Energy debt trap
Incurring debt in the absence of energy is a fools errand.
It’s 2025 budget week.
With this momentous date in our political calendar nearing, there is a lot of commentary rebuking the government’s austerity measures while simultaneously challenging the 50% debt to GDP ceiling.
The general critique is that our debt levels are not excessively high in the big scheme of things (compared to other times in our history), and that the government can and should incur more debt to fund public services and maintain / build infrastructure.
At the same time the media is full of articles about New Zealand’s precarious energy security, and this week energy scarcity, as our natural gas supplies decline rapidly.
Debt and energy are cousins
The implications of these two parallel narratives are under appreciated from a biophysical standpoint.
Budget week is all about the state of our public services and the topic of GDP to debt levels will be the topic du jour, but there is a trap I fear we are oblivious to.
In an energy constrained economy debt has more significant, and dangerous implications.
Debt is a promise to deliver goods or services in the future. Producing those goods and services will require energy.
Production by definition requires the processing of energy and materials.
Therefore, debt has a major assumption built into it, that the future will have energy abundance. In order to pay back not just the principle, but also the interest.
Economists use models like the Cobb Douglas and Leontief production functions that consider only labour and capital. Both models omit the importance of energy or in the best case see it as a third production factor alongside capital and labour.
Both approaches are energy blind and fail to recognise that machines (capital) without energy produce nothing and labour without energy also produces nothing.
Energy is the master resource.
Labour without energy is a corpse, while capital without energy is a sculpture. - Steve Keen
Which brings us to the critical implications of increasing the debt levels in an energy constrained economy.
The logic of this is quite simple:
Debt = a claim on future increased production.
Production = processing of energy and materials.
Production will reduce in proportion to reducing energy availability.
Reducing production = inability to service debt
In an environment where our energy is decreasing, we are creating debt with no ability to pay it back
New Zealand’s net primary energy is decreasing and as a result we are de-industrialising (producing less).
The fundamentals are not there to underwrite the current debt, let alone increased levels of debt.
The only way incurring debt makes sense is if the debt is directed to providing energy infrastructure.
It’s like borrowing money to buy the ingredients for a bake sale when the oven is disconnected from the power supply.
The Budget’s Energy Context
New Zealand’s economy is now severely energy constrained and as such, our productive capacity is reducing proportionally to the reduction in energy.
To grow, our economy needs an abundance of cheap energy. Any other intervention is just fiddling at the edges.
Shrinking GDP by itself increases the debt to GDP ratio, even when the net debt is not increased. GDP growth in real terms is necessary to avoid debt destabilisation and this will not happen without energy.
Debt destabilisation is a systemic vulnerability where economies overshoot their real productive base by relying on expanding debt. If the energy, labour, or resource foundation for repaying that debt erodes, it can lead to inflation, austerity, insolvency, or collapse.
In other words, it all turns to custard fast.
The government wants to attract international investment but realistically what is attractive about New Zealand when we are energy constrained? What can investors invest in that does not require energy in some form?
Investment at scale
The root of this issue in my humble opinion sits with the Bradford reforms in the late 90’s when New Zealand’s large scale electrical generation assets were privatised.
Before this, there had been consistent large investment in infrastructure through NZED (New Zealand Electricity Department), much of which we’re still totally dependent on now.
The Bradford reforms (privatised generation) were the end of an era of large-scale base load energy infrastructure investment. Prior to these reforms we were aspirational and able to build bigger than what we needed with an eye to the future.
What is needed now, is vision and large scale investment in large infrastructure projects, so that our children (and us) can have an energy abundant future
This kind of scale is now not possible in a market the size of NZ where the big generators are fractured and 49% of their dividends are syphoned off to private investors, and the other 51% disappears to the government’s coffers. Little of the revenue is re-invested in generation capacity. The little that is reinvested is typically in the form of intermittent renewables that do not effectively address the shortages in base load and dispatchable firming capacity.
Adding to these problems the generators have a fiduciary duty to shareholders and as such they a disincentivised from adding large amounts of generation that would significantly reduce the wholesale power prices to ideally about something less than $50MW to allow our industries to be internationally competitive. This is a sixfold reduction in the current price.
EROI is critical (Energy Return On energy Invested).
Just adding generation is not enough. It needs to be energy that provides high levels of surplus. The reason I say “surplus” energy is because we need energy that is available to the productive economy. Not energy that is consumed in the circular pursuit of energy.
This is why wood pellets and hydrogen are not the solutions to NZ’s energy problems.
New Zealand’s economy is now severely energy constrained and as such our productive capacity is reducing proportionally to the reduction in energy. To grow our economy needs an abundance of cheap energy, anything else is just fiddling at the edges.
Will budget 2025 deliver decisive changes to our energy sector and ensure that any debt funded expenditure is purely in the pursuit of high EROI baseload generation and more gas?
Will we see vision and a look to the future and a bold investment into generation capacity that far exceeds our needs now?
I doubt it, but I hope I’m wrong, or we may be stepping into a debt trap that we will not get ourselves back out of.
Larry
Yes, true and disturbing that the massive power schemes that NZ is utterly reliant on today are, effectively, impossible to replicate under the current fragmented, commercialised model. Development at scale carried out by the old, can-do government combo of NZED and MOW are beyond the outer limits of plausability with the current mare's nest of equity stakeholders, bean counters, and genuflecting protocols around transparency, accountability, resilience and 'best practice'.
Gone are the innocent days when MOW Ceasars could go in and set up purpose-built camps and towns, marshall a thousand bulldozers and create an energy surplus El Dorado for future kiwis. Think Upper and Lower Waitaki (8 power stations, Twizel etc, supremos Roland Packwood and Max Smith), Tongariro scheme (Turangi, Warren Gibson, Dekker, Natusch), Huntly Thermal (Hugh Robertson), Clyde high dam (new Cromwell, Terry Storey). Can you imagine schemes at scale underwriting our energy future like that today? Beyond preposterous.
I remembered the name Phil Blakeley, the time when NZ was run by engineers; along with the Commissioner of the Works. The hydro power stations built by these guys have an energy return EROI well over 100 and growing with time.
Then Lange/Douglas, followed by Bradford decided we didn't need Engineers anymore. Same with Local Bodies who got rid of the technical experts on the 3 waters, clean, sewage and surface water.
The money men run the system now into the ground; the gravy train deep state run by useless politicians, the bureaucrats, the NGOs. Similar overseas except for Trump who is stopping it.