Our electric regulatory model is broken. It preferentially deploys expensive power sources before cheap ones. It compares the variable costs of dirty fuels to the all-in costs of clean fuels and deludes itself into thinking that the dirty, expensive power is economically advantaged. It places the interests of utility shareholders above the interests of other potential investors in our power grid, massively skewing capital allocation, even while it insulates utility investors from the disciplines imposed by a competitive market.
These problems arise fundamentally from the over-regulation of our electric sector, which has created stable utilities, but virtually no opportunities for the kind of economic "upside" necessary to attract entrepreneurs into the sector. This ought to be good news; after all, we Americans are really good at taking risks, deploying our prodigious entrepreneurial talents and making big financial bets. The problems we face all play to our strengths. Unfortunately, any positive change to our system is by definition deregulatory -- a word that has been politically poisoned by the botched restructuring (don't call it dereg!) in California and Enron's machinations. As factually irrelevant as those bogeymen may be to any discussion of deregulation, they present formidable political obstacles to reform -- and only the most quixotic windmill-tilter chases reforms that are politically untenable to both sides of the aisle.
Houston, we have a solution.
The outline below describes a regulatory structure that we have been developing, built upon existing "standard offer" programs in California and Ontario, and extending based on recent and on-going conversations with a broad swathe of utility executives and regulators. We expect to shortly announce the roll-out of this plan with a major U.S. utility, and continue to refine and enhance for maximum viability. We'd also like to hear from you. Tell us what flaws you see in this, but more importantly, suggest tweaks to improve, subject to a few ground rules:
- Greenhouse gas reduction is critical to the long-term health of the planet, or at least our species' inhabitation thereof. Suggestions that this tenet might be up for debate are not welcome.
- Societies' interests are best served by profitably reducing GHG emissions to the extent we can. Policies that start from a debate over who must lose are non-starters.
- Goals trump paths. We're not interested in cherry picking technologies -- even those that we happen to have a vested interest in. We are interested in policies that define success and then leave the market to figure out which route to take.
- Competitive markets are more important than the long-term health of any specific business, and provide quicker, cheaper solutions than any top-down regulatory approach.
If you disagree with those points, you won't find us very receptive. But within those points, we welcome your thoughts on how to strengthen the policy proposal outlined below.
We hold these truths ...
Harry Truman said famously that you can get a lot done if you don't care who gets the credit. Getting to this point first means setting up a goal in which lots of folks can claim victory (and therefore have an incentive to take credit). When it comes to electric system reform, this means that politically-viable reforms need not only to create economic and environmental value to society, but also need to recognize the economic interests of regulated utilities and the political interests of regulators.
Clearly, our existing regulatory model has failed to deploy the cheapest or cleanest generation sources. But just because that's true doesn't mean there's much to be gained by rubbing the noses of the regulated or the regulator in that fact. However, if we don't reform, we are going to deploy technologies that will massively increase both electricity costs and associated CO2 emissions.
As such, I'd suggest the following framework foes any near-term regulatory reform of the electric sector:
- Keep the regulator involved. Our nation's electric regulators pride themselves -- not entirely without justification -- in their knowledge of the complexities of our electric system, capital costs of competing technologies, and capital needs of the industry. Let's use that knowledge to our advantage, rather than "de-Baathify" the system.
- Keep the utility whole. The biggest opposition to electric sector reform has historically come from the electric industry, out of a fear that they will lose customers in a competitive market. While it is tempting to brush this off with a "welcome to my world, bub!" Hallmark card, one still must admit that the massive capital invested in our electric system -- however flawed it may be -- is at risk if customers run to other suppliers. Utility opposition can be substantially reduced if we craft regulations that avoid this financial pressure.
- Level the playing field. A big part of the reason that we build economically foolish generation is because of the equity guarantees given to regulated utilities, which make foolish technologies appear comparatively sane due to differential capital costs. (In other words, if your bank likes you more than mine likes me, you might find it easier to build a power plant than I, even though I am clearly smarter than you when it comes to power plant technology selection and construction.) It's politically hard to take that away, but one can structure contracts with non-utility players to make them comparably attractive to the lending community.
