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  • Our Electricity Future (a bleak version)

    Posted by Carl from Chicago on July 30th, 2011 (All posts by )

    A recent Bloomberg / Businessweek article on Pakistan provided a pithy summary of a possible energy future for the US in an article titled “Convoys and Patdowns: A day in the office in Pakistan”.  The article describes the robberies, violence and general chaos that a business manager faces daily in that country.  However, this part might be surprising to readers that would think the Taliban would be a managers’ top concern:

    Political violence is not National Foods’ worst problem.  “The biggest problem by far is energy”… Demand for electricity in Pakistan is three times supply.  President Asif Ali Zardari is trying to attract independent power producers to Pakistan and has big plans to build hydroelectric plants.  Companies cannot wait.  “We have created a mix of power we get from the grid, and what we can generate using our gas and diesel generators.”  Many factory floor, office and bathroom lights are kept off to compensate.  Ali often visits the powerhouse, a room at the plant that contains huge German-made diesel generators.  Scarcity of fuel is a frequent worry.  Bigger companies like Lucky Cement don’t rely on the national grid at all.  It started generating its own power in 1996 and can produce 150 megawatts from its plants.

    Karachi’s residents have taken to the streets this summer… to protest outages lasting days at a time.  “In the morning I assess my workers”… “If I find someone is stressed out because he hasn’t slept all night without electricity… I have to change his shift and give him easier work”.

    Electricity is something that most Americans took for granted as reliable and available for a reasonable price for many years.  After California’s disastrous “de-regulation” experiments in 2000-1 (check wikipedia where they have a pretty good summary under “California Electricity Crisis“), the citizens of that state at least woke up to the fact that the machinery that delivered reliable and reasonably priced electricity was falling to pieces.

    The core of the issue is that to meet future DEMAND for electricity, you have to procure appropriate SUPPLY, and then BRING it to the customer.  Given our “NIMBY” culture, and difficult regulatory regime, there has been little incentive to develop new “baseload” generating capacity to procure supplies for the future.  In addition, a lack of investment in new transmission lines, which are needed to bring supply to the customer, limits our ability to tap new sources of electrical generation and there is little financial incentive to devise a solution to this issue.  As a result, we have a long-simmering problem that will come to a head in various guises over the next 20 or so years.

    One more subtle issue, that is little discussed, is that electricity started as a public monopoly, meaning that one company provided you generation, transmission and distribution of power and you paid that company a single payment for doing all those services.  While there are many problems with this model (inefficiency and lack of innovation), there were positive elements, mainly that it worked and provided a reliable service to everyone for a reasonable price.

    There are few public monopolies remaining.  Public schools used to provide services to all in major cities; now they mainly serve those that have no other options (fleeing, private schools, or perhaps some walled-off sub-component of the area).  Authorities used to provide security to all areas (in theory); now many use their own security guards (they were ubiquitous when I used to live in Texas, even in grocery stores) and gated communities; the areas solely governed by authorities such as inner cities have little security at all.  For public health, feel free to show up at your local community facility without insurance and get in line.

    Many elements of electricity in the US are moving in this direction; after the recent set of storms here in Chicago I noted a burst of interest for local generators (gasoline powered) to run your home for days when the power goes out.  Businesses routinely plan for backup generation in the costs of their facilities; these backups allow them to either mitigate the spikes and poor quality electricity that they receive from the grid (the “dirty” power) or to prepare for the grid to be unavailable entirely.  Note that this is a significant cost and one that is poorly recognized; businesses and residents used to NOT have to plan for life without reliable electricity service, and now they MUST.  This is a major drain on total productivity because these sorts of investments have little return and just add to the cost of doing business; they are more like a necessary evil than anything else.  I haven’t seen a formal study or analysis on the cost of unreliable electricity across all sectors (household, commercial, government and industrial) but it would be an eye-opening survey, I believe.

    The gradual shift is that electricity is being viewed as a “typical” public service, meaning one that you might or might not want to rely on, depending on where you live and what your ability is to avoid the vagaries or inadequacies of that service.  This is happening over many years and varies based on your local situation; in Wisconsin, for instance, where Dan lives, the state did not (foolishly) de-regulate; so businesses and residents there are mostly shielded from this situation.  If you live in California, on the other hand, you were exposed to it a decade ago for the first time.

    When you compare this to other losses of monopolies, such as the end of the fixed-line monopoly under AT&T for telephone (which fell to wireless service), it is important to note that the end of the typical large scale generation, transmission, and distribution system of energy there will not be significant improvements to the end customer when this monopoly collapses (or becomes unreliable enough that affluent customers begin to escape).  It is VASTLY more efficient overall to generate power using technologies such as coal or nuclear power than to do it in a little generator running gasoline attached to your house, even when you factor in transmission and distribution costs.

