Electric Power to the People!

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Nobel laureate in economics Vernon Smith and Reason Public Policy Institute's Lynne Kiesling get to the heart of the nation's electricity problems in today's Wall Street Journal:

A systematic rethinking of the power demand and supply system—not just transmissions lines—is required to bring the energy industry into the contemporary age. Eighty-five years of regulatory efforts have focused exclusively on supply—leaving on dusty shelves proposals to empower consumer demand, to help stabilize electric systems while creating a more flexible economic environment.

Under these regulations, a pricing system has developed that is so badly structured at the critical retail level that if it were replicated throughout the economy, we would all be as poor as the proverbial church mouse. Retail customers pay averaged rates, making their demand unresponsive to changes in supply cost. Without dynamic retail pricing, no one can determine whether, when, where or how to invest in energy infrastructure. Impulsive proposals to incentivize transmission investment, without retail demand response, puts the cart before the horse and risks expensive and unnecessary investment decisions, costly to reverse.

A subscription is needed to read the whole damn thing. For free, here's the interview Reason did with Smith, who won the 2002 Nobel for his pathbreaking work in experimental economics. And here's a link to RPPI's Blackout Resource Center.

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  1. My take on the whole power thing is “shit happens” – a failure doesn’t tell us the system is somehow horribly broken and unworkable. Shit just happens – in the words of one of the Apollo 7 engineers, “No matter how much you try to create a leak-proof valve, nature is going to give you a leaky valve. The question is how much leaking you can tolerate.”

    The power grid is not a chain, and all such analogies and metaphors break for the simple reason that there simply is no one chain; this is the fundamental sort of insight required to understand how bridges can be built, because _there is no single point of failure possible_, else they would fall down all the damn time. You are always going to have weak links – the key is not to have the whole system fail just because a link broke.

    Furthermore, most of the commentators on “what the real problem is” don’t seem to know anything about the actual power system itself. Yet somehow, knowing nothing of what actually happened, nor how the system even works to much a degree of detail, manage to figure out the answer. And isn’t it funny that the answer is some massive thing that only the government can fix with some massive sweeping, and surely massively sweepingly expensive, changes? If a system only fails one for a few dails every few decades, that system can only be so damn bad.

    After studying risk management, I’m inclined to believe one actual engineer I heard that claimed it was a “perfect storm”, where simply many different failures occurred together such that failure was inevitable. Nature is always going to hand you outlier events, “black swans” – things you never, and couldn’t possibly, expect or plan for. As the sample size increases, so increases the volatility.

    The key is to analyze what happened, and simply keep it from happening again; then try to use such insights gained to predict what other things might happen, then protect from such things as well.

    In the real world, you don’t get to just scrap a multi-billion dollar system developed over decades and just start over. You have to deal with the world you’ve got, and improve it according to costs vs benefits vs risks, relative to available alternatives.

    Just feel good about this one particular thing – power companies don’t, or at least shouldn’t, get paid for power that doesn’t get used, and not much power gets used in a blackout. If no one else, power generating companies don’t like having the whole damn system go off-line for hours and hours, no more than their customers do.

    The other thing is, you have to realize that this whole “Oh no, the lights went out” thing is really a very regional, cultural sort of reaction.

    To me, this whole thing was much ado about nearly nothing; I live in a port city on the Florida coast – power flickers on and off regularly in rain storms (especially in the summer), and every few years it can be reasonably expected that a hurricane will blow through the place and possibly wipe power out for way longer than the New York Blackout. If you live in a place like Dolphin Island, the damn power goes off all the time, and it seems like most hurricanes that come through this way wipe out their damn power for days on end all the time.

    We, however, being a folk which have experienced these things regularly, expect and prepare for such eventualities, and as far as I’m aware it doesn’t get national coverage, either; our 911 systems often have triple-battery/generator backups, and usually have multiple installations in case somethings happens to one and they have to move to another; our communication systems, such as towers, have power backup systems; everything is tested on a weekly basis to ensure that all systems are in proper working order and can deal with unexpected events. Gulf Power seems to have gotten pretty good with power outages of all sorts, from falling trees to lightening strikes to hurricanes, and they can get everything up and running in pretty short order.

    You guys up north are just a bunch of damn sissies 🙂

    And hey, we haven’t had a riot here once, either! Yet we don’t get on the news for our outstanding spirit of brotherhood and citizenship and outreach, do we? I sense the growth of a religion, much like Texanism – New Yorkism.

    Waa, waa, the lights went out – that’s what generators, battery backups, and UPS systems are for. It happens – get over it and plan ahead, which seems to be what the actual people in charge of such things have done quite well – the media and politicians, of course, have nothing but Fear Uncertainty Doubt and Massive Changes Are Needed to offer – what a shock.

    I just realized a political tactic I hadn’t heard before – claim in horror how bad some system is, even if it isn’t, then use it to garner massively more power and monies to change it…which of course, predictably, have a strange tendency to fail totally or do very little. Beware of cries for “modernization” – pork and bullshitting will be sure to follow, as they always do.