With that in mind, we have developed the Clean Energy Standard Offer Program. Its basic principles are as follows:
- Each year, the regulatory agency (this could be FERC, the state utility commission, or some other entity as appropriate) calculates the delivered, all-in price per MWh of the best generation options they either considered or approved in the prior year. Delivered, in the sense that it must include the cost of the wires to get the generation from the plant to the load. All-in inclusive of capital recovery, profit, pollution control -- this should represent the costs that electric customers will have to pay on the margin for that generator. Note that in current markets, this price is substantially higher than the average retail rate, since the latter includes lots of existing generation that is already fully or partially amortized. But since this is the competing cost of new generation, it sets a "price-to-beat" for any non-utility offer.
- The state then provides long-term (15 year +) contracts to any eligible power plant at 80 percent of the price per MWh calculated above. These contracts may be entered into by the local government or the local utility as appropriate. Note though that in all cases, any power sold on these contracts is implicitly at a 20 percent discount relative to the best power plant that would have been built in our existing regulatory model -- thus guaranteeing that society benefits from any power plant built under this program.
- Eligibility is limited only to power plants that consume one-half or less of the fossil fuel per MWh as the U.S. grid average. This ensures that any eligible plant is dramatically lowering the fossil-intensivity (and hence CO2 emissions ) of the U.S. power grid, while driving down the cost of electricity.
- Any utility customer who installs (or engages a third-party to install) an eligible generator on their premises must continue to buy 100 percent of their power from the utility. This is designed to separate the societal benefit of clean power from the financial solvency of the local utility. It's a neat trick that recognizes that the financial settlement of a power contract does not have to have any direct relationship on where current from the generator flows.
- As a condition of eligibility, a qualifying generator must decline any other state or federal incentives. This ensures that the net societal cost of the plant is always less than the alternative supply.
- Any eligible facility must be interconnected by the utility to the grid at the utility's expense, provided that the utility may recover those costs through their rate base. In all current interconnection standards, utilities are allowed discretion to protect their asset (the grid), but the interconnecting customer must pay the costs. This creates a misalignment of incentives, no different than if you were allowed to tell your neighbor what plants they ought to buy to beautify the border between your lawns. This provision not only removes the misalignment, but also ensures that interconnection for all generation is treated the same way, regardless of ownership.
Note what the CESOP does. All traditional renewables are eligible, as are thermally-matched CHP, waste heat recovery, and any other technology we haven't yet thought of. The goal of lower fossil-intensivity is rewarded without getting caught up in a specific path. Further, it subverts the argument that non-utility power sources aren't economically viable, since any participating power plant is, by definition, at least 20 percent cheaper on a delivered basis than the central alternative.
But it still retains a role for the regulator, who is still obliged to use their efforts to deploy the cheapest possible technology they can identify within their regulatory paradigm. The better they do at their job, the better off society is as we deploy ever-cheaper power. And it still retains a role for the utility to manage and operate the grid, with sufficient compensation for their efforts.
Perhaps most importantly though, it dramatically levels the playing field for the local power plant. A big, expensive, central coal plant has the perverse luxury of very cheap money, granted at the moment the utility regulator says "yup, you can build that", since it then gets guaranteed rates set by the government. By contrast, a cost-effective local power plant selling power to a local industrial or residential user must pay very high borrowing costs due to the comparatively higher credit risk of their host. (Joe's Paper Company being much more likely to miss a couple payments than New York State.) By granting clean energy plants with the same underlying credit risk as the utility -- but still holding them accountable for performance, since they won't get paid unless they produce those MWh -- the CESOP makes it dramatically easier to finance clean power while still keeping competitive pressure upon the industry.
So now it's your turn. Where do you see holes? Where can we improve? (And if you have no criticisms, use the space below for hagiography as necessary.)
