The incessant calls for – and criticism of – government-funded/mandated “green/clean power” pork both ignore root causes and potential common ground. As a result, both sides of the debate are largely talking past each other, one talking about why there is a pressing need for government policy to address climate change concerns (concerns underscored by the May 19 MIT study), while the other is concerned chiefly about the likelihood of heavy-handed mis-regulation and wasted resources. This leaves the middle ground unexplored.
While there are plenty of root causes for the calls for legislative and regulatory mandates in favor of clean / green / renewable power, such as:
- concerns about climate change,
- the political deal in favor of dirty coal under the Clean Air Act,
- the enduring role of the federal and state governments in owning vast coal fields (the royalties from which it does not distribute to citizens but go into the General Pork Pool),
- the unwillingness of state courts, in the face of the political power of the mining industry, to protect persons and private from pollution and environmental disruption created by mining,
- the deep involvement of the government in developing, encouraging and regulating nuclear power,
the most obvious and proximate root cause is something that attracts far too little attention – the frustration of consumer demand for green energy, and the inefficient and inaccurate pricing and supply of electricity. It`s prettty clear that the grant of public utility monopolies and the regulation of the pricing and investments by utilities greatly restrict the freedom of power markets, from the ability of consumers to choose their provider, to the freedom of utilities to determine what infrastructure to invest in, to even simple information as to the cost of power as it varies by time of day and season, and the amount power consumers use by time of day or appliance.
With freer markets, we would see much more competition, better pricing, much more cost-saving (and conservation), and more money flowing into green power. So why is so little attention being paid to all of the gains that could be achieved from less – and more rational – power regulation?
Allow me to provide a few quotes and links to those interested:
1. Lew Rockwell, President of the Ludwig von Mises Institute, “The Real Cause of Blackouts” (July 27, 2006):
Now, if markets were in charge, a heat wave would not be looked at as a problem but as an opportunity. Entrepreneurs would be swarming to meet demand, just as they do in every other sector that is controlled by markets. The power companies would be praying for heat waves! …
Just who is in charge of getting electricity to residents? A public utility, which, in the absurd American lexicon, means “state-run” and “state-managed,” perhaps with a veneer of private trappings. If you look at the electrical grid on a map, it is organized by region. If you look at the jurisdiction of management, it is organized by political boundaries.
In other ways, the provision of power is organized precisely as a central planner of the old school might plan something: not according to economics but according to some textbook idea of how to be “organized.” It is “organized” the same way the Soviets organized grain production or the New Deal organized bridge building.
All of centralization and cartelization began nearly a century ago, as Robert Bradley points out in Energy: The Master Resource, when industry leaders obtained what was known as a regulatory covenant. They received franchise protection from market competition in exchange for which they agreed to price controls based on a cost-plus formula — a formula that survives to this day.
Then the economists got involved ex post and declared that electrical power is a “public good,” under the belief that private enterprise is not up to the job of providing the essentials of life.
What industry leaders received from this pact with the devil was a certain level of cartel-like protection, the same type that the English crown granted tea or the US government grants first-class postal mail. It is a government privilege that subjects them to regulation and immunizes companies from business failure. It’s great for a handful of producers, but not so great for everyone else.
There are many costs. Customers are not in charge. They are courted only for political reasons but they are not the first concern of the production process. Entrepreneurial development is hindered. Our current system of electrical provision is stuck in time. Meanwhile, sectors that provide DSL and other forms of internet and telecommunication services are expanded and advancing day by day — not with perfect results but at least with the desire to serve consumers. …
How New York and California consumers would adore a setting in which power companies were begging for their business …. Competition would lead to price reductions, innovation, and an ever greater variety of services — the same as we find in the computer industry.
What we are learning in our times is that no essential sector of life can be entrusted to the state. Energy is far too important to the very core of life to be administered by a bureaucracy that lacks the economic means to provide for the public. How it should be organized we can’t say in advance: it should be left to the markets. …
What we need today is full, radical, complete, uncompromised deregulation and privatization. We need competition. That doesn’t mean that we need two or more companies serving every market (though that was common up through the 1960s). What we need is the absence of legal barriers to enter the market.
