Getting our energy policy right does not require new technology, added societal cost, or economic disruption. However, it does require the political courage to question the sacred cows that have shaped 100 years of electric-market regulation.
A few ideas that are missing from the energy debate:
- Fossil fuel use in the U.S. is split approximately in thirds between transportation fuels, electric power generation, and heat generation (buildings, industrials, etc.). GHG emissions track accordingly.
- The electric industry is -- with very limited exceptions -- a regulated monopoly, subject to cost-plus pricing. This has been the case for 100 years. In other words, they have had a 100-year incentive to overconsume fossil fuel.
- Adam Smith never said anything about profits causing the public good. What he did say is that the pursuit of profits in a competitive market engenders the public good. The second half of this clause is entirely missing from the electric sector.
Why this matters:
Much of the debate on energy policy -- be it driven by national security, prices, global warming, reliability, or any other issue -- is built on the implicit, but flawed, assumption that our economy is optimal. This assumption is never spoken, but you hear it when Dick Cheney says that conservation is nothing more than personal virtue, or when economists discuss the costs of GHG reduction. All are predicated on the belief that we have a functioning market economy, ergo we have perfect efficiency, ergo any deviation from the status quo must imply an increase in cost.
The first piece of this logic is flawed, and the house of cards cannot stand. Whether this is cause for optimism or pessimism is a matter of perspective.
Pessimistically, this means that for over 100 years, we have been paying too much for electricity so that we could release too much CO2 into the atmosphere. Had we crafted a more thoughtful regulatory paradigm in the early part of the 20th century (or changed courses sooner), we could have massively reduced today's atmospheric GHG concentrations and lowered our energy costs -- with all sorts of concomitant benefits in terms of industrial competitiveness, etc. Indeed, the entire electric industry was twice as efficient in 1910 as it is today. Meaning that if all we did was return to 1910 efficiency levels, we would not only cut fossil-fuel use in the electric sector in half, but would also exceed our obligations for carbon reduction under Kyoto.
But there is an optimistic take as well. We can dramatically lower greenhouse-gas emissions without imposing societal costs and without depending on new, unproven technologies. And we can do so as part of an economic growth plan. But only if we have the political courage to change 100-year-old rules that have been extremely remunerative to the electric sector -- the biggest industry in the country.
Let's start.
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Comments
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Jon Rynn Posted 7:20 am
20 Jun 2007
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Sean Casten Posted 7:38 am
20 Jun 2007
http://www.recycled-energy.com/documents/articles/sc_tran ...
See Figure 1 for the whole efficiency history.
1910 is simply when the industry peaked, but even Thomas Edison's first power plant was more efficient than the current grid (50% vs. 33%). Put another way, the industry has NEVER been less efficient than it is today, which is really fairly remarkable (and vastly under-reported).
The difference is one of thermodynamics, economics and system design. Thermodynamically, you can't make power without also making heat. Economically, if your goal is to make as much money as possible with the minimum cost (not the way the electric sector works, but the way that functioning markets work), you recover that heat and sell it. Which brings us to system design. Before we regulated the electric sector, industry entrepreneurs sought to maximize their revenue per dollar of cost, and sited plants next to thermal loads where the heat could be recovered and sold. Once we went to a cost-plus regulatory model, utilities just became electric companies and moved their generators far away from thermal loads (building them much bigger in the process).
If this sounds confusing, think of it as a dairy, where whole milk is analagous to fuel. Would you rather sell cream, skim milk or a whole slate of products? Economics says you ought to sell the whole shebang. Our electric industry right now just sells the cream and pours the rest down the drain (or into the atmosphere, as the case may be). Meanwhile, lots of other parts of the economy would like to have skim milk (heat), and therefore burn more fuel to make the industry the electrics just finished throwing away.
Your question on municipalities is interesting, but for different reasons. The history of electric regulation has almost always been jurisdictionally confusing, and a case can be made that electric utilities outgrew municipalities in part to get away from municipal regulators. A case can certainly be made for jurisdictional consistency, but that's more appropriate at the federal level (since electrons don't know where state and municipal boundaries lie). That said, there is a really interesting question with relate to whether there is any public good created by a for-profit monopoly, and a strong case can be made for utilities being forced either to embrace competition (and be subject to anti-trust enforcement) or be civil servants (and get rid of their profit drag on the public good). But that is a post for another time...