    It is likely that the decline in value and reliablity of the public monopoly on electricity will be accompanied by some innovation, mainly in technologies that use less power at the retail or commercial level (such as when you go to a European hotel and you put your key card in the slot to turn on the power; this means that when you leave the room with your card everything is always shut off) or that consume less power at this level (such as televisions), and these will be favorable, although in no way covering for the value of the loss of the large scale generation and transmission model.  There will also be innovations in control and monitoring of power since the power quality will also decline in tandem with the unraveling of the local monopoly.

    The other element of this is that the public electricity sector will get caught in a “death spiral” similar to what happens to public schools in large cities when all of the affluent citizens either physically leave or send their children elsewhere to school.  Businesses may wall themselves off entirely from the grid to ensure reliable power and housing or condominiums may be established with their own power sources, which in turn will limit the amount of money available to support the public model.  These types of changes will take decades to fully play out, and the various steps won’t be immediately visible to most people that aren’t attuned to the electricity industry, but it is happening nonetheless.

    Pakistan is an extreme example but in these few paragraphs you can see it all:
    – businesses that are under competitive pressure have to put their top managers focusing on procuring energy rather than being more productive
    – staff that are inefficient due to poor quality and unreliable service
    – costs 2-3 times higher for their own generation relative to the grid
    – larger businesses “opting out” entirely to gain a competitive advantage, reducing funds available to solve the core problems
    – the government with grandiose long-term plans (like new hydroelectric) that won’t materialize in the near term
    – the fact that the government did nothing while demand moved to 3x supply

    Cross posted at LITGM

     

    16 Responses to “Our Electricity Future (a bleak version)”

    1. Michael Kennedy Says:

      That Wikipedia article (I didn’t finish all of it) does not state the real cause of the crisis in California. When the utilities were forced to divest themselves of their generating capacity, by legislation written by a small time politician whose claim to fame was his movie, “Attack of the Killer Tomatoes,” they begged the governor to be allowed to sign long term contracts for wholesale power. Everyone assumed that prices would fall and the wholesale prices were quite low at the time. Had they been able to do so, all the manipulation of the market would never have happened and this would not be a story. However, Gray Davis and the Democrats, in thrall to leftist theory, refused the request.

      When the first price spikes occurred (Electricity bills went up by 20 to 100 fold), Davis panicked. Within days, the usage rates had gone well down as business adapted. The price caps then came as the crisis was easing. Had they waited another couple of weeks, the usage numbers would have fallen and the wholesale prices would have collapsed.

      This story has every element of the failure of command economy. Unfortunately, it hasn’t fazed California’s love affair with fascism.

    2. onparkstreet Says:

      Lucky Cement don’t rely on the national grid at all. It started generating its own power in 1996 and can produce 150 megawatts from its plants.

      A version of this happens in India, too, where the public sector is bloated, weak, and ineffectual. The private sector steps in.

      In Gurgaon, economic growth is often the product of a private sector improvising to overcome the inadequacies of the government.

      To compensate for electricity blackouts, Gurgaon’s companies and real estate developers operate massive diesel generators capable of powering small towns. No water? Drill private borewells. No public transportation? Companies employ hundreds of private buses and taxis. Worried about crime? Gurgaon has almost four times as many private security guards as police officers.

      http://www.nytimes.com/2011/06/09/world/asia/09gurgaon.html?_r=1&pagewanted=all

      USAID is involved in building dams in Pakistan – Pakistan is a big “client state” for a lot of DC bureaucracies which affects our efforts in Afghanistan. The military and its intelligence service, the ISI, is heavily involved in business, sort of like the Egyptian army. They own a piece of the pie so any development program also funds their, er, activities across the Durand Line:

      Energy is essential to economic growth and political stability. Efficient energy management facilitates trade, enhances agricultural and industrial production, supports job creation, and increases opportunities for all citizens to benefit from economic growth. The U.S. Government, through USAID, works in partnership with the government of Pakistan, the private sector, and other donors to increase energy supplies and improve metering, commercial operations, and power distribution efficiency. USAID also provides technical support and training in policy reform and other essential areas.

      http://www.usaid.gov/pk/sectors/energy/

      I’m furious that we are not pursuing more energy “resilience” within our own country and region. It’s bad news, being tied up in Saudi for energy reasons.

