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  • Britain and Electricity – Asking the Wrong Questions

    Posted by Carl from Chicago on October 20th, 2009 (All posts by )

    Recently I wrote about Britain and electricity and the fact that Britain isn’t bringing new capacity on line in time to stave off a looming crisis as older plants go out of service and electricity demand rises.

    This article, titled “Questioning the invisible hand“, has the sub title “Can liberalized energy markets cut carbon emissions? Britain is starting to doubt it”.

    The first myth is that Britain, like America, really “deregulated” or “liberalized” their markets. A better description would be that the markets are “regulated differently”.

    In the old markets, utilities had a duty to plan for customer demand growth and re-invest in future capacity. Many of the deregulation schemes split off generation, transmission, and local energy distribution into separate companies, which is fine in theory because then each of these three components could be optimized. In many cases local citizens were given a “choice” of electricity providers at the distribution level, but these distribution companies still essentially utilized “legacy” transmission and generation assets.

    The reason that these schemes were only partially deregulated is that 1) barriers in the market place ensured that it was difficult to build base load capacity of coal or nuclear power, meaning that the older units ruled the market 2) the spot price of generation was determined by gas fired units, which essentially meant that it fluctuated with the price of natural gas 3) building transmission is so onerous (getting permits, siting it) and funding is so uncertain that the grid was not significantly improved. What did happen is that price controls on generation were lifted and rates were capped, so for a decade or so there weren’t increases in the price of electricity from the generation side.

    From the article:

    The committee’s diagnosis was stark: the market, left to its own devices, is failing to deliver (carbon reductions). Consumers are not buying energy-efficient appliances or insulating their houses… and power makers still prefer fossil fuels to greener alternatives.

    Well of course consumers don’t do un-economic things – unless the price of electricity skyrockets, it doesn’t make sense to over invest in energy reduction. And as for the power companies, why would they invest in anything at all when they could just keep running their fully paid-for units until they keeled over; after all, it wasn’t their responsibility to plan for future generation anymore (that was left to the broken market).

    Those that are obsessed with carbon gases have been touting nuclear power and renewable power, but of course 1) basically no nuclear plants will be built anywhere because of financial and regulatory uncertainty 2) renewable power is a money loser unless it is massively subsidized, which the generating companies aren’t going to do.

    Thus now the politicians in Britain are apparently telling companies what to build and when, per the Economist. But it will be interesting to see how they can make a company build a nuclear reactor when this is essentially assigning them to bankruptcy and never ending legal and publicity battles with the looney left.

    In the document they really started to figure it out though:

    Low prices (for electricity) were as much a result of firms sweating their assets as of competition and ingenuity.

    CLOSE, but no cigar. The REAL reading is that companies were able to keep prices down not only by sweating their assets, but not investing in the future (on the generation side, at least). When I was in the industry a “rule of thumb” is that you should reinvest capital equal to depreciation; else you were essentially winding down the business (of sorts). If you don’t reinvest in generation and are a generation company, you will have a massive windfall to your current investors. Not only that, but since there are big barriers to entry, as your asset base degrades, you will be able to charge MORE for what is left, making you probably just as profitable over all, since there isn’t anyone else out there with a base load nuclear or coal plant.

    The mix of carbon limits and taxes and a busted deregulation scheme which encourages no investment in base load generation is just adding fuel to the fire that will rage when we start pulling the older base load units off line. Future rate payers will certainly curse us when they get the bills for paying for the future’s high cost electricity (a mix of broken base load plants and high cost renewables) while they pay exorbitant amounts to fund high cost new base load plants.

    And shame on the Economist for focusing on carbon while the real issue is that the lights will go out unless something happens to build new base load power.

    Cross posted at LITGM

     

    7 Responses to “Britain and Electricity – Asking the Wrong Questions”

    1. Robert Schwartz Says:

      Depressing, ain’t it?

      We’re pretty much in the same pickle, aren’t we?

    2. renminbi Says:

      I gave up on the hapless Economist a long time ago.Theyare “pro-market” in a strange,bloodless way.They miss the moral point of the market;maybe that is why they can never get it quite right. Actual , in a more general sense they have a broken moral compass-they even endorsed Obama.

    3. Marty Says:

      The only honest way to reduce CO2 through the market is through a carbon tax, but of course that would be too obvious.

      Not that I believe for a minute that AGW is proven to even exist, let alone be so dangerous as to justify hobbling the economy.

    4. Jonathan Says:

      It’s not looking good. As in California, partial deregulation often causes more problems than it solves, and legislators and the public often draw the wrong conclusions from the problems.

      I blame our lousy media, which are dominated by people who are ignorant about science and economics, and our lousy system of primary education for teaching green propaganda and sentimental fables about nature rather than science.

    5. Shannon Love Says:

      Half-assed “deregulation” is worse than pure socialism. The free-market works because of numerous feedback loops that steer resources to the proper use. Creating a system which has most but not all of its feedback in place creates a runaway system that eventually crashes. In this case, we have no feedback to maintain the transmission grid and we have no feedback that makes new generators profitable. “Deregulators” were more worried about someone monopolizing the power grid than they were worried about paying for maintaining the grid. They just assumed that demand for electricity would induce people to invest in generation without any thought given to all the regulatory hurtles in the way.

    6. Michael Kennedy Says:

      California “deregulation” was a sham because the utilities were forced to divest their plants and buy energy on the spot market. They saw the coming crisis and begged the governor, Gray Davis, to let them sign long term contracts with all the generator companies that had popped up to buy the plants. They were not allowed to do so and six months later the storm hit. Actually, when rates went up 500%, as mine did, consumption dropped by half and there might have been an equilibrium fairly quickly but the politicians panicked and then all hell broke loose. The problem is not solved and is just a small piece of the maelstrom that is California politics.

    7. Joseph Somsel Says:

      I agree that “deregulation” in California has been a sham – the net result is MORE government control of the system and the private companies that participate in it. Some companies, the ones that play along, can find this rewarding. Those that don’t, get push back until the stockholders replace management with a team more compliant. New entrants have to beg.

      While a “free market” in generation SOUNDS good, remaining elements of natural monopoly remain, especially with transmission constraints. A large generator can’t usually participate in a state-wide market but instead is stuck within the territory set by transmission bottlenecks. That’s why the new issue is “locational” market distortions.

      As an engineer, central planning of an electrical grid combined with an enforced obligation to serve with a non-corrupt regulator makes a LOT of sense. Too bad that politicians saw the grid as an opportunity for a political power grab.