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Ron Steenblik Posted 8:24 am
20 Jun 2007
Long ago (during the mid-1970s) I worked for a municipal power company in Florida. Eventually put in charge of environmental-monitoring and reporting, I attended state-wide meetings with counterparts from other munis and from the private utilities. While the private companies were active and effective in lobbying the State Capital to water down environmental regulations that they did not like, once the regulations were the law of the land they tended to abide by them. I can't say the same for all the munis.
Also, government environmental inspectors pursued the privates much more assiduously, and seemed almost reluctant to look too closely at the performance of the munis.
The managers of the city for which I worked were always looking for ways to cut corners. So when my boss once suggested we hire somebody whose whole job would be to reduce our fuel costs (both through shrewd purchasing and improving efficiency), they said "Why? With the fuel-adjustment clause, we can pass on the cost to our rate-payers." In short, they refused.
The experience left me less than impressed with munis. Give me the regulated private-industry model over the government-owned one any day. (And then there is the federal-government owned Tennessee Valley Authority ... )
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Sean Casten Posted 8:39 am
20 Jun 2007
But the conversation really opens up more interesting avenues. Utilities used to be competitive. They used to chase cost-reductions. And then they convinced regulators that their industry would be better served if regulated. And so now we have for-profit monopolies, which have none of the economic discipline of competitive enterprises, but still have a profit incentive. I challenge anyone to identify an incentive within this model that doesn't place shareholders and customers into direct conflict. (Raise prices and shareholders win through greater dividends while the public pays more for power. Invest in more reliable infrastructure and the public wins while your shareholders don't see as much free cash to dividend.)
Certainly, government monopolies are subject to inefficiencies of their own, but at least we're honest about those limitations. No one argues that the police force would be more efficient with a profit incentive. And yet we hold up utilities as responsive businesses that somehow get to bask in the reflected glow of market discipline in spite of their lack of any such structure.
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Jon Rynn Posted 2:17 pm
20 Jun 2007
Also, the muni question is interesting from a more general point of view as a possible important part of economic democracy, something I (and Melman) have thought (and he wrote about in a book "After Capitalism, you can also see his site) about quite a bit (the other main part of economic democracy being worker ownership and control, but that too is another post).
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Sean Casten Posted 11:46 pm
20 Jun 2007
1) You are absolutely right about electric trends. Someday, I will figure out how to hyperlink in these blogs, but until then you will have to suffer through my lengthy links. Check out a recent presentation I did:
http://www.recycled-energy.com/pubs_sean_casten.html
Click on the 2nd presentation about the "Goldilocks opportunity", and go to slide 7 to see the long term electric price trends. The reason for the inversion is deeply structural, and will keep going up for the foreseeable future due to a combination of stricter environmental rules for coal plants, fundamental increases in gas plants, and a shortage of new generation/transmission.
2) A really interesting link between energy costs and economic growth is the work of Bob Ayres, a PhD physicist and economist at INSEAD. Google him for full links, but the simplified version of his career worth of work is that the single best long-term predictor of GDP growth is declining real prices of delivered exergy. No typo there, but if you're not a thermodynamics wonk, you can think of that as useful work. (The price of light in your home, vs. the price of coal at the power plant). His work is compelling, and shows among other things that the recent inversion in energy costs may be suggestive of long-term structural disruptions in the economy. If he's right, efficiency isn't only important from a pocketbook/environment perspective, but may be the only way to ensure future economic growth. Chew on that one for a while.
Our firms take on INSEAD here, but worth going to the source if you're interested in reading more.
http://www.recycled-energy.com/pubs_tom_casten.html
(Go to third link to see paper co-authored with Ayres)
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JMG Posted 4:33 am
21 Jun 2007
In a nutshell,
1) Combined heat and power good. Just selling power, dumb. And wasteful. And dangerous.
2) Fossil fuel efficiency standards would be a nice lever to get where we need to go. Rather than trying to get regulators (often captured by the regulated) to lead, get them out of the way and require companies figure out how to maximum fossil fuel efficiency. You wind up with a system much more like Sweden's and less like ours.
It's well worth a read.
Save the world: Reduce greenhouse gas emissions 5% annually.
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