Archive for May 30th, 2006

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“This Outlet Talks to People”

May 30, 2006

Michael Giberson

Two weeks ago, Lynne mentioned an ad by IBM that had appeared in the Wall Street Journal. They reprinted the ad on the back page of the first section in today’s edition (Tuesday, May 30). Still can’t find the ad online, but here is a picture:

IBM ad - this outlet talks to people

The text says:

* this outlet talks to people

It tells headquarters exactly how much power it’s using. It even keeps accounting up-to-date, making for automated real-time billing. In short, a once dumb line is now smart. Enel, Italy’s top utility, uses this Automated Meter Management system to support 30 million homes. They can see their entire grid at all times, and billing efficiency is up. Now IBM is rolling out this groundbreaking program to utilities around the world. Want innovation for efficiency? Talk to the innovator’s innovator. Call on IBM. To learn more, visit ibm.com/innovation

I quote the ad not to endorse IBM’s products or services, but to endorse the idea of smart metering.

Lewis L. Strauss famously imagined a future in which “our children will enjoy in their homes electrical energy too cheap to meter.” Typically this remark is interpreted in terms of a projected falling cost of producing electricity. But implicit in the “too cheap to meter” phrase is a comparison of benefits of metering electricity and the costs of doing so. The benefits of metering are improving dramatically as advanced meters capture increasingly detailed data on energy consumption. At the same time, the costs of metering are falling dramatically because of advances in electronic technologies and the expansion of communications networks. Advances in computers and software further magnify the value of the meter data now available.

Currently the price of energy is relatively high, compared to recent history. If the peak oil people or other resource pessimists are right, then maybe the cost of energy is going up for a long time to come. In that case, smart metering is a no-brainer. Personally, I’m an optimist and believe that useful energy will get cheaper and cheaper in the long run. So I think that advanced metering should be subject to a careful cost-benefit test. I also think it is obvious that smart metering passes the cost-benefit test in more and more cases.

It makes no sense to ration — through markets or other economic systems — any good that is not scarce in economic terms. Perhaps electrical power or some substitute source of useful energy will become so abundant some day that it is for all practical purposes simply no longer a scarce good. Power would actually be too cheap to meter. We aren’t there yet, and if the quality of metering continues to advance while the cost of metering continues to drop, we are not going to get there for a while.

Falling cost of power vs. falling cost of metering — now that’s a race to the bottom I’d like to see. At the moment, the smart money is on smart meters.

Posted in Electricity | 3 Comments »

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Fair Trade in Green Power?

May 30, 2006

Michael Giberson

Newsday reports that some consumers “feel ‘ripped off’ by LIPA’s alt-energy plan.â€?

Ratepayers who sign up for Green Choice permit LIPA to add an average premium of 1 to 2 cents a kilowatt hour, or $4 to $15 a month, to their bills. LIPA sends that to one of two green-power marketing companies that buy renewable energy “attributes” from state-approved, green-power producers to send to the state power grid, which is available to all users.

Some consumers thought that the “green power� they paid a premium for would be delivered directly to them, so that the power they consumed would be the actual green power they paid for. However, there is no way to differentiate power on the grid, and no way to deliver a specific injection of power in one location to a specific consumer at another location. Green power certificates allow consumers to, in some sense, overcome the physical limitation of the grid and support green power even when the generator isn’t right next to the consumer.

However, another feature of the Green Choice program puzzles me a bit. From the article:

Green Choice customers still pay LIPA for 100 percent of their regular usage, plus fuel-adjustment surcharges, from power produced at local plants fired by oil and natural gas.

Well, I guess it is only puzzling if you think of Green Choice as a product selection. The LIPA Green Choice brochure (PDF) provides options to support 100% wind, wind and hydro, or wind, hydro and biomass for a premium of 1 to 2 cents per kWh. The alternative, default option — let’s call it “Gray Choiceâ€? — in New York would be a combination of coal, oil, gas, nuclear and hydro. (See EIA report, PDF) If Green Choice were a product, then choosing Green Choice would opt you out of responsibility for Gray Choice, including, for example, fuel-adjustment charges.

But the choice in Green Choice is not for an alternative to Gray Choice, it is merely to continue to get Gray Choice while paying extra to support alternative energy generation in New York.

Green Choice as a product would be much more interesting than Green Choice as a premium. Oil and gas prices have been relatively high and volatile recently, and Gray Choice consumers are being hit via fuel adjustment charges. Makes a certain amount of sense. But shouldn’t consumers making the Green Choice be given a little protection from the hazards of Gray Choice? That would make more sense.

Posted in Electricity, Energy markets, Environmental policy | 1 Comment »

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Regulatory Hurdles to Electricity Mergers Persist

May 30, 2006

Lynne Kiesling

I saw an interesting article over the weekend about M&A activity in electricity. Currently there are two large electricity mergers that are receiving both federal and state regulatory review (Exelon/PSEG and Constellation/FPL), and the reviews are causing a lot of contentious political machinations because they are occurring at the same time as fuel costs are rising. But wasn’t one of the provisions of last year’s Energy Policy Act supposed to make such mergers easier to bring about?

The strict regulatory climate comes even as the national energy policy has changed with the repeal of the Public Utility Holding Companies Act in February. The move was expected to pave the way for utility M&A that had been held back by the Depression-era federal statute, but no deals have happened that could not have before its repeal.

Instead, the attention has been on the state level, as each deal must be approved by local regulators. In Oregon and Arizona, they have been powerful advocates who have shut down private equity purchases. Because of their investment statutes, most private equity firms hold investments for a limited time and are seeking to make profits — a concern to regulators who want consumers to benefit.

Regulators, nervous after the energy crisis earlier this decade, are concerned that consolidation of power providers will hurt consumers because of decreased competition.

But some favor consolidation because the industry is going to need new power plants in the upcoming decade, an expensive proposition that requires companies to be well capitalized.

Lazard’s head power and energy investment banker, George Bilicic, says mergers take too long to close and that there is not enough communication with the state regulators about consolidation’s benefits to customers.

Mr. Bilicic is right; communicating those benefits is difficult. I recommend to Mr. Bilicic that investment banks consider using economic experiments as an education and outreach tool: model different merger scenarios, put state regulators (and, I would add, legislators) in as participants in the experiment, and they will learn in a very real and visceral way what the possible costs and benefits are, all without risking service to any politically powerful constituency.

Posted in Economics | Tagged , , , | 2 Comments »

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Restaurant-Customized Coca-Cola Drinks

May 30, 2006

Lynne Kiesling

When you sell products globally with the volume that Coca-Cola does, how much additional profit do they really think they can earn from restaurant-customized beverages?

Coca-Cola has partnered with the Culinary Institute of America, the nation’s preeminent culinary school, to develop specialty drinks for restaurants using Coke products and other sweet and savory ingredients, such as fruit juice, hot sauce and soda water.

I mean, restaurant-customized beverages aren’t really “scalable”, so to speak, so this is not a low-cost strategy. And I can’t see much upside. Still, I’d like to try a Pomegranate Fresca; I have been powering through the Black Cherry Fresca at home now that the weather’s toasty and humid.

Posted in Economics | 4 Comments »

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England: Winemaking Powerhouse of the Future?

May 30, 2006

Lynne Kiesling

Regardless of whether climate change is anthropogenic or not, when it happens adaptation occurs. Is one beneficial future adaptation likely to be winemaking in England? Yes, according to a Telegraph article cited by Jonathan Pearce in this Samizdata post. Stranger things have happened …

And happy belated birthday to Jonathan.

Posted in Economics | Tagged , , | Comments Off

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