Michael Giberson
Clash of the titans: one of the world’s most prominent academic energy economists reacts to the peak oil commentary of one of the world’s preeminent establishment consulting energy economists. Self recommending, worth additional thought.
Michael Giberson
At ProPublica, Ariel Wittenburg assesses the meaning of the early September blackout affecting parts of Arizona, Southern California, and Northern Mexico. The proximate cause was substation maintenance in Yuma, Arizona and an apparent fault in protective systems that should have kept surrounding lines running during maintenance. As these systems failed, the disturbance reached generators in the regions, which protected themselves by switching offline and pushing the area into a blackout. (It is easier to restart a generator that has been tripped off, than rebuild a generator that has been fried.)
While Wittenburg more or less endorses the “aging infrastructure” argument that The Economist‘s Babbage column pursued (see Lynne’s reaction to it), Wittenburg differs from Babbage in rather uncritically accepting smart grid ideas as a partial solution. (On the other hand, Wittenburg acknowledges recent upticks in transmission spending, even if judging the increase as insufficient to growing needs; Babbage didn’t mention the recent increases.)
But this uncritical attitude is not limited to smart grids, the problem with Wittenburg’s piece is that it uncritically passes along the views of various authorities without much in the way of a data point or countering view. The article draws on an interview with FERC Chairman Jon Wellinghoff in which the Chairman suggests FERC should have more transmission-siting authority. The article passes along the position of the Edison Electric Institute on how much transmission spending consumers would want to bear. The article quotes former FERC Chairman Jim Hoecker in support of transmission spending – “everybody needs them” – without mentioning that Hoecker is now an attorney representing a coalition of transmission-owning utilities and other groups with clear economic interests in building transmission.
Among other points where a little testing may have been useful, EEI’s David Owens is quoted as saying that transmission costs represent 35 to 40 percent of the typical consumers electric bill. That range seems high to me – I would guess at most 20 percent – but a quick scan of both the Energy Information Administration website and the Edison Electric Institute website didn’t turn up information on that point. I hope that Wittenburg verified the claim before publishing, but the apparent uncritical attitude toward official pronouncements leaves me unsure. But much more importantly, I would have much rather heard from a consumer’s representative on the question of what consumers might be willing to put up with on transmission expense, rather than see a representative of investor-owned utilities cast as presenter of the consumer viewpoint.
My complaint isn’t that Wittenburg drew on federal regulators and spokesmen for private utilities and transmission line owners. In fact, these parties along with state regulators and a few other federal, state and local government agencies are largely the folks responsible for building, maintaining, and regulating the transmission system we have. If anyone is to blame for the current system, these are the main folks to be talking to. But rather than asking them what they did to get to the current state of things, Wittenburg is asking them for advice on how to fix it.
Isn’t it not much of a surprise that the takeaway from the article is, in effect, spend more money and centralize more authority in Washington, DC. EEI, put into the role of consumer advocate for this article, is the only voice of a little moderation.
Is it that hard for a reporter to turn up a knowledgeable representative for power consumers? A fundamental problem with our electric power system is that widespread monopoly service combined with state retail rate regulation severely constrains the ability of consumers to express their value for electric service through consumer choices in markets. This article mimics this fundamental problem by failing to allow consumers to represent their own views.
Lynne Kiesling
The usually-reliable Babbage columnist at the Economist has written a misguided commentary on last week’s power outage in San Diego and its broader implications (and, unfortunately, Glenn has picked it up on Instapundit, which will magnify the effects of its misguidedness). He starts by summarizing what’s known about the fault that led to a voltage reversal that culminated in the outage, but then goes awry with his interpretations of the event:
Managing supply and demand, once the prerogative of the utilities’ planners, has become a process shaped largely by an energy company’s appetite for risk. Meanwhile, independent system operators who schedule the dispatches of electricity have become, effectively, asset managers—using market-clearing prices to equilibrate between bids by suppliers and those from retailers.
By and large, such changes have made energy markets more efficient. For consumers, the competition created by deregulation has kept a lid on electricity prices. But it has had downsides, too. One of the biggest is the way it has removed what little spare capacity the grid once had. In the power industry’s new competitive environment, transmission companies operate their lines at near full capacity, leaving little room for those threatening fluctuations in voltage caused by accidental outages.
