Easy to dream big when you can spend other people’s money, and really, why else would you build solar power in Michigan?

Crain’s Detroit Business reports:

A solar power work group in Michigan is making progress discussing the possibility of expanding the current utility-sponsored solar incentive program ….

But the real question is whether DTE and Consumers will voluntarily expand their programs — as environmentalists, manufacturers and solar installers have been asking the state to require for job creation and public health reasons — before the programs expire in 2015.

Involved in the solar power work group discussion are state regulators, solar PV installers, solar PV manufacturers, environmental groups, and the state’s two large regulated utilities, DTE and Consumers Energy Co., who collect a regulator-approved renewable energy surcharge from their customers.

Not mentioned in the article are the views of retail electric power consumers, whose money is up for grabs, nor anyone thinking of federal taxpayers’ stake in the matter.

There is a respectable answer to the question “why else would you build solar energy in Michigan?” If you have strong pro-solar commitments, for ethical or other reasons, the you may well feel strongly enough about it to be willing to spend your own money on a system. Or, if you are off-grid or want to be, solar is one way to stay powered.

But the answer most prevalent in the work group, at least if the Crain’s article is a guide, is much less respectable: they are mostly people who feel strongly enough about solar power–or the money they might make from it–that they want to force their unwilling neighbors to pay.

Background on the Michigan solar power work group can be found at the pro-solar-policy Michigan Land Use Institute.

Decarbonization Now? (No, not yet.)

Paul Krugman’s recent opinion column in the New York Times ran under the headline, “Salvation Gets Cheap.” At first I though Krugman was making a snarky comment on ex-Mayor Michael Bloomberg’s claim that the ex-mayor’s work on restricting access to guns, and efforts on obesity and smoking would ensure a place in heaven. But no, Krugman is opining that technology is providing an easy way forward on climate change:

The climate change panel, in its usual deadpan prose, notes that “many RE [renewable energy] technologies have demonstrated substantial performance improvements and cost reductions” since it released its last assessment, back in 2007. The Department of Energy is willing to display a bit more open enthusiasm; it titled a report on clean energy released last year “Revolution Now.” That sounds like hyperbole, but you realize that it isn’t when you learn that the price of solar panels has fallen more than 75 percent just since 2008.

Thanks to this technological leap forward, the climate panel can talk about “decarbonizing” electricity generation as a realistic goal — and since coal-fired power plants are a very large part of the climate problem, that’s a big part of the solution right there.

It’s even possible that decarbonizing will take place without special encouragement, but we can’t and shouldn’t count on that. The point, instead, is that drastic cuts in greenhouse gas emissions are now within fairly easy reach.

The “Revolution Now” report, which was linked in Krugman’s column online, is surprisingly weak sauce. The U.S. Department of Energy report (your tax dollars at work) purports to describe “four technology revolutions that are here today” and “have achieved dramatic reductions in cost” and “a surge in consumer, industrial and commercial deployment” in the last five years. The four “revolutions” are onshore wind power, polysilicon photovoltaic modules, LED lighting, and electric vehicles.

Each “revolution” gets a two-page summary and a colorful chart showing declining costs and rising use. The summaries are footnoted, just like real research, and studded with more factoids than the front page of USA Today. Here’s a fun fact: the ratio of empirical claims to footnotes in the article’s two pages on wind power is 4-to-1.

You can get a sense of the quality of the report by considering the claims strung together on electric vehicles: First it is reported “more and more drivers are abandoning the gas pump for the affordability and convenience of in-home electric charging,” then that 50,000 EVs were purchased in 2012 and the rate of purchase doubled in early 2013. Next we are told “to maintain this momentum the most critical area for cost reduction is batteries.” A paragraph later the report said, “In many senses, EVs are already competitive with traditional cars.” In the final paragraph, however, a sober note: it will take “further progress on reducing the cost of EV batteries” to make “these benefits available to a larger audience.”

The sober note referenced a DOE battery cost target of $125/kwh by 2022, at which point the DOE expects ownership costs for a EV will be similar to a standard vehicle. A glance back at the chart suggests current battery costs nearer five times that level, leaving at least this reader wondering in which sense “EVs are already competitive with traditional cars” and part of the “technology revolutions that are here today.”

