Creative destruction - "Old typewriter" used to control Earl's Court Tube Station

In today's Times there is a report on the London Underground showing a control machine being used at the Earl's Court tube station that is 55 years old.

For more information see
http://www.thetimes.co.uk/tto/business/industries/transport/article2697416.ece

Whilst the article is a deliberate lobby attempt to preserve the upgrade budget for the underground - it is amazing how individuals and organisations hold onto "the old ways" of doing things.

My favourite example is that Vasco de Gama reported the use of citrus fruits to prevent scurvy in 1497. The Royal Navy took until 1790 to finally adopt lemons as a preventative measure. The merchant navy a little longer - The Merchant Shipping Act in 1867 made it law that every service man should be given lime. The UK sailors were called "limeys" thereafter. Also in 1867 Lauchlin Rose patented a method of preserving lime juice without using alcohol. You can purchase Roses Lime Juice today for £1.65 in a large supermarket near you.


Adoption has its hurdles. One of the uses of wood pellets has been as animal bedding and cat litter. I am told reliably that wood pellets are more convenient to store, cheaper, and easier to use than straw or shavings for those that keep horses in stables. Whilst some have changed quickly - especially the commercially driven stables - the market will take some time before it is accepted as a good way forward for all.


Evidence collected by McKinsey consultants at the turn of the century suggested that the rate of creative destruction was increasing. ie people are getting quicker at adopting new solutions to problems and the information is more available. Perhaps Vasco de Gama did not really solve the problem of scurvy elegantly - that was Lauchlin Rose, but that was nearly 400 years later. Today we see replacement items with better specifications coming out every few months - I am not sure that that is really making significant improvements to our quality of lives - and can be termed "creative destruction" - but online shopping has and can be.

Creative Destruction - heating

The government have published their annual energy statement. Action 13 states: "We will set out detailed proposals for taking forward the Government’s commitment to renewable heat through the Spending Review."


They support this statement by their commitment to a 12% target for renewable heat by 2020
Stating "This Government is fully committed to taking action on renewable heat."


From a creative destruction perspective it is interesting to see how the market is responding. 


The gas market clearly has most to loose from renewable heat. They are having to import more, prices are rising, and gas heating is by far the most popular form of heating.


"We've cut our boiler and standard installation prices by a third and if you call by the 31st July we'll also give you 12 months boiler and central heating care (2 years if you're a British Gas customer)."


Whilst the existing market is competitive, this seems to be getting commitment from potential customers  in advance of any firm announcement.


In the heating market there is a "heating season". Not every boiler is sold during this time, but there are clearly people who turn their system on and find it does not work, or breaks down during Autumn. This makes September to Christmas a really busy time in this market. 


Consumers are not well informed at the moment - not because they do not want to be - but because there is lots of conflicting information out there - most of which is wrong or misleading. 


The present conservative (is it really a coalition?!) believe in markets. Markets are not just the city financial markets, but the markets that we see all around us. Consumer and business confidence is low at the moment and the job of government is surely to provide some leadership ie direction. 


They are making cuts and reducing the size of the public sector purse. They expect that the private sector will "fill the void". 


With what?


If you were a business person at the moment - what would you invest in? In the renewable heating market many companies have invested already. They are just sat there waiting. Other markets have been heavily hit by the cuts, or by the recession. e.g. Were you in construction you have had the double burden of the schools programme being cut whilst the housing market looks set to fall again.


Leadership is really important to the renewal process - there seem to be very few people willing to take a lead. Is the consequence further inactivity. Economists are very cautious that the growth estimates for the UK are too optimistic whilst we are in a space where there are cuts, drops in spending, and no leadership.

Creative Destruction - The UK National Renewable Energy Plan 2010

The UK Government are required to submit their National Renewable Energy Plan by the end of June.


The published document is quite hard to find and 160 pages long. It has been published in association with a number of other documents:


"Unlocking investment to secure Britain's low carbon future" an independent report from the Green Investment Bank committee
http://www.theccc.org.uk/reports/progress-reports/2nd-progress-report An independent report from the Climate change committee
Zerocarbonbritain2030 from The Centre of Alternative Technology


I am particularly interested in biomass, and especially the domestic heating market.


Some initial observations:


In the National Renewable Energy Plan (NREP) there is a commitment to 12% of the UK heating being met from renewable sources.


In the plan the government comment that they are starting at a "very low" base with regard to renewable heating. They do have 2 strategies for heating:


1 - A green investment bank


"we are looking into the possibility of a Green Investment Bank (GIB) to help fund the introduction of renewable energy. As part of the creation of this bank, we will create financial products to provide individuals with opportunities to invest in the infrastructure needed to support the new green economy."