U.S.-Russia climate and energy efficiency cooperation: A neglected challenge
How fast can the US electric sector reform?
Lost in the shuffle: Some efficiency policies weakened in Waxman-Markey bill
Comments View as Flat
GreenEngineer Posted 9:19 am
18 Jul 2008
Question
I'd like to have you clarify the meaning of this statement
When you say "must continue to buy 100 percent of their power", do you mean "100% of their power requirements over and above what they generate on-site"? Or do you mean that they have to pay the utility for all the power they use, regardless of how much of it they generate on site? If the latter interpretation, that sounds alot like a departing load fee.
Or is your model this: The customer-generator builds a plant, which sells power to the grid at the pre-agreed rate (per the 15 year contract), while the customer buys all their power through the utility meter. In other words, the generation and the use of power are separated; i.e. this is not net metering. After thinking about it, this seems like the most likely interpretation, but hopefully you can confirm or clarify this for me.
Permalink
Gar Lipow Posted 10:15 am
18 Jul 2008
nearly 100%, not half
At this point I would require that any new electrical source be essentially carbon free. However, pace Gore, I would have a requirements on utiltities that they be 100% carbon free at the end of ten years - meaning that they know they will have to shut down existing plants that are not low carbon within ten years. I would count electrical generation that ran off waste heat from existing processes, even existing carbon intensive processes as "carbon" free, provided that revenue streams from this generation did not result in those processes being run for longer times. So much of the "recycled energy potential" would count as carbon free for this purpose.
Permalink
Gar Lipow Posted 10:18 am
18 Jul 2008
markets
>Competitive markets are more important than the long-term health of any specific business, and provide quicker, cheaper solutions than any top-down regulatory approach.
The part outside of bold should not be conflated within what is in bold. I've posted int he past on Sulphur trading in the U.S. vs. Sulphur regulation in Germany. Regulation worked a whole lot faster. So you don't have to be receptive. I guess it is a matter of whether you care if your postion is reality based. If realism is unimportant to you, than by all means be closed to the idea that regulation and public works may provide faster results.
Permalink
Sean Casten Posted 12:48 pm
18 Jul 2008
GreenE
Good question, and it gets to one of the key insights.
Let's say that you are the big local industrial on a local utility load. To pick numbers, let's say the utility has a 50 MW load, of which you represent 25 MW. Then let's assume that you have waste heat and/or a perfectly balanced cogen potential to generate 100% of your load, all of which is at vastly higher efficiency than the grid.
From society's perspective, the choice is a no-brainer. Install the generation and reap the benefits. But from the utility's perspective, the choice isn't so obvious. 50% of their capital assets (generation, wires, etc.) has been deployed to serve your load. While one might quibble that they shouldn't be compensated for building generation & distribution that you could more cost-effectively build on your own, that doesn't alter the reality that if you build the optimal on-site generation, their revenues fall by 50% but their debt-service is unchanged. Ergo, they've got a hard time keeping rates unchanged for the rest of the customers who don't have such options.
Now look what the CESOP does. The utility was strapped for power anyway, so the rule simply stipulates that they buy their marginal power from you instead of from a 20% more expensive central power plant. Whether they use this to serve load growth, the other 50% or simply "flip it" to someone else is immaterial - but in any event, they have to buy the power.
But in exchange, they still serve 100% of the industrial load. So they still get all the $ they were anticipating to recover their capital, but as a bonus find themselves owning power that they can dispose of however they wish, at a price that is cheaper than anything they could otherwise build on their own.
The key to keep them whole is that 100% of all the power you generate gets sold to the utility, so 100% of the revenues they were anticipating still get earned. But in the meantime, we've brought cheaper, lower-carbon power on-line in a manner that lowered the rates for all customers. The intellectual insight here is that you can completely separate the financial transaction for the power sale from the physical transaction of where the current goes, such that the industrial still gets the benefits of the power, but the utility doesn't get hit with a financial hammer as a result.
Make sense?