The revolution is here today! Or maybe in 2022!! Or maybe whenever “further progress” is made!!!

Overall the report is more enthusiasm than analysis, and not sufficient to justify changing beliefs on the cost of decarbonizing energy supplies.

Looking for renewable policy certainty in all the wrong places

From EnergyWire comes the headline, “In Missouri, industry wants off the ‘solar coaster’.” (link here via Midwest Energy News).

A utility rebate program authorized by voters in 2008 is making Missouri into a solar leader in the Midwest. But $175 million set aside to subsidize solar installations is [nearly] fully subscribed … and the same small businesses that scrambled to add workers last year to help meet surging demand are facing layoffs….

Heidi Schoen, executive director of the Missouri Solar Energy Industries Association, said the industry, which has generated thousands of jobs and millions of dollars in new taxes for the state, is just looking for certainty.

“We want off the solar coaster,” she said. “We don’t want to be in this boom-and-bust situation.”

It is a patently false claim.

If they wanted off of the boom-and-bust policy ‘solar coaster,’ they’d get off. They could go do unsubsidized solar installations for example, or if (when?) that proves unprofitable get work doing something else. By their actions they signal that they prefer the booms-and-busts that come with reliance on politicians for favors.

Better red than dead, but not red yet (on solar power)

In her New York Times Economix column Nancy Folbre recently said (“The Red Faces of the Solar Skeptics,” March 10, 2014):

If the faces of renewable energy critics are not red yet, they soon will be. For years, these critics — of solar photovoltaics in particular — have called renewable energy a boutique fantasy. A recent Wall Street Journal blog post continues the trend, asserting that solar subsidies take money from the poor to benefit the rich.

But solar-generated electricity is turning into a powerful environmental and economic success story. It’s also threatening the balance sheets of electric utility companies that continue to rely heavily on fossil fuels and nuclear energy.

I don’t count myself a renewable energy critic, but I do find myself as a critic of most renewable energy policies and so feel a bit like Folbre is addressing her points to me. In response I’ll say my face isn’t red yet, and I’m not expecting it to turn red anytime soon.

Folbre is a distinguished economist at the Univ. of Massachusetts, but she isn’t a specialist in environmental or energy economics, and I think her thinking here is a little muddled. (In this muddling through she has similarly distinguished company–consider this response to a Nobel prize winner.)

So a sample of my complaints: She trumpets the fast declining price of solar panels by picking a factoid out of a story in ComputerWorld: “declined an estimated 60 percent since the beginning of 2011!” ComputerWorld? Maybe the work of the U.S. Department of Energy or other more traditional information sources wasn’t sensational enough (claiming as it does, merely that “U.S. solar industry is more than 60 percent of the way to achieving cost-competitive utility-scale solar photovoltaic electricity”).

An investment company would have to acknowledge that cherry-picked past results are no guarantee of future performance, but it isn’t even clear that she is firm on the idea of “cost.” Folbre declares that generous subsidies and feed-in tariffs have “allowed solar photovoltaics to achieve vastly lower unit costs.” Really? Well maybe if we subsidize it a little harder, it will become free for everyone!

C’mon professor, get serious! Perhaps it is true that generous subsidies and feed-in tariffs have allowed owners of solar PV systems to experience lower out-of-pocket expenses, but it is a little embarrassing to see a distinguished economist make this mistake about costs. Should we conclude congressional junkets overseas don’t cost anything because the government foots the bill?

Not until the penultimate paragraph does Folbre get back on firm ground, talking about renewable energy policy rather than technology:

Subsidies are not the ideal public policy for promoting clean energy. As a recent analysis by the Carbon Tax Center points out, a carbon tax devised to protect low-income households from bearing a disproportionate share of higher energy prices would yield more efficient overall results, as well as encouraging solar power.

But in our subsidy-encrusted energy economy, some subsidies are better than others. As farmers say, make hay while the sun shines.

Yes, as any economist ought to say, “subsidies are not the ideal public policy for promoting clean energy.” In fact, it’s been said here a time or two.

[HT to Environmental Economics.]

