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Debunking Silly Arguments for Utility Protectionism

By Dick Munson

2008_Weak_&_Strong_Arguments_BRYANS.jpegOhio utilities FirstEnergy and AEP, as readers of this blog know too well, want the Buckeye State to bail out their uneconomic power plants. Combined, their proposals before the Public Utilities Commission of Ohio (PUCO) would run Ohioans nearly $6 billion in increased costs. We understand where the companies’ greedy desire for subsidies comes from, but the arguments for them have become downright silly.

Let’s review why FirstEnergy and AEP’s bailout justifications don’t hold up:

  • The power giants say their subsidies will be good for customers by providing certainty about future electricity rates. The only certainty is those same customers will need to pay an extra $130 per year so the companies can enjoy bonuses and dividends.
  • They also argue the bailouts will be good for Ohio’s businesses. Yet industrialists, which are major electricity consumers, say the utilities’ income-guarantee plans “will make it more difficult for […] Ohio manufacturers to remain competitive in the global markets.”
  • They claim the bailouts will save Ohioans money in the long run. According to a state agency, they will actually cost Ohio almost $6 billion.
  • FirstEnergy and AEP also say the lights will go out if they have to close their power plants. Reliability, no doubt, is an important issue. That’s why the responsibility is in the hands of the regional grid operator, which can manage electricity across a wide area, not the regulators of an individual state. The regional regulator, in fact, says Ohio has lots of excess capacity and reliability is not an issue. Even the Public Utilities Commission chairman warned the utilities to stop scaring Ohioans. Viewing reliability from another perspective, the regional power market ensures power plants that are needed are paid for their electric capacity. In other words, unnecessary units don’t make the cut. The only reason FirstEnergy and AEP are seeking subsidies is their generators are expensive and not needed.
  • FirstEnergy and AEP say regulators need to protect their financial health. Last time we checked, the regulators’ job is to protect the public interest – and to care more about fair customer bills than utility credit ratings.
  • FirstEnergy complains Ohioans should not rely upon out-of-state power, forgetting electrons don’t really care about state boundaries. Once they’re on the regional grid, there’s no telling where they’ll end up. Plus, there are other Ohio-based generators willing to meet energy demand (like Dynegy, which has offered alternative plans).

AEP does say it’s willing to support a few hundred megawatts of solar and wind power, but its requested subsidies would ensure dirty power plants continue operating and spewing more than a few thousand megawatts worth of pollution.

Their strongest – although unspoken – argument seems to be political influence. The powerful utilities have made generous campaign contributions and hired trusted advisors to key elected officials, but the proposed “deals” are bad for business, reliability, customers, and the environment.

The PUCO should see right through these silly arguments and reject FirstEnergy and AEP’s requests for subsidies.

Photo source: Wikimedia/Joan Bryans

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Recent Comments

Bob Meinetz's picture
Bob Meinetz on February 14, 2016

Dick, your article reveals a fundamental misunderstanding of electricity, and thus doesn’t make much sense. You write:

Once [electrons] are on the regional grid, there’s no telling where they’ll end up…

Electrons on an A/C grid go go back and forth – the “alternating” in “alternating current”. If you were to cut the electric energy which pushes and pulls them, they would end up very close to where they started. That electrical energy is very carefully accounted for (that’s how generators get paid). Questions:

1) What gives you the right to tell utilities who will generate the electricity on wires they own?

2) If AEG builds thousands of megawatts of solar and wind capacity, who/what generates Ohio’s electricity at night and when the wind is not blowing – coal plants in other states?

3) “A few thousand megawatts worth of pollution” makes no sense at all – emissions are a function of energy, not power, and are completely dependent upon the method of generation. Since Ohioans can be counted on wanting electricity any time they need it, is this a plug for nuclear?

EDF would benefit by having someone who’s knowledgeable on the subject they want to debunk. Even though it would likely upset EDF’s policy-cart of apples, that’s the place to start.

Bruce McFarling's picture
Bruce McFarling on February 15, 2016

Three of these plants impose substantial direct costs in the form of CO2 emissions which the utilities does not pay, and so all estimates of their cost to the economy are under-estimates.

