This is a response to a Forbes commentary published last week, by Steve Cicala
In his commentary last week, Steve Cicala fell into a common trap for economists analyzing the electricity system. Touting what economics calls competitive advantage, Mr Cicala suggests we pursue the lowest price by taking cheap solar electricity from the Southwest, wind from the Midwest, and even coal from Appalachia, and send it across the country to places where those same electrons can’t be as inexpensively generated.
But like many driving the same low-price vehicle, Mr Cicala’s logic hits several of the same potholes.
First, the centralization and long-distance transmission of electricity is a outdated legacy of the last 20-30 years, and is under serious threat from cost-effective local alternatives. A million solar arrays now grace American rooftops, and most were installed because customers reduced their energy costs by doing so. The power generation of the 21st century grid doesn’t compete with the wholesale power from last century’s big power plants, because it’s produced at the retail level, where the costs and benefits of power generation are completely different. Utility scale solar, advocated by Mr Cicala, does cost less than rooftop solar (and most fossil fuel options, as well), but it’s also worth less to the electric grid, as I wrote in July 2015.
The long-distance, utility-scale grid Mr Cicala envisions also ignores the way in which smart grid innovations are shrinking the value of a big grid. In New York, for example, grid regulators are “reforming the energy vision” to write rules that capture the more cost-effective deployment of distributed energy solutions. Already, a $1 billion electrical substation upgrade for ConEdison was avoided through a $200 million investment in distributed solutions, including rooftop solar, customers using smart meters to reduce their demand during periods of peak use, and energy storage. The challenges of the 21st century grid aren’t bulk production of low-cost power, but maintaining the delicate balance of supply and demand, stable frequency, and voltage, which can now be supplied by utility customers using a network of smart meters, appliances, and smartphones. Building out a national “super grid,” as others have called it, could be a costly mistake. The Rocky Mountain Institute recently released data suggesting that, within 20 years, the shift toward “energy democracy” will permit most Americans to generate cheaper electricity from rooftop solar panels combined with inexpensive batteries than their utility could provide.
A final pitfall in the passionate pursuit of low prices is that it ignores customer preferences for local and the enormous economic benefits of local energy generation. As an illustration, while Mr Cicala talks of the national orange supply coming from two specialized states, he ignores the rapid growth in farmers’ markets in recent years, as Americans have voted with their wallets to purchase local food directly from the supplier. Americans similarly value the local production of energy for its many economic benefits, as illustrated by a letter signed by 10 East Coast governors in 2009 opposing new subsidies for long-distance transmission for undermining their efforts to capture more of the economic benefits of generating their own renewable energy. And as a million solar roofs illustrates, there’s perhaps no greater driver of clean energy adoption than the attraction of saving money while reducing reliance on an unresponsive, monopoly provider.
Even if nothing I’ve said to this point were true, Mr Cicala and others are missing perhaps the most important economic (and political) implication of their vision. The nation’s electricity system is currently controlled by scores of publicly-sanctioned monopoly utility companies, a situation that rests on the crumbling intellectual assumption that power generation is a natural monopoly. These companies have relied for decades on increasing sales and the ability to deploy capital without competition for steady profits. Their response to competitive pressure is to wield their government-granted economic and political power against the innovations of distributed power, from rooftop solar to customers pooling their ability to reduce energy use.
It might lower power prices by a few pennies, but we can’t afford to cement the political power of monopoly utilities with a costly interstate grid when energy democracy promises lower costs, greater customer choice, and a faster pace to the clean energy transition.
Photo credit: Flickr user Steve Garfield (CC BY-NC-SA 2.0 license)