2. Lynne Kiesling, Senior Lecturer in Economics at Northwestern University and former director of economic policy at the Reason Foundation; participant in debate at Reason online “Carbon: Tax, Trade or Deregulate?“
[M]ost people fail to realize that the abysmal job we do of pricing electricity contributes substantially to our energy use. The only resources that are priced as badly as electricity in our economy are highways and water.
Retail competition and choice for consumers would increase the offering of time-differentiated dynamic pricing, which shifts resource and electricity use across time. Research shows that this promotes conservation and more efficient use of electricity, increases offerings of green power to consumers who want to choose a green power option, and increases the incentives to develop and adopt technologies, such as price-responsive appliances, that enable private individuals to control their own energy use.
So the message from me is this: It’s a complicated, imperfect world, and the policies we can adopt that induce innovation and harness diffuse private knowledge will be the most effective for this long-term problem.
3. Paul Joskow, current President of the Alfred P Sloan Foundation and former head of theMIT Department of Economics (now on leave) and former director of the MIT Center for Energy and Environmental Policy Research; speech at the National Press Club in September 2008:
For almost 50 years this sector was stuck in an organizational and regulatory framework that may have been well matched to the electricity generation and transmission technology available in 1935, but was surely poorly matched to changes in technology, new technological opportunities, contemporary investment needs, or current economic and environmental challenges. Then in the early 1980s, electricity sector reformers began to stir, responding to concerns about the system of regulated vertically integrated monopolies inherited from the 1930s. The “good old days” of regulation represent a view to the past with rose colored glasses. The system of regulated vertically integrated monopoly was plagued by cost overruns associated with nuclear power plants, poor operating performance for both nuclear and large fossil-fueled plants, poor fuel procurement decisions, wide price differences between neighboring areas, excess generating capacity, inefficient dispatch and economy energy trading between generating companies, regulatory incentives to keep old inefficient plants operating rather than retiring them, too many small utilities to take advantage of economies of scale, institutional and technological barriers to using the transmission network to access lower cost power, productivity lags, and inefficient retail prices. The system …was unnecessarily costly and inefficient.
Reformers looked to the favorable experience with restructuring, competition, and regulatory reform in other sectors and with electricity in other countries to help to solve the problems associated with the fragmented electric power sector made up of over 100 vertically integrated geographic monopolies. Municipal distribution companies and large industrial customers were especially aggressive at promoting reforms focused on open transmission access, the creation of transparent organized regional competitive wholesale markets, and (in the case of large industrial customers) retail competition.
A large number of states initially embraced this restructuring, competition, and regulatory reform vision and began to implement it. In 2000 it looked like restructuring and competitive market reforms were going to sweep the U.S. electric power industry.
Then came the California electricity crisis, the collapse of Enron and a number of merchant generating companies, increased volatility to natural gas markets and associated volatility in wholesale electricity market prices, and a long march upward in fossil fuel prices ultimately resulting in rising retail electricity prices in both regulated and restructured states. Most of the states that were leaders in restructuring during the late 1990s, when natural gas prices were low and there was excess capacity, initiated reforms during a period when regulated prices for generation service were expected to be much higher than perceived comparable competitive wholesale market prices. The expectation was that over time retail prices would fall. This forecast was based on the assumption that low prices for natural gas in particular would continue and that a new system built on efficient CCGT technology would evolve. At that time, a major “problem” that many of these states had to cope with were the “stranded generation costs,” primarily associated with what were perceived to be costly nuclear power plants, that were expected to result from the introduction of real wholesale and retail competition. This was expected to be a “transition problem” because it was expected that competition would result in market prices that would fall to levels below the embedded costs of nuclear plants and older fossil plants that would have otherwise been used to calculated (higher) regulated retail prices.
However, as natural gas and coal prices continued to rise far above anyone’s expectations, many of these states soon found that competitive market prices were rising dramatically along with natural gas prices (which affect competitive wholesale electricity prices in most regions of the country) — arguably rising to levels above what regulated prices would have been today under the status quo ante (though this requires a difficult counterfactual analysis). This, of course does not mean that these electricity sector reforms were a failure. In states that adopted the restructuring, wholesale and retail competition model, retail prices now reflect marginal supply costs, as they should to give consumers the right price signals to use electricity wisely. Rather it means that regulated prices are or would have been too low to give consumers appropriate incentives to make wise consumption decisions.
