Dismantling the Utility Model is the Fastest Path to a Cleaner Electricity Infrastructure
- Jul 20, 2014 11:41 pm GMT
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In 1882 the Pearl Street Station became the first central electrical generation plant in the U.S., providing power to lower Manhattan. In 1935 FDR labeled the power companies which were then providing electricity to increasing numbers of American’s “evil”, which marked the beginning of regulated and price controlled electric utilities in the United States. The underlying premise was that guaranteed monopoly revenues would support low cost borrowing for the large capital investments needed to build out the system. In return the electric utilities would be tightly regulated and price controlled. The regulated utilities did complete the system build-out and succeeded in electrifying virtually every home in America by 1965. Despite having fulfilled the original rationale for the regulated industry, there has not been any effort to move to a comprehensively free electricity market in the intervening 50 years.
Utilities have come under increasing pressure from constituents, customers, and politicians in recent decades. Grueling battles are fought over how fast to reduce the industry’s air pollution, how much to spend to reduce water use, what generation plants should be built, and how progressive utility rates should be. Many of these issues have migrated from the states to Washington for resolution, and national politicians find themselves in increasingly uncomfortable and untenable positions. For example, we have politicians’ arguing against emissions reductions, arguing in favor of the federal government owned utility model as exemplified by the Tennessee Valley Authority, and even proposing to tax homeowners for their rooftop solar systems! The parallels to the Russian and Chinese controlled economies are also notable. The result of politicians being in charge of industry decisions for the past 80 years has been (perhaps inadvertently) deleterious environmental impacts and a dim record of new technology adoption.
Recent technological advances provide the opportunity to change all this. It is now becoming technically feasible to restructure our generation portfolio to deliver cleaner, more reliable, and less expensive electricity. We can get there by unshackling the forces of innovation from the control of PUC’s, politicians, and monopoly utilities. We often hear that new generation technologies are “more expensive”, and that renewable generation resources are “still subsidized”. Let’s take a look at those claims.
There are three fundamental issues that complicate broad claims about electricity costs:
- When electricity is produced matters: Electricity follows normal laws of supply and demand, but it is not easily stored so its value fluctuates season by season and hour by hour. For example, electricity produced during hot summer afternoons can be 1,000 times more expensive than the same unit of electricity produced during a cool winter night. On the customer pricing side, utilities charge homeowners the same price regardless of when they consume electricity. The result of this continuous mismatch between electricity cost and price is opaque and illogical cost shifting, whose rules are determined at the whim of politicians and PUC’s.
- Apples and oranges comparisons: Capital intensive power plants are built with planned 20 year lives, and are routinely kept in service for three times that long. When comparing the cost of generating resources, it doesn’t make sense to compare a newly built wind plant to a 60 year old highly polluting coal plant – this is like comparing a new car to Havana’s fabled 1950’s era Chevrolet’s. Unfortunately, this new to old cost comparison is regularly made.
- Fuel matters: When comparing new generation alternatives extending 20 years into the future fuel prices are a big unknown. Utilities will use DOE projections or in-house custom forecasts to predict fuel prices. Both are guaranteed to be wrong, and can easily sway the financial analysis results in favor of any preferred outcome. The only accurate fuel price projection would be a contract to purchase the required fuel at a known price for 20 years, but contracts to do that are typically either unobtainable or determined to be too expensive.
In addition to pricing complexities, each electricity generation technology has multiple technical advantages and disadvantages. To provide a few examples, nuclear plants generate no emissions but have no long term waste disposal solution. Natural gas plants can offer rapid response to load changes but have historically exhibited volatile fuel pricing. Our existing 60 year old coal plants offer low costs but high levels of pollution and water usage. Wind and solar plants offer 20 year contracts with no price risk, emit no pollution, and use no water. Typically noted disadvantages include cost, intermittency, land use, and scalability.
If we compare new plants to new plants, unsubsidized wind generation is widely considered by knowledgeable industry participant to be the lowest cost option across most U.S. geographies today. Solar panels produce electricity during the most valuable time of day, and are less expensive today (unsubsidized) than utility-delivered power in high cost states such as Hawaii and California. Solar prices have fallen 7% per year for 20 years, and both wind and solar prices have fallen 10% per year for the past four years. There is no end in sight to these technology-driven cost reductions. U.S. utility prices have risen 2.1% per year for the past 20 years, and crossover points for these different generation technologies are now within sight.
Industry experts are predicting that wind generated power will fall below the marginal fuel cost of natural gas plants within the next 3 to 5 years. In a sure sign of the declining cost of solar, the electric utility industry association has declared customer-owned solar to be a “disruptive challenge” and recommends that their utility members act aggressively to financially penalize homeowners installing solar panels. As to the important question “why then are renewables still subsidized”, one might as well ask why natural gas drilling subsidies still survive after 98 years, or why billions in nuclear plant subsidies (first established in 1957) are still required to build each new plant today. The government has subsidized all forms of energy production for 100 years and shows no signs of stopping now.
Given that renewable generation options are already less expensive in many locations than traditional fueled plants (with renewables costs still falling 10% a year), the opportunity for a technology driven sea change in the U.S. electricity sector becomes apparent. Our debates over climate change, pollution levels, and the mix of our generation resources should now be left to free market forces to optimize. If Boulder, Colorado and other cities or states want to push the envelope of innovation and rapidly implement a 100% clean energy strategy, why do our politicians want to stop them? If a homeowner wants to generate clean power on their own rooftop, how is anyone benefitting if utilities, PUC’s and politicians want to penalize that choice?
A better course would be to trust the free market to work in the electricity sector. The challenge we face is how to implement the cleanest, most reliable, and most cost effective electricity system in the shortest time period. The free market is unquestionably better at this type of optimization problem than regulatory models driven by political influence. There are many constituencies who will argue that it can’t be done, including incumbent utilities and their state public utility commission regulators. A wiser course for politicians would be to end FDR’s regulated monopoly model and unleash the forces of innovation that can now feasibly revolutionize the industry. Our experiences in dismantling heavy regulations in the telecommunications and airline industries have been positive and resulted in great benefits to our economy. Now is the time to trust core marketplace principles and embrace a dismantling of the suffocating regulations and price controls which stifle innovation in our electricity industry. The results will be good for consumers, good for the environment, and good politics.