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Richard Brooks's picture
Co-Founder and Lead Software Engineer Reliable Energy Analytics LLC

Dick Brooks is the inventor of patent 11,374,961: METHODS FOR VERIFICATION OF SOFTWARE OBJECT AUTHENTICITY AND INTEGRITY and the Software Assurance Guardian™ (SAG ™) Point Man™ (SAG-PM™) software...

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  • Nov 5, 2021
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Let's be clear about one fact regarding carbon taxes on electricity, it's not the "dirty polluter paying the tax", it's us, the consumers of electricity that will pay the carbon tax. The dirty polluters are just collecting the tax from consumers and passing it along to others. A carbon tax will create enormous windfall profits for companies that generate electricity, at the consumers expense. If the goal of a carbon tax is to reduce green house gases (GHG) from being emitted into the atmosphere then stop right here and consider this: There are much better, more effective solutions to reduce GHG's; incentivize investments in zero-emission generating resources. Yes, the consumer will still be footing the bill for these investments, the only real question is, which approach, carbon taxes or incentives to build clean generators, is more effective at reducing GHG. FYI: empirical evidence from carbon tax policies in Alberta contain the answer.  

I assure you Senator there will be many in the industry profiting from a carbon tax and thanking you, at the consumers expense, if you are successful at ramming a carbon tax through with very little, if any, real progress toward decarbonization, as shown in the report from Alberta.

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Bob Meinetz's picture
Bob Meinetz on Nov 5, 2021

"Let's be clear about one fact regarding carbon taxes on electricity, it's not the 'dirty polluter paying the tax', it's us, the consumers of electricity that will pay the carbon tax."

Dick, the devil is in the details. When the tax is revenue-neutral, it's the fuel used to generate it that's being taxed, not the electricity. That means utilities have to ask for rate increases to cover the tax, and that means citizens get involved. They go to PUC hearings and say, "Why can't XYZ Amalgamated Power user cleaner sources? I don't want to pay more for their pollution!". With commissioners who actually care about fair prices for electricity, they might not grant rate increases on the entire cost of fuel. They might send part of the bill to XYZ, and its shareholders.

Then the shareholders get involved. They go to shareholder meetings and say, "That coal plant is putting a cap on profits, and driving the value of our stock down. We need to invest in natural gas, and maybe a little solar to make Greenpeace happy."
 

"A carbon tax will create enormous windfall profits for companies that generate electricity, at the consumers expense."


How would a fuel tax result in profits for utilities?
 

"There are much better, more effective solutions to reduce GHG's; incentivize investments in zero-emission generating resources."


Your source doesn't offer any support for the idea incentives would be more cost-effective than a carbon tax. In California, we offer incentives to build more sh#t, in the form of Return on Equity (ROE). The sh#t doesn't have to lower carbon emissions at all - it just has to cost a lot of money. Then, consumers not only have to pay for the cost of its depreciation, they have to pay for a percentage of its book value every year. The utility makes big profits, the consumer gets nothing of value in return. After it's fully depreciated, on the books it's worthless - without any equity, there is no ROE. So the utility tears it down and builds more sh#t. Rinse, repeat. It costs a lot of money, it accomplishes nothing.
 

You make it sound like there are no consumers who are dirty polluters. Ask Exxon, they will say, "Hey, climate change isn't our fault. We're just selling consumers a product that they want to buy." Ask consumers, they will say, "It's Exxon's fault! They're selling fuel that's dirty." Who do you think should pay for the cost of climate change? Saying no one should have to accept responsibility is equivalent to saying, "We should all have the right to use whatever fuel is cheapest, the environment be damned." That isn't what you believe, is it?

Richard Brooks's picture
Richard Brooks on Nov 6, 2021

Bob, thanks for sharing your always thoughtful insights. I appreciate you taking the time to engage in these discussions.

First, my position on climate change is: Climate change is a genuine risk to our planet and our lives that must be met with an urgent response and an effective solution. Electrification is the only real solution to reduce Green House Gases and we must aggressively pursue the build out of zero emission generating supply and the wires needed to carry this energy from source to loads, across the nation.

With regard to electricity pricing, you are correct, in a cost of service model a rate making case determines the $.c/kWh the consumer pays. In wholesale energy markets (DA and RT), like we have in New England the price of electricity is determined through a market clearing process that sets the price of electricity (LMP) at the cost of the marginal unit, which is often time a fossil unit, using a uniform clearing price. All generators receive this payment for their electrons produced, which means a very efficient unit, like a nuclear plant that produces electricity for 0.03/kWh will receive the uniform clearing price which may be 0.19/kWh resulting in a significant profit of 0.16/kWh - a huge windfall profit for the nuclear plant owner that's capable of producing 1,200 MW per hour. All other generators that are producing energy for less than the uniform clearing price will also see varying revenue benefits based on their own production cost. Units that are more expensive than the uniform clearing price do not clear the market and receive no revenues (unless they are allowed to self schedule).

