The Politics of Renewable Energy
I found yesterday’s NY Times article on the shifting politics of renewable energy morbidly fascinating on both a political and economic level. Basically the article pieces together anecdotes of odd-couple political alliances between renewable energy boosters and Republicans, Libertarians (e.g. Barry Goldwater Jr.), or Tea Party stripes. My reaction was that the Times seems to have found a collection of Republicans who want to support renewable energy for all the wrong reasons. Barry Goldwater seems to see renewable energy as a freedom issue and solar panels as sticking it to the man – where the man in this case is the electric utility.
A new political twist on this is the perception of utilities as extensions of the government, with “prices set by bureaucrats.” In fairness, some of these folks probably supported electricity competition (which still has its share of bureaucrats). Ironically, with competition, when there is a different company billing you for the energy, it’s pretty clear that your utility bill is just for the grid infrastructure part – and we still need to pay for it. Sorry, there is no escaping these bureaucrats unless you are willing to go off the grid completely.
Others attempt to bring national security into the picture, which requires some impressive rhetorical gymnastics. Tom Morrisey of the Arizona Republican Party links solar energy to the war in Afghanistan. In the past, Energy Institute bloggers have had to complain when electricity subsidies were justified as somehow reducing our dependence on foreign oil, which fuels only a trivial fraction of US electricity production. At least Morrisey avoids that mistep, as there is no oil in Afghanistan. Perhaps he is focused on our dependence on foreign lithium.
The economics in the article is really nothing new. The fights being played out across the country are about the fairness, and sustainability, of solar policies that shift the fixed costs of network infrastructure to customers without solar. I am frustrated how verifiable facts are reported as “arguments” instead of checked and reported as true or false. The Edison Foundation “argues” that non-energy charges account for 55% of an electric bill on average. The fact that a big part – usually a majority – of a residential electric bill covers costs other than generation is not an “argument,” it’s a truth. Only 31% of the electric charges on my last bill are for generation. The EIA website says that over all customers (including commercial and industrial) generation accounts for 58%. That’s a lot higher because for commercial and industrial customers T&D costs are much lower. Your percentage may vary but the underlying point – that your bill covers a lot more than energy – does not.
The counter-argument, articulated by an Arizona Republican, is that this implies that if he conserved energy by using less air-conditioning, he would also be free-riding on these grid charges. Yes! That is exactly right!
We have been recovering fixed costs with variable rates for so long that people do not realize what the costs really are. At one time it was perhaps reasonably fair and financially viable to pro-rate fixed charges according to a home’s energy use. As some homes approach very low levels of net energy use, that is no longer fair or financially viable.
The “freedom from the utility argument” would carry a lot more weight if folks were in fact not using the expensive grid infrastructure they complain about paying for. However the vast majority of solar installations do not allow one to even power a house during a black-out, let alone disconnect from the grid completely.
Liberals have come to embrace the notion that the costs of health-care risks should be pooled and shared by the general population. They do not seem to feel that way about energy infrastructure. The Republicans in this piece don’t want to pay (or don’t recognize) the costs of the grid either. Neither side of this “green-tea” coalition has the economics right.
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After reading through the comments above, I’m struck by how much they reflect arguments I’ve heard made at numerous workshops, seminars, and the like. There seems to be this us-vs-them quality that is similar to the one that existed prior to the DOT-com bubble bursting. That is, there’s this New Economy that the Old Economy advocates (i.e, those that argued that value has to have some thing behind it to support it) just didn’t grasp. What we learned is that the DOT-comers were wrong but that they were working in a field that could and still does have an impact on the economy, new or old. A few thoughts follow.
1. Telecom is a bad analogy for electric and gas utilities.
2. Your choice to meet your electric use via solar, wind, energy efficiency (EE), has costs for me that you do not bear. These pecuniary externalities are legitimate issues for public debate, especially if you remain grid connected.
3. Outside of more remote locations, you do not get to choose whether you are connected to the water and sewer systems, where they are available. You may not like this, but you picked your location. Nor should you get to choose whether or not you remain connected to the electric and natural gas systems. Ergo, we’re back to #2.
4. People with solar on their roof, or a wind generator, or even EE, may lead to a more needle shaped spike in capacity constrained systems. If this occurs, it will lead to higher costs to the utility (i.e., all customers). Addressing all these various issues with pricing (rates) is difficult.
5. Smart meters and smart grid can, in theory, help address issues such as the one raised in #4. Yet, while there are examples of using various tools to manage capacity constraints via price signals to customers, please do not argue that such methods are widespread, or that they could be if the utility and its commission would just get smart.
We only need look at other transformative technologies that nay sayers claimed would never catch on–automobiles, kitchen appliances, radio (and TV), personal computers. Who in 1900 would have thought that the infrastructure that fed and cared for horses would be obsolete in less than 30 years?