    Oh, and “if it works, it works” – there is nothing wrong with something being old. My computer is pretty damn new, and it breaks all the damn time – sometimes old things were built to be more rugged than present things. That, and they just hadn’t figured out so well how to cut costs and quality without it being noticed or confronted for _years_ as well as many things have in recent history – like with using flimsy plastic piping in plumbing, rather than copper tubing which is far more resilient (but slightly more expensive – and no, plumbers didn’t much start charging less because the cost of materials went down).

    Modernize my ass – just keep it from breaking down for another 2+ decades and shut up already.

  2. it is greedy corporations to blame

  3. It’s the evil and wasteful US lifestyle that’s to blame. If we all went back to our ancestral oneness with nature this sort of thing wouldn’t happen.

  4. How hard is it for people to understand different rates based upon peak times? Anyone over the age of 25 remembers long distance calls and you made them after 6:00 p.m. or 11:00 p.m. to save money. Why? Because personal, discretionary calls could quickly swamp capacity that businesses could not/would not delay.

    That’s the whole point of the article and the solution that could be enacted tomorrow. Some power generation companies are already doing it (see Southern Company). Too bad we as a society believe complex solutions are always required.

  5. milco88 – power is peak priced at the wholesale level, but not for the average customer.

    Bobo – please don’t get cous-cous on the straw man.

  6. Joe, that’s the point. My complaint is that the article cited should consistently hammer home the easy solution of demand-based pricing at the retail level, similar to what we had with long distance rates under Ma Bell.

    Trying to thread the needle of environmentalist lawsuits, federal/state jurisdiction and imaginative finger-pointing because of last week’s blackout is, IMO, a complete waste of time because it fails to address the real issue.

    Stick to something simple that people can understand and focus on it.

  7. In other words, discern where the demand is, and invest there. Wow! 🙂

  8. Long-term, the answer is decentralization — every house or building must contain, on-site, the means of generating the electricity it needs, much as underground steam pipes began a century ago to be replaced by decentralized furnaces.

  9. Lex, isn’t there a balance to be struck between the efficiency of on-site generation and the efficiency of scale from a larger plant that serves multiple consumers?

  10. Ideally you’d have residential homes and large buildings with their own power, plus small power plants to service areas that can’t power themselves all the time, and to provide backup generation during peak times. Surplus power from homes/business would be sold to the utilities to make up for deficits elsewhere. Solar and fuel cells look like the best solutions for most places.

  11. Electricity is one area in which I actually agree with market regulation, at least on the production side, for the very reason that joe mentioned – savings from economies of scale in production can be passed along to consumers. In fact, even in a deregulated market, given the immense economies of scale inherent in the business, a single dominant survivor is the natural end result. And given that electricity is a natural monopoly, it makes sense to let the monopolist do business, but regulate his prices.

    Deregulation, which is ideal in many industries, simply falls flat in the realm of electricity. One of the problems, illustrated last week with the blackout, is that no one has ownership of the power grid. One solution would be private ownership of the power grid, but there, you get into the same problem mentioned above (many smaller providers are much less efficient than a single dominant provider, due to high fixed costs).

    In a regulated market, the single provider can be the owner of the grid, paying to upgrade it when necessary, and passing on that amortized cost to consumers.

  12. Long-term, the answer is deregulation — every house or building may contain either (or both)
    the means of generating electricity on-site (much as underground steam pipes were replaced by decentralized furnaces), or receiving electricity that is generated elsewhere (much as underground steam pipes were replaced by underground natural gas lines?), in whatever quantity it wants at the (possibly dynamic, volatile) market price of electricity.

  13. Brad S.,

    In France one of the major benefits of having a public corporation run electrical generation is the uniformity which is created. France’s first generation of nuclear power plants, all fifty-four of them, are identical. Thus if there is a problem at one, the solution can be applied to all of them. They all use the same parts, methods of operation, etc.

  14. Darb, you ignore the fact that there are many different types of cars. Electric power is a commodity.

  15. CARS are one area in which I actually agree with market regulation, at least on the production side, for the very reason that joe mentioned – savings from economies of scale in production can be passed along to consumers.

    In fact, even in a deregulated market, given the immense economies of scale inherent in the business, a single dominant survivor is the natural end result. And given that TRANSPORTATION is a natural monopoly, it makes sense to let the monopolist do business, but regulate his prices.

    Deregulation, which is ideal in many industries, simply falls flat in the realm of TRANSPORTATION. One of the problems, illustrated last week with the TRAIN WRECK, is that no one has ownership of the RAILWAYS. One solution would be private ownership of the RAILWAYS — but there, you get into the same problem mentioned above. (Many CARS are much less efficient than a single dominant TRAIN, due to high fixed costs).

    In a regulated market, the GOVERNMENT can be the owner of the RAILWAYS, paying to upgrade it when necessary, and passing on those amortized TAXES to consumers.

    Waa, waa, the TRAIN GOT WRECKED. Well, hell, that’s what TRUCKS, 18-WHEELERS, and SUVs are for!

  16. One interesting side note: In Ontario, if you generate your own electricity, any surplus power you generate has to be purchased by the local utility at market rate. So the investment in reducing one’s dependence on the grid can be made to pay for itself, over time. Anything like this below the 49th?

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