This assertion is simply false, as a couple of commenters on the column point out. The statutory reserve margin requirements have not changed. But no system, natural or engineered, is 100% reliable.
Babbage’s interpretations are misguided in two particular, and related, ways. First, he refers repeatedly to “deregulation” in the electricity industry in a misleading manner. Deregulation is a misnomer, especially with reference to California and Arizona, the states involved in this event. Regulatory restructuring in electricity was not deregulatory in general, but focused primarily on liberalizing wholesale electricity transactions. In this particular instance, California has an Independent System Operator-operated wholesale power market, with substantial restrictions and regulations, and Arizona suspended its restructuring and does not participate in organized wholesale power markets. Thus his connection of the San Diego blackout to perverse incentives arising from “deregulation” is more than misguided; it is misinformed.
He also asserts that while smart grid technologies might seem like they would enhance coordination and information in ways that would improve grid reliability, the opposite may be true because of increased cyber-security risks due to the communications overlay. Smart grid capabilities, like all other communications networks, create potential security risks, but system operators and all utility grid owners and all parties involved in scoping smart grid investments, creating cost-reducing and efficiency-enhancing customer-focused interoperability, and implementing smart grid technologies are very aware of those risks, working to mitigate those risks, and are focused on creating a resilient networked system of systems.
Babbage mentions that smart grid technologies will
… add a communications layer to the local electricity-distribution network—so consumers can see at a glance how much electricity they are using at any time of the day, and how much it is costing them. Alerts sent by the utility at peak periods will allow customers to cut back their consumption and save money—or have it cut back for them to reap extra rewards. The real aim, of course, is to save the utility from having to invest in additional capacity.
The aim is to maintain the reliability of the network while making it more efficient, which reduces costs of the regulated function for captive ratepayers … but he totally misses that if we have competitive retail markets that enable consumers to automate their responses to dynamic pricing, their individual, distributed decisions are more likely to make the grid more resilient, leading to better reliability.
A very disappointing and poorly-thought-through article.
Michael Giberson
I second Lynne’s recommendation of Yergin’s column in the Saturday Wall Street Journal.
On the topic of Hubbert’s peak and peak oil generally, I particularly recommend these two paragraphs:
Hubbert insisted that price didn’t matter. Economics—the forces of supply and demand—were, he maintained, irrelevant to the finite physical cache of oil in the earth. But why would price—with all the messages that it sends to people about allocating resources and developing new technologies—apply in so many other realms but not in oil and gas production? Activity goes up when prices go up; activity goes down when prices go down. Higher prices stimulate innovation and encourage people to figure out ingenious new ways to increase supply.
The idea of “proved reserves” of oil isn’t just a physical concept, accounting for a fixed amount in the “storehouse.” It’s also an economic concept: how much can be recovered at prevailing prices. And it’s a technological concept, because advances in technology take resources that were not physically accessible and turn them into recoverable reserves.
Yergin’s proposed alternative to thinking in terms of “peak oil” is to think in terms of a plateau in production, you might call it a long-drawn out peak, which will be limited more by price and demand than by exhaustion of supplies.
The WSJ article is accompanied by a 20-minute video interview, mostly about Yergin’s new book, The Quest, to hit the stores tomorrow.
Lynne Kiesling
In Saturday’s Wall Street Journal, Daniel Yergin has a thorough, thoughtful essay on oil: There Will Be Oil. It’s largely a reflection on “peak oil” ideas, and how innovation and technological change have reduced the cost of identifying and accessing more oil reserves:
This is actually the fifth time in modern history that we’ve seen widespread fear that the world was running out of oil. The first was in the 1880s, when production was concentrated in Pennsylvania and it was said that no oil would be found west of the Mississippi. Then oil was found in Texas and Oklahoma. Similar fears emerged after the two world wars. And in the 1970s, it was said that the world was going to fall off the “oil mountain.” But since 1978, world oil output has increased by 30%.
Just in the years 2007 to 2009, for every barrel of oil produced in the world, 1.6 barrels of new reserves were added. And other developments—from more efficient cars and advances in batteries, to shale gas and wind power—have provided reasons for greater confidence in our energy resiliency.
Much of Yergin’s essay is an intellectual history of the peak oil concept, and how economic dynamism (both price signals and innovation) are creating a world in which that theory is increasingly irrelevant, largely because of its assumption of the irrelevance of such economic aspects of oil.
