Lynne Kiesling
My colleague Shane Greenstein does very interesting work on industrial organization and networks in Internet-related industries. These insights also bubble up when he is reflecting on his personal experience in his recent family holiday travels, as related on his blog. Here he relates what they found on their recent travels to northern Wyoming, one of my favorite places on the planet; part economics, part sociology, part travel essay, this is an excellent read.
Lynne Kiesling
While I am musing on the problems with the traditional regulatory model in electricity, as in my prior renewables feed-in reverse auction post, I am going to pile on (yes, it is like shooting fish in a barrel, but it’s the first day after a long holiday weekend, so cut me some slack, OK?). I was simultaneously excited and appalled on Friday when I read this Financial Times article about how consumers are changing their electricity consumption. More and more people are investing in energy efficiency upgrades to houses and buildings, replacing devices and appliances with ones that deliver the same functionality while using less electricity, and consequently reducing their electricity consumption. Increases economic efficiency, good for the longevity of the planet, individuals save money and feel good about themselves and how they are choosing to live their lives. So far, so good.
But here’s the meat of the article:
Wholesale power demand was down 15.3 per cent in the second quarter compared to last year, according to data compiled by Credit Suisse Securities. Total retail demand was down 5.4 per cent, with industrial demand plunging 14.7 per cent, commercial demand falling 3.5 per cent and residential demand dropping 1.7 per cent. …
“There is a mindset change in consumers,” said John Berger, chief executive of Standard Renewable Energy, which sells energy audits and solar energy. Those who follow the advice in energy audits typically reduce power demand 20-30 per cent. “The demand for that service is going up exponentially,” he said.
The company’s energy efficiency and solar businesses have both grown about 20 per cent per month in the past six months.
The impact on utilities’ bottom lines has led to talk about forcing consumers to pay a flat fee for electricity, so utilities will be profitable even if power demand continues to drop.
“It’s desperate behaviour,” Mr Berger said.
Let me just pull that out and emphasize it, in case you missed it because it’s the first day back after a long holiday weekend:
The impact on utilities’ bottom lines has led to talk about forcing consumers to pay a flat fee for electricity, so utilities will be profitable even if power demand continues to drop.
Yes, you read that right. Price signals and other intrinsic motivators are leading individuals to increase their energy efficiency, conserve, and (if they are fortunate enough to be able to choose a dynamic pricing contract) shift their consumption from peak hours to off-peak hours. And what’s the regulated retail utility response to this salutary change? Force consumers to pay even if they don’t buy their services. Furthermore, if they force (force!) consumers to pay a flat fee, do you think they are still going to have these incentives to invest in energy-efficient technologies? That’s only the case for consumers who have very, very strong intrinsic motivation because they want deeply to reduce resource use and environmental distress.
If you don’t realize that retail economic regulation of electricity service is pernicious and counter-productive, you have not been paying attention.
At its core, this atrocious incentive problem is a direct, predictable consequence of cost-recovery-based retail rate regulation. Regulated utilities are legally entitled to recover all of the costs that the regulators allow, plus a markup for their regulated rate of return. They are guaranteed that by law. That guarantee means that their business model is rigid, inflexible, and maladaptive in the face of the kinds of changes described in the FT article that we are all seeing around us and engaging in ourselves. And instead of using this fall in profits as a signal, as a way for them to learn that they should do.things.differently, they want to resort to the old, traditional, top-down regulate-and-control model to force consumers to pay them, even if they don’t continue to consume as much of their service.
Not only is this economically inefficient and environmentally deleterious, it’s a disgusting demonstration of the corrupting effects of political processes. Retail electricity regulation based on cost recovery: EPIC FAIL.
Lynne Kiesling
Proponents say yes, but I’m not convinced. Here’s the story: the California Public Utilities Commission is considering some regulatory innovations to increase the share of renewables in the state’s generation portfolio, including a reverse-auction procurement solicitation for the provision of renewable power:
In what might be a world first, the California Public Utilities Commission on Thursday proposed letting developers bid on contracts to install green energy projects. A solar company that offers to sell electricity to one of California’s three big utilities at a rate lower than its competitors would win a particular power purchase agreement.