Permalink
Sean Casten Posted 12:57 pm
18 Jul 2008
Gar
If we can get 90% of the way to Gore's goal, we shouldn't award that 90% $0 and leave all the cash only for those who get 100% of the way there.
One could quibble with 50% fossil reduction, I suppose, but recognize that hitting 66% annualized fossil efficiency (2x the grid average) is really freakin' hard with cogen. You need a steady thermal load pretty much all year long to make this work. Is it possible? Absolutely. But you rule out an awful lot of projects that are better than the grid by far, but not quite up to this standard. In other words, the bar is high, and sufficiently high that you can't game it.
(I would say, per my Truman line above, that the political challenge of this will be getting all the traditional cogen folks to buy in. A group with which I have much simpatico, I might add, but one which will really struggle to hit the 66% threshold.)
But if you hold out for 100%, I'd argue that you're making the perfect the enemy of the good, to the detriment of the overall concept. That said, I think it's quite reasonable to devise a formula whereby the total payment is indexed to the % above the average fossil efficiency. (For example, if 2X gets 80% of the avoided cost, maybe 100% improvements get 90% of avoided cost, with a linear connection in between.)
But keep in mind that this is not meant to be a GHG policy as much as an energy policy that is internally consistent with GHG objectives. Let's set a GHG target because that's an important goal, but let's then also set a price on GHG emissions that can be additive or subtractive to the revenue earned under this program. (For example, while a coal CHP plant could hit this goal just as readily as a gas plant with careful thermal matching, that doesn't mean that the gas plant wouldn't be eligible for additional revenues as well due to it's lower GHG signature.)
Permalink
Sean Casten Posted 1:02 pm
18 Jul 2008
Gar, re: markets
Let's not call names. I saw your post on sulfur and fundamentally disagree that a top-down approach could have done better than the cap & trade (with the caveat that grandfathering greatly diminished the power of US sulfur C&T.) We may disagree, but that's not because one of us is "realistic" and the other living in la-la land. We simply interpret the same fact pattern differently.
In fairness, the trouble with any analysis of past regulation is that it is monumentally difficult to back-figure how the world would have responded if we changed one variable and held all else constant. The experiment has no controls. What I know from experience is that markets innovate and craft all sorts of clever ideas (provided appropriate gov't oversight) and top-down regulations constrain solutions. Maybe you draw a different conclusion from the data, but it's not because we have different goals, nor because we have differential levels of reality-acceptance!
Permalink
David Mack Posted 2:45 am
19 Jul 2008
Comment and question
Permalink
Sean Casten Posted 7:34 am
19 Jul 2008
David
This is in no way intended to solve the GHG problem, nor to be a stand-alone policy. Indeed, it's only because of our biases for clean power that we put the clean test in there at all (and frankly, because including a stringent environmental test politically immunizes the CESOP against claims that it's just a sop to the big old merchant power industry - not to mention aligning it with the CA and Ontario programs that also include such eligibility limits)
At core though, the purpose of the CESOP is to get more, lower-cost sources of power deployed than will be deployed under our current regulatory regime, and to unleash the capital and entrepreneurial power of our economy in the electric sector without first having to unbundle 100 years of regulation and jurisprudence.)
As to who would be the first to shut down, per my prior post, the plants all run so long as they are recovering their variable cost. At current gas prices, I don't see any GHG pricing regime that would shift existing coal onto the margin relative to natural gas. But it would affect the decision to build new plants. You raise a very good question about shutting down old plants though, and one that will get you kicked out of many an electric policy meeting for daring to suggest that an asset, once built ought ever be retired before it has been fully amortized twice over. Indeed, I know of no other industries where 50-year old assets are not only still running, but are actually competitive (without major modification - there are old steel mills running, but they are almost totally rebuilt from their initial designs). The reason is a regulatory model that massively protects those old assets from competition, and a full overhaul of the system to inject competition would immediately mothball many of those plants. (If all we did was remove the grandfather rights of the Clean Air Act, such that all plants had to operate under the same emissions regime, regardless of when they were built, we'd shut down lots of those old dogs.) But I know of no way to make that reform in a way that won't trigger massive political opposition. Not to say we shouldn't do it of course, but we need a politically elegant way to do so, or else it's just a lot of yelling with no result. Ideas welcome.
