MeanGene Rants 13
March 2002
Last time we examined what happened in the CA electricity markets.
We saw what happens when the rules of the game are set up poorly. This week we
ask, what would be a good set of rules, after all, we can't just criticize.
Cool
Stuff
·
Nuclear
Powered Rockets - for more energy on earth. http://www.techreview.com/articles/hickam030802.asp
·
Brewing
Beer begets Methane begets Hydrogen begets Power http://www.sustdev.org/journals/edition.01/preview/1.103.shtml
Fuel cells made by Mitsubishi Electric Corporation are providing
power to Asahi and Sapporo breweries in Japan, according to Nikkei America, and
the Kirin Brewery Company's Tochigi brewery will be installing a fuel cell next
year, utilizing hydrogen made from methane produced during the brewing process.
·
Hyundai
wins 2 Gold Medals in 1st North American Competition http://www.enovasystems.com/investor/pressContent/PR20011107HyundaiAwards.pdf
Last
time in Mean Gene's Energy News we looked at the boondoggle that was (and still
is) the California Electricity Market. It failed because it was a game with the
wrong rules.
If you
had the awesome power of playing a California politico in charge of creating an
electricity market, what would be the rules of the game that you'd create?
Let's
start with no rules and see where that gets us. Certainly we add rules like
enforcing contracts signed between mutually consenting parties. But then what?
It is
proper that a governing agency add some rules to the market to ensure that the
price of electricity includes all the costs. As the saying goes, there is no
free lunch, so if the price doesn't include the full cost, you know who ends up
paying for it somewhere else. The sellers of electricity will certainly cover
their own costs, but what are the other costs, or "externalities" as
the economists would call them?
No one
wants a power plant near them and they will use all manner of political power
to keep the plants far away. It is no secret that you don't find power plants,
and generally not even an unsightly sub-station in a nice posh neighborhood. It
isn't that power companies just want to build where land is cheap. The cost of
delivering electricity over hundreds of miles through transmission lines hung
off big towers costs a lot of money. It would be more economical to build the
power plants where they are needed. Why don't people want power plants near
them? They are ugly and the big dirty ones cause health problems. Call it the
Health-Aesthetic externality.
How to
offset this externality? The current method of dealing with it politically
seems less than optimal. Faithful Mean Gene's Energy News reader Matt Galla
suggests a tax on the energy delivered to your home as a factor of the distance
from you that it was produced. Not a bad idea. Long distance calling meet long
distance current. Pollution - How should it be priced? Certainly the subject of
no small amount of debate. How to price in the pollution externality? By now
none but Dick "Coal" Cheney can argue that producing electricity (and
a great many other things) doesn't generate a troubling amount of pollution. But
what is the cost?
(We
start with a reminder that a bit more than 50% of electricity in the US comes
from coal, 20% nuclear, 15% natural gas, 7% hydro and 4% oil. http://www.worldbank.org/data/wdi2001/pdfs/tab3_9.pdf )
We could
list health costs. Again we could list aesthetic costs of smog and haze. We
have WAGs (Wild Ass Guesses) about what the costs of global warming might be
and even if they are off by a factor of 100, they are alarming. But all those
costs may just be scratching the surface.
Rather
than cover ideas we've undoubtedly heard before, carbon tax, gas tax, sulfur
tax, trading credits ... good ideas all, Mean Gene presents one that is
probably less familiar, though certainly not made up here.
Think of
the various living and non-living systems of the earth as providing services.
Services like oxygen production. Services like organic decomposition, water
purification, food generation, topsoil generation, pollination, air
purification, flood control, pest control, disease control, toxin and pathogen
filtration and decomposition, storage and recycling of nutrients, climate
moderation, ... What are those services worth? What would it cost to replace
them?
What
does it cost when we reduce the effectiveness of those naturally provided
services? That may be an issue we will start to face more and more. One group
of biologists and economists attempted to price out the value of these
services. Their WAG was $33 trillion a year. (About equal to Gross World
Product) http://www.globalideasbank.org/SD/SD-84.HTML
Now it's
a long way from that WAG to the WAG as to how much a given form of electricity
generation or any other industrial process decreases the effectiveness of those
services. But it's certainly a new way to look at things. In developing a new
market, a simple thing like a tax on CO2 may work better, but let this idea of
paying for the destruction of earth-provided services swirl around your head.
Other
Certainly
there are more externalities. The cost of defending the electrical generation
and transmission infrastructure is one. The costs of not having a resource
available for future generations is another. Imagine if we burned all the oil
for transportation and electrical generation but had none left with which to
make plastics. That would be a real bummer. What is the cost to us now of our
great grandchildren not knowing what a clear day is? It's probably not as high
as you'd think, but it certainly isn't zero.