Michael Giberson
To Julian Simon-inspired resource optimists, this is news of the most ho-hum sort. Oh, so we think more resources now are available than previously expected because of improvements in technology? Nothing new under the sun. Humanity’s many-centuries-long trend of energy resources becoming cheaper continues into the indefinite future.
If you believed that world oil production probably peaked in 2006 and we were stuck in a handbasket to oblivion, then you might be surprised.
Otherwise, ho-hum. Move along. Nothing to see here.
[HT to Eric S. for the prompt.]
Michael Giberson
Yesterday the staff of Rep. Gabrielle Giffords (D-Az) conducted a “Solar Summit” in Washington, D.C. You can watch all three hours of the program here, or maybe you’d rather read the overview provided by Phil Riske at the Rose Law Group Blog, “Mayes, Spitzer bemoan congressional Republicans ‘retrenching’ against renewable energy funding and transmission.” (I took the latter option.)
The headline’s “Mayes” is the Republican former Arizona Corporation Commission chair Kris Mayes. At the summit:
On transmission, Mayes said it’s essential there be a build-out of transmission lines, notably connecting Phoenix, San Diego and Los Angeles, but Congress is “retrenching” against financing transmission projects. She added she is concerned about a possible stumbling block that California will hurt progress by maintaining a “protectionist” posture.
What? Transmission lines connecting Phoenix, San Diego and Los Angeles are essential according to Mayes? Well then, we must overcome that protectionist posturing that is frustrating interstate commerce in electric power!
So presumably when Mayes had a vote on the Arizona utility commission, she voted in favor of building transmission lines between the state and California, right?
Uh, no.
Flashback to 2007, when Mayes vote against a proposal to build a power line from near Phoenix to a point just east of Los Angeles. What was the objection?
“California wants to drop a giant extension cord in Arizona and draw out our power,” Commissioner Kris Mayes said. “Arizona’s energy future is at issue in this case.”
(Link here.) Other commissioners were similarly dramatic in their stated opposition: Commissioner Bill Mundell said, “I don’t want to be an energy farm for California”; Commissioner Jeff Hatch-Miller said, “California needs to step up to the plate and begin building its own generation.”
The transmission line’s California-based sponsor has begun construction on the California part of the line, but gave up on trying to persuade the Arizona commission to let it build the rest.
Arizona policymakers are changing their tune – now they want to build power generation for Californians and become an energy farm for the neighboring state. Apparently Arizona’s energy future once required a “protectionist” blocking of added transmission lines to California, but those lines are now essential to the state’s energy future.
With leaders like this, who needs enemies?
Lynne Kiesling
The DOJ challenge to the AT&T/T-Mobile merger is bringing AT&T to our attention in ways that it hasn’t been in a while, including this great Ars Technica blog post providing a concise guide to the history of AT&T. Matthew Lasar argues that AT&T conquered the 20th century through patents, strategic acquisition, and embracing regulation and using it to its advantage. By so doing it did provide universal telephone access as it consolidated and cemented its monopoly, although some of its ways of using regulation to its advantage proved to be its undoing in the 1982 divestiture.
A highly recommended read, especially if you are not particularly familiar with the history of the telephone industry. That history provides important context for understanding current competition policy issues and events.
Lynne Kiesling
Does President Obama realize his hypocrisy when he says (as he did in his weekend radio address) that “as Americans, we refuse to live in fear”, while simultaneously having large armed law enforcement teams storm airplanes that have landed, remove passengers, strip search them, and detain them without probable cause or a warrant? Soshana Hebshi gives her own account on her blog; Mike Riggs reports on it at Reason, and James Fallows reports on it at The Atlantic. Note in Hebshi’s account that there were about 50 such events on Sunday, so if you think this is an isolated event you are sadly mistaken, or dare I say with all respect, naively deluded and in denial.
This authoritarian drive for power and control is a consequence of our fear-based “anything for security” policies. Such fear-based cowardice is socially, culturally, morally, and economically corrosive.
It.must.stop.now. And it will only stop if we, individually, choose consciously to object to authoritarian policies grounded in fear-based cowardice, make our objections loud and unavoidable to our peers and our elected so-called representatives, and refuse to be terrorized by our own government.
