The electric power system in Texas failed to meet customer needs during the extreme cold that descended upon the state in mid-February, 2021. The failures generated a lot of finger-pointing: too much wind power, not enough reliable natural gas, too little regulation, failed long-run planning, and too few connections to neighboring grids, among other targets. Most early complaints were wrong.

Extreme cold overwhelmed winter preparations in Texas: this is the main story. High power bills and other financial repercussions also have created challenges. The electric power system failures were severe, but any diagnosis of the failure or proposed remedy focusing solely on the Electric Reliability Council of Texas (ERCOT) will miss the mark. Electric power was not the only industry to see failures, and power systems did not only fail in the ERCOT. Natural gas wells and pipelines began freezing up. Municipal water systems broke down in several southern states. Roads were closed due to snow and ice. Ranchers and farmers saw severe losses from the cold.

This report focuses on ERCOT and the electric power system because the power outages were the proximate cause of many hardships suffered during the failures. No single cause was responsible and no simple fix will prepare the state to survive the next extreme cold weather event. Many details will only emerge with time, but this paper aims to provide a clear analysis of what is now known, along with a bit of background on how the system works, to help the public and policymakers understand what happened and what should be done next.

Table of Contents

Part 1 Introduction

Part 2 What Happened?

2.1 How Cold Was It?
2.2 Natural Gas and Electric Power Entanglements
2.3 Not the First Time

Part 3 How Did ERCOT Perform During the Emergency?

3.1 The Financial Fallout Continues

Part 4 What Can Be Done?

4.1 Winterization Requirements
4.2 Resource Adequacy Assessments
4.3 Does ERCOT Need a Capacity Market?
4.4 Interconnecting With Neighboring Grids
4.5 Microgrids, Battery Storage, and Other New and Improving Technologies
4.6 Analyzing the Financial Challenges

Part 5 Recommendations

Part 6 Conclusion: Looking Forward

Full Policy Brief — Texas Power Failures: What Happened in February 2021 and What Can Be Done

The post The 2021 Texas Power Crisis: What Happened and What Can Be Done to Avoid Another One? appeared first on Reason Foundation.

While the Texas power grid is back in business, the financial fallout is likely to continue for months, maybe years. Resolving financial problems as soon as reasonable will reduce uncertainty and likely help facilitate the investment needed to improve integrated energy systems in Texas. Much analysis has already identified specific problems in the Texas energy system contributing to the outages, but investigations should be continued. As the Texas Legislature was already in session at the time of the outages, hearings already have been held and bills already have been introduced in response.

The Federal Energy Regulatory Commission/North American Electric Reliability Corporation (FERC/NERC) 2011 Report will be one place to look for recommendations, updated to reflect the more extreme cold conditions experienced in 2021. FERC and NERC are collaborating on analysis and recommendations addressing Texas’ 2021 experience. Presumably, the degree of compliance with recommendations from the 2011 Report will be among the topics investigated.

Likely better to let investigations continue before imposing significant reforms. The high stakes of failure demand a well-informed and well-considered response.

What changes are called for to help the system improve reliability?

Recommendations

Winterization

More-stringent winterization requirements seem politically unavoidable, though again the degree to which winterization is needed depends on the critical assessment of the cold. The severity of failures in 2021 may lead the incautious to say any cost of winterization is justifiable, but that is not true. It is the potential severity of failures in the future that demand that resources be devoted to where they will be most effective. Benefit-cost analysis is the standard approach for answering the question, “Where should resources be devoted to secure the best overall protection?”

Winterization standards should allow power plant operators significant flexibility to adapt plants to colder weather. It may be reasonable to prioritize implementation for Texas power plants that failed in February 2021 or February 2011, and possibly appropriate to excuse plants that performed well through both events from any new rules. It may be reasonable to set standards differently in the northern and southern parts of the state. Whatever winterization requirements ought to apply to panhandle wind turbines, they are likely more stringent than those applied to coastal wind turbines. Rules will likely be tailored to generating technologies, with some rules targeting wind energy, others targeting natural gas generation, and so on. Care should be taken to ensure requirements do not unreasonably burden any one type of generation or region of the state.

Lack of fuel supply is a concern. The loss of natural gas generation came both from plant outages and from a lack of natural gas supply. Winterization standards should not neglect the natural gas production and distribution system. Natural gas plants can be adapted to allow the plants to run on fuel oil when gas is not available, and regulators should consider whether some minimum amount of dual-fuel capability is desirable. In addition, gas pipelines should take the opportunity to have their facilities listed as critical services during rolling outages in order to avoid unintentional cuts to otherwise available gas supplies. While gas generation contributed the largest share of outages, coal-fueled plants and nuclear plants also deserve attention.

In assessing Texas’ winterization requirements, the public and policymakers should be aware that owners of power plants have strong financial incentives to avoid failures and will take steps to improve their plants with or without added regulations. Each additional MWh of power a generator could supply during the grid emergency could have earned $9,000, an amount almost 300 times higher than typical market prices. Any power plant already contracted to supply power, but unable to do so because of the cold, was likely paying that $9,000 MWh price to replace the power they could not provide. The prospects of earning that revenue or avoiding that cost provide a strong market signal. The good news, then, is that regulations can be focused on systemic challenges beyond investments that will already happen.

A related issue arises with calls for “bailing out” companies hard hit financially by the failures. If bailouts provide cover directly or indirectly for losses suffered by generators, it will reduce generator willingness to spend their own money to prevent failures. If bailouts cover losses incurred by retail electric suppliers, then it undermines incentives for retail providers to engage in long-term firm contracts that can encourage investment in new power plants. Bailouts for residential customers struck by $1,000 power bills raise more complex issues, but having seen the risks residential consumers will likely be much more cautious about supply offers that expose retail consumers directly to wholesale prices.

As part of ERCOT’s winterization response, it should fully reassess its resource adequacy analysis and the manner in which that analysis figures into its operational decisions.²⁹ Scheduling of maintenance outages and reliability commitment policies for winter weather should be among operational practices updated. The PUC of Texas failed to produce annual reports on electric power winter readiness, as required in a law passed after the February 2011 rolling outages. Had it done so, potential failures may have been foreseen and avoided. As should go without saying, regulators should comply with the law.

Capacity Market

Installing a capacity market would achieve little without a better resource adequacy assessment, but how the resource adequacy assessment should be improved depends upon how and why the assessment was wrong. While the errors of the assessment are clear in hindsight, the relevant question concerns how it can be improved using information available as much as three to six months before the season arrives. Improvements in resource adequacy assessments are critical.

However, a better resource adequacy assessment combined with reasonable winterization of electric power and natural gas systems in Texas are likely adequate to the task. Fundamental changes to the Electric Reliability Council of Texas (ERCOT) market design could impose additional costs without predictable benefits.

Transmission Links

More substantial connections to neighboring grids would have reduced the depth and duration of the crisis. Proposals have been made, but appear to be mired in regulatory processes. The Public Utility Commission of Texas had directed ERCOT to prioritize rule developments needed for the Southern Cross proposal, but rules will mean little if the project cannot obtain regulatory permission from other states involved. FERC does not currently have authority to mandate transmission siting, but does bear significant responsibility for interstate transmission and wholesale power transactions crossing state borders. FERC’s authority over power flows in interstate commerce suggests it examine ways in which it can promote interstate transmission more effectively.

Many state legislatures, including in Texas, have granted existing transmission owners a right of first refusal (ROFR) over the construction of new transmission projects in their states. Supporters of ROFR provisions point to the benefits of working with experienced transmission owners. Critics of ROFR provisions say the provisions unnecessarily add costs and tend to discourage transmission expansion. If transmission expansion is part of the state’s response to the February energy emergency, the legislature may want to reconsider its ROFR law.

ERCOT and the PUC should ensure rules can accommodate Southern Cross and then are generalized for any subsequent link. The PUC and FERC should adopt standardized procedures for such links to add predictability to regulations. FERC should guard against the use of state regulatory processes to impede interstate commerce in power.

New Technologies

The ERCOT market design has demonstrated an ability to accommodate new and improving technologies from wind and solar to batteries to distributed energy resources. Retail market rules have allowed REPs to offer the most diverse selection of retail supply contracts available, including market-based net metering proposals and offers providing home energy management capabilities. Risks associated with retail offers passing through wholesale costs have demonstrated such contracts are not wise for most consumers, but they have not undermined the value of allowing experimentation by retailers. Rather, competition in the market should be protected to foster continued innovation as technology and communications improve and open up new ways of creating customer value.

These changes are not likely to provide more than modest improvements to winter reliability in the short run, but are nonetheless desirable and will continue. Resource adequacy assessments should reflect whatever reliability benefits new technologies offer.

Financial Reforms

Resolving financial problems surrounding the energy emergency will be a particular challenge. A quick resolution reduces uncertainty, which allows market participants to move forward more confidently. Few investors will be willing to put millions of dollars into a system in which billion-dollar obligations remain unresolved. But resolving problems quickly can raise the cost or force the liquidation of market participants that may otherwise have been capable of reestablishing their financial position.

Legislators and regulators also have to be concerned about imposing unnecessary costs on outside investors and financial market participants. The presence of purely financial market participants helps the market run more smoothly by making it easier for physical market participants to enter into both short-term and long-term contracts. Costs that do not reflect the costs associated with market participation will unnecessarily raise the cost of capital for market participants, slowing investment and ultimately resulting in somewhat higher prices for consumers.