Re: your first comment, I agree. I threw this out as a possibility, but the more I think about it, the more I think a single 80% value and 2x efficiency test is simple and sufficient. The complexity of a sliding scale gains little, but adds massive complexity.
Permalink
David Hewitt Posted 6:51 am
20 Jul 2008
a case in point?
I would offer what I hope is an appropriate case in point. Here in SE Wisconsin our local IOU is preparing to bring two new conventional coal plants online next year. Early in the permitting process, the state regulatory body (Public Service Commission) approved the two conventional plants for the site, but nixed the third, an advanced technology coal gasification plant, saying it would cost too much. The IOU sited the two new plants on the shore of Lake Michigan on the same site as an old (still operating) coal plant. They did an end-run around the Clean Air Act rules, saying because the new plants are on the same site, the new plants constitute a grandfather-able upgrade. All relevant regulators agreed to that idea. Recently, the final permits were up for review for the cooling system. The cooling system will draw approximately 2 billion gallons of water daily from Lake Michigan, and return it about 10 degrees warmer. Concerned about the effect on the natural environment, opponents argued that they could have built cooling towers. But because of the Great Lakes Compact's restrictions on diverting water from the Great Lakes basin, the IOU argued that their proposal is superior to cooling towers, which would divert Lake Michigan water into the atmosphere.
From all this we may conclude that the current regulatory structure in Wisconsin seeks to provide the lowest-cost electricity to the rate payers. Waste one third of the heat generated by dumping it into the natural environment? Doesn't matter.
I admit I'm struggling to understand parts of your re-regulation proposal. Thinking about our local situation one day, I searched online for "electric utility heat exchanger" and found you. Could a company like RED build a closed loop heat exchanger near our IOU's site to use the waste heat to generate electricity under your proposal and be profitable?
A more efficient design of these two new plants could have incorporated a closed loop heat exchanger from the start (if I correctly understand your writing), although the cost to rate payers would have been higher due to the increased cost at the outset. In our current regulatory scheme, even if that had been proposed (it was not, as far as I know), it would have been vetoed by the PSC as too costly, just like the coal gasification proposal. But if the market could provide a way to do it, we could get to where we as a society want to go. If there are any regulatory barriers to an independent company doing what the IOU could have done in the first place, those barriers should be eliminated.
The benefits to society would include that Lake Michigan water temperature would not rise artificially; we would burn significantly less coal to generate the same amount of electricity; the cost to rate payers might go down due to the efficiency increase; the IOU is not injured as their sunk costs and financial commitments would go forth on schedule.
We're looking for the best balance between regulation and market forces. We don't want to de-regulate, we want to re-regulate or restructure. I know what outcome I want: to stop "smoking" -- stop dumping GHG into the environment. I'm starting to be persuaded that we should not make laws that incentivize a particular technology. If somebody could profitably generate electricity from the waste heat (or use the waste heat to economical advantage), then I would only wish for the law to stay out of the way to allow that capital investment -- as long as it doesn't veer off the path toward the smokeless atmosphere.
If I'm completely wrong-headed I apologize and I'll go back to reading silently.
Permalink
Sean Casten Posted 7:48 am
20 Jul 2008
David
If you have copies of the decision in Wisconsin, please send along, as I'd like to take a closer look. I am not aware of anyone right now getting coal plants approved that won't raise rates once their equity recovery is factored in. I don't want to diminish the impacts of water temperature on the Great Lakes, but would point out that from an economic perspective, that's second order. The reason those plants are so expensive isn't because of how they waste energy, but the fact that they do. The trouble with a coal plant in that context is two fold: (1) the capital costs and pollution control are prohibitive. Unless they're grandfathered out of 2 decades of standards, it's an expensive plant to build (but admittedly, cheap to run. (2) Perhaps more importantly, the economic scale to build a coal plant - if the only economic lens you have is one that is based on making power (rather than $) is >500 MW, and often closer to 1000. At this scale, there simply is no thermal host that is sufficiently large to take the waste heat, and so you are compelled to waste.