Someone please explain the American Wind Energy Association’s funky electricity price arithmetic

About a month ago the American Wind Energy Association blogged: “Fact Check: New Evidence Rebuts Heartland’s Bogus RPS Claims.” I’m scratching my head a bit trying to understand their so-called facts. The big claim from AWEA:

The eleven states that produce more than seven percent of their electricity from wind energy have seen their electricity prices fall 0.37 percent over the last five years, while all other states have seen their electricity prices rise by 7.79 percent.

The blog post mentions DOE data, and the post links to a report the AWEA assembled titled “Wind Power’s Consumer Benefits” which cites U.S. EIA data on “Average Retail Price of Electricity to Ultimate Customers” (find the data here). The blog doesn’t explain their method and the report is only barely more helpful in that regard.

The AWEA report describes the price suppressing “merit order” effect of subsidized/low marginal cost wind energy, but that is a wholesale price phenomena that doesn’t include various other utility compliance costs, and anyway the AWEA is making claims about end consumer benefits from lower retail prices. The merit order effect only matters to consumers if consumers end up paying lower retail prices.

So I downloaded data from the EIA site and tried to calculate the retail percent change in price for every state over the last five years, then compared the eleven states that AWEA said produce more than seven percent of their electricity from wind energy to the remaining states and DC.

By my simple average, prices in the 11 “wind states” were about 18.8 percent higher in December 2013 than they were in December 2008; prices in the 39 other states and DC were about 5.7 percent higher in December 2013 than they were in December 2008. Now maybe AWEA is doing a weighted average by kwh sold or something different than my straightforward calculation, but they don’t explain it and I can’t reproduce it.

Can you?

The price data from December 2008 and December 2013 for the eleven “wind states” and “Avg-All Others” are:

State Dec-08 Dec-13 Percent change
Iowa          7.10          7.77 9.4%
Kansas          7.01          9.19 31.1%
Minnesota          7.66          9.27 21.0%
North Dakota          6.35          8.03 26.5%
South Dakota          6.93          8.57 23.7%
Oklahoma          6.55          7.14 9.0%
Texas        10.85          8.77 -19.2%
Colorado          8.01          9.48 18.4%
Idaho          5.97          7.91 32.5%
Wyoming          5.68          7.71 35.7%
Oregon          7.24          8.61 18.9%
Avg-All Others        10.60        11.19 5.7%
* Prices are cents/kwh

I can’t help but notice that only one of the 11 wind states (Texas) saw a decline in prices over the time period, and the other 10 wind states actually saw prices increase from December 2008 to December 2009 faster than the overall average of the other states.

So what kind of funky AWEA arithmetic turns (mostly) larger retail price increases in the 11 states into a big consumer benefit?

NOTE: By the way, a sophisticated attempt to address the questions of wind power’s consumer benefits-if any on net-would look at a lot more information than simple average retail rates by states. I was trying to engage the debate on the level presented and even at this simple level of analysis I can’t tell how they got their numbers.

No net metering without grid connection, no net metering controversy where wires and energy products are unbundled

Around the country lobbyists for utilities and solar power companies are fighting over public policy, mostly for and against reform of net metering policies.* Today, The Alliance for Solar Choice (TASC) trumpeted in a press release recent victories in the states of Utah and Washington over net metering reforms urged by utilities. TASC highlighted the involvement of conservative policy group the American Legislative Exchange Council (ALEC), which joined the battle over net metering via a January 2014 resolution calling for “policies to require that everyone who uses the grid helps pay to maintain it and to keep it operating reliably at all times.”

In the TASC press release the group makes the odd and laughable claim:

Net metering allows rooftop solar customers to … receive full retail credit for any excess electricity sent back to the grid. Utilities turn around and sell this energy at the full retail rate to the neighbors, even though they paid nothing to generate, transmit or distribute that cleaner power.

I wonder how TASC thinks the net-metered customers’ excess electrical power actually flows to the neighbor’s property?

On the other hand, I take the next sentence in the TASC press release as obviously true: “Utilities attacking net metering want to eliminate the policy to stifle energy choice and protect their monopolies.” Evidence for the point is contained in the Washington state bill which, in addition to reforming net metering would have banned third party financing of rooftop solar if the utility itself offered a leasing program.