      – Madhu

    3. onparkstreet Says:

      Carl,

      I don’t know anything about this topic and have enjoyed your consistent digging into this issue around here. If you are interested and can find the time, would you be interested in digging around that USAID site?

      I don’t understand what they are saying a lot of the time because I’m ignorant of many of these matters.

      Of course, you are a busy person and have other interests, so if not, no worries :)

      I’m kind of obnoxious in asking for help, sometimes.

      – Madhu

    4. Whitehall Says:

      Thank you, thank you, thank you!

      I’ve worked in the electric business all my adult life and I’m continuely amazed at how taken for granted the system is by the average citizen. As I always told my kids when when I found them wasting electricity “Do you know how much WORK it takes to make that stuff?”

      Like so many good working systems of American life, political players, parasites really, have moved it to skim and loot.

      Wild-eye idealists will point to communcations as a model for re-organizing the electric business but that fails on the difference between physics and mathmatics. Electricity is bulk power, moving electrons with voltage. Communications is signal and the closer to no physical carrier, the better, Hence using a few photons via fiber optics lowers bulk comminications costs.

      No such luck with electricity. It conveys massive amounts of energy from some other source, of which there has yet to be a significant new competitor in the market. We’re still stuck with fossil fuel combustion, falling water, or nuclear fission. All show very strong economies of scale.

      So our electric grid is getting screwed over, and as Carl shows, this will come bite us in the ass, much as it holds back less developed economies.

    5. Lexington Green Says:

      “… political players, parasites really, have moved it to skim and loot.”

      This is the story of our whole economy.

      The current politico-economic model is a looters model, much like the period in Russia before during and after the fall of the Soviet Union.

      We are going to rolling waves of systemic failure as the the whole system falls apart, leading to increasing calls for government involvement, leading to further waves of looting. The trillion dollar TARP bailout was one wave of looting, which saved not the banking system, but the banks and their owners, then the trillion dollar so-called-stimulus which was a cash payout to the public sector employees unions, which was another. That is the model. Create a crisis, do not waste the crisis, but take a huge chunk out of the corpus of the country and hand it off, repeat until there is nothing left but Tim Geithner, Harry Reid and Obama riding in an armored limousine between the cardboard boxes where the survivors are living, using kerosene generators, like in Haiti.

      Somewhat facetious. But not much. That is the direction, even if we do manage to change course before the end.

    6. Shannon Love Says:

      One more subtle issue, that is little discussed, is that electricity started as a public monopoly, …

      I’m going to have to quibble with that because I think it is important. Electricity did not start out as a public monopoly. In fact, for the first 30 years of electrical generation in the US, it was purely a private service by competing companies.

      It was not until WWI, that the government began to step in owing to the need to rationalize electricity for war production. (E.g. The TVA was originally supposed to power war industry.) The big drive for socialization began in the 1920s when suburbanites wanted electricity at the same rates as urbanites even though the cost of delivering electricity to more spread out houses was higher. The government under the guise of consumer protection and efficiency began socializing the cost of electricity to far flung households and businesses. Rural electrification completed this process in which rural electricity delivery was massively subsidized by urbanites.

      It is true that a few big generators are more efficient than many small ones so there was always going to be some centralization of electricity generation but it doesn’t follow that its more efficient to runs miles and miles of wire to supply one little farm out in the sticks instead of just having the little farm power itself from a generator.

      If the government had never stepped in we would have had a more diverse system. If nothing else, farms way out in the country probably would have their own generators and the grids would be more compact and stable.

      I’m not sure that the old centralized monopoly will even work anymore because of how rapidly the economy and population changes occur. 30 years ago, Texas was still an oil economy and Californian was still gaining population. Today, Texas has an industrial export economy and California is imploding. Power decisions made 30-40 years ago aren’t very relevant and I don’t think anyone today would care to plan that far ahead any longer.

    7. Shannon Love Says:

      Sorry, I meant to add to my previous comment that a lot of the issues we see today with big power trace back to politicians buying votes with subsidized electricity way back in the day.

      Had electricity remained free-market, we would most likely have a more expensive but more flexible and robust private system today.

    8. John Cooper Says:

      First: Michael Kennedy is right on. The popular meme that the California power crisis was a “failure of the free market” is totally wrong. There never was a free market in electricity in California.

      Second: The the reason we have large, centralized power plants is thermodynamic, not political. Your crappy little 5KW generator is terribly inefficient, thermodynamically speaking.

    9. Carl from Chicago Says:

      Hmmm

      As far as whether electricity is public or private, I guess the key variable is regulated or non regulated. Either way we have operated overall as a de-facto monopoly.