Retail Competition

Some critics of retail competition in electric power took the opportunity of the Texas power outages to again state their case. One such article stated the point in its headline, “The real problem in Texas: Deregulation.” Reporters at The Wall Street Journal claimed that residential consumers in Texas had paid billions of dollars too much because of retail competition, although their calculations are inadequate to justify their conclusion. Adjusted for inflation, retail power rates in the competitive retail parts of Texas are lower than the rates charged in those areas when they were last regulated by the state PUC, which makes the overcharge claim hard to accept. The best economic analysis of Texas retail power prices, a peer-reviewed academic study published in the journal Energy Economics, found that retail competition brought cost savings to end consumers. Also, it is not the case that savings have come by cutting corners on reliability. Industry veterans Devin Hartman and Beth Garza report competitive markets have a superior reliability record overall.

Looking Forward

In responding to the power system failures, the identification of the root causes of failures will be critical. Many critics and analysts were quick to offer their long-favored prescriptions—limit renewables, add a capacity market, return to vertical integration—but the very rapidity of the prescriptions ensured they were not based on a deep understanding of what happened.

The days following the emergency have allowed a tentative picture of circumstances to be assembled, but more investigation remains. The weather was colder for longer across a larger portion of the state than ever recorded before. The widespread damages caused by a lack of access to electricity, including loss of life as Texans struggled to cope with the extreme cold, were disastrous, but examining ERCOT’s response shows that ERCOT did its job during the emergency.

The major failings happened before the bad weather hit. It may not prove to be cost-effective to fully weatherize every system component against the possible extremes of cold and heat experienced in Texas. Yet the severity of the failures, the lives lost to the cold, and the significant costs imposed on the state demand a careful look at the range of possible alternatives.

We should not overlook the point that the ERCOT power system has performed well under a wide variety of weather conditions. The regulations established promoting competition in ERCOT’s wholesale and retail market have served the state well. While these regulations must change in response to the failures of February 2021, this fundamental commitment to competition should be maintained.

Full Policy Brief—The 2021 Texas Power Crisis: What Happened and What Can Be Done to Avoid Another One?

The post How To Prevent Another Texas Power Failure appeared first on Reason Foundation.

Summary:

Renewable Portfolio Standards require that regulated electric utilities collect a minimum percentage of electricity from designated renewable sources, such as wind turbines or solar panels. Nevada’s Question 6 would double the state’s Renewable Portfolio Standard (RPS), from the current 25 percent to 50 percent by 2030.

Nevada voters approved this question in 2018 in the first of two required votes to place it into the state constitution.

Fiscal Impact:

The true fiscal impact is unknown as of this writing. Critics suggest costs could be in the hundreds of millions when considering potential higher costs in energy generation, distribution, and higher consumer rates. Much of the additional cost would likely be borne directly by electric consumers, but state and local governments could face higher costs as well.

Proponents Arguments For:

Proponents argue that increasing Nevada’s Renewable Portfolio Standards is the best way to make the necessary move to more clean and renewable energy. Supporters say that moving to 50 percent renewable energy will add thousands of jobs and billions in investments to the state’s economy in the renewable energy sector. Question 6 would make Nevada a self-sufficient leader in renewable clean energy, taking advantage of its natural supply of solar and geothermal resources, and would dramatically reduce carbon and sulfur pollution in our air. Supports say now is the time to make this change because renewable energy is already more reliable than fossil fuels and it keeps getting more affordable. Nevada currently gets 80 percent of its electricity from out-of-state natural gas and this over-reliance on fossil fuels leaves Nevadans vulnerable to price spikes and supply disruptions that Question 6 would end, its proponents argue.

Opponents Arguments Against:                                 

Opponents to Question 6 argue that a higher RPS will impose higher electric rates and lead to less-reliable power for households and businesses. Nevada already has one of the most diverse renewable energy portfolios in the nation, including 19 geothermal projects, 14 solar projects and roughly one dozen wind, biomass, hydro and waste heat renewable energy projects, with additional renewable energy products in the planning process. Forcing further shift to renewables before the market is ready will hurt consumers, opponents say. Furthermore prices of renewables are still high and the would cost jobs in manufacturing, agriculture, and tourism. Question 6 would impose the same type of RPS in Nevada that is partially blamed for California losing a large percentage of its industrial base since 2000, opponents say. California’s residential utility rates are 57 percent higher than Nevada’s and industrial rates are more than double, according to statistics from the U.S. Energy Information Administration. Putting Question 6 into Nevada’s state constitution means that if it turns out to be impractical to implement or too costly to the state’s economy, the only way to fix it would be with another constitutional amendment.

Discussion:

While Renewable Portfolio Standards may expedite the adoption of renewable energy, it does appear that this transition comes at a higher cost to customers. A recent comprehensive review of RPS by the University of Chicago shows a significant increase in costs alongside more mild gains in renewable energy use. This is in part because renewable sources like solar and wind are generated geographically further from the city centers they serve, resulting in higher infrastructure and transmission costs, but also due to costs imposed when energy companies are mandated to abandon old technologies and systems. Indeed, Question 6 could mean Nevada utilities have to abandon existing power plants before their useful life is completed. Furthermore, ratepayers will still be required to pay for those unused power plants.

There is also some controversy over what types of technologies would get designated as renewable. Hydroelectric dams, for instance, provide very renewable energy but do not qualify as an approved renewable source in Nevada. Generally, regulated utilities can generate power internally or purchase it wholesale from an independent power producer utilizing an approved technology.  Regulated utilities have an incentive to own and operate their own power plants since their allowed rate of return is based on a percentage of equity. NV Energy has been criticized in the past for supporting plans to prematurely shutter its power plants and replace them with solar plants in part to increase the utility’s equity and rate of return for shareholders while causing rates to increase for businesses and households.

It is also possible an RPS could be optimally effective at lower rates than 50 percent. There is some evidence that these requirements have helped to lower the costs of renewable energy generation by giving manufacturers of solar panels and wind turbines a guaranteed market into which their products will be sold.

California has recently experienced rolling blackouts, in part, because of its abandonment of traditional power sources for renewable sources. Although solar panels tend to produce electricity reliably during peak hours, wind turbines have highly variable outputs that tend to peak during off-peak hours when it is less useful. By contrast, nuclear and coal-fired power plants can supply a steady level of baseload power and natural gas turbines can be quickly scaled up on-demand, as needed. Grid managers must balance the supply and demand for electricity at any given moment, which can be more challenging with renewable sources since the production of wind turbines especially can vary greatly over short time periods. If reducing carbon dioxide emissions is the underlying goal of Renewable Portfolio Standards, there are many ways of achieving the goal without specifying in the state constitution what utilities must do.

Voters’ Guide to Nevada’s Other 2020 Ballot Questions

Voters’ Guides to 2020 Ballot Initiatives In Other States

The post Nevada Ballot Initiative Analysis: Question 6 (2020) appeared first on Reason Foundation.

If, however, you want to save electricity and reduce your carbon footprint, Bauters explains, that’s much easier “because there isn’t an artificial intelligence component.” So, he created an app that helps homeowners calculate the best times of day to use their appliances.

Bauters isn’t the only one helping people go green and save money. Karolis Petruskevicius, the founder of Homely Energy, used his parents as guinea pigs to see if the energy-saving technology he was developing would work. And Mick Wall taught himself several programming languages as he developed a web page showing the lowest-cost times to use household appliances.

Across the U.K., lone hackers, a term that has come to mean high-tech tinkerer, are creating ways to harness energy price and usage data that has only recently become available. Their creations tell people how to reduce CO2 emissions and save money by reducing their electricity use. Remarkably, by reducing electricity demand at specific times, they are also helping balance the electrical grid.

Two innovations made this possible. First, an electric and gas company called Octopus Energy created a variable-rate pricing plan called Octopus Agile that uses prices to reward customers for using electricity when supply is abundant and increases prices when demand is high. Second, Octopus made real-time price data available to anyone with enthusiasm and a little programming skill. Octopus encouraged everyone who would listen to create new tools for their customers.

The results are just beginning to appear, but these new innovations are attracting the attention of energy experts and managers in the United Kingdom. Thanks to the democratization of information, individual hackers like Bauters, Petruskevicius, and Wall can create, all by themselves, what used to require a team of experts with a big bank account. Octopus is also adding customers, thanks in part to these innovators who make trying this unique approach to electricity pricing less daunting and more rewarding. 

Helping homeowners respond to fluctuations in price—encouraging them to use renewable energy when it is available—will become even more important as the National Grid Electricity System Operator moves toward the goal of operating Great Britain’s grid with zero-carbon by 2025. Meeting that goal while delivering power when people need it will be very difficult without the help of homeowners. That difficulty will become more pronounced as the U.K. adds increased demand for electricity from a growing number of electric vehicles. 

In the midst of these large and challenging trends, we are increasingly likely to find individual hackers nibbling away at the problem with tools that can be as simple as sharing information to gadgets driven by artificial intelligence and complex algorithms. Without them, the transition to a carbon-free grid would be more expensive and difficult.

A new approach to electricity pricing 

Nobody knows that better than Phil Steele of Octopus Energy, whose official title is “Future Technologies Evangelist.” His job is to proselytize about the need to create the technology and tools customers will need in the changing electricity landscape.

“It is all about trying to get consumers on to renewable energy,” he explains. The best way to do that is to help customers use electricity during the times of day when it is generated by renewables. Currently, that is a challenge.