To take an agricultural point of comparison, it's directly analagous to the separation of combined crop/livestock lots, where the waste of one was the fertilizer for the other but now both produce prodigious environmental externalities in the form of settling ponds and fertilizer run off. The logic for building those is that if you only wanted to grow corn, the economic size is big. But if your goal was to minimize inputs per $ of profit, you build smaller and size the two relative to one another.
Taking this back to power and our big coal plant analogy, the big coal plants being built right now are like massive cattle feed lots. They're more economic than small feedlots, but both of them are vastly more wasteful than the integrated farms of yore. In power, this means that power plants need to be sized not to the power need, but to the local thermal need. Thus, 10 50 MW combined-heat and power plants rather than 1 500 MW power-only facility. (This same logic applies where there is not a local thermal source, but there is a supply of opportunity fuels like heat, landfill gas, etc. Size to those fuel supplies rather than power demand for maximum economic return - which again means smaller facilities.) The end result when you size this way is that you don't need the cooling tower at all, because your local thermal load is doing the cooling for you or, in the case of waste heat, you're throwing slightly less heat away than you were throwing away before, leading to a net reduction in heat rejection to the environment. (Admittedly, you might shift from atmospheric heating to water heating, but it's still at a vastly smaller scale.)
The irony is that those smaller units can beat the stuffing out of the big plants because they are so much more economic - which is why the utilities have fought them so hard. But they don't get built in our model. The idea of the CESOP is to make sure that those smaller plants get built first, so that we don't then need to shut down the big and expensive (but grandfathered) ones that we're going to build if we stay on our present course.
Permalink
Wolverine Posted 9:15 am
20 Jul 2008
Industry Lies
Sorry Sean, but you're just an industry insider spouting industry lies that regulation doesn't work. The root of the problem is that energy companies are not, by and large, publicly owned. The ones that are are generally more environmentally friendly AND provide cheaper energy. But if you capitalists insist on private ownership in an industry that's a natural monopoly, then there must be very strong regulation of everything within that industry. The only other alternative is to allow a tiny number of rich and powerful people to do whatever they want, to the great detriment of the Earth and ratepayers.
Permalink
2wheeler Posted 4:57 am
21 Jul 2008
not quite ready for takeoff
I would rather consider what the most progressive examples of what other nations are doing at this time with their more urgent political environments to address this problem since 2000. In addition, I didn't see conservation mentioned-- this is all sounding like supply-side economics.
The grid serves a purpose, guaranteeing stability of the supply across many sources. Perhaps it should be nationalized as much as our interstate highway system has been. I realize this comes at a cost but there is a public benefit attached thereto which need not be tied to corporate profit-taking at all turns on the way to a renewable energy future.
I don't agree that the large investor owned power companies continue to need to sit in the catbird's seat indefinitely here, whether that means guarantees of profits or fiscal "wholeness". The risks of distributed energy production will necessarily be taken on by other smaller players, who should also be justly rewarded for their investments in sustainable energy technologies and production.
I also disagree that the guarantee of grid operator "sales" (even when they did not produce the energy nor transport it, as condition #4 suggests may be the case) and profit needs to be included since we all know the many externalities of current unbalanced energy production on the environment and future life on the planet. Nothing in this proposal seems to address the externalities, instead it seems to be all about price. A carbon tax could be much more effective addressing the externalities than this command-subsidy setup which seems biased only in favor of continued energy production increases and not in favor or taking old outmoded dirty energy sources offline in time.
In short this seems an incremental approach not destined to succeed along the lines required (see challenge set forth by Mr. Gore last week). We would continue to have those old dirty coal plants on line indefinitely this way too, wouldn't we.
Moving toward sustainability with hopefulness, one revolution at a time.
Permalink