A few things to note here. First, procurement reverse auctions are pretty common, and do have some appealing economic efficiency properties as a market design — if a single buyer is issuing a solicitation for a common-value resource (i.e., something that is not too heterogeneous and subjective in its value, such as art), a reverse auction can avoid a winner’s curse and can reveal otherwise private information about the costs of producing the resource. In terms of dynamic efficiency, the reverse auction can provide price signals that lead to technological change; innovation may enable an entrepreneur to offer a lower price and win the reverse auction. It’s easy to see how that incentive can be important in the evolution of renewables technologies. The linked article does a decent job of communicating these benefits, as well as point out that such a reverse auction would avoid the problems of the overly-generous feed-in tariffs that have been used in Europe (particularly Spain).
Another thing to note, though, is how deeply embedded this whole regulator-induced utility procurement process is in the historical, traditional business and regulatory model of a utility. Just look at the framing and the language in the quote I pulled above — regulators would “let” renewable power developers bid to provide power to the three regulated investor-owned utilities in the state, for them to then sell on to their retail customers. Despite all of the protestations about this being innovative and market-based, this is still a regulatory model and a business model that Sam Insull would recognize, with regulators having their hands on the throttle of the generation of electricity, determining top-down what the generation portfolio will be and who will be allowed to participate in it. This model is premised on the idea that only the regulators can determine what generation portfolio is in the best interests of the residents of California — the best decisions can only come from the political elite, not from the aggregation of distributed individual decisions.
That’s why I do not believe the argument put forth by the CPUC that such a reverse auction is market-based. Here’s the argument that it is market-based, from the Green Inc. article linked above:
An auction would essentially let the market set electricity rates for photovoltaic projects that produce between one and 20 megawatts in California and can be built within 18 months.
“This mechanism would also allow the state to pay developers a price that is sufficient to bring projects online but that does not provide surplus profits at ratepayers’ expense,” utilities commission staff wrote in its proposal. “Providing a clear and steady long-term investment signal rather than providing a pre-determined price can create a competitive market.”
As far as this argument goes, it is valid. But look at what it takes as given, what is missing: the bureaucratic, administrative decision about how much renewable power capacity should be built, “the state” paying developers to bring projects online, and the fact that all of this behind-the-scenes and top-down control of the electricity consumption decisions of individuals is taking place in an environment where individual consumers have no control, no choice, no options, no freedom. California electricity consumers cannot choose among competing retailers — if they live within the physical footprint of the historical utility, they have to buy retail service from that utility, with their consumption provisioned through these wholesale procurement contracts (both for renewables and for conventional generation). Calling such mandated, regulated, forced wholesale renewables procurement “market-based” just because it uses a reverse auction is not quite as much Orwellian Newspeak as what Mike posted about last week, but it’s not that far off.
Regulator-mandated wholesale renewable power procurement using a reverse auction is not market-based. It remains as much about centralized control and about lack of individual consumer choice in retail markets as has been the case for the past century. Even though it uses an auction design for procurement, the procurement is still centralized and as centrally-driven as has been the case for the past century.
Michael Giberson
Rebecca Smith, in the Wall Street Journal, surveys the current state of nuclear power’s future in the United States.
“Times are exciting for nuclear,” says Ronaldo Szilard, director of nuclear science and engineering at the Idaho National Lab, a part of the U.S. Energy Department. “There are lots of options being explored.”
But nuclear is far from a sure thing. Yes, the plants of tomorrow—some of which could enter construction as soon as 2012—go at least part way toward solving some of the problems of yesterday. But they are still more expensive than fossil-fuel plants, and they still generate waste that must be stored safely somewhere.
And while the industry is winning converts, plenty of powerful enemies remain.
Smith hits on the technology, costs, and politics of nuclear power.