But one can oppose net metering and still favor “energy choice.” In fact, net metering is in the end incompatible with energy choice since net metering requires a grid connection and a cross-subsidy from grid-connected, non-net metered customers to survive. Giving energy choice to the customers subsidizing their solar-paneled neighbors will, if the burden grows large enough, push unsubsidized customers off the grid.

Currently, the burden is rather small most places. The utility industry is worried, though, about the possible rapid spread of net metering as the economics of rooftop solar improve and the consequent rate “death spiral” as fewer and fewer customers remain who actually pay for the costs of local distribution systems. See the report Disruptive Challenges, distributed by EEI in early 2013, and now the Economics of Grid Defection, published by the Rocky Mountain Institute this year.

The fight over net metering and other rooftop solar policies has broken out in a number of states, from Georgia to Massachusetts to Wisconsin to the solar-rich states of California and Arizona. Perhaps most interesting, however, is to note one solar-rich state lacking a battle over net metering: Texas. As Lynne noted here last summer, with generation and retailing already divorced from the monopoly wires business (in most of the state), Texas’s wires utilities are not nearly as threatened by distributed generation resources.

Power retailers in Texas are free (within limits) to offer a variety of contract to customers with distributed generation capability, and at least one offers a net metered-style product. Reliant’s e-Sense Sell-back plans credit customers for the full retail energy rate for the first 500 kwh of power put onto the grid (about $0.17 kwh at peak prices, and any additional power at $0.05 per kwh). Notice that as Reliant is an unregulated retail power provider, not a regulated utility, there is no forced cross-subsidization of distributed energy resources in the offering.

No subsidy, no undermining of grid finances, supports energy choice without promoting energy poverty. What is not to like?

 

 

*Net metering policies allow consumers capable of self-generation to be credited for any generation put onto the local distribution grid at the full retail price of electricity. Because the full retail price of electricity covers both energy and grid costs, utilities object that net metered customers are overpaid for the power they inject into the distribution grid.

Permissionless innovation in electricity: the benefits of experimentation

Last Monday I was scheduled to participate in the Utility Industry of the Future Symposium at the NYU Law School. Risk aversion about getting back for Tuesday classes in the face of a forecast 7″ snowfall in New York kept me from attending (and the snow never materialized, which makes the cost even more bitter!), so I missed out on the great talks and panels. But I’ve edited my remarks into the essay below, with helpful comments and critical readings from Mark Silberg and Jim Speta. Happy thinking!

If you look through the lens of an economist, especially an economic historian, the modern world looks marvelous – innovation enables us to live very different lives than even 20 years ago, lives that are richer in experience and value in many ways. We are surrounded by dynamism, by the change arising from creativity, experimentation, and new ideas. The benefits of such dynamism are cumulative and compound upon each other. Economic history teaches us that well-being emerges from the compounding of incremental changes over time, until two decades later you look at your old, say, computer and you wonder that you ever accomplished anything that way at all.

The digital technology that allows us to flourish in unanticipated ways, large and small, is an expression of human creativity in an environment in which experimentation is rife and entry barriers are low. That combination of experimentation and low entry barriers is what has made the Internet such a rich, interesting, useful platform for us to use to make ourselves better off, in the different ways and meanings we each have.

And yet, very little (if any) of this dynamism has originated in the electricity industry, and little of this dynamism has affected how most people transact in and engage with electricity. Digital technologies now exist that consumers could use to observe and manage their electricity consumption in a more timely way than after the fact, at the end of the month, and to transact for services they value – different pricing, different fuel sources, and automating their consumption responses to changes in those. From the service convergence in telecom (“triple play”) we have experimented with and learned the value of bundling. Such bundling of retail electricity service with home entertainment, home security, etc. are services that companies like ADT and Verizon are exploring, but have been extremely slow to develop and have not commercialized yet, due to the combination of regulatory entry barriers that restrict producers and reinforce customer inertia. All of these examples of technologies, of pricing, of bundling, are examples of stalled innovation, of foregone innovation in this space.