It is not necessarily true that using DG/EE will impose costs on others. In fact, you might have noticed that transmission rates are increasing exponentially, so that it may be those who rely on bulk power who are being subsidized. And addressing that issue is one of proper cost allocation. Yes there will always be those who complain, but we can get it approximately right.
There are new technologies that may make neighborhood-scale waste treatment more economic than city-wide systems. Technology is making economies of scale less important in many cases. We may not have to be connected to the electric grid if we set up microgrids. UCSD has a microgrid that can island from SDG&E.
There’s both contractual and technological ways to deal with changes in load shape. Needle peaks are NOT one of those problems–in fact solar DG is chopping off the current needle peaks. We won’t do this entirely with rates, but they are effective. And just saying going back to the old ways is neither viable nor desirable compared to the alternative.
We already know from other industries that having dynamic transparent price signals can change behavior significantly. We only need look at gasoline prices which have effectively managed supply and demand quite well from a resource constraint basis. People complain about volatility, but they reduce their demand and by fuel efficient cars. Several studies have shown that the CAFE standards have had relatively small impacts compared to fuel prices. Cell phones are another example.
Jack and Richard,
As to whether we value something before it is added or after it is added, a lot depends on the contracting that is going on to get the thing added. We can have different prices for everything, but that would probably mean huge prices for large items that are added in lumps. They would get the price before the addition and the addition would dramatically drop the price. That pricing concept would encourage 1000 MW solar plants instead of 1 million 1 KW solar plants. Are we going to have that sort of hedging?
The first question is “which side of the meter is it on?” Customers should get the price before the addition of the resource. Otherwise the benefits of the investment disperse to the other customers who have not made the investment. If it’s on the utility side, that is more of a policy question about whether we need to provide incentives for the technology.
An interesting fact about economics is that I don’t think it has addressed what theoretically is the correct method for lumpy additions. Economics generally assumes very small increments that have little impact on price. Large resources may fall into competitive monopolies, oligopolies or bargaining theory.
Richard, I don’t think it matters whether we value solar before or after everything else. My point is, when energy production solar and other sources that cannot be turned down exceeds demand, something has to give. I’d have to look at the graphs more closely but at the 50% penetration level I suspect solar would still have to be curtailed even if everything else could be turned off, which it can’t.
Scott, while the transformation you describe might be possible, I’d like to see a couple of demonstrations before I become a believer. Time after time, allegedly transformational technologies in the energy space like fuel cells (Bloom Energy is a favorite example) and storage have not performed up to expectations. Moreover, assuming it makes technical and economic sense, the dystopia you describe is fine for the wealthier folks who can afford it, but no one has explained how it works for the folks who cannot afford distributed generation and storage. I’m not necessarily a fan of the current utility business model but it does have the advantage of providing reasonably priced electricity on a universal basis. Of course I suppose another alternative is to allow the wealthy to do as they wish and impose a tax as Germany has done to support the cost of operating the wires.
Azmat, while I’m convinced renewable energy has a place in our energy mix, I’m equally convinced it’s not the only means or even the best means for reducing CO2 emissions. If you think storage is the answer, I’d be interested in hearing how that works. Several months back I performed a little thought experiment that illustrated the enormous amounts of storage that would be required to support a 100% renewable energy system for California at current rates of electric consumption. I’ll be happy to send that to anyone who wants it but stated another way, we’d need the equivalent of 100 or more pumped storage plants the size of PG&E’s Helms facility, or half a million acre feet of water sitting at an elevation of 6,000 feet above the lower reservoir, and that’s without worrying about seasonal storage.
Jack, it DOES matter if the valuation is done before or after solar enters the queue, at least up to a point. You’re implying ALL of the solar should be valued at zero if it forces other resources to back down. I’m pointing out that the solar that meets demand up to the full customer load has value equal to what it would have cost to provide that power from outside sources (plus any other intrinsic values.)
Customers have the right to meet their own energy needs with their own resources–the utilities do not OWN the customers’ energy loads (although the IOUs will attempt to argue otherwise). The IOUs and wholesale generators do not have a property right to the electricity to be generated on the grid. If those resources are displaced, then those suppliers suffer an uncompensated pecuniary loss. That’s the nature of markets.
With smart meters spreading it will become easier to offer various electricity billing plans. Buy a fixed number of kWh per billing cycle, and pay for the overuse at a 2-3x that rate somewhat like mobile voice minutes plans.
Water utilities already charge a base connection fee independent of usage, and then add the usage at a tiered rate. Easy enough to do for electricity. Having electrons flow back to the grid should incur a grid usage ‘toll’.
The PUC needs to do a ground up review of the tariff structure.