 

To summarize, I'm all for solving the problem of climate change NOW, as an urgent matter, through electrification. Wholesale market electricity pricing can produce the type of windfall profits that I described in my article, but, as you pointed out, areas of the country that remain under a "cost of service" model generators may not experience the windfall profits that are possible in wholesale markets, where prices can spike to $9,000/MWh as they did in Texas during storm Uri in February, 2021.

Roger Arnold's picture
Roger Arnold on Nov 7, 2021

I very much agree with Bob that "the devil is in the details". And he brings up a good point that I hadn't thought about before: the perverse incentive of a guaranteed return on capital investment, as enshrined in the traditional utility regulation model.

 

The guaranteed "fair return" on capital investment is a feature of traditional regulated monopoly model for public utilities. The guarantee is in the form of rate setting, such that the utility will generate sufficient revenue to yield the stipulated return. It's not a blank check for just any investment the utility elects to make; the regulatory commission has to review and approve any proposed investment. However, humans are very good at rationalizations. It's never all that hard to come up with "objective" reasons for decisions that will -- quite coincidentally mind you -- play to one's advantage. In the cozy relationship that tends to develop between regulator and regulated, regulated entities rarely have difficulty winning approval for what they want.

 

It's not clear to me how this dynamic plays out in "deregulated" utility markets. Deregulation splits off power generation from transmission and distribution. Utilities that own generation assets are required to either divest those assets. or reorganize into separate and (in theory) independently run divisions for generation vs. T&D. A firewall is supposed to be put in place to preclude collusion between the generation division and the T&D division. All generators are supposed to enjoy equal access to the T&D system.

 

The vehicle for access, as I understand it, is a FERC-compliant wholesale power market. In that case, I don't believe return on capital invested in generation assets is guaranteed by or subject to regulation. The distribution utility may remain a regulated monopoly, but only its actual operating costs and investments in the T&D network are considered in the rate setting process. There's still a perverse incentive at work, but it's an incentive to allow operational expenses to inflate. Or a disincentive to push operational efficiency.

 

I don't know, though. The business of regulations and rules is a space long since colonized by lawyers and lobbyists. It's in their interest (job security) to make things complicated. Perhaps guaranteed return on invested capital still lurks in the regulations, even for nominally deregulated markets. That would render the pressure to decommission perfectly good zero-carbon nuclear power plants more understandable. Not forgivable, but understandable. 

Bob Meinetz's picture
Bob Meinetz on Nov 7, 2021

Providing everyone in society with access to reliable, affordable electricity has always been a challenge, but I have yet to see evidence deregulation offers any kind of solution.

"The business of regulations and rules is a space long since colonized by lawyers and lobbyists. It's in their interest (job security) to make things complicated."

Truer words never spoken, Roger, and the 559-page Energy Policy Act of 2005 is a perfect example of legislation chock-full of carveouts and pork-barrel rewards for special interests. Since then, band-aids applied to the bill by state legislators have only turned federal problems into local ones. 

In an email exchange with a retired FERC attorney years ago I asked why free-market competition in electricity had failed to keep prices low. "What leads you to believe there's free-market competition in electricity?", she replied, then went on to explain why competition in wholesale markets doesn't keep prices low for retail consumers. Electricity, despite various machinations to make it appear otherwise, remains a natural monopoly for consumers - there is no freedom of choice. And where there is no freedom of choice, on a product that most agree is an essential need, market restraints on price are non-existent.

I'm convinced that is the crux of the problem with escalating prices and declining reliability. There is nothing fundamental that distinguishes today's challenges from those of a century ago, when monopoly abuse by Samuel Insull and other electricity robber barons made it a luxury, unavailable to most. As part of FDR's New Deal, the Public Utility Holding Company Act of 1935 sought to craft a compromise between public and private interests, with both state and federal oversight for consumers. And it worked - in fact, it became a model for the world. Is it surprising that following its 2005 repeal the same problems are appearing again?

Audra Drazga's picture
Audra Drazga on Nov 10, 2021

Great discussion - I would love to hear from someone who currently works at a utility on how this would affect them - the challenges and the opportunities. 

 

A couple of other thought points: 

1) Many times I think we forget about energy efficiency programs and the opportunities they present to reduce consumption.  It seems like we are always focusing on building vs reduction.  

20 How any of this is going to affect those who already struggle to pay their bills. One way or another all of this has to come out of someone's pocket; it always seems like it is the middle and lower class that get hit the hardest. 

Richard Brooks's picture
Thank Richard for the Post!
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