On a typical day, the amount of electricity that people want increases in the morning as they wake up and head to work. It declines slightly through the middle of the day and then peaks during the late afternoon and evening as people return home, turn on the TV, and cook their dinner. This pattern, while fairly predictable, can double energy demand—or cut it in half—in just a few hours. That large swing requires grid managers to find more supply by turning on and off “dispatchable” sources of electricity, often natural gas or coal. The peaking plants that generate this electricity are not only less environmentally friendly, but they are also the most expensive. Shifting demand away from peak hours would not only cut CO2 emissions, but it would also reduce the need for the most expensive sources of electricity.

Few people, however, realize how expensive it is to turn on their tumble dryer or dishwasher during those peak hours because they have been protected from big fluctuations in the prices electric companies must pay to meet that demand. When customers did not have the capability of following real-time price fluctuations, a stable rate structure made sense. Most electricity rates protected customers, charging based on simple price schemes that often had only two price tiers—one for the daytime, and one for overnight. Most electric companies in the U.K. still use a similar system.

Recognizing the new opportunities created by information technology, Octopus created their Agile rate which varies every half-hour during the day. “We launched Agile Octopus to encourage households to shift their consumption from the daily peak energy demand period of 4 p.m. to 7 p.m. when we’re paying very high wholesale prices,” said Steele. If the electric company can buy less energy when wholesale prices are high, they can pass the savings on to the customer. And the savings can be significant.

For example, at 3:30 p.m., customers could be paying less than three pence for a kilowatt-hour (kWH) of electricity. A half-hour later that price might jump to 17p per kWh. When 7:30 p.m. rolls around, those prices plunge down to eight or nine pence. Price changes during the rest of the day are less dramatic, but they can go from 1p up to 4p in just 30 minutes. 

Perhaps most remarkably, prices can even become negative, when Octopus actually pays customers to use more electricity. This typically happens in the middle of the night, when demand is low and there is an excess of wind power. Last December, when Storm Atiyah blew in, the amount of wind energy on the grid, enough to power about 15 million homes in the U.K., doubled in 24 hours. 

That electricity had to go somewhere. Rather than turning other generating stations off, which is expensive, Octopus decided to pay people to use the short-term surplus. Between 1:30 a.m. and 6 a.m. on Dec. 8, 2019, Octopus paid customers about 1 pence per kWh. As Octopus staff wrote on their blog, “overnight storms triggered the energy equivalent of an ‘everything must go’ sale.” If you owned an electric car, you hit the jackpot. Imagine what would happen if filling stations paid to fill your tank with petrol.

Grid managers noticed what Octopus was doing. The director of operations for the GB grid tweeted “a big thank you” for helping create demand to balance the excess supply.

Paying people to use electricity, however, doesn’t make a difference if nobody knows about it. To help customers, Octopus publishes its rates online, as well as making them available to programmers using an Application Programming Interface, or API. Put simply, the job of an API is to answer questions asked by another app. Programmers send a query to the API— a more technical version of “what will tomorrow’s electricity prices be in London” —and the API returns the data. 

Programmers can ask for the prices customers will pay during the next 24 hours. They can check the energy usage for individual meters. Octopus encouraged programmers to find new ways to use all this data. In 2018, they hosted a “Hack Day,” attracting more than 100 computer programmers and tinkerers. “We wanted to enable other tech innovators in the energy sector access to this incredible data,” Octopus staff explained, “so we …cracked open our Agile Octopus API for public development.”

Individuals have taken up that challenge, and the results are beginning to appear.

Tools to empower energy customers

The most basic way to help consumers adjust to the Agile pricing is to provide timely and useable information. When Mick Wall started playing with the Octopus API, he only wanted the information for himself. His home already had solar panels, so he appreciated the value of using electricity when it was available. As an Octopus customer, he wanted to know more about pricing but the detail he wanted was not available. “You could download small amounts of Agile tariff data for a single U.K. region from the Octopus website,” he said, “but not my region.” That’s when he started his “journey of discovery.”

Teaching himself several programming interfaces, he created a program that downloaded the data into a spreadsheet. Since he already managed the web page for his running club, he created energy-stats.uk and shared what he found. Soon, people began asking him to generate graphs and over his Christmas break, he added the ability for visitors to download the data. The simplicity of the site, providing electricity prices for regions of the U.K., is what makes it useful. When I asked him what innovations were next, Wall said he liked it the way it was. “I fear adding more stuff will take away from what the site is good at, just delivering the Octopus pricing data each day,” he said.

He’s probably right. He notes that the basic information on his site changed how he uses electricity and says many people have been in touch to thank him, saying it has helped them save money too. “The Octopus Agile tariff is a game-changer,” he says. “I defy anyone not to change their habits when they know they can save lots of money.”

That is also what inspired Kim Bauters to put his knowledge of computer science to work. He knew the price data was available, but, “People in my family found it was hard to track, so I decided to create an app.” Initially, he created an app called Octopus Watch for the Apple watch but has now added versions for the iPhone and Android. Unlike his other apps that use AI to create soap and gelato recipes, the programming for Octopus Watch was straightforward – take the data provided by the API and make it digestible. “All of these incentives don’t necessarily translate into a user doing something,” he said. The amount of data could be overwhelming.

“It is like the Google problem of having too much data,” he said, referencing the trend toward “big data,” where individuals and businesses are inundated by the information. Octopus Watch takes all that data and translates it into simple guidelines about when to turn on energy-intensive appliances like clothes dryers and dishwashers. Before the app, “we didn’t use timers on any appliances,” said Bauters, “but now we routinely use the app to find the best slots.” It is paying off.

The combination of the Octopus Agile prices and his app is yielding a “fairly consistent 35 percent savings,” he told me. For owners of electric cars, the savings “tend to be much more toward 60 to 70 percent.”

To take the next step in energy savings, however, people will probably need a little help. You may not need artificial intelligence to find the best time to dry your clothes, but it is handy when trying to keep your home comfortable amidst daily price fluctuations. That is the problem Karolis Petruskevicius and his colleague Ignas Bolsakovas wanted to solve.

A Ph.D. candidate in power networks, Karolis has been focusing on modeling electricity prices in the U.K. with a growing number of residential heat pumps and an increase in power production from intermittent renewable sources such as solar and wind. Working with his advisor, he developed a model and he wanted to test it. His parents had a heat pump and he decided to make them his test subjects.

Ground-source heat pumps are expensive to install but can be extremely efficient. Taking heat from the pipes in the ground, heat pumps return about four units of heat for every one unit of electricity. “You are getting three units of energy for free from renewable sources,” Karolis explained. “It is going to be key to decarbonizing.” The problem is to decide when to use electricity to run the pump. 

The algorithm he developed turned on the heat pump before prices jumped during peak demand, relying on the home’s insulation to keep temperatures at a comfortable level until prices fell again. “When price is low you slightly overheat the home. What it would do is overheat the house slightly before 4 p.m. and then let temperatures drop until 7 p.m.” With the tolerance of his parents, he found the system worked. 

Monitoring the heat pump is more than most people can do on their own. Partnering with Ignas, a computer scientist, he launched Homely Energy, and created a smart thermostat for heat pumps that uses Octopus Agile price data. Their app also works with heat pumps that are already internet-connected, turning them on and off based on the same price algorithm he used at his parents’ home. “We think that we can save up to 30% compared to fixed tariffs,” he says. 

If his projections are right, the market for Homely’s thermostat and app could grow dramatically. Petruskevicius cites estimates from the National Grid that half of the population of the U.K. could have a heat pump by the year 2050. He believes that as people see the economic and environmental benefits of heat pumps, more people will give them a try. 

Another person who is convinced is Jan Rosenow, the European Program Director at the Regulatory Assistance Project, an independent energy think tank. “The main reason I chose Agile is that we installed a heat pump,” he told me. “The interest was to see if we could get benefit out of load shifting.” 

Where does one of Europe’s leading experts on energy demand turn for information about how to manage his personal energy use? “I rely on third-party apps,” he answered. Prior to switching to Octopus Agile, Rosenow was paying about 14 p per kWh on average. Now, thanks to the price information, he says he pays about 7 or 8 p per kWh.

Rosenow is optimistic about the ability of market prices and consumer information to help adjust to the changing electricity market in the U.K. and Europe will see in the future. He explains that the main benefit of using prices and information to change the way people use electricity is to “shift that additional load outside peak hours and absorb renewables or solar during the day.” By charging an electric car during the day, rather than when people get home, it not only avoids the hours of peak demand, it uses solar energy that is available during the middle of the day. Users get two benefits at once – cheaper energy and smaller environmental impact.

Open data for green energy

The U.K. is just beginning to see these innovations make a difference, and there is still a long way to go. As the number of innovators grows, they realize they are part of a community. Mick Wall is building a list of devices and apps that work with the Octopus API. These range from intelligent plugs like Ecopush, to chargers for electric cars. More innovations are most certainly coming.

The catalyst for those creating these tools that take advantage of Octopus’s variable rates was to make the data available. “Without the APIs we wouldn’t be able to do what we are doing,” says Bolsakovas of Homely Energy. That data is also helping improve the performance of future innovations. “We also need more accurate data to make our algorithms work properly,” and instead of just using data from Petruskevicius parents’ home, they can now use the enormous amount of data provided by the API and their hardware. “The more open data we have the better.”