One of these does not.

The short and medium term replacement for any of these is likely to be Natural Gas. It is, after all, the low cost of NG (which is also artificially held lower than its actual cost due to not charging for the right to use scarce and overloaded natural carbon sequestration ecosystem services) that is responsible for the financial difficulties that these plants face.

Three of these emit substantially more CO2 than a natural gas power plant, and so it is a net gain (though not an adequate one), if they are replaced by NG fired power.

One emits almost no CO2, and so it would be a substantial economic loss for it to be replaced by NG power.

So if the question is asked whether it is justified to provide a subsidy to maintain this generation capacity, only one of the four has a substantial economic case to be made for it. The other three are an obsolete form of power generation that merit abandonment.

Nathan Wilson's picture
Nathan Wilson on February 15, 2016

EDF’s decisions to oppose the regulated utility model (in favor of the free market) in Ohio is a deal with the devil.  Perhaps this move will tend to make the regional generation portfolio slightly cleaner in the short term (by allowing free-market fossil gas generation to replace utility owned coal generation), but in the long term, the move will lock-in a system that favors the fossil fuel industry.  The truth is, fossil fuel costs are not going up, they are going down.

Pollution control is a luxury that tends to put upward pressure on energy cost.  Arguments like EDF’s, opposing the Ohio public utility commission’s move to implement regulations based on predictions that they’ll make cost go up, is effectively a blow against clean energy.

As we add more and more clean energy to the grid (with it’s high capital cost and low operating cost), the free market will be less and less effective at funding the system.  In these market based systems, merchant producers bid in at their marginal cost (e.g. zero for wind and solar), and hope that subsequent bidders drive up the price of electricity (by burning expensive fossil fuels like oil); for ever hour that expensive fossil fuel is not needed, no power producers get paid!  It is simply the wrong system to fund wind, solar, and nuclear power.

Successful high penetration clean energy requires the regulated utility model, and regulated utilities are perfectly capable of delivering clean energy (often via long term power purchase agreements with wind farm developers).  All they need is legal authorization to charge customers more for clean energy, using an emissions limiting schedule such as the EPA’s Clean Power Plan.  Deregulation and pursuit of the lowest cost will simply lead to completely predictable failure of the free market to control pollution and CO2 emissions. 

Clayton Handleman's picture
Clayton Handleman on February 16, 2016

If time of use metering is included along with price signals made avaiable to consumers, a market based grid would be very effective.  This is particularly true with the emerging EV fleet which is a highly flexible load that can be designed to arbitrage consumption (not production which degrades batteries).  Late September and early October would present problems in the US and at those times the existing fleet of gas plants might need to be fired up.  This would be costly on a $/kwhr basis but on a systemic basis, averaged over the year, relatively inexpensive.  Likewise, the emissions woud be small on an annualized percentage basis.

A frequent argument against this approach is that renewables are highly intermittent.  This is true on an individual basis but geographical aggregation smooths the intermittency and addresses the diurnal behavior of the various sources.

An interesting and productive discussion would be to look at the difficulties and debate solutions rather than to reject out of hand.  What are some of the things that concern me and that a progressive board would be discussing:

1) Cyber security of a highly interactive, networked electricity market.

2) Addressing terrorist vulnerability of high density power corridors

3) Systemic costs of a modern smart grid vs 20th century central system.  In other words, rather than cherry picking individual components, looking at the holistic cost of both approaches.  What is the annual cost. 

 

Nathan Wilson's picture
Nathan Wilson on February 16, 2016

time of use metering … a market based grid would be very effective

No, that would be good for a centrally managed grid, but it would make the deregulated free market even worse, by reducing the need for fossil fuels.  Batteries do nothing for the problem that the wholesale short-term market price of electricity will be unrelated to the cost of production (the improvements you suggest are not compatible with the free market that EDF is endorsing).