(Thanks Chris)
Michael Giberson
In the Wall Street Journal, an interview with Texas Tech University football coach Mike Leach:
WSJ: You want a 64-team playoff system. That seems crazy.
Mr. Leach: It’s only crazy if you are in Division I football. There’s nothing new about this playoff stuff. It would be like crediting me with inventing fire. I think 64 would be fun. You would cut the regular season back to 10. The champion is going to play 16 games. You would guarantee everybody 12 games for athletic budgets. Then, because it’s fun, and it would be exciting to watch people from across the country play each other, you’d pick your 64.
Then the arguments aren’t who won the national championship. The arguments are about whether the 77th team is better than the 61st team. The one thing that would be undisputable is who ever did win it had legitimately and justifiably earned it. It’s obviously workable. Any claims that its not workable because of this that and the other thing is ridiculous because they do it at every other level.
Also:
WSJ: Graduation rates as a tie-breaker?
Mr. Leach: Why wouldn’t it be? We talk about student-athletes and the rest. We have the highest graduation rate of any team in the top 25.
All in all, I found it about the most focused and coherent interview with the coach I’ve seen published.
Michael Giberson
Tyler Cowen said if he were exiled from the United States and had to live semi-permanently in another country, assuming a non-English speaking country to make it interesting, he’d select Berlin or Cologne in Germany.
My thought? Copenhagen.
Denmark scores high on assessments of economic freedom (here and here) and political freedoms (here). Denmark is peaceful and not corrupt, according to other analysis. Given my American culture, I’d be troubled by the direct state subsidies for religion and the remaining, essentially ceremonial monarchy.
But Copenhagen aims to be the “best city for bicyclists” (and for biking in style, check out Copenhagen Cycle Chic), is surely cosmopolitan enough to keep me engaged, and I could talk wind power and cogeneration policy in the cafe late into the long summer nights.
The days would be too short in winter for me in Copenhagen. Maybe Barcelona for the winters.
Lynne Kiesling
Charles Darwin’s great-great-granddaughter, Sarah Darwin, is a biologist, and she’s just embarked on a recreation of her great-great-grandfather’s seminal voyage on the Beagle that induced him to develop his theory of evolution. In addition to that being just downright cool, she’s doing it on a really neat ship:
The voyage will be made aboard the Dutch Clipper Staad Amsterdam. The sailing ship was built in 2000 to recreate a mid-19th century clipper, but at 250ft (76m) it is about double the length of Darwin’s Beagle.
There is a laboratory on board where visiting scientists will undertake a number of experiments.
The BBC link has two videos about Darwin and the ship she’ll be traveling on, very neat!
Michael Giberson
In Grist, Adam Browing asks, “Does the Wall Street Journal employ anyone who understands energy markets?“ Browning’s question and his answer seem just a little off, as I’ll discuss below, but first an excerpt from Browning:
Actually, I think they do. I think Keith Johnson knows quite a bit about energy markets. Which makes this hit job on solar subsidies, published before the Senate considers national renewable energy legislation, so disturbing.
After chronicling the problems of the Spanish solar industry, the article goes on to say:
“Clean-energy skeptics, however, point to Spain as a cautionary tale of a government policy … with disastrous consequences. … California and New Jersey, which lead the U.S. in solar power, are among states that have used subsidies similar to the ones in Spain to make solar power more attractive”
This is in fact incorrect.
Spain used a singular policy, a fixed price, standard offer contract known as a feed-in tariff.
California, on the other hand, has several different policy mechanisms, and each one is market-based. They look nothing like Spain at all.
My first reaction: Browning isn’t asking about energy markets, per se, but the design of energy subsidies. Really he complains about the WSJ‘s characterization of public policy tools. Browning is director of The Vote Solar Initiative and a former EPA official, so I’d expect him to be aware of various environmental policy tools. Energy markets – maybe not so much.