This seems like small stuff, but the potential is huge. A study by Octopus found that customers with Agile pricing and an electric car, shifted their energy use from the more traditional pattern – peaking around 7 p.m. – to peaking in the early morning hours around 2 a.m. This shift reduced their total electricity use during peak hours by nearly 50 percent. 

Open data also means an increasing diversity of solutions to suit the needs of customers. Not everyone has an electric car or heat pump. For many people, the primary electrical draw may be a clothes dryer. Whatever the case may be, from a simple web page like energy-stats.uk to a more sophisticated controller using data-driven algorithms like the Homely heat pump controller, customers can already find something that suits their needs. As more electric companies introduce similar pricing systems, the number of customers who can benefit from these tools will grow, and so will the incentives to create more apps.

Octopus seems to agree. After Storm Atiyah moved through, the company managers wrote on their blog, “For years, the mainstream thinking was that renewable or sustainable products were expensive or niche. Over the weekend, a combination of smart meters, smart energy tariffs and a couple of windy nights helped us make the U.K.’s greenest energy the cheapest too.”

Petruskevicius wants to be part of undermining that mainstream mindset. “I think it is the future,” and services like Homely Energy’s will be more necessary “when we have a lot more loads like batteries, EVs and heat pumps.”

These early energy hackers did not intend to overturn the mindset and change the way the U.K. – and, perhaps, others in Europe and North America – think about and use electricity. Curiosity and self-interest were their primary motives. As the changes in electricity generation and markets accelerate, however, hackers like Wall, Bauters, and Petruskevicius will be pioneers in that important transformation.

The post Hacking the United Kingdom’s Electricity Grid appeared first on Reason Foundation.

As PG&E looks to emerge from Chapter 11 bankruptcy, there’s a lot of debate about what to do now. In response to the power shutdowns that had many people comparing California’s electricity infrastructure to that of a third-world country, Gov. Gavin Newsom may have threatened a state takeover of the utility, saying, “All options are on the table.”

Similarly, two dozen mayors, including those in San Jose, Sacramento, and Oakland, are recommending converting PG&E into a publicly-owned co-op. The plan would potentially put taxpayers on the hook for damages related to future fires caused by PG&E’s equipment.

PG&E CEO Bill Johnson recently admitted that it could take another decade for the utility to improve its grid enough that it no longer has to conduct power shutoffs to avoid causing wildfires. “I think this is probably a 10-year timeline to get to a point where it’s really ratcheted down significantly,” Johnson said of the blackouts.

Thus, routine power outages and rolling blackouts appear to be Californians’ new normal for at least another decade. Rather than accept this failing status quo, and instead of increasing taxpayers’ risk or government’s role in PG&E, California should give serious consideration to an entirely different model—competitive electricity markets.

The state’s regulated monopoly approach has failed, resulting in tragic deaths, massive property damage, not to mention some of the highest energy prices in the nation, and unreliable service.

Texas offers an interesting counterpoint.  In 1999, Texas launched an effort to bring competition and consumer choice to its electricity market.  Since that time, rates in its competitive market have declined by 31 percent and Texans now have access to some of the cheapest electricity in the country.  For comparison, according to the most recent data from the US Energy Information Administration, the price per kilowatt-hour across all sectors is $0.09 in Texas and $0.19 in California.

Additionally, as competition increased in its electricity market, Texas also became a leader in renewable energy. “Texas continues to dominate the nation’s wind energy production, adding far more generating capacity than any other state last year and having more installed wind power capacity than all but five countries in the world,” the Houston Chronicle reported last year.

California’s politicians and customers may still have bad memories from the disastrous results of the state’s last flirtation with energy deregulation in the early 2000s.  But that complex effort wasn’t deregulation— it only attempted to deregulate prices on the wholesale market while holding them fixed on the retail market.  It also prohibited retail providers from signing long-term purchase agreements with power producers to safeguard against price volatility. In short, the poorly designed system paved the way for market manipulation and the rolling blackouts and high prices that consumers faced at the time.

Since then, however, a dozen states have successfully implemented consumer choice into their electricity markets.  As a whole, they’ve fared well, cutting prices and expanding options for consumers.  Instead of accepting a decade of blackouts while PG&E struggles to modernize and improve its infrastructure, this is an opportune time for California to reconsider the direction of its electricity markets.  Californians deserve better than what they’re getting, and competition would deliver choices and alternatives to consumers.

This column originally appeared in the Orange County Register.

The post PG&E’s Settlement Won’t Fix Its Problems and Consumers Deserve Choices appeared first on Reason Foundation.

With a campaign season upon us, politicians and other usual suspects are again in full swing, promoting over-the-top rhetoric about how the world will end if we don’t vote a certain way. One area of unusual focus this year has been Question 3, a proposed amendment to the Nevada Constitution that would require the Legislature to create “an open, competitive retail electric energy market.”

It’s rare that citizens get a chance to vote on their right to choose among electricity providers. In the states that have established competitive retail markets for electricity, it has never been accomplished at the ballot. As a constitutional amendment, the measure must pass the ballot twice consecutively. It already garnered 72 percent of the vote in 2016, so, if a simple majority of Nevada voters approve Question 3 this year, it will become law.

This reality has led NV Energy, the state’s current monopoly electricity provider, to pour nearly $12 million into ads intended to scare Nevadans about the implications of choice and competition.

The most oft-cited example is a half-hearted and botched attempt at implementing a retail electricity market by California nearly 20 years ago. But that’s a poor example because California’s regulation included so much price-fixing and needless mandates that it’s hard to characterize the effort as a real attempt at providing consumers with electric choice to begin with.

Essentially, California prohibited any movements in the price of retail electricity but deregulated prices on the wholesale market. It simultaneously required utilities to purchase power from independent power plant but prohibited them from signing long-term contracts. The entire framework was poorly constructed and destined to fail from the outset.

The good news for Nevadans is California’s botched attempt is an extreme outlier in the world of electric choice. At least a dozen states have created competitive retail electricity markets, according to the U.S. Department of Energy, and no others have experienced the crisis that California lawmakers created for themselves with their poor design.

In fact, ending the monopoly structure for electric utilities has been a huge success in most states. Texas created electric choice in 2002. Last year, the Texas Public Utilities Commission reported that retail electric rates have declined by as much as 63 percent since 2001. Texans now face electric rates as low as 4.5 cents per kilowatt-hour, compared to a national average of 13.45 cents. Meanwhile, Nevada’s monopoly structure has led to an overall price increase of 23 percent over the same timeframe and a price of 11.7 cents per kilowatt-hour today for residential customers, according to data from the Department of Energy.

Further, contrary to claims from opponents who say choice is incompatible with so-called “renewable” power sources like wind and solar, Texas’ power generation mix has grown to include more and more renewable sources in the years since its choice program was established.

Nearly every argument being offered against electric choice is little more than a straw man. Of the total $11.9 million raised in opposition to the measure, NV Energy has contributed almost all of it, using money earned from ratepayers. The existing monopoly framework is good for NV Energy, because its profits are broadly determined as a percentage of its costs. As a result, NV Energy knows it can be inefficient and less responsive to its customers than businesses that must compete to attract and retain customers. After all, being tired of dealing with a costly, subpar electricity provider is why Nevadans have forced this issue onto the ballot to begin with.

The post The Truth About Electric Choice in Nevada appeared first on Reason Foundation.

The cost of installing residential solar electricity generation in the United States has declined significantly over the past few years, due mostly to innovations that have reduced the cost of photovoltaic panels. But, nationwide, American consumers are still being charged far more for solar panels than the average consumer in other countries.

Antiquated regulations, primarily at the state and local levels, are costing American consumers about $70 billion per year. Permitting and other regulations vary significantly from state to state, but onerous permitting processes, strict building codes, and various tariffs cause U.S. consumers to pay, on average, nearly double what consumers abroad pay for installing similar solar systems. That amounts to nearly $10,000 more in costs for a 5-kilowatt residential solar system. The contrast with Australia, where there is no permitting process at all for solar, is stark. Solar installation costs in the U.S. are $3.25 per watt, compared to just $1.34 per watt in Australia.

California, not typically known for being a leader in government reform and efficiency, has actually been leading the way in streamlining its solar permitting process. The state has taken a number of steps to standardize its permitting process and has modernized outdated laws and regulations that were impeding Californians’ ability to adopt solar.

Assembly Bill 2188, passed in 2014, requires all local and city governments in California to follow the permitting processes included in the “Solar Permitting Guidebook,” which lays out standards and best practices for governments to reduce barriers to entry and cut costs. And the state has seen remarkable progress, with many local governments updating their books, reducing installation and permitting fees, and/or waiving them entirely. Each step taken locally to modernize outdated and onerous regulations is one step closer to ensuring the solar market is competitive and attractive to the ordinary consumer.California’s improvements have played a role in the price of solar in the state plummeting 55 percent over the last five years. And California is expected to lead the nation in solar production in the next five years, with a projection of 13,402 megawatts of solar according to the Solar Energy Industry Association.

These successes should be spurring California to continue streamlining its solar process so homebuilders, businesses, and consumers voluntarily select it. Instead, the state is implementing a mandate that may not scale well or generate positive returns since California is already experiencing periods where it has more solar power than the grid needs. Meanwhile, there is one very obvious negative. Piling on another $10,500, or more, in the costs of a home only makes the region’s housing more unaffordable for first-time homebuyers and middle-class families.
In March, the median home price across Southern California’s six counties was $519,000, according to CoreLogic. In Orange County, the median price hit a record $725,000 and in Los Angeles County the median price was up to $585,000.

