste management and recycling and a strategy for reducing rubbish volumes and cutting landfill emissions.

But the Getting Rid of Waste for a Circular Aotearoa New Zealand paper expresses scepticism that energy projects are better than alternative uses for waste diverted from the tip.

Pyrolysis and gasification of municipal solid waste projects are “unlikely to align with our circular economy goals,” the Ministry for the Environment says in the document.  

Such schemes are commonly used in Europe and North America to process waste into an energy source.

But MFE says these are technically challenging projects likely to create hazardous by-products and greenhouse gas emissions.

We have a tech-neutral energy grid. If you can supply power, put your bids in to supply. Easy. If you're not competitive as a generator, you're going to be out of luck. 

We have a tech-neutral ETS (barring biogenic methane from agriculture). If you emit carbon, you pay for it. Just like everyone else. 

And landfills cover their costs through tip fees. And they get charged for any methane. And Wellington's landfill turns that waste methane into energy, burning it off to make money from electricity and save on carbon charges.

If a waste-to-energy plant can pay its own way, in that landscape, then it's obviously ok (subject to meeting non-CO2 emission standards on any smokestacks - and plenty can). If it produces greenhouse gasses, it has to pay for them. It can't force anyone to deliver it trash for feedstock; it has to be at least as attractive as other alternatives. 

But that isn't good enough for MfE. You see, MfE has very strong preferences about how we all live our lives. And good living, for them, is circular. Old clothes? Turn them into a patchwork quilt! Use $300 of your valuable time to fix a $5 gadget rather than use up $0.05 of space in a landfill. Organic material shouldn't go into a waste-to-energy plant to produce electricity! No! You should spend multiples of that cost to compost it, and maybe get some mulch that somebody can use later. 

Any incoming government would be well advised to put MfE into the circular file and start over.