Energy Infrastructure
Investment or blurred mess?

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Energy Infrastructure
Investment, or blurred mess?
Herbert M Barber, Jr, PhD, PhD
Xicon Economics

Energy has long been touted as an investment; such occurs at every level across multiple mediums—from politicians to engineers, across the front page of energy trade journals to referred academic journal papers to board rooms; and it occurs within every economy. Energy, and in our case here, electricity; without it we accomplish little. Through it we plan, we design, and we construct a better tomorrow. Arguably, outside of merely a couple other catalysts for economic growth, electricity has no equal; it reigns supreme in its seeming ability to stimulate economic output.

But does it? Does the consumption of electricity lead to economic growth? Well, through its multi-billion-dollar expansion of Plant Vogtle, Southern Company—and the State of Georgia—is gambling just such growth occurs. Of course, the gamble does not come without a cost. Less than half way through construction and commissioning of the project, Southern Company appears to many shareholders to be scrambling to fund, and control, the project, especially given the enormous cost overruns shareholders and customers must now somehow absorb. Everything from large personnel layoffs to pushing homeowners to purchase the latest and greatest lawn sprinkler system to what the company announced today—selling portions of its assets such as Gulf Power Company, Florida City Gas, and other assets to NextEra Energy for nearly $6.5 billion—gives the appearance that Southern Company is doubling down its efforts to fund the nuclear plant expansion at all cost.

In the end, well, let’s hope Southern Company knows what they are doing. Let’s hope they retained a savvy team of researchers and economists to count their chickens before they hatch, no pun intended in Baxley. Such seems questionable given such drastic cost overruns. But let’s get to the point. “The energy-economics nexus is a complex econometric paradigm that allows for the existence of unidirectional and bidirectional relationships across continuums demonstrating both effect and causality. To this end, however, the scientific literature remains ambiguous, with studies demonstrating effect and causality among variables, coupled with a host of studies that do not demonstrate effect or causality among variables, let alone direction.”

My point here? Policy makers should never attempt to force energy, be it electricity, oil, gas, nor any other form of energy, as a means of growing an economy unless such has been financially and econometrically substantiated. Hence, the problem today with many, many mega infrastructure projects; projects are assumed to be sound financial and economic investments that will inherently generate millions and billions in return, while those counting the beans have failed to actually model and forecast the beans.

Consider a few examples other researchers have investigated in the past through the use of analysis of variance, vector autoregression, and Granger-causality in terms of the impact electricity has on economic output—and vice versa, knowing that studies investigating actual causality between generation, consumption, and output typically investigate cross-country data and country-specific data. However, regardless of the methods used to investigate these relationships, or the countries investigated, findings remain mixed as to whether economic returns on energy infrastructure yield definitive increases in output, such as GDP, jobs, unemployment, and tax generation. For example, Chen, Kuo, and Chen (2007) found there to exist unidirectional causality from economic output to electricity consumption through a heterogeneous causal approach. Many other researchers indicate that economic output Granger-causes electricity consumption, such as Gosh (2002) and Jumbe (2004). However, other researchers found consumption to Granger-cause economic output, such as Akinlo (2009) and Acaravici (2010). Still other researchers, such as Barber and El-adaway (under review) found there to be significant effects between economic output when expressed via GDPReal and electricity generation, F(1, 22)=280.63, p<.01; and consumption, F(1,22)=328.13, p<.01, but no significant effect between generation and consumption and other economic variables.

Despite ambiguities in the literature among findings, and despite methodological differences among various studies, electricity remains [seemingly] imperative to economic growth, for it is through electricity that nearly all forms of economic output are increased, and subsequent growth occurs. However, relatively little research has been conducted regarding the effect that electricity generation and consumption has….[on economic output, and vice-versa.]

Such ambiguity can be seriously problematic and even blurred, and it becomes worse when the decision makers have little to no idea how to develop, let alone conduct, what should be advanced financial, statistical, and econometric analyses when investigating returns on potential energy projects. Of course, granted, owners are more concerned on the forefront of projects with financial returns than with economic returns. The project must “cash-flow” as we say here. However, on PPP, public, and quasi-public projects, all parties should be concerned with the financial and economic returns, as one should be a derivative of the other, i.e. bidirectional, with great emphasis on the word should. In fact, on most PPP, public, and quasi-public projects, such as harbor deepening at ports, for example, economic returns should be gaged against financial outlay. But such is not inherent; positive financial returns (or outlay) do not inherently lead to positive economic returns, nor does the reverse inherently hold true. And this becomes a huge problem for those ultimately funding these projects, e.g. the customer. For example, is the intent of the Vogtle expansion to merely deepen the pockets of the shareholders at the expense of its current customers? Or, will the project cause—econometrically—greater returns in economic output, while then increasing financial returns, i.e., revenues and profits? In this case, as in nearly every PPP, public, or quasi-public endeavor, the additions of Units 3 & 4 at Vogtle was touted as such. Unfortunately, this specific outlay of capital appears to be off to a rough start.

Consider the potential ambiguity associated with the effect electricity generation and consumption has on economic output in variously selected economies from recent research we conducted at Xicon Economics. Omitting the statistical jargon associated with our findings, note the differences between electricity generation and electricity consumption in terms of their effects on the economic output of a few different countries. While the study was comprised of numerous countries, both developed and developing, our findings demonstrate the shortcomings of assuming financial returns (and outlay) on energy investment inherently yield positive economic returns, and vice-versa. For example, while electricity generation and consumption both have an effect on economic output in Angola, neither generation nor consumption have an effect on economic output in Mozambique. However, making this dilemma more ambiguous, generation has no effect on economic output in Haiti, a perpetually hurricane-torn country, but consumption does. Perhaps even more perplexing, generation has an effect on economic output in Tanzania on the Indian Ocean in Sub-Sahara Africa, but consumption itself has no effect on economic output. Of all countries, one would think consumption would positively influence poorer economies, if no others.

The catch, of course, is that the same financial, statistical, and econometric analyses used in the Democratic Republic of Congo noted above applies to output in the United States and the state of Georgia, as well as the entire region Units 3 & 4 at Plant Vogtle will impact. The same analyses apply if we were calculating financial and economic return for a new transmission line across Sub-Sahara Africa for Eskom, the largest producer of electricity on the African continent, as they do if we were calculating financial and economic return for a waste-to-energy plant in the Kingdom of Swaziland, a tiny kingdom landlocked by South Africa. Likewise, identical analyses should have been used when analyzing, modeling, and forecasting financial and economic return for installation of Units 3 &4. Otherwise, allow me to professionally assure the stakeholders, shareholders, and customers, any mega PPP, public, or quasi-public project—in the energy sector or otherwise—that a blurred guess has been taken as to the project’s return on investment, which in lay terms is a kind way of suggesting the owners are partaking in a crapshoot.

So, will history demonstrate the construction and commissioning of Units 3 & 4 as an investment, or as a blurred guess—or as a clear mess? In the interim as we wait for history to prove such, we can only hope Southern Company used very savvy researchers and economists to conduct the advanced analyses hinted at herein. Otherwise, expect a mess.

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