Instead of the solar mandate, California would be much better served to continue focusing on reducing the cost of permitting and other regulations that have helped drive down the price of solar. Doing that can help solar installations become cheaper and more attractive to a wider swathe of consumers without pushing sky-high housing prices further out of reach for most Southern Californians.

This column originally ran in The Orange County Register.

The post Permitting is Making Residential Solar Expensive and Reforms can Change That appeared first on Reason Foundation.

The post Obama’s Clean Power Plan Is Bad News for California appeared first on Reason Foundation.

It would be more accurate to say that, “The Clean Power Plan is a centralized plan for electricity generation in the United States that is likely to harm public health, increase energy bills for households and businesses, destroy American jobs, and cause blackouts in communities across the country.”

Here are a some thoughts on the plan’s main claims:

1. The White House asserts, “The Clean Power Plan, and other policies put in place to drive a cleaner energy sector, will reduce premature deaths from power plant emissions by nearly 90 percent in 2030 compared to 2005 and decrease the pollutants that contribute to the soot and smog and can lead to more asthma attacks in kids by more than 70 percent.”

Indeed, in its regulatory impact assessment of the original Clean Power Plan rules, these public health benefits accounted for the majority of all benefits.

But these benefits do not come from reducing greenhouse gas emissions: they come from reducing other emissions, such as particulates. Yet these “public health benefits” would be achieved far more cost effectively by targeting harmful emissions directly. The Environmental Protection Agency (EPA) is already targeting such emissions. To claim such benefits for the Clean Power Plan is either double counting or misdirection, or both.

2. The White House asserts that the Clean Power Plan will, “Create tens of thousands of jobs.”

This may be true, but it will also likely destroy hundreds of thousands of jobs.

Given the enormous capital cost of implementing the plan, it seems highly likely that the net effect on jobs will be negative.

3. The EPA claims that these jobs will be created, “while ensuring grid reliability.”

This is surely a joke, since the Clean Power Plan envisages a significant increase in the proportion of electricity supplied by “renewable” power, much of which will come from intermittent sources such as solar and wind, which as the North American Electricity Reliability Corporation notes, tend to reduce grid reliability. To compensate, grid operators will be forced to spend billions of dollars on new technologies that enable them to balance power generation with demand.

4. The White House asserts that the final rule will, “Drive more aggressive investment in clean energy technologies than the proposed rule, resulting in 30 percent more renewable energy generation in 2030 and continuing to lower the costs of renewable energy.”

The rule does indeed require more electricity generation from “renewable” sources – from about 13 percent today to 28 percent by 2030. That will likely drive innovation, lowering costs of such technologies over time. But this will come at the cost of investments in other forms of innovation that would likely have greater benefits to society. The history of attempts to plan the direction of innovation is replete with white elephants. There is no good reason to think that this time is any different.

While the effectiveness of different sources of renewable generation varies according to climate and geography, we estimate that the maximum that could be produced using the current generation of intermittent technologies (that is, technologies such as wind and solar that are not capable of producing continuous power) is about 10 percent. Currently, solar and wind account for about 5 percent of electricity generation. Taking this to 20 percent or above will require heroic feats of engineering that may simply be impossible – and certainly will be enormously expensive. It is highly likely, therefore, that the Clean Power Plan will result in a substantial increase in the number of brown- and blackouts.

5. The White House claims that the plan will, “Save the average American family nearly $85 on their annual energy bill in 2030, reducing enough energy to power 30 million homes, and save consumers a total of $155 billion from 2020-2030.”

This assertion is based on the assumption that consumers will install energy saving devices because of the rule. In reality, the rule will almost certainly increase the cost of energy considerably over the next 15years, and beyond, as a result of the massive increase in investment in costly “renewable” generation that is required by the rule. While this will likely encourage consumers to be more frugal in their use of energy, it is entirely disingenuous to claim that this will “save” them any money: consumers will almost certainly spend more in total on energy and energy saving devices than without the rule.

6. The White House claims that the rule will, “Give a head start to wind and solar deployment and prioritize the deployment of energy efficiency improvements in low-income communities that need it most early in the program through a Clean Energy Incentive Program.”

While it is no doubt true that people living in low-income communities would benefit from energy efficiency improvements, it is far from clear that a federal rule is the best way to stimulate such investments. Meanwhile, increasing the proportion of energy generated by wind and solar power is likely to be highly regressive – harming the poor more than others.

Poorer consumers spend a higher proportion of their income of energy, so any policy that increases the cost of energy will disproportionately affect such poorer consumers, who will spend more on energy and have less available for other items. In other words, it will make poor people poorer. Since poverty is associated with health, the Clean Power Plan will almost certainly adversely affect the health of those who are already poor.

7. Finally, the White House claims that the rule will, “Continue American leadership on climate change by keeping us on track to meet the economywide emissions targets we have set, including the goal of reducing emissions to 17 percent below 2005 levels by 2020 and to 26-28 percent below 2005 levels by 2025.”

This is perhaps the most bizarre claim of all. First, it is by no means clear that the targets set for reducing emissions would pass an impartial cost-benefit test. The Obama administration’s current estimate of the “social cost of carbon,” which is used by the EPA to justify these cuts, is almost certainly higher than is justified by an impartial assessment of the costs and benefits of emissions of carbon dioxide, as we show in a paper to be released later this week.

Second, carbon dioxide emissions have been falling in the U.S. largely as a result of an autonomous switch from burning coal to burning natural gas, yet instead of assuming that this trend will continue, the revised Clean Power Plan rule requires states to focus on increasing the amount of power that will be generated by “renewable” and nuclear power. This is simply illogical.

Julian Morris is vice president of research at Reason Foundation.

The post Rebutting the Obama Administration’s Clean Power Plan’s Claims appeared first on Reason Foundation.

If my experience working for the California Energy Commission taught me anything, it’s that the California way is more a cautionary tale than a model for the world.

In 2006, California aimed to make a splash when it passed AB 32, its landmark energy law requiring greenhouse gas reductions to 1990 levels by 2020. The centerpieces of the plan are an energy mandate forcing utilities to purchase one-third of their electricity from unreliable renewable sources, and a costly and convoluted carbon cap-and-trade system.

Instead of environmental gains, the plan resulted in lost prosperity for residents in the form of soaring electricity, gasoline prices and joblessness, all among the highest in the nation. Higher prices and stagnant employment have led to, on a cost-of-living basis, California’s poverty rate being much worse than the rest of the country.

Now Brown is promoting legislation that will make things even worse, requiring that half the state’s electricity come from renewables while cutting petroleum use in vehicles by 50 percent. This new legislation would accelerate California’s trend of rising energy prices and unemployment rates, yet offering zero climate benefits.

If the Obama administration gets its way, California-style energy policies, and the harm they cause, would be spread across the country. In the coming months, the Environmental Protection Agency (EPA) is scheduled to finalize its so-called Clean Power Plan requiring states to reduce carbon dioxide emissions by 30 percent by 2030.

The EPA has called on states to submit their “own plans” to outline how they propose to adhere to the new rule. To achieve these strict reductions, states can choose only from an EPA approved set of “building blocks.”

Under threat of withheld federal dollars for everything from transportation projects to sewer treatment facilities, each state will be forced to follow California’s “lead” by imposing costly taxes, carbon trading and mandates on energy. In practice, states that succumb to the EPA’s plan will be following California’s lead into economic purgatory. Beyond quality of life concerns, there are simple reasons the California way isn’t a model for the nation.

The state is blessed with mild temperatures, so heating and cooling expenses take less of a toll there than most other places. But it still manages to have higher energy prices than most of the country due to nonsensical policies.

For the rest of the country to comply with the EPA’s Californication of the electric grid, states will be forced to switch from affordable, reliable coal and natural gas to costly, unreliable and patchy sources. NERA Economic Consulting estimates residents of 43 states would see double-digit rate hikes under the EPA rule.

The spike in energy prices will harm all Americans, particularly the poor, who spend more on energy and will thus have less to spend on basic necessities such as food and medicine, compromising their own and public health.

The EPA’s rule also subjects states to electric reliability problems. Currently, California imports much of the power it needs. Its own grid operator has warned that, with the increasing reliance on unreliable renewable resources, “the system becomes increasingly exposed to blackouts.”

The EPA is moving quickly to finalize its costly climate rule before the Paris summit. This is because, by itself, EPA’s climate regulation is purely symbolic. By EPA’s own calculations, it has a negligible impact on global temperatures.

To achieve its symbolic victory, EPA seeks to submit all states to the threat of high energy prices and a less reliable grid. Instead of surrendering to the EPA, states should do everything in their power to resist.

Tom Tanton is a senior fellow at Reason Foundation and former policy advisor at the California Energy Commission. This article originally appeared in Investor’s Business Daily.

The post California Is the Wrong Energy Model for the Nation and World appeared first on Reason Foundation.

“The report shows that with continuing technological advancements, cost reductions, and siting and transmission development, the nation can deploy wind power to economically provide 35% of our nation’s electricity and supply renewable power in all 50 states by 2050.”

The “continuing technological advancements” and “cost reductions” mean the White House’s estimate is based on hope – hope that some as-yet unimagined future technology will change the economics of wind power, making it more cost effective than fossil fuel-based generation. That’s not impossible – but it is very unlikely. And hope without change can be both costly and unpleasant.