In evaluating restructuring, competition and regulatory reform one must understand all of its efficiency and distributional properties, not just at short run price effects. From an efficiency perspective, the restructuring reforms implemented at the federal level and in some states have led to numerous cost reducing successes in the face of rising fossil fuel prices. These include dramatic improvements in the performance of divested nuclear plants, significant improvements in the performance of fossil plants that now face market incentives, roughly 200,000 GW of new (mostly merchant) gas-fired generation has been added to the system between 1999 and 2004, while the risk of cost overruns, fuel price fluctuations, demand variations, and availability problems experienced by some of these plants were shifted to their owners through the market rather than borne by consumers through cost-of-service regulation. There is good empirical evidence that the expansion of the boundaries of RTOs (e.g. PJM) have led to significant changes in power flows and more efficient dispatch of power plants, while inefficiencies are observed at the boundaries of RTOs that have not agreed to be consolidated (e.g. NY/NE). Gradual improvements in wholesale market designs have increased the efficiency of these markets and have restored investment incentives. Moreover, retail prices now respond quickly to changes in wholesale market prices, providing consumers with the right price signals rather than the wrong price signals resulting from retail price regulation. And these price signals are properly differentiated by time and location to reflect marginal supply costs, rather than the depreciated original cost of generating plants built 50 years ago. Demand management programs linked to short-term supply and demand conditions are expanding quickly as well in the reform regions.
Of course, the full reform program has not been implemented in large areas of the South, the West, and portions of the Midwest. The partial electricity reform equilibrium that we appear to be in now will not serve the country well and is potentially quite unstable. We have a system that is 1/3 reformed and 2/3 stuck in the structural and regulatory paradigm of the 1935s or somewhere in between.
The problems created by an antiquated industry structure and incompatible mix of state and federal regulation have not gone away. They are lurking out there to undermine achieving the goals that I enumerated earlier. Absent a comprehensive national electricity policy framework this sector is and will perform poorly in meeting the four sets of goals that I discussed earlier.
Joskow has spelled out his specific proposals for reform, which I note here.
4. Google, September 19, 2008 press release – “Partnering with GE on clean energy“:
Today we announced that we’re joining forces (PDF file) with GE to use technology, information and corporate resources to drive the changes necessary to empower consumers with better energy choices. We will focus on improving power generation, transmission and distribution – a combination of technologies that could be known as the “smart grid.” (It would be fair to refer to electricity technologies in common use today as a “grid of only average intelligence.”)
The existing U.S. infrastructure has not kept pace with the digital economy and the hundreds of technology opportunities that are ready for market. In fact, the way we generate and distribute electricity today is essentially the same as when Thomas Edison built the first power plant well over one hundred years ago. Americans should have the choice to drive more fuel efficient cars – or even electric cars – and manage their home energy use to reduce costs, and buy power from cleaner sources, or even generate their own power for sale to the grid.
We all receive an electricity bill once a month that encourages little except prompt payment. What if, instead, we had access to real-time information about home energy use? What if our flat screen TVs, electronic equipment, lights and appliances were programmed to automatically adjust to save money and cut energy use? What if we could push a button and switch the source of our homes’ electricity from fossil fuels to renewable energy? What if the car sitting in our garage ran on electricity – the equivalent of $1 per gallon gasoline – and was programmed to charge at night when electricity is cheapest?
This vision is what unites Google and GE. We’ll start by working together in Washington, D.C. to mount a major policy effort to enable large-scale deployment of renewable energy generation in the United States.[deregulation? mandates?] We’ll also work on development and deployment of the “smart” electricity grid that will empower consumers, utilities, and technology innovators to manage electricity more efficiently and lower their carbon footprint. Finally, we’ll collaborate on advanced energy technologies, including technologies to enable the large-scale integration of plug-in vehicles into the grid and new geothermal energy technologies known as enhanced geothermal systems (EGS).
As I have noted elsewhere,
While Smart Meter / Smart Grid programs have been growing, there is still considerable market fragmentation and rights of consumers have not been clearly spelled out. According to Google, while some state regulators have ordered utilities to deploy smart meters, their focus has been on their use by utilities and grid managers, and not on consumer rights to the information they generate. As a result, Google is engaged in policy advocacy as well; says Google:
“deploying smart meters alone isn’t enough. This needs to be coupled with a strategy to provide customers with easy access to energy information. That’s why we believe that open protocols and standards should serve as the cornerstone of smart grid projects, to spur innovation, drive competition, and bring more information to consumers as the smart grid evolves. We believe that detailed data on your personal energy use belongs to you, and should be available in an open standard, non-proprietary format. You should control who gets to see your data, and you should be free to choose from a wide range of services to help you understand it and benefit from it. For more details on our policy suggestions, check out the comments we filed yesterday with the California Public Utility Commission.”