My second reaction: Does he really say that California’s policies look nothing at all like Spain’s feed-in tariffs, even though one of California’s policies is a feed-in tariff? He describes it as a market-based feed-in tariff later in this very post, and in another post at Grist he says it is “kind of like a feed-in tariff, but different.” So I guess that is it: it is “kind of like a feed-in tariff,” but nothing at all like Spain’s feed-in tariff.
Huh?
Then he trumpets the fact that “most” of the recent utility contracts signed by California utilities with solar power providers (with the aim of complying with the state’s Renewable Portfolio Standard mandate) have been “under the price of natural gas.” He repeats this claim again – “clean energy, cheaper than natural gas” — and again — “Solar is getting cheap—cheaper than fossil fuel alternatives—and Congress has nothing to fear by getting aggressive on clean energy.”
But the contract he offers a helpful link to, between PG&E and First Solar, clearly describes that part of the project plan is to cash in on Federal subsidies for solar power projects. In addition, the contract clearly states that the project is eligible for “above-market funds (‘AMFs’)”, which is California regulatory-speak for a pool of money available to help utilities meet RPS mandates when proposed projects are more expensive than other alternatives in the market. In fact, the reference point isn’t actual fossil fuel project proposals presented in actual market competition but rather a “Market Price Referent” established in regulatory processes.
My third reaction: This is “cheaper” only if we ignore the subsidies.
[Separately, on The Vote Solar Initiatives' "four key buttons that must be pushed in order to make the [solar power] market work”, I’d say only “(2.) Standardized interconnection procedures” is a clear winner. The Spain example discussed by the WSJ shows some limits of policy (1.), a kind of demand-push-assume-economies-of-scale-follow approach. “3. Net Metering” and “4. Fair Rate Design” are just attempts at providing distributed, small subsidizes through regulated rate structures.
In my view we can’t subsidize the market into becoming more efficient. Yes, their are problems associated with fossil fuel use. Better to identify the externalities associated with generating technologies actually causing third-party harm, and push for policies which get the parties responsible to pay for the harm. Wasting resources will not save the earth.]
Michael Giberson
At Stumbling and Mumbling Chris Dillow ruminates on “Norms, agency, and competition,” which is just some fancy econo-speak for a post about why football coaches prefer conventional strategies that reduce the chance of their team winning. Dillow notes David Romer’s work (via James Kwak) on American football, which shows coaches punt too often on fourth down, and research by Christian Grund and Oliver Gurtler on “proper football” (Dillow’s term), which shows coaches in the Bundesliga too often add an attacking player when down a goal even though it reduces their chance of winning.
For more on Romer’s work, see this article in Contingencies (a magazine of the American Academy of Actuaries). Related, “Never Punting,” a guest post at Football Outsiders.
Dillow notes the two responses are both the conventional approach, but observes that in American football the convention favors an overly conservative choice while in proper football (I’ll accept Dillow’s terminology) the convention favors a too risky approach.
For Dillow, “The question is: why? Is it because coaches are ignorant of the statistics and so follow herd mentality?” He doesn’t offer an answer, just a good question. It could be that the outside analysts are wrong, and coaches right, but then there should be a problem in the analysis to point to. Is there such a problem? (The Contingencies article notes that Texas Tech Red Raider coach Mike Leach is among coaches with a reputation for aggressive action on fourth down, but adds that even he doesn’t go for it as often as the statistics recommend.)
Interesting topics as the American football season gets underway, and most proper football leagues just underway.
Michael Giberson
An economist is quoted in Platts’ Megawatt Daily commenting on a proposal within ERCOT to apply the same performance standards to wind farms as apply to other generators:
On the one hand, it is desirable to have all market players working under the same rules, but on the other hand, rules are usually made with the existing status quo in mind, and when new technologies come along, they don’t always fit neatly with the pre-existing rules.
That certainly does sound like an economist:
Yes, unfortunately is looks like I was quoted correctly. At least they spelled my name right and mentioned my employer: “Michael Giberson, an economist at the Texas Tech University Center for Energy Commerce.”
Any publicity is good publicity, right?
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