A 2012 report from Reason Foundation examined the economics of wind power as it exists, not the one we hope for. The study found it isn’t economically feasible to expect wind generation to produce more than 20 percent of operating electricity capacity, and even that is stretching it. The Department of Energy study assumes that the 35 percent capacity (up from about 4.5 percent today) would be reached by some combination of “low wind costs” and/or “high fossil fuel costs.”

However, as the Reason Foundation study points out, expanding wind penetration beyond about 10 percent requires a significant increase in the amount of available “spinning reserve” – instantly available power generation from an alternative source that can be brought online whenever the wind is too strong or too weak to supply enough power into the grid. That need for backup increases the capital costs of wind power because the spinning reserve generating capacity must be available even if it is not being used. In addition, since the spinning reserve is likely to be in the form of natural gas (because it is the lowest cost source of power and the one that can by brought online most quickly), the cost of fossil fuels has a much less significant impact on the cost competitiveness of additional wind generation.

The White House also claims that the expansion of wind power would result in “more than 500 U.S. manufacturing companies across 43 states,” and thereby “boost America’s competitiveness, help launch new businesses across the country, and secure the future of thousands of U.S. manufacturing jobs.”

The installation of 11 gigawatts of wind generation capacity per year – which is what the Department of Energy report estimates is necessary to achieve 35 percent by 2050 – would almost certainly require some new manufacturing in the U.S., with associated new jobs. But such a massive investment (reaching $70 billion in 2050) would divert hundreds of billions of dollars away from other investments that would have created other jobs.

Wind energy is obviously not the only possible investment that could be made with those billions and on the basis of our current knowledge it is almost certainly not the best and most productive investment. Imagine some of the other investments that could be madebut might not be made because the money is being spent on wind turbines:

• New drugs to prevent, alleviate, or cure diseases ranging from neurodegeneration to heart disease to cancer;
• New agricultural technologies that enable more and better food to be produced on less land, improving nutrition while reducing the impact on wild species;
• New materials that enable the production of better, stronger, less expensive vehicles, buildings, computers, and all manner of other devices.

And that is just a small selection of innovations that are easily imagined because they are similar to innovations that have recently taken place. There are surely many other innovations that will occur but which are more difficult to imagine. Many investments in such innovations have the potential for far higher returns, generating greater benefits to a larger number of companies, and providing more and better jobs.

Simply asserting that investing in wind generation will yield the benefits claimed without considering other investments that could create greater benefits is economically naïve. Decades of evidence shows that government directed investment tends to yield lower returns, resulting in lower rates of growth, and generates worse and lower paying jobs than private sector investment. There is no empirical reason to think government is suddenly going to improve on this record and much reason to think that it will not.

The Obama administration further claims that:

“Today, average wind energy costs nationally are approaching cost-competitive levels. Backed by stable policies including the production tax credit and the EPA’s Clean Power Plan, costs will continue to drop as the industry scales up and innovates.”

Taking into account the capital costs of wind’s spinning reserve, wind energy is not cost-competitive with fossil fuels by a wide margin – even the Department of Energy’s own estimates put the levelized cost of wind at 20 percent higher than natural gas. While some wind projects may be cost-competitive, many are only proceeding because of the production tax credits and state renewable energy mandates imposed by government. In other words, taxpayers and energy consumers are being forced to subsidize the owners of wind generators.

The White House asserts, “Wind is anticipated to provide nearly $280 billion consumer savings by 2050.” But even under its wind power scenarios, the White House study says the cost of electricity is expected to rise at least until 2030: In other words, the White House wants us to incur almost certain costs for the next 15 years in return for highly uncertain benefits – benefits that are entirely dependent on the development of new technologies that dramatically reduce the cost of wind generation – sometime after 2030.

The White House goes on to list a series of “key findings.” It begins with the claim that “Wind power could help America combat climate change by avoiding more than 12.3 billion metric tons of carbon pollution cumulatively by 2050, equivalent to avoiding one-third of global annual carbon emissions.”

This is both confusing and highly implausible. It is confusing because it compares a single year of global emissions with 35 years of emissions reductions from the US. Even if the absolute reduction in emissions were accurate, it would amount to a reduction of less than one percent of global emissions annually. But this is likely a vast over-estimate: Reason Foundation estimates that at most wind could reduce carbon emissions from electricity generation by 18 percent, which would amount to around 100 million tons per year, or 3.5 billion tons by 2050.

But the strange claims don’t end there. The White House continues: “Wind energy could save approximately 260 billion gallons of water by 2050, by side-stepping the water-intensive processes of conventional energy production. At deployment levels examined in the report, the nation’s electric power sector could consume 23% less water.”

That sounds great, but again ignores alternative solutions. Where water use in the electric power industry is a major concern (for example, in more arid parts of the U.S.), there are existing technologies that could be used to reduce water use far more cost effectively than by switching to wind generation.

Finally, the Obama administration asserts that:

“This growth in wind power could lead to approximately $108 billion in savings in healthcare costs and economic damages. This estimated saving is made possible through cumulative reductions in air pollutants, including sulfur dioxide, nitrogen oxides and fine particulates that could otherwise cause nearly 22,000 premature deaths from respiratory ailments and other diseases by 2050.”

Reducing the health effects of electric power generation is desirable. But as Reason Senior Fellow Tom Tanton and I have pointed out in relation to an assessment of state renewable portfolio standards, most if not all the reduction in damaging health effects claimed by the White House would happen anyway, as a result of power generation companies complying with existing regulations. In addition, it is likely that generation will continue to shift to natural gas, which is a far cleaner fuel than coal. Over the past decade, the proportion of electricity produced from natural gas has nearly doubled and now stands at about 30 percent. If that trend – which has been driven almost entirely by the lower total cost of new gas generation – continues then emissions will fall even further without any new regulatory intervention. In other words, most of the health improvements and associated $108 billion in alleged savings are illusory.

It is quite possible that the costs of wind power generation will continue to fall as the White House hopes. But that is more likely if wind is forced to compete in the market and far less so if it continues to receive subsidies.

Julian Morris is vice president of research at Reason Foundation. This article originally appeared at RealClearMarkets.

The post Obama Administration Report Overstates Wind Power’s Potential, Understates Costs and Limitations appeared first on Reason Foundation.

• Cost estimates include only direct costs to utilities. Other market participants and non-participants carry much of the cost of renewable portfolio standards. Further, the Survey counts the costs for only two years (2010-2012), while counting the benefits for 30 years or more.
• Neither costs nor benefits occur in a consistent manner over time. The Survey‘s selection of the time-frames magnifies the false impression that benefits are near equal to, or exceed, costs.
• The Survey is incomplete with respect to the cost of integration of intermittent and volatile generation sources. Specifically it ignores the cost of backup capacity and the lost efficiency of power plants required to balance the output of intermittent and volatile generation. (With wind energy, “backup” is required to operate during periods when the wind is not blowing; “balancing” is required during periods when the wind is blowing but not at a very constant speed.)
• The Survey does not include environmental impacts that create non-monetized costs, such as noise pollution and avian mortality. Increased noise pollution, in addition to its own health impact, reduces the aesthetics of neighborhoods with renewable installations, thus reducing property values and property taxes to local governments.
• Higher electricity rates caused by RPS lead to reduced discretionary income for ratepayers, which in turn may lead to premature mortality. This phenomenon is especially regressive (that is, it harms poor people more than wealthy people).
• The Survey ignores the cost associated with causing prematurely “stranded” assets in the existing fleet of power plants due to lowered capacity factors. RPS effectively wastes useful and serviceable power plants (and the embodied energy and emissions that went into building them), because they will no longer be used at the capacity for which they were designed.
• The Survey ignores costs for backup and balancing of intermittent and volatile renewables that are shifted to neighboring states.
• Similarly, the Survey ignores the very expensive Production Tax Credit that shunts almost half of the cost of wind installations onto taxpayers (many of whom realize zero benefit from wind installations) made even worse by special tax depreciation available only to certain renewables.
• The Survey is silent on lost opportunity. There are commercially available technologies that can achieve the same or better primary objectives (price stability, environmental improvements, etc.) than the specified favored renewables included in RPSs.
• The Survey assumes that all renewables installed during the period in which RPSs have been in place were the result of the RPSs and that without the RPSs there would have been zero new renewables. This is clearly an error, as renewables were in fact installed prior to any RPS, when market participants found specific installations cost-effective. In some states, there was as much renewable generation, in percentage terms, prior to imposing the RPS as there was after.
• Some benefits noted in the Survey, including inflated benefits and incomplete netting, are speculative and self-fulfilling rather than meaningful. For example, one RPS benefit claimed is an increase in diversity, even if that supply diversity provides no price hedging, reduction of emissions or other actual benefit. It presumes diversity is a goal and benefit in and of itself.
• The benefit estimates also suffer from double counting. Double counting is especially prevalent with emission reductions, as those benefits (and their costs) have already been accounted for in such regulatory programs as Clean Air Act Regulations. The majority of the dollar benefits from emission reduction cited in the Survey are from reductions of carbon dioxide “priced” at the EPA’s highly controversial “social cost of carbon.”

Some renewable energy technology installations conserve resources and some don’t: some are efficient and some are not. Renewable portfolio standards (further exacerbated by various federal tax treatments and local subsidies) fail to recognize this distinction and foster the development of inefficient installations, thereby discouraging the use of more efficient and environmentally effective facilities. For example, most of the compliance with state-level RPSs has come in the form of wind energy. Wind energy is unpredictable and volatile, leading to lower value and imposing significant costs on others. Advocating for RPS reveals the belief by proponents that the market would not otherwise embrace cost-effective, resource-conserving installations of renewables. History proves otherwise.