5. Jerry Taylor, senior fellow at Cato Institute, “The Right Way to Fix the Grid“, August 19, 2003 (New York Post):
Yes, the need for more investment in the grid seems clear. The system was designed to handle a limited number of transactions, not the large interstate exchanges of electricity now common. Moreover, transmission capacity has been stagnant relative to the growth in power generation, stressing the system even more.
Why has the grid deteriorated?
* Transmission projects are considered, approved and paid for at the state level – but the benefits cross state lines. And state-level decision-makers understandably resist using ratepayer dollars to pay for investments that will mainly help out-of-staters.
* In much of the country, incumbent utilities and state politicians actively resist improving the grid. Vertically integrated companies (which own the generating plants, transmission lines and distribution networks within a service territory) often fear that a more robust transmission system would boost potential competition.
Many politicians also oppose grid improvements because new transmission capacity would make it easier for out-of- state customers to bid-away the cheap power from in-state consumers.
* Returns on transmission are regulated, so utilities have found that they can make more money by investing in virtually anything besides transmission infrastructure.
* With many regulatory fights still unresolved, and the potential for profit thus unclear, investors have delayed risking their money on the grid.
The solution now in vogue to solve these problems is to give the Federal Energy Regulatory Commission more authority over transmission investment. State regulation of transmission is, after all, an archaic relic of another era; and all who use the transmission system are vulnerable to the weakest links in it.
But forcing utilities to invest in transmission upgrades through increased federal regulation is too crude and blunt a policy hammer. It may get the job done to some degree, but running industries by federal dictate is less efficient than ensuring that proper incentives exist for the industry to operate efficiently on its own.
Instead, why not try deregulating the grid? Kill the cap on transmission profits. Jettison the state regulations that protect transmission companies from competition. Cease the endless political debate over how the transmission lines ought to be organized and managed and let grid owners discover for themselves how to most efficiently run their businesses – something market agents are more adept at learning than legislators or regulators.
Most analysts are convinced that the transmission system is a natural monopoly, and so recoil at the very thought of competition to the grid. But it already exists, in the form of natural-gas pipelines.
All new power plants, after all, are natural gas-fired. They can be located far from urban areas and their product shipped to urban areas via the electricity-transmission system, or they can be located in urban areas and their output shipped locally.
The competition between gas and electric transmission is no worse than the competition between cable and satellite television service providers.
Deregulation would also mean an end to rules that force grid owners to do business with anyone who wants access to their wires. Transmission providers should be allowed to negotiate the terms and conditions for both putting power into the lines and for taking it off.
Those who own the power lines, after all, have a greater incentive to ensure that their lines run safely than do the regulators who watch over them, particularly since they wouldn’t be able to rely on regulatory bodies to guarantee them a rate of return on their investments.
Deregulation can’t guarantee that blackouts would never again occur. But it would almost certainly lead to a faster flow of dollars into overdue investments in reliability and a far wiser use of such dollars than would the orders and mandates being contemplated in Washington.
More by Taylor on power regulation here and here.
Any Austrians who have read through this may be familiar with these words from Roy Cordato:
“by placing environmental problems within the context of personal and interpersonal plan formulation, we discover that they are not about the environment per se but about the resolution of human conflict. …
“Humans cannot harm the environment. Instead, they can change the environment in such a way that it harms others who might be planning to use it for conflicting purposes.”
“The focus of the Austrian approach to environmental economics is conflict resolution. The purpose of focusing on issues related to property rights is to describe the source of the conflict and to identify possible ways of resolving it.”
“Environmental problems are brought to light as striking at the heart of the efficiency problem as typically seen by Austrians, that is, they generate human conflict and disrupt inter- and intra-personal plan formulation and execution.”
Do Austrians and others have their problem-solving caps on, focussed on aiding conflict resolution? Or are they instead simply fighting over the wheel of government, in a way that ensures the continuing frustration of the concerns that many have about apparently very serious climate change risks?
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