Again, the way the short term markets function is that producers bid for the quantity of energy they expect to be able to produce in the specified time interval, bids are acceptabled starting from the lowest until demand is met, then each producer gets paid the highest bid that was accepted (ie. not their own bid).  To avoid getting left out, everyone bids their marginal cost (fuel only break-even), so they can only make a profit if a higher cost producer wins the bid also.

A free market will always degenerate to this.  The only solutions are to form regulated utilities which can make long-term contracts with producers (to prevent over-supply), or to add an endless series of bandaids (fossil fuel subsidies and capacity payments) to the market rules to help hold it together a little longer.

Clayton Handleman's picture
Clayton Handleman on February 17, 2016

“Successful high penetration clean energy requires the regulated utility model, and regulated utilities are perfectly capable of delivering clean energy (often via long term power purchase agreements with wind farm developers).”

I disagree.  We are rapidly moving to a time where regulated utilitis should run the transmission and distribution lines and really, not much else. 

Using absolutes to make a point is fraught with peril.  “, THE way the short term markets function is that producers bid for the quantity of energy they expect to be able to produce in the specified time interval, bids are acceptabled starting from the lowest until demand is met, then each producer gets paid the highest bid that was accepted

In fact, already, customers are making long term contracts with producers locking in rates to assure project success. 

 

This is not a simple process but hand waiving arguments saying it just doesn’t work with markets using today’s rules are not a productive use of this board.  An interesting conversation is what are the weaknesses of today’s market rules and how can they be changed to adapt to another approach. 

When all is said and done, I agree with you, today’s centrally planned utility model will not work for high penetration renewables.  Where we part company is to imagine that a market set up by utilities, designed for central planning, is the best approach to use for matching distributed generation to distributed loads. 

The level of automation available today allows for far more sophisticated and granular market making.  And BTW, in free markets, some investors get hurt.  Thats the way it works.  But now customers have choice and cannot be forced into rates based upon their provider’s poor decisions.

 

Bob Meinetz's picture
Bob Meinetz on February 17, 2016

Clayton, ignoring for a moment the arrogance inherent in the assumption your opinions represent a more “productive use of this board” – you’ve got it exactly backwards.

Today’s market was not set up by utilities – it was set up by FDR’s Public Utility Holding Company Act in 1935 as a response to the generation free-for-all of the 1920s, when independent power producers raised rates on the lines they owned whenever they wanted. Sound familiar? Since PUHCA was repealed in 2005, electricity rates are up a record 40% in ten years.

Now, some history-challenged advocates wax nostalgic for a return the 1920s, thinking “granular market making” won’t be equally available to devoted con artists, and selectively forgetting the decade which followed. Since the centrally-planned, centrally-regulated utility model worked pretty damn well for 70 years, the answer is simple: if you don’t like it, go off-grid. Otherwise, you’ve got a fight on your hands.

Nathan Wilson's picture
Nathan Wilson on February 18, 2016

“… customers are making long term contracts with producers locking in rates to assure project success.

Umm, have you read this TEC article, New Data Debunks Clean Energy Claims by Apple, Amazon, Google ?

The electricity these companies use is essentially all baseload.  But rather than buy renewable baseload (e.g. geothermal), they buy regular grid power for their own use, then buy renewable energy certificates to pretend to be green.  A scam.

Companies that claim to sell green energy to consumers are no better; the product is really just green certificates.  The companies don’t actually support energy storage or long distance transmission or any of the expensive techno-patches that are necessary for actual high penetration renewables.

 

 I agree with you, today’s centrally planned utility model will not work for high penetration renewables.

I said just the opposite: today’s deregulated market model will not work for high penetration renewables (or at least is the hardest way to do it), and a regulated utility is the best way to do sustainable energy (renewable or nuclear).

I’m not arguing that utilities should own all generation.  Private companies are goot at reducing operating costs, which makes them great for fossil fuel.  They are also great at innovation, so they are good for building wind and solar installation; but owning them is a different question.  For capital-intensive projects like sustainable energy, the lower interesting rates available to regulated utilites (due to the lower risk) gives them an advantage; when the technology gets mature private companies have less scope for improvement and again a regulated utility becomes more appealing.  Similarly, when the energy system has long life and low operating cost, a regulated company can pass more saving on to customers.