I have read this several times. Initially I thought it meant that individuals could get a loan for their biomass boiler and have it linked to the Renewable Heat Incentive. However the words clearly state "financial products" and not loans for heating. It also says infrastructure rather than heating equipment. Reading the Green Investment Committee report - it seems to be more about electricity and not about heat. The Renewable Heat Incentive is not mentioned once. The Renewable Heat target of 12% by 2020 is not mentioned once (other than they mention 12% by 2020. The "drill down" section (it talks about loans for energy efficiency rather than "simply decarbonising the supply chain".


(p32 "As the recent Green Deal recognises, we need to reduce energy demand by improving the energy efficiency of the UK’s housing stock rather than simply decarbonising an ever-increasing energy supply. It is the cheapest way of delivering carbon emission reductions and energy security.")


In section 4 of the NREP it clearly states that the GIB is linked to support "renewable generation" there is no direct reference to heat or the renewable heat incentive.


Summary: The Green Investment Bank may not have any direct link to the Renewable Heat Incentive or Renewable Heat. Whilst they (GIBC) are mandated to consider both electricity and heat they have made up the shortfall in heating requirement with heating from electricity (considerably more expensive for the tax payer in the form of much higher bills at present day prices)


Setting up a bank before the 11 April 2010 - is it realistic?


2 The Renewable Heat Incentive (RHI)


The NREP makes significant mention of the RHI but also mentions that there is sign off needed from ministers.


It is not clear how to fund or administer this - and whilst the GIB may have facilitated - it is not proposed at the moment.


The report from the Climate Change Committee suggests that there needs to be a stronger link between housing efficiency and claiming the RHI. At the moment the monies paid out are "assuming" an efficient house - but it is up to the householder to make the improvements.


The low carbon buildings grant (now closed) was criticised due to the costs of administration often ending up with a low uptake of the grant opportunities. Clearly one of the dangers for the RHI is that it could be expensive to run and put up too many hurdles for the consumer.


Perhaps something is to be said for "responsibility" - the new coalition government's buzz word. Whilst in health they are suggesting that healthy eating is the responsibility of individuals - and not the education programmes that have been in place. Is there a need for one set of measures being about housing  efficiency and another about renewable heat?

Creative destruction - Electric heating?!

There is a lot of discussion about carbon reduction and global warming. Some people believe it - some don't.

The reality is that the debate is going on about how we produce electricity and heat - both at home and through national grids.

Other than global warming - there are factors to consider:

Capital cost (if any)
Running costs
Pollution
Access to the supply chain

In 2008 The Energy Savings Trust commissioned a report that investigated both the carbon emissions, costs and performance of over 50 different heating systems in a variety of settings. The carbon emissions will have stayed the same. For fuel these were:
                                                               kgCO2/kWh

Natural gas                                             0.191
LPG                                                       0.234
Oil                                                          0.264
Bio-kerosene                                          0.212
Wood (pellets, bulk supply)                    0.025
Electricity - standard tariff                       0.539
Electricity - 7-hour tariff (on-peak)         0.539
Electricity - 7-hour tariff (off-peak)         0.539
Electricity - sold to grid                          0.539
Community heating (from biomass boilers) 0.025

Clearly Electricity uses a lot of carbon for heating and hot water - it is not very good - in Sweden and Denmark it has been limited. Most "tests" e.g. SAP propose that electricity uses a lot of carbon.

From a cost perspective electric heating is quite cheap to install - and you can use off peak metering. However a quoted price per kWh is about 13p including off peak tariffs.

Compare this to Gas at 4p or wood pellets at 3.5p or oil at 4.5p - even with large rises in cost - electricity is about three or four times as expensive.

Why focus on Electricity?

In the UK the Green Investment bank commission has issued a report titled "Unlocking investment to secure Britain's low carbon future". In it they have proposed that we move to electricity as the primary form of heating in the UK. See the annex1 for graphs.

Even with reductions in CO2 emissions through increases in nuclear power and wind power generation - our CO2 emissions may be cut - which is a good thing - but they won't be cut by the ratio above ie electricity generation costs 0.539 kgCO2/kWh which is more than 20 times the emissions of biomass. Are they going to reduce carbon emissions by 20 times?

The UK consumer will be left with no option but to purchase significantly more expensive heat that generates more carbon emissions than alternatives.

If I was a venture capitalist - I would consider this to be a pretty poor pitch!

Whilst I can support better generation of electricity through off shore wind power - it does not transfer to heating. (If carbon reduction is the goal)

The average heating bill in the UK is said to be £800 for gas. Looking forward electric heating would be £3200. Over 15 years this would be £48000 rather than £12000 to run. Whilst gas prices may well rise - are there any guarantees that electricity will fall? Is this a winning strategy?

The present government wants to make market forces work - I am not sure that this demonstrates market forces - more bully boy tactics from large companies that are used to making lots of cash. (Have you met a RWE N-Power salesman (or woman)?! I can imagine that it is corporate culture - and rife throughout the organisation.