Conservation?
Do we need it? What is the long term game like?
In a
no-rules market, everyone uses as much electricity as they want. And surely in
any market, everyone should be able to do the things they want to do without
thinking about how much of some resource they are using. Wouldn't that be nice?
In any
market, producers are incented to sell you more of their product. They are
absolutely not incented to have their consumers conserve. Producers in an open
market won't like conservation.
Consumers
are generally incented to conserve in any market because the less they use, the
lower their bills are.
But is
conservation really a goal?
It's
strange. In no other industry, except perhaps water, do we try to get people to
use less of something. Why are we told to conserve electricity?
Conservation
is usually pushed for one main reason. If we use less electricity, we will have
less of some bad externality that we haven't accounted for in the price of the
electricity. If we could perfectly account for pollution, damage or loss of
other resources, defense of infrastructure, and aesthetics in the price, would
conservation be worth talking about?
Assume
electricity is made 100% from solar, wind, geothermal and other completely
renewable systems. Now to produce more electricity we either need more
efficient generation per square mile of land devoted to electrical generation,
or we need more square miles of land devoted to electrical generation. So this
would introduce a new externality, land use. Some of the same externalities
come back. How pretty is it to cover a lake with solar panels? And what is the
environmental cost of covering a thousand square miles of desert (or ocean)
with solar panels (or solar chimneys!). Even wind turbines have issues with
killing birds which has other effects cascading on down through our ecosystems.
Someday,
if we do run out of energy supplies, even if it isn't until we are out of
physical space on which to erect more solar panels, we could conserve then.
That makes sense.
But ...
But, we
aren't likely to get all of our externalities reflected in the price of
electricity anytime soon. It's not that we can't do the math. If we only got
10% of the equation right, it would be quite a step in the right direction.
It's politics, stupid.
In the
end, one could think of scenarios that could possibly play out where
conservation might not be needed. But those scenarios are not today's (or
tomorrow's) realities and perhaps they never will be. The bottom line is that
we need conservation now, and we need to work to get as many of the
externalities of this market included in the price as accurately as we can.
The
biggest reason people don't conserve now is simply that it often doesn't make sense.
In pure financial terms, you should not buy a compact fluorescent light bulb.
Solar panels for your house (unless they are built into your mortgage) are
provably dumb even in California where the state will pay half! So clearly we
need better conservation incentives now. When the price of electricity in
California jumped, the consumers responded by consuming 5-10% less. Clearly it
can be done. The thought experiment.
So,
here's a real thought experiment. How does one create a market whereby consumers
are incented to conserve AND (the hard part now) producers are incented to
produce less?
Consider
a market where the electricity provider makes less money with each additional
unit of power he sells to the same consumer. If producers have a fixed generating
capacity, and are already selling all of it, they would then do better to get
1000 customers to use a bit less so they could sell that power to 1000 new
customers. They make more money because the first unit they sell to the 1000
new customers provide more money than the last units sold to the 1000 old
customers.
It's
interesting that this scheme is completely the opposite of what most people
think is right and what the state of California is doing now. In California,
the first units are the cheapest and the last units are the most expensive. But
here is a totally different idea.
In
France, some people buy heating service. They don't buy gas. They don't buy
coal. They buy a service to maintain room temperature in the winter at a
comfortable level. The company they buy the service from reserves the right to
install more insulation in the attics of their customers’ homes. They reserve
the right to replace a customer's furnace, after all, the customer doesn't own
it, he rents it from the warmth service provider. The warmth service provider
is heavily incented to make the customer conserve. The customer is not incented
to conserve, but nonetheless, that is the result.
In
Brazil they aren't interested in buying warmth. They have enough of it. There
they have a market for coolth. It's the same story. They pay a company as a
service to keep their houses cool. The company may adjust some things about
their house, may plant a few trees, may change the color of their roof tiles,
may make a larger roof overhang for the windows, etc. The coolth companies know
lots of ways to keep a house cooler for less money than setting up an air
conditioner. The company has more capital and can wait for a longer return than
a home-owner who might otherwise consider these changes himself and decide that
an air conditioner is better in the short term. The company also has a lot more
expertise in how to do these things than a home-owner does.
And so
electricity?
This
works for warmth and coolth services. No one really wants to buy gas or coal.
They want a warm room (or a cool room) and they want a hot shower. But due to
the diversity of electrical products out there: lights, computers, stereos,
televisions, refrigerators, etc, it would seem that to apply this idea to
electricity would be to invite your "electron service company" to
pester you every week to exchange this or that home appliance for any of these
lovely new models. No thanks.
And yet,
there are companies that sell lighting services to corporations. Maybe there is
something there, there.