Private wires and the electric power industry you want

Michael Giberson

The New Republic has an excellent article by Bradford Plumer about the current state of the electric power industry and the prospects of the industry achieving what diverse interests expect of it. (Yes, in TNR, who’d a thunk it?) The article highlights the political economy of regulated electric utilities and their immense lobbying savvy and political sway, and how the existing regulatory framework acts to perpetuate the status quo.

The article leads off with an anecdote about Tom Casten wishing to develop a combined heat and power (CHP) plant for a chemical plant in Louisiana in the early 2000s – you know, one of those win-win-win projects that recycle waste heat to make electric power, reduce air emissions, reduce costs to the industrial company host, and still makes a profit for the CHP company. The proposed project never got off the ground due to the lack of support from the local utility, and that lack of support was attributed to a regulatory structure which rewards utilities for owning power plants rather than minimizing the cost of power to consumers.

The article goes on to tell more stories, and delves into issues like renewable portfolio standards, distributed power, smart grid visions, and how a mostly-regulated industry is going to do tackle all of these changes while not upsetting existing political deals and getting paid a fair rate of return. Overall, the inherent conservatism of the regulatory approach suggests that change is going to come slowly to the industry. It is kind of depressing.

[In] Louisiana, as in most of the United States, state law forbids anyone from stringing up private wires across a public street. Casten couldn’t market his power directly–he could only sell it to the local electric utility. And, because the utility, due to state rules, chiefly earned a profit from the power plants it built and ran itself, it refused to offer anything more than rock-bottom prices for Casten’s recycled power–prices too stingy for the project to work. After many months of bitter wrangling, Cabot gave up entirely. As a final insult, the utility later won approval from regulators to build a brand new fossil-fuel plant, a pricier way to generate electricity that would also add more carbon to the air.

I’ve long been a fan of the idea of allowing “private wires,” that is to say, allowing a non-utility power plant to string a wire in order to reach a customer. So long as utilities can rely on the coercive power of the state to maintain monopoly service territories, electric power entrepreneurs will have to innovate mostly on terms and conditions acceptable to the utilities and their regulators. That is why, as Kurt Yeager of the Galvin Electric Initiative put it, “When it comes to electricity, we’re still living in the era of black rotary phones.”

Allowing private wires will undo the utility industry’s veto on innovation and help foster the kind of creative destruction that consumers need if consumers are going to get what they want.

5 thoughts on “Private wires and the electric power industry you want

  1. You call this an excellent article? It’s barely a half-step above the selective twaddled normally peddled by the Michael Moores of this world. The notion that distributed generation and CHP will give us all the free lunch that the greedy utility execs are currently hoarding is niave at best and disingenuous at worst. Trying to say that the Louisiana experience is typical of the entire US is simply dishonest. In the Northeast, the Midwest, Texas and California, which amounts to about 80% of the nations’s population, a CHP producer does not have to sell power to a utility, but is free to participate into markets that are, by and large, free of exercises of market power and oligopoly. You know that, so I am disappointed that you would trumpet this pile of half-truths, innuendo, demonology and selective omission as “excellence”.

  2. Quite the buzzkill, bartman, but maybe you’re right. Maybe I should rethink my initial reaction.

    But I will dispute the significance of RTO markets for small CHP projects. About 2/3rd of the U.S. population is served in RTO-style markets, but for a modest-sized distributed energy resources the economic sweet spot is displacing its own retail-priced consumption and selling the excess down the road at a price below current retail yet above wholesale rates. Even smack dab in the middle of the most efficient RTO market, the difference between wholesale prices and what a potential customer across the street is willing to pay can be significant.

    Also, in all or almost all states, selling power to a retail consumer requires the seller to be a regulated utility and stringing a power line requires obtaining a certificate of convenience and necessity (CCN). Typically the state won’t grant more than one CCN for an area, so the CHP project is back to dealing with the local utility for permission to use the local distribution system.

  3. bartman,

    You’re not thinking at the margin here. While you are certainly correct that CHP is not a free lunch, at the margin, compared to the astounding heat losses both in generation and in many end uses, CHP can increase the amount of value/utility/surplus we get out of each BTU equivalent of fuel. It’s the barrier to that choice that is galling, and that the TNR story tells. It’s a story that has been told a lot, and those of us who follow this industry know it well, but it bears retelling to a lay audience.

    I second Mike’s comments on RTO participation, which itself is not close to a free lunch or silver bullet.

    But let’s be honest about the incentives facing utility executives: they have every incentive to block competition for their retail services, and this persistent wires monopoly serves that incentive, even in situations like office parks and convention centers where the wires monopoly is an archaic relic of an old way of living. That’s also why they charge excessive standby rates in situations where they have been unable to block the distributed generation installation.

  4. I don’t want to be automatically negative, but whenever lefties write business stories, skepticism should be the very first order of the day.

    Maybe we’re talking past each other, but where I live, if you build a new plant, be it CHP or not, you connect to the transmission grid, not the local distribution network. The idea that a generator bidding into the RTO market must take the wholesale price at his node is incorrect. I work for a large generator with many plants in a large RTO, but most of our power is sold 1 to 3 years forward to both retail utilities and direct end users at a negotiated price. When the RTO pays us, they pay us the constracted price. Only a very small share of our generation gets freely bid into the day-ahead market. You claim that generators get paid whatever their nodal price is, but this is a large misunderstanding.

    And Lynne, we’re going to disagree about “excessive” standby rates for people with DG. It’s fine and danady if people with their own solar or microturbines are disconnected from the grid, but most aren’t: they stray connect, and thus have a free option to take power from the grid whever they want it, and the utility is obligated to serve their load. Like it or not, maintenance of the grid is expensive, and if you exempt DG owners from their share4 of that fixed cost, then the fixed cost will get shifted to a smaller and smaller customer base.

    As a laissez-faire economist, I’d like nothing more than a wide-open, freely competitive market in everything, but natural monopoly is an unfortunate reality we have to deal with in the electricity distribution business. I understand that technology has eroded natural monopolies in telecommunications, but as long as everybody wants to stay connected to a grid and wants the free option to buy power at will, then there’s going to be a grid, and that grid is going to be a natural monopoly, and maintenance of it has to be paid for by somebody.

    Anyway, keep up the good work. I know you’re both working hard to push the rock forward.

  5. Bartman –

    I’m not quite an unbiased observer, since I’m associated with Recycled Energy Development, the company run by Tom Casten, who’s featured in the New Republic article. That said, you’re vastly underestimating the power of CHP here. Look at Denmark. Over half their power comes from CHP. As a result, it costs them less than half as much to produce each unit of energy. The way Denmark’s system got that way is the country decided to reward efficiency and let any technology emerge that could accomplish that end. CHP emerged victorious. Here in the U.S., EPA and DOE estimates suggest there’s enough CURRENTLY RECOVERABLE waste energy to slash U.S. greenhouse gas emissions by 20%.

    You are of course correct that we must deal with the reality of monopolies in the electricity distribution business. But we do not have a NATURAL monopoly here. There’s no cost advantage to doing it the way we’re doing it. The economy of scale is exactly backwards in this case: if you’re generating power remotely, you’re necessarily wasting heat. Moreover, the monopolies got where they are through direct government interventions, subsidies, and protections; this isn’t due to the utilities exemplifying the ideal of “survival of the fittest.” What we need is some creative destruction, a la Schumpeter.


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