Regarding your apparent assumption that deregulation will be better for distributed generation, I don’t see why.  Particularly for residential system, a public utility commission will certainly grant homeowners a more favorable rate than a greedy private company like Enron.  Without favorable regulations, there is no way ma&pa operators can compete with Walmarts.

Clayton Handleman's picture
Clayton Handleman on February 18, 2016

 

Umm, have you read this TEC article, New Data Debunks Clean Energy Claims by Apple, Amazon, Google ?

The electricity these companies use is essentially all baseload.  But rather than buy renewable baseload (e.g. geothermal), they buy regular grid power for their own use, then buy renewable energy certificates to pretend to be green.  A scam.

Since the building solar farms at utility scale can be traced directly to those purchases they are hardly a scam.  There are a lot of footnotes that can be attached to the use of a REC system but it did not suddenly become a scam the moment Google and Apple got some favorable PR.  I address this in comments to the post you reference above. 

 

 I agree with you, today’s centrally planned utility model will not work for high penetration renewables.”  I said just the opposite:

My bad, sorry about that.

 

Regarding your apparent assumption that deregulation will be better for distributed generation, I don’t see why. Particularly for residential system, a public utility commission will certainly grant homeowners a more favorable rate than a greedy private company like Enron.  Without favorable regulations, there is no way ma&pa operators can compete with Walmarts.

Bringing up Enron is simply propaganda.  Enron employees were found criminally liable and people went to jail.  Not even in the recent banking debacle was the system so perverted that people went to jail.  Enron is not a proxy for how a market based system would function with reasonable ground rules and enforcement.  To portray them as such is desparate and pathetic effort to manipulate opinion rather than earn it through reasoned and supported dialog.

Regarding the rest of your comment, I don’t see why residential users should get a preferential rate.   They can shop through aggregators as we already do in the Northeast or they can put up their own generation and sell to the aggregators. 

A real market in electricity would have an automated market maker managing millions of transactions on a fine timescale much as NASDAQ does with stocks.  It will be highly automated and match buyers to sellers.  This will provide monetary incentives for much more extensive load shifting than is currently used.  I.e. it is important to monetize the load side demand as well as the generation side and then match them.  The current system does not do that and will not do that well in a centrally planned system.  There is no reason such a system could not accomodate long term contracts and / or include contingency purchases for peaking power (much like an insurance policy).  While many cautionary concerns have been raised, I believe we need to move forward with this.  As with the clean air act I think that we will find the benefits far outweigh the imagined problems with a real time market based system. 


Nathan Wilson's picture
Nathan Wilson on February 21, 2016

A real market in electricity would have an automated market maker managing millions of transactions on a fine timescale… I believe we need to move forward with this.”

The system you’ve described has no critical mass.  Please try it on a small town somewhere before setting it as goal for the nation; I’d be happy to see my tax dollar put to work demo’ing it on a population of a few hundred people.  Maybe Hawaii has something suitable.

For comparison, the island of El Hierro is getting close to making electricity without fossil fuel, using a centrally managed system of utility-scale wind and pumped-hydro (and a huge subsidy from the EU).  I suspect there would be a large cost increase if you tried to do the same thing with distributed generation, residential scale batteries, and a deregulated market, but good luck.

In the meantime, we know nuclear works at national scale in France, Sweden, and Switzerland.

Clayton Handleman's picture
Clayton Handleman on February 21, 2016

Yes Pilot it.  Yes there is a lot to do. 

But there are interim opportunities that can get us on that path.  One that I favor is time of use price signals provided so that EVs can do automated charging arbitrage in order to get lower prices on electricity and smooth night time wind peaks allowing for higher penetration of wind power.  And before that, simply night time charging incentives offer increased penetration of night peaking wind without the need for concurrant increase in backup natural gas.

 

Yes Nuclear is a quick fix but is not the panecea that promoters on this board make it out to be.  Nuclear is bad enough that other rapid deployment approaches make sense, if nothing else, as a transition.

 

 

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