      The element that is monopolistic is that you can’t turn away customers, you need to serve a territory, and all the households and business in that territory.

      This means that if you are serving a poor area, you likely are going to lose money because of all the turn on / turn offs and related issues with collections. In a totally free market system, likely people wouldn’t bother investing in those areas, at all. It goes to generation, as well – if you aren’t making much on the distribution side, you aren’t going to bother paying for a “safety margin” on capacity.

      Countries can cope with high demand growth if they have a PLAN, and discipline to execute against that plan. When I used to work in Nevada, they would routinely build substations and plan for high growth in new areas where there was residential expansion. China obviously plans to meet the gigantic growth demands of their industries and urbanizing population.

      In the US we don’t have much of a plan, overall, and in fact we actively discourage many entities (through regulation) to plan ahead very far. The US is changing, but our electrical situation is not keeping up with it. The situation is cloudy because it is state-by-state, but it is safe to say that in general everything is getting older and we aren’t investing in new generating and transmission capacity of the right type to keep up with capacity and reliability.

      It is certainly true that a private system would have advantages, but I really can’t see it just because I only know the system that we have had since the time of Edison. It is bending my brain too far to imagine what a private system would have looked like FROM SCRATCH.

      Where our system works everyone pools together to buy generation, transmission and distribution and everyone gets served, and we have enough money to re-invest in future generating capacity and to continually improve our transmission and distribution system. The poor in effect benefit from the rich because the system is maintained as a whole.

      The problem is that the public system IN REVERSE is a very bad system because it takes everyone backwards. The rich and industry will try to escape because of poor quality and unreliable power, which becomes EXPENSIVE power when all factors such as backup generators and the like are factored in. Since the public system still needs money, as the people who can leave go, the rest get socked even harder so what can be a regressive system becomes even more regressive. And the economy as a whole becomes less competitive, which in its worst case is like Pakistan, above.

      This is what we have, a public system operating in reverse, and this is what we need to face. I would say “fix”, but I don’t know how to fix it, any more than anyone knows how to save Detroit (as in plans that could be put into practice in the current climate).

      Likely we just band-aid it and get less reliable and less effective and more expensive. That sucks, but I don’t have any answers that matter, any more than the “plans” for new generation in Pakistan, per above.

    10. newrouter Says:

      Any thoughts on the various shale gas plays that are being developed and natural gas fuel cells for the home? It would seem that the grid would necessarily contract.

    11. Dan from Madison Says:

      Newrouter – I am putting my money where my mouth is wrt NG all over the place. That is the only fuel that anyone is allowing generation to be built for. I also plink away at MLP’s for distribution.

      I still think that the second that idiots like Barbara Streisand can’t plug in their iPhone charger and get a little green light that there will be a million coal/NG/whatever plants sprouting up all over the place. Then again, what do I know.

    12. Michael Kennedy Says:

      The parasites concept is a crucial insight.

      The TVA was originally supposed to power war industry.

      Actually, Muscle Shoals was a nitrate plant for World War I that was superfluous as the war ended. Coolidge tried for years to sell it. Willkie was the president of Commonwealth and Southern and fought Roosevelt’s attempts to socialize power with TVA. The Wikipedia article is not totally fair but gets most of the TVA story right.

      In 1933, Roosevelt proposed legislation creating the Tennessee Valley Authority (TVA), a government agency with far-reaching influence that promised to bring flood control and cheap electricity to the poor Tennessee Valley. However, the TVA would compete with existing private power companies in the area, including Commonwealth & Southern. This prompted Willkie to become an active critic of the TVA, as well as other New Deal agencies that directly competed with private corporations. Willkie’s argument was that government-controlled organizations (such as the TVA) had unfair advantages, in that they did not have to make a profit and could thus charge cheaper rates than private corporations needed to levy in order to operate at a profit. This was not a new idea for Willkie; in 1930 he had stated publicly that it would be unconstitutional for the federal government to enter the utility business.[3]

      In April 1933, Willkie testified against the TVA legislation before the Military Affairs Committee in the House of Representatives. He testified that the TVA supplanting Commonwealth & Southern could threaten $400 million in investors’ equity, which convinced the House to limit the TVA’s ability to build transmission lines that would compete with existing private utility companies.[4]