As a consumer there are choices for the government. If they vote for "electric heating" then some of our bills will rise by a factor of 3 or 4 in the coming years.

The Renewable Heat Incentive has been costed at £104 per person by 2020 - this is a fraction of the electricity cost of £3200. Is there really any alternative?

Unfortunately we have elected a government that believes in markets - even if they deliver a four fold price increase - rather than pay out a penny extra in tax. As a consumer I want the lowest cost alternative.

Creative destruction - project management

Getting a project going for a small company often involves a visit to a potential client or a meeting. Your team inspect the problem, issues, or potential objectives and a discussion ensues.

How do you get started?

In larger companies they start with "top down" estimates that are then confirmed with "bottom up" estimates of the work to do. In a smaller company you may not have the skills or the breadth of team to do this.

Top down approaches are made from experience, intuition, and are broad brush in nature. Builders use rules of thumb to help them, as do many people in the construction field, yet in some way this is flawed in its approach.

To what extent do you solve problems on the broad brush approach?

My observation is that the problem identification is often done, however rather than solve the problem in the most effective way companies put in safety buffers - so that when they do the work - there is room to complete the job and still make profit.

Recently I have seen quotes from "the other side". It is interesting to consider why some companies quote despite being double the price of others.

In today's competitive world - how much of a skill in demand is it to be able to solve problems - and therefore to do the job required - and still make a profit?

Creative destruction - now that's useful!

Aren't flat screens great! PC screens have been replaced, as have a lot of TV's by businesses and consumers alike. It is the simple process of renewal - with one thing being replaced by something that offers more value.

In the same way internet purchasing offers the consumer more facilities, more choice, and often keener on price. As a method it is replacing how we shop.

If you consider a shrinking economy it could have any number of renewal processes going through at any one time. Some of them will represent job losses as old inefficient ways are replaced with better new ones.

In a growing economy you may find supply chains developing as a new process or technology adds to our lives in a significant way. Consider the mobile phone and the infrastructure that surrounded it. Companies spring up all over the place and grew very quickly. In terms of jobs and growth of the economy this was a good thing.

In the UK at the moment there has been a lack of new ideas. If the government cut taxes what would people spend the extra cash on?

They could spend it on Apple products - however the cash would go straight out of the economy. There are very few people employed by Apple in the UK, or any of the spin off industries. You do have to hand it to Apple - they do manage to make products that cost pennies and sell them for lots of money - and make people feel good (well apart from the people who have to make them).

Most of us have fairly flat spending habits without realising it. We have our essentials, we have our luxuries, and we have our mistakes. Extra income is often saved if you have everything you need.

Creative destruction does bring about growth, but only if the renewal process gathers pace and the supply chain is constructed in such a way as the cash is circulated around the economy. Cheekily I think it is also about faster renewal in even a wasteful way. How could you make someone throw away a perfectly functioning PC or Monitor - and we are back to the flat screen argument. Unfortunately for industry flat screens are now very common and a commodity. So what's next?

Creative destruction - do small firms need support?

We live in an unfair world, but fairness has very little to do with the answer to most problems.

Small companies provide a lot of employment, contribute taxes, and are large providers of innovation and growth.

They did not seem to figure in the recent election - but may well be centre piece to any recovery.

On one hand recent announcements of government funds may have their advantages. These funds may have crowded out many firms from competing fairly. Equally supporting industries or companies in markets that no longer "function" is more of a museum piece than looking after our future. Cuts in largely ineffective grants on small firm training, support, and even the SME adjudicator may be welcome.

That said - Labour stands for unions, Conservatives for big business. There is money in lobbying - if you are big enough. This is surely where the disadvantage lies. SME's do not have the funds or influence to compete.

Perhaps in our new world the Conservatives will pay back the £12m donated to them during the first quarter of 2010. What was it for? It was larger than all the other funds of all the other parties put together (If they were McDonald's they would have had a majority parliament)

Creative Destruction is about new ideas replacing old ones. New methods, new products, new services. Removing everything in its path will enable the process to work more quickly. This means if there is a bonfire of quangos and regulatory authorities (presumably had nothing to do with donations), unless there is a sharper tooled device to stop monopolies from abusing their powers, they will.

Consider the energy market. Among the cuts announced today were the withdrawals of grants to micro renewables. The Carbon Trust has "suspended" the call for research into renewable energy (£22m). Nuclear Power R+D is said to be worth £60m a year (has that been suspended also?).

The question was "do small firms need support?". If you asked a large company the answer would be "no". If you asked a Union - the answer would be "no". Both sets of people are linked to the stock exchange and the long term performance of shares and pensions. Why would they want replacement?

The economic justification for long term growth and the link with entrepreneurs or small companies is only every made when times are really bad. At the moment there seem to be some cuts and some agendas. Not helpful for anyone.