As long as this state of affairs persists, these issues are far, far more important and life-threatening (and way-of-life threatening) than electricity regulation, regulatory and competition policy, and technological change. That’s why I am writing about Shoshana Hebshi today rather than those topics. It.must.stop.now.
Lynne Kiesling
Macroeconomics and I have never gotten along, and for years I couldn’t figure out why — I’ve just never understood much of the underlying logic, why the analyses start where they do and make the assumptions they do (the only exception to this is my undergrad class with William Hart at Miami when we worked through Malinvaud’s Theory of Unemployment Reconsidered). By nothing more than tenacity and stubbornness I managed to pass enough macro to be accepted into the economics guild.
This recession and the policy debates in it are clarifying some ideas that resolve my cognitive dissonance, the largest of which is the central role of consumption in Keynesian economics. This focus on consumption as the first step in the causal link that leads to underemployment in equilibrium seems to invert the causality of value creation embedded in all other economic models, which start with the production of compelling value propositions that attract customers. This shift in focus to consumption pivots on how Keynes’s model, and Keynesian models, treat Say’s Law. The Keynesian interpretation of, and rejection of, Say’s Law provides the justification for focusing on aggregate demand in general, and consumption in particular, as policy levers during business cycles.
In August Steve Horwitz wrote a clear analysis of the interpretations of Say’s Law, and it’s a good place to start. After quoting Say’s Treatise on Political Economy, he notes that:
… Say was making the claim that production is the source of demand. One’s ability to demand goods and services from others derives from the income produced by one’s own acts of production. Wealth is created by production not by consumption. My ability to demand food, clothing, and shelter derives from the productivity of my labor or my nonlabor assets. The higher (lower) that productivity, the higher (lower) is my power to demand.
This is different from, and more nuanced than, the terse “supply creates its own demand” interpretation that Keynes placed on Say. It’s also not very different from Smith, Ricardo, or Mill in their articulations of the central role of productive activity in creating value, and hence economic growth. Steve goes on to discuss how Say’s Law and its operation in real economies also depends on money markets and how the banking system operates, and how Say’s Law does still admit the possibility of underemployment in equilibrium; my summary here does not do Steve’s argument justice, so I encourage you to read it yourself.
This prelude sets up a blog post from Robert Higgs on Friday that lit a light bulb of comprehension for me with respect to the current policy proposals to “create jobs” to increase consumption to increase aggregate demand to end the recession. Bob points out that if you take the domestic national income accounting relationship (Y=C+I+G), and if you look at data on consumption and government spending, they are both above pre-recession levels. Consumption as the laggard in aggregate demand is not driving the recession. Nor is government spending, which is clearly high.
The economy remains moribund not because consumption spending has failed to recover and not because government spending has failed to increase, but because the true driver of economic growth—private investment—remains deeply depressed. Gross private domestic fixed investment fell steeply after the second quarter of 2007, and in the second quarter of 2011 it remained 19 percent below its pre-recession peak.
After going into some important detail on private domestic investment, Bob returns to the theme that has animated all of his work (if you haven’t read Crisis and Leviathan, you should!), a theme that I think has a lot of explanatory power in this recession:
Private investors, despite the full recovery of real consumer spending and the increase of real government spending for final goods and services, remain apprehensive about the future of new investments, especially new long-term investments. I have argued repeatedly during the past three years that an important reason for this apprehension and the consequent reluctance to make new capital commitments is regime uncertainty—in this case, a widespread, serious fear that the government’s major policies in areas such as taxation, Obamacare, financial reform, environmental regulation, and other areas will have the effect of depriving investors of control over their capital or diminishing their ability to appropriate the income that the capital generates.
Note also that Greg Mankiw made a similar argument on Sunday in his New York Time column. Policies that focus on increasing jobs to increase consumption get the causality the wrong way around. And, as Steve Horwitz said in the post that got me thinking about this over the weekend,
You want recovery? Forget consumption. Ask yourself what sorts of policy changes would make entrepreneurs and investors feel like they know what to expect over the medium and long run and convince them that they will be able to keep the fruits of their labor and investments. Hint: the president’s jobs plan ain’t it.
Frankly, I think the important factor for long-run growth is innovation and technological change rather than investment in existing factors of production to produce existing value propositions … but the policies that facilitate innovation are correlated with policies that facilitate investment, so I’ll leave their arguments as they stand.
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