      Roosevelt, however, persuaded the Senate to remove those restrictions and the resulting law gave the TVA extremely broad powers. Because the government-run TVA could borrow unlimited funds at low interest rates, Willkie’s Commonwealth & Southern was unable to compete, and C & S had to sell its properties in the Tennessee Valley to the TVA in 1939 for $78.6 million. Willkie formally switched political parties in 1939 and began making speeches in opposition to the New Deal. However, Willkie did not condemn all New Deal programs; he supported those programs that he felt could not be run better by private enterprise. His objection was that the government had unfair advantages over private businesses, and thus should avoid competing directly against them. In 1939 Willkie made a highly publicized appearance on the popular Town Hall nationwide radio program, where he debated the merits of the private-enterprise system with Robert H. Jackson. Jackson was Roosevelt’s Solicitor General and a possible 1940 Democratic presidential candidate. Most observers felt that Willkie won the debate, and many liberal Republicans began — for the first time — to view him as a possible presidential candidate.[5]

      It is amazing that Willkie was only 52 when he died. The article makes no mention of the fact that Roosevelt tentatively offered the VP nomination to Willkie in 1944. Had he lived and had that occurred, the possibilities are astonishing.

    13. Whitehall Says:

      In the early days of electricity, small scale socialism worked. Each town would build its own power house and municipal distribution system. The customers could (and did) vote out management if they were incompetent or corrupt.

      However, the private power companies were more aggressive and competent and so came to dominate the market. They did establish working relationships with state government and came up with cost-of-service regulation and exclusive service franchises. That allowed cost transfers from expensive to serve areas (rural) to a big network. The industry was a declining cost industry which meant that marginal costs for generation offset adding more expensive distribution costs.

      A good story of the growth of the industry is the biography of Samuel Insull. You’ll recognize his visage as “Mr. Monopoly” from the game of the same name. He started as a secretary to Thomas A. Edison but when J.P. Morgan decided to back the AC technology of George Westinghouse and Tesla he was out of work. He was then invited to Chicago by the city fathers to take over their system. At one time he controlled a third of US generation. Today the seccessor company is called Exelon.

      Sorry, but I see the classic cost-of-service business model of Insull as the preferred method. Its weak point is political looters and their extortion plans. Here in California we saw Speaker Willie Brown caught wtaking ith $50k extorted from PG&E, in the Capitol.

    14. David Foster Says:

      For a while, low natural gas prices (driven by fracking technologies) will help keep electricity prices down and partly compensate for the government-forced shutdown of coal plants and suppression of new ones. But inevitably, nat gas consumption will rise, driven by electricity production, use as a transportation fuel (local trucks & buses), feedstocks for chemicals & plastics, etc, and gas prices–hence electricity prices–will rise. This will be another blow to energy-intensive manufacturing in the US, and indeed to data center operations and particularly the rise of “cloud” providers.

    15. Craig Says:

      “farms way out in the country probably would have their own generators and the grids would be more compact and stable”

      That’s a very good point and is borne out by the fact that rural homes and businesses still have their own water wells, pumps and septic systems. Had the technology existed for efficient home generators in the twenties, it all might evolved quite differently. All that said, local power generation is still dependent on an efficient fuel delivery network — another area that worries me.

    16. SgtPete Says:

      I worked at an electric utility for 25 years as a nuclear engineer. In the early 80’s most utilities were required to maintain 20 percent reserve capacity. This was to ensure power during normal plant outages or unexpected outages. This excise capacity is currently what the utilities have been using in lieu of new plants. Soon demand will exceed supply and rolling blackouts will be common. Nuclear, which I believed to be the savor was bashed by the left, being unsafe. I disagree; nuclear is safe, even after Japan’s meltdown which could have been prevented. The Japanese knew about tsunamis, how large they were with the history of them known. However the Japanese design for such an event, was not considered. This lack in design is what caused the Japanese events. Nuclear energy is the sole power source, providing electric energy while leaving little pollution behind when compared to fossil fuels. Green energy, which I too favor, is not capable of power for industrial use and is very expensive. If battery technology is enhanced, then green energy may be profitable. An automobile plant can’t run when the sun shines or the wind blows, it needs power 24 hours and 7 days a week, and constant power demands. The money spent on this green energy is poorly invested; see Spain’s issue with this green electric problem. The real problem with American’s electric system is the grid. It’s 1950 technology, with some improvements, but still high voltage, alternating power lines. These lines are limited in power delivery. What is worst is that no individual electric company wants to pay for new lines for other electric producers to use. I see a future where nuclear fission, then later, fusion produces cheap and safe power. I see a future where super conductor lines carry high voltage direct current with no line loss from NY to LA. It’s my vision and I’m sticking to it. Hey, if you’re an engineering student and want life time employment, work on these two vision.