Comments on: Free markets are never really free — thoughts on markets, auctions and capital investment http://blog.recycled-energy.com/2009/11/13/free-markets-are-never-really-free-thoughts-on-markets-auctions-and-capital-investment/ RED | the new green: thoughts on ways to reduce greenhouse gas emissions Mon, 19 Jul 2010 17:50:47 +0000 http://wordpress.org/?v=2.9.2 hourly 1 By: Sean Casten http://blog.recycled-energy.com/2009/11/13/free-markets-are-never-really-free-thoughts-on-markets-auctions-and-capital-investment/comment-page-1/#comment-4544 Sean Casten Tue, 17 Nov 2009 19:05:11 +0000 http://blog.recycled-energy.com/?p=583#comment-4544 Thanks, Dean. I claim no expertise in aircraft economics, but isn't that also pretty heavily subsidized? It certainly is in Europe, and I'd be surprised if not in the US as well. Even if not, it's got such a small number of players (and such massive barriers to entry) that I'd be hard pressed to use that as an example of a perfect market. Interestingly, the one market I am aware of that sets prices at a high enough level to bring new capital forward is that created by state RPS rules - but only once the RPS % requirement rises high enough to exceed the existing supply and utilities must pay a price sufficient to bring new-build on line. A market where demand is set by statute rather than market isn't exactly perfect either - but maybe it does point the way towards a more robust economic toolkit. Thanks, Dean. I claim no expertise in aircraft economics, but isn’t that also pretty heavily subsidized? It certainly is in Europe, and I’d be surprised if not in the US as well. Even if not, it’s got such a small number of players (and such massive barriers to entry) that I’d be hard pressed to use that as an example of a perfect market.

Interestingly, the one market I am aware of that sets prices at a high enough level to bring new capital forward is that created by state RPS rules – but only once the RPS % requirement rises high enough to exceed the existing supply and utilities must pay a price sufficient to bring new-build on line. A market where demand is set by statute rather than market isn’t exactly perfect either – but maybe it does point the way towards a more robust economic toolkit.

]]> By: Dean Karafa http://blog.recycled-energy.com/2009/11/13/free-markets-are-never-really-free-thoughts-on-markets-auctions-and-capital-investment/comment-page-1/#comment-4543 Dean Karafa Tue, 17 Nov 2009 15:10:17 +0000 http://blog.recycled-energy.com/?p=583#comment-4543 Sean, You present an interesting arguement. Clearly the drive to energy efficiency, a drive that RED and others encourage (and participate in), is for the most part, a drive to the marginal pricing structure of energy delivery. All of the major energy capital investments I can think of are geared at capturing that next increment of margin. The lack of "free market" can really be a culprit of confusion. Too many examples of that exist. As John and Jane Consumer make there choices on what to buy they are forced to deal with the reality of the "structured market". A market that forces them to make choices based on restrictions or controls in some way. When I built out my basement I put in electric heat because the market told me that cheap electrical power was better than a natural gas price the was shooting skyward (with no top in sight as we "run out of natural gas"). I now find myself investing in a dual system that will allow me to heat my basement based on the energy commodity price at the time. If you will, my personal drive to the marginal price of heating my home. Both the electric and gas markets are operated within the context of a highly regulated system. I can think of one example where major investment in a mature market is taking place based on a pricing signal. Boeing, dispite the technology problems it is having, is coming forward with a new aircraft, the 787. Boeing is boasting of a 20% decrease in fuel consumption! When previous new aircraft models came out they were happy to portray a 5% improvement. If the 787 proves out, the marginal price to transport a passenger will have a significant reduction and begin a new drive to a new marginal cost. How can United Airlines allow their competition to participate in that without jumping on board as well? How can Airbus allow Boeing to capture such a large market share? Again, if the 787 proves out, Boeing may be catching deer with a new type of fishing pole! Time will only tell what the pole will look like to capture the GHG deer! Or as you suggest, we shouldn't bother- spend the investment on a new trap at some marginal cost. What is the signal that John and Jane should look for as they make the choices that ultimately dictate the success or failure of any investment? I don't know Sean- at times it makes me want to move to an island! Regards, Dean Karafa Sean,
You present an interesting arguement. Clearly the drive to energy efficiency, a drive that RED and others encourage (and participate in), is for the most part, a drive to the marginal pricing structure of energy delivery. All of the major energy capital investments I can think of are geared at capturing that next increment of margin.

The lack of “free market” can really be a culprit of confusion. Too many examples of that exist. As John and Jane Consumer make there choices on what to buy they are forced to deal with the reality of the “structured market”. A market that forces them to make choices based on restrictions or controls in some way. When I built out my basement I put in electric heat because the market told me that cheap electrical power was better than a natural gas price the was shooting skyward (with no top in sight as we “run out of natural gas”). I now find myself investing in a dual system that will allow me to heat my basement based on the energy commodity price at the time. If you will, my personal drive to the marginal price of heating my home. Both the electric and gas markets are operated within the context of a highly regulated system.

I can think of one example where major investment in a mature market is taking place based on a pricing signal. Boeing, dispite the technology problems it is having, is coming forward with a new aircraft, the 787. Boeing is boasting of a 20% decrease in fuel consumption! When previous new aircraft models came out they were happy to portray a 5% improvement. If the 787 proves out, the marginal price to transport a passenger will have a significant reduction and begin a new drive to a new marginal cost. How can United Airlines allow their competition to participate in that without jumping on board as well? How can Airbus allow Boeing to capture such a large market share? Again, if the 787 proves out, Boeing may be catching deer with a new type of fishing pole!

Time will only tell what the pole will look like to capture the GHG deer! Or as you suggest, we shouldn’t bother- spend the investment on a new trap at some marginal cost. What is the signal that John and Jane should look for as they make the choices that ultimately dictate the success or failure of any investment?

I don’t know Sean- at times it makes me want to move to an island!

Regards,

Dean Karafa

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