I don’t really care a whole lot WHY someone supports renewables, as long as we get more renewables into the system. BUT the REAL solution to our energy problem is reduction, initially by efficiency, but eventually by reduced usage per capita. Not a very difficult change to pull off with proper pricing structure. Just look at the DYNAMIC pricing models now cropping up in street parking and car rental [‘taxi’] rates.
While I understand the idea of pooling costs, technology is surpassing what the wired grid may offer following the cellar phone experience. All the “risk” is borne by the customer, not the electric utility. If the utility builds a generation plant based on the expected cost with agreement by the State regulators, and the delivered electricity price increases – the utility doesn’t bear that increase, they pass on the costs (fuel escalation costs) to the customers. If the electric utility has outages (some very anticipated), the customer bears lost of service and loss of income (and in many cases invests in back-up diesel generators, monthly testing, and trading-out the diesel fuel). Lawrence Berkeley National Laboratory initiated a study to measure the economic impact of power outages. Their study included “typical” power outages that don’t make national headlines, but do have a very real cost. Their finding: Power outages cost the U.S. $80 billion every year. And when the electric grid has over-voltages (surges), under-voltages (sags), and transients (spurts of electrons) that all ruin digital equipment – the utility doesn’t replace that equipment , or for surge protectors and other power quality equipment that consumers pay billions of dollars every year. Over 40,000 commercial businesses have on-site renewable energy tied to battery banks to power their loads directly with no electric utility interface. There could be a future where the wealthier consumer – commercial, institutional, and residential will have their own self-powered on-site system, and everyone else will have a wired centralized grid. Higher end “smart grids” will be in denser urban areas where grids made economic sense when they started. The author misunderstands that these on-site energy technologies, both electric and thermal, are in an evolutionary stage where prices are dropping and delivery is being scaled. Advanced, higher-value energy efficiency will also take its toll on the old utility model. Solar water heating and solar daylighting, geothermal heat pumps, LED lighting, superinsulation, electrochromic and advanced windows, and Energy Star++ appliances and office machines – can reduce building loads by 60 percent, making on-site generation loads much smaller to meet, and lower in cost. So the snideness about “pooling of grid costs” is cute, but the very model is facing a major transformation — and just like cellular, will be for the good. We have a 20th century electric grid, predominantly using 19th century energy technologies, for 21st century needs.These cost recovery measures by utilities intently trying preserve their old business model, will just further accelerate the new electricity delivery model. And it’s about time.
I agree with Scott. The utilities have passed off all of the risk of misforecasting and overinvesting on ratepayers. Yet the IOUs earn near S&P500 returns instead of the rates on corporate bonds. It’s time to shift the risk back to to IOUs. Otherwise we might as well as have munis.
Jim’s commentary treats this risk sharing as though it can’t be or shouldn’t be changed. It’s time to challenge that mindset.
Jim,
Nice commentary on the New York Times article. A month ago I wrote about the similar concern in my blog,” Net Metering–Morphing Customers Who Self Generate”, http://www.livelyutility.com/blog/?p=254
In part, I said “The rapid growth in the number of small roof top solar generators requires the electric industry to develop a pricing plan that is fair to traditional customers as well as to the hybrid customers, those still connected to the grid but with some self generation.”
The growing divergence between customers requires a different way to charge them for the use of wires. The approach I discuss in my blog is demand charges, which roughly reflect the way that utilities incur the cost of wires for their customers. An alternative is dynamic pricing of the wires, which could follow the losses on the distribution grid, as I discuss in last week’s “Dynamic ‘Distribution’ Grid Pricing,” Energy Pulse, 2014 January 21http://www.energycentral.com/generationstorage/distributedandcogeneration/articles/2817
Subtitle: the mingled public and private goods
You make some pretty astute observations that escaped me when I read the article yesterday, but there’s no disputing the odd politics and irrational economic thinking. In fact, it’s going to get stranger and a lot worse. If you’ve read the recently published report that looks at higher renewable penetration rates for California (http://www.ethree.com/documents/E3_Final_RPS_Report_2014_01_06_with_appendices.pdf), we could be facing a situation during spring weekdays where the value of solar energy is negative because there’s too much supply compared with demand. A rational person would say, well I either need to invest in a battery or hold off on rooftop panels. Instead, the solar PV lobby is doing everything it can to divert attention from this problem, which could impose huge costs on those consumers who can’t afford both rooftop PV and storage.
The important question is whether we value solar before or after it’s added to the power network. Of course if it drives the value of the grid to zero AFTER its introduction, then the price will be zero or negative. But if we really want to look at it as a value proposition, we need to look at its value BEFORE it enters the grid.
Maybe this should be an op-ed in the NYT? Sure, you’ll be rhetorically tarred and feathered in the comments as a utility/bureaucrat apologist, but such is the normal reward for truth-telling in the energy business.
Here, you’re mostly preaching to the converted.