Although we do not observe it directly, the cost of foregone innovation is high. Today residential consumers still generally have low-cost, plain-vanilla commodity electricity service, with untapped potential to create new value beyond basic service. Producers earn guaranteed, regulation-constrained profits by providing these services, and the persistence of regulated “default service contracts” in nominally competitive states is an entry barrier facing producers that might otherwise experiment with new services, pricing, and bundles. If producers don’t experiment, consumers can’t experiment, and thus both parties suffer the cost of foregone innovation – consumers lose the opportunity to choose services they may value more, and producers lose the opportunity to profit by providing them. By (imperfect) analogy, think about what your life would be like if Apple had not been allowed to set up retail stores that enable consumers to engage in learning while shopping. It would be poorer (and that’s true even if you don’t own any Apple devices, because the experimentation and learning and low entry barriers even benefits you because it encourages new products and entry).

This process of producer and consumer experimentation and learning is the essence of how we create value through exchange and market processes. What Internet pioneer Vint Cerf calls permissionless innovation, what writer Matt Ridley calls ideas having sex — these are the processes by which we humans create, strive, learn, adapt, and thrive.

But regulation is a permission-based system, and regulation slows or stifles innovation in electricity by cutting off this permissionless innovation. Legal entry barriers, the bureaucratic procedures for cost recovery, the risk aversion of both regulator and regulated, all undermine precisely the processes that enable innovation to yield consumer benefits and producer profits. In this way regulation that dictates business models and entry barriers discourages activities that benefit society, that are in the public interest.

The question of public interest is of course central to any analysis of electricity regulation’s effects. Our current model of utility regulation has been built on the late 19th century idea that cost-based regulation and restricting entry would make reliable electric service ubiquitous and as cheap as is feasible. Up through the 1960s, while exploiting the economies of scale and scope in the conventional mechanical technologies, that concept of the public interest was generally beneficial. But by so doing, utility regulation entrenched “iron in the ground” technologies in the bureaucratic process. It also entrenched an attitude and a culture of prudential preference for those conventional technologies on the part of both regulator and regulated.

This entrenchment becomes a problem because the substance of what constitutes the public interest is not static. It has changed since the late 19th century, as has so much in our lives, and it has changed to incorporate the dimension of environmental quality as we have learned of the environmental effects of fossil fuel consumption. But the concept of the public interest of central generation and low prices that is fossilized in regulatory rules does not reflect that change. I argue that the “Rube Goldberg” machine accretion of RPS, tax credits, and energy efficiency mandates to regulated utilities reflects just how poorly situated the traditional regulated environment is to adapting to the largely unforeseeable changes arising from the combination of dynamic economic and environmental considerations. Traditional regulation is not flexible enough to be adaptive.

The other entrenchment that we observe with regulation is the entrenchment of interests. Even if regulation was initiated as a mechanism for protecting consumer interests, in the administrative and legal process it creates entrenched interests in maintaining the legal and technological status quo. What we learn from public choice theory, and what we observe in regulated industries including electricity, is that regulation becomes industry-protecting regulation. Industry-protecting regulation cultivates constituency interests, and those constituency interests generally prefer to thwart innovation and retain entry barriers to restrict interconnection and third-party and consumer experimentation. This political economy dynamic contributes to the stifling of innovation.

As I’ve been thinking through this aloud with you, you’ve probably been thinking “but what about reliability and permissionless innovation – doesn’t the physical nature of our interconnected network necessitate permission to innovate?” In the centralized electro-mechanical T&D network that is more true, and in such an environment regulation provides stability of investments and returns. But again we see the cost of foregone innovation staring us in the face. Digital switches, open interconnection and interoperability standards (that haven’t been compromised by the NSA), and more economical small-scale generation are innovations that make high reliability in a resilient distributed system more possible (for example, a “system of systems” of microgrids and rooftop solar and EVs). Those are the types of conditions that hold in the Internet – digital switches, traffic rules, TCP-IP and other open data protocols — and as long as innovators abide by those physical rules, they can enter, enabling experimentation, trial and error, and learning.

Thus I conclude that for electricity policy to focus on facilitating what is socially beneficial, it should focus on clear, transparent, and just physical rules for the operation of the grid, on reducing entry barriers that prevent producer and consumer experimentation and learning, and on enabling a legal and technological environment in which consumers can use competition and technology to protect themselves.