Even more unfortunate is that some advocates are citing the Survey in efforts to extend or expand such policies. The Survey has already been inappropriately cited, such as in congressional testimony, to justify extending and expanding renewable portfolio mandates, including at the national level. Doing so would further harm our economies and negatively impact public health. The Survey should not be used to formulate or justify policy in any state or federal legislation.

Attachments

• Assessing the Costs and Benefits of Renewable Portfolio Standards: A Guide for Policymakers

The post Assessing the Costs and Benefits of Renewable Portfolio Standards appeared first on Reason Foundation.

Gov. Brown recently signed into law Assembly Bill 2363, which improves accountability for solar and wind integration, but the law doesn’t go far enough. California should consider adopting Idaho’s approach and make wind generation developers pay their fair share of added costs.

The California Renewables Portfolio Standard Program requires utilities to purchase specified minimum quantities of electricity products from eligible renewable energy resources. But integrating intermittent renewable technologies like wind power results in significantly less efficient performance of fossil fuel facilities.

That’s because wind fluctuates in strength rather than providing a consistent and reliable stream of energy so electrical grid operators must rapidly cycle up and down other units to compensate. Much like your car in stop and go traffic, fuel use and emissions increase. Currently, utility companies must pay and then pass on these integration costs thereby increasing energy rates for consumers.

And these costs increase, per kilowatt-hour, at a rate faster than the growth in total wind generation. Taken together, these costs can double the apparent cost of wind power. Looking at just the apparent cost makes it seem wind is more cost-effective than other renewable energy sources.

The California Renewables Portfolio Standard Program currently requires the state’s Public Utility Commission to adopt rules for selecting the “least-cost and best-fit” renewable energy resources on a total cost basis. Assembly Bill 2363 will require the commission to adopt by December 31, 2015 a method for accurately determining the total costs, both direct and indirect, of integrating an eligible renewable energy resource. This will allow for an apples-to-apples comparison of energy sources that informs procurement, resulting in a more diverse, reliable, and cost-effective system.

“California has the nation’s most aggressive plans to promote renewable energy,” stated Assemblyman Brian Dahle, the bill’s sponsor. “As we push ahead, we need to protect ratepayers and be fair to businesses that have invested in renewable generation.”

However, the legislation falls short because it doesn’t hold wind developers responsible for the integration costs they impose. Instead, wind developers are paid the same amount the utility company would pay for energy from a source that doesn’t require added integration costs. That’s like selling something on eBay but making your neighbor pay the shipping cost.

California’s utility commission would do well to look at how Idaho regulators addressed the problem in their state.

“We find that the current mechanism for recovery of integration costs has resulted in under-collection of the actual costs required to integrate wind onto Idaho Power’s system,” according to an Idaho Public Utilities Commission press release. “That is not in the best interest of Idaho Power ratepayers because expenses to integrate wind that are not paid by wind developers are paid by consumers.”

So Idaho regulators recently adopted new rates to be charged wind generators who sell to Idaho Power Company to account for the utility’s expense of integrating wind power. They also approved a new method for calculating the wind integration charge under which wind developers will pay a rate that increases as the utility’s overall wind penetration level increases. It reduces the price paid for electricity sold to the grid, which should reduce consumers’ electric bills.

Adopting the Idaho approach would not threaten California’s Renewables Portfolio Standard Program. Some renewables, like biomass and geothermal, do not impose nearly as high integration costs as intermittent and unreliable technologies such as wind and solar. There may be a shift from wind to other types, but the aggregate amount would likely remain growing. Costs would be lower and reliability higher, even with growing amounts of renewables.

California should follow Idaho’s lead and reduce utility bills for consumers by making those responsible for integration costs pay those costs.

Tom Tanton is a senior fellow at Reason Foundation.

The post The Hidden Costs of Wind Power in California appeared first on Reason Foundation.

The Obama administration correctly sees TVA, saddled by $26 billion in debt, as a risk to the taxpayer-a Too-Big-To-Fail enterprise waiting in the wings to financially stumble. TVA claims that it is not currently a burden to taxpayers, having ceased taking federal appropriations for its power program in 1959 and for its environmental stewardship and economic development activities in 1999.

Nevertheless, TVA is unwilling to sever its umbilical cord to the federal government, and it is reasonable to expect that its stakeholders would show up at the federal government’s doorstep, begging for relief, if TVA stumbled financially (despite provisions in its federal charter stating that TVA’s debt is not guaranteed by the federal government).

That’s the reason d’être of continued federal ownership, especially since the market prices TVA bonds as if they were government bonds backed by the full faith and credit of the federal government. For example, TVA sold $1 billion in 10-year, non-callable bonds in 2013 at an interest rate of 1.75%, at the same time that 10-year Treasuries, which are also federally taxable, sold for between 1.5-2.0%.

Yet in its review of TVA earlier this month, the credit rating agency Moody’s cited a number of troubling risk factors including TVA’s $30 billion statutory debt ceiling (that causes it to use alternative funding mechanisms), its underfunded pension plan, the unresolved cost of the coal ash spill at Kingston, TN, and the cost overruns of its Watts 2 nuclear construction project. While Moody’s has given TVA bonds its best rating, “Aaa,” for many years and currently classifies TVA’s outlook as “stable,” these ratings hinge upon two important factors:

• Moody’s stated that “TVA’s Aaa credit rating could be downgraded if there are any limitations on the independence of TVA, including it ability or willingness to set rates at sufficient levels to cover operating expenses and debt service requirement.”
• Moody’s also noted that, “TVA is unlikely to maintain its “Aaa” rating in the event of a divestiture from the U.S.”

In other words, Moody’s maintains its high rating of TVA’s debt so long as TVA is seen to be independent for ratemaking purposes (the TVA board sets its rates which are not subject to review by a public utility commission or any outside parties) but it must continue to be owned by the U.S. government.

There’s only one reason why bondholders want continued ownership of TVA by the federal government-in case the wheels come off on TVA’s financial performance. And this is why TVA management and labor are spreading fears of a “sale” and rising electricity rates, which have been repeated uncritically by many in the Tennessee media.

Public officials and journalists in Tennessee continue to describe the administration’s proposal as “privatization” and a “sale,” as opposed to what it actually proposed: a transfer. According to the budget proposal, the administration “stands ready to work with the Congress and TVA’s stakeholders to explore options to end Federal ties to TVA, including alternatives such as transfer of ownership to State or local stakeholders.”

Nowhere is the word “sell” or “privatization” used in the administration’s budget proposal. In fact, the language is sufficiently broad to allow the federal government to consider different transfer scenarios, including the transfer of the ownership to the states that TVA operates in, or alternatively, to its distributors, or even a combination of states and distributors as well as other alternative transfers.

What the administration is actually proposing could run a wide gamut of options. The federal government could simply transfer title to the TVA assets and its accompanying responsibilities-including its non-power generating responsibilities, like river navigation maintenance and flood control-to state or local stakeholders and change next to nothing, including the rates it charges which are fixed by the TVA board. Or it could transfer TVA’s navigation maintenance and flood control functions to other federal agencies and transfer TVA itself to its stakeholders, potentially both states and/or distributors. Or it could even overhaul or completely repeal TVA’s federal charter-the TVA Act-which created the TVA and mandates everything from who can serve on its board and how rates are set to the federal and state laws to which it is subject.

The best approach would be for the federal government to transfer TVA to the seven states in which the utility operates, using one or more metrics-such as the number of employees or sales in each of the seven states-to determine what each state’s ownership interest would be. Such a transfer would not only transfer the assets operations to the states, but also any risks associated with the TVA assets and operations. When the federal government “sold” the Alaskan Railroad to the state of Alaska, the railroad played a leadership role in facilitating that transfer, working with both the Congress and the state to make the transfer as easy and transparent as possible as well as to maximize its subsequent successful operation after the transfer. TVA’s footprint is biggest in Tennessee, and that state can and should play the role of leader of the states served by TVA with respect to the transfer, just as Alaska did in the Alaska Railroad transfer.

Another plausible scenario for TVA is to follow the Metropolitan Washington Airports Authority (MWAA) model. In 1987, Congress transferred the Washington Dulles International and Washington National Airports to the Metropolitan Washington Airports Authority under a 50-year lease authorized by the Metropolitan Washington Airports Act of 1986. By statute, MWAA pays the federal government $3 million annually to lease the facilities, is responsible for capital improvements and otherwise runs these airports. Prior to the transfer, the airports had been owned and operated by the Federal Aviation Administration.

While not as attractive as a straight transfer of ownership, a TVA lease would limit the federal government’s potential liability to that of a landlord. Moreover, the lease could be written to allow, and even incentivize, a subsequent complete transfer. Unfortunately, were TVA to financially stumble, stakeholders in a lease scenario in which the federal government is the landlord may believe that the federal government will backstop its lessee, just as the financial world sees an implicit federal guarantee of TVA bonds today, legal restrictions notwithstanding.

By contrast, if TVA were transferred to the states and/or its distributors and such an adverse event to occur, stakeholders might still try to seek a federal bailout, but such intervention and recourse would be much more difficult to secure than under the status quo or a lease scenarios. When the United States Enrichment Corporation, which was a division of the Department of Energy until privatized in 1993, financially stumbled in recent years, Congress and the administration worked together to find ways to direct government largesse to it in an unsuccessful effort to keep it from bankruptcy. TVA stakeholders would demand nothing less, and in all likelihood, much more government assistance and intervention, in the event TVA were to stumble.

What’s really missing in regards to TVA is imagination and creativity. Most TVA stakeholders cannot see beyond the status quo, but the world has changed and will continue to change. It is no longer 1933, when few people had electricity in the Tennessee Valley. And given the federal government has spent the last decade bailing out Too-Big-To-Fail companies and government-sponsored enterprises like Fannie Mae, Freddie Mac, AIG, General Motors, and Chrysler, it is refreshing that the Obama administration has rightfully concluded that it doesn’t want to have to confront a similar bailout option with respect to TVA in order to mitigate risk to taxpayers.

Tennessee, where the bulk of TVA’s operations and employees are located and where the greatest benefits of TVA are reaped, needs to think about how it wants the future TVA to look, and it should work with both the TVA and the federal government to design the post-federally owned TVA to assume the risk that federal taxpayers assume today. TVA President and CEO Bill Johnson recently stated that, “[TVA] will continue to work collaboratively with the Office of Management and Budget […] [b]ut, be assured, our focus tomorrow will be the same as it is today – to provide lower cost, reliable power to the 9 million people of the Tennessee Valley.”

By transferring TVA to the states it serves, both Johnson and the Obama administration can achieve their stated goals. TVA’s focus would be the same as it is today; in fact, a post-transfer TVA could be practically identical to today’s TVA. Only the ownership would change-and the risk currently assumed by federal taxpayers.

William B. Newman, Jr., is Senior Adviser to HC Project Advisors in Washington, DC. He is a former executive of Conrail, and worked on Conrail’s successful sale by the federal government. Conrail was sold in an initial public offering in 1987, then the largest initial public offering in history. His previous articles on TVA divestiture are available here.

The post Obama on TVA: Time to Transfer to Help Mitigate Risk to Taxpayer appeared first on Reason Foundation.

TVA is a federally owned power company yet it pays its executives at the private sector level. If retaining an executive to head a federal agency requires this high level of compensation (as TVA asserts), it is time for policy makers to revisit TVA’s existence as a federal agency and make the entire entity, not just its pay scales, comparable to private firms to which its executives’ compensation packages are compared.

Like other federal employees, Johnson’s base salary of $708,000-close to double the president’s salary-was frozen last year under the federal pay freeze but remains a hefty amount by most standards. And his base salary accounts for just 12 percent of his total compensation last year; most of what was paid to Johnson last year came from performance incentives of nearly $2.6 million and deferred compensation payments of $2.06 million, according to the Chattanooga Times Free Press.

Johnson is not the only TVA employee to out-earn the president. TVA’s chief financial officer, John Thomas, was paid $2.1 million in 2013, and its chief counsel, Ralph Rogers, was paid $1.9 million. Preston Swafford, TVA’s chief nuclear officer, earned $1.9 million through August when he left TVA (plus an additional $552,488 as severance). Swafford will also be eligible for executive bonuses and incentive awards paid to top managers this year.

But for Tennessee Valley Authority being an agency of the federal government, there is nothing objectionable about TVA’s Board of Directors compensating its executives at these high levels. Executive compensation is an essential element of managing risk and providing incentive. With $10.9 billion in operating revenues and $44 billion of assets on its balance sheet, TVA’s CEO and other leaders have major responsibilities in this large, complex organization. TVA is close to, if not, the biggest producer of electricity in the nation, as measured by megawatt hours produced. According to its latest annual report, TVA operates six nuclear plants (with a seventh being built) and a range of other power-generating facilities, has roughly 16,000 miles of transmission lines, manages and services $26 billion in debt, and employs 12,600 people.

In fact, if TVA was a Fortune 500 utility, Johnson could be considered underpaid relative to CEOs of other utility companies comparable in size and complexity. In its recent Securities and Exchange Commission filing, the Tennessee Valley Authority stated that Johnson’s pay of $5.9 million is still below average in the industry. According to the Times Free Press, compensation consultants Towers Watson said the average CEO of a comparable size utility was paid nearly $6.8 million in total compensation last year.

So if Johnson’s compensation at TVA is reasonable, even less than other executives in similar positions, what’s the issue? The problem is that TVA is an agency of the federal government. If the federal government needs to pay the agency’s CEO at that level, it is but another reason why TVA should no longer be part of the federal government, something the Obama administration is exploring.

There are two ways to rectify the issue of TVA-a public sector service-offering private sector compensation. The first option is to align its executive compensation with other federal executive employees by utilizing the federal government’s Executive Schedule. TVA’s chief executive officer would be compensated the same as the secretary of energy, for example, as they would both be classified as Executive Level 1 employees. As of January 1, 2012, an Executive Level 1 federal employee’s annual salary is $199,700. It is interesting to note that when the Alaska Railroad was owned by the federal government, much like TVA, its executives were paid under the federal government’s General Schedule, which offers lower compensation levels than the Executive Schedule. And when Conrail, a freight railroad based largely in the Northeast and Midwest, was owned by the federal government, its chief executive officer was paid $200,000 ($420,000 in today’s dollars), with no bonus-a fraction of Bill Johnson’s base salary. That said, the likelihood of either Congress or the TVA Board of Directors reducing the CEO’s compensation this significantly is nil, which leads to consideration of a second option.

The second-and better-option is to make the Tennessee Valley Authority become more like the utilities it compares itself to when determining its executives’ compensation. Divesting the TVA-just as the federal government divested both the Alaska Railroad and Conrail-thereby subjecting the compensation of TVA’s CEO and other executives to board members elected by and accountable to shareholders, is the sensible path to pursue. TVA executives should not only be compensated like executives at comparable utilities, but also should operate in the same environment as comparable utilities and be subject to the same economic forces as other utility executives, be it investor-owned utilities or non-federal public power utilities.

William B. Newman, Jr., is Senior Adviser to HC Project Advisors in Washington, DC. He is a former executive of Conrail and worked on Conrail’s successful sale by the federal government. Conrail was sold in an initial public offering in 1987, then the largest initial public offering in history.

The post The Highest Paid Federal Employee Is Not the President appeared first on Reason Foundation.

The administration’s rationale is eminently reasonable. First, it notes that, “Reducing or eliminating the Federal Government’s role in programs such as TVA, which have achieved their original objectives and no longer require Federal participation, can help put the Nation on a sustainable fiscal path.” Second, the TVA already has $22.3 billion in debt outstanding, and the administration estimates that its current capital investment plan includes more than $25 billion of expenditures over the next 10 years, which could result in it exceeding its statutory $30 billion debt limit. As TVA notes in its most recent annual report, “TVA faces potentially large capital requirements to maintain its power system infrastructure and invest in new power assets, including generation assets using cleaner energy sources.”

The TVA’s primary function is power generation and transmission, hardly a necessary federal function given the ubiquity of private sector power provision in this country. In addition, TVA provides navigation maintenance on and flood damage reduction from the Tennessee River and its tributaries. These latter functions can be assumed by other appropriate federal agencies under any divestiture option. In any case, TVA ratepayers shouldn’t be subsidizing these functions through their electricity rates as they are today.

Divestiture, in whatever form, would bring two major benefits to taxpayers. First, according to the Congressional Budget Office, a divestiture of TVA would avoid adding roughly $10 billion to the federal deficit over the next decade through additional capital outlays (less the cost to the federal government of assuming the navigation maintenance and flood danger reduction functions of the TVA). Absent divestiture, TVA’s increased capital expenditures are scored in the federal budget as increased outlays, thereby increasing the deficit. Second-and much more importantly-a divestiture of TVA avoids another bailout of a “Too Big To Fail” government sponsored enterprise, not unlike Fannie Mae and Freddie Mac. By law, TVA’s bonds are not backed by the federal government; nonetheless they dropped in value on the day of the announcement of the administration’s budget because investors believe that, regardless of the statutory language, the federal government would ultimately bail out the TVA if it were unable to honor its debts. A divestiture would make such a taxpayer bailout considerably less likely.

Opponents of divestiture argue that the risk of a future financial meltdown resulting in a bailout is low. That may be true but even so, what’s the downside of divestiture? None. Such a scenario begs the question: other than waiting in the wings for a potential future bailout of TVA, why have continued federal ownership?

How then might the federal government divest TVA’s power generation and transmission functions? Three options seem worth evaluating: a public offering, an asset sale and a divestiture to the states. Let’s consider these in turn.

Public Offering of TVA Stock or Asset Sale

TVA could theoretically be divested either through an asset sale, or an initial public offering (IPO), as were Conrail and the United States Enrichment Corporation. Yet, some might rightfully question what the likely proceeds of an IPO might be for a corporation with 1) $22.3 billion in debt; 2) $25 billion in needed capital investments over the next 10 years; 3) an estimated multi-billion dollar unfunded liability in its pension plan, and; 4) paltry earnings (its 2012 annual report shows $60 million on $11 billion revenue and $46 billion in assets, representing a 0.5% return on sales and .01% return on assets). For the federal government, a sale of TVA would be less about the proceeds garnered and more about the risks shed, but Wall Street is not likely to be able to take TVA public in the short-to-mid term, as the enterprise has not been managed so as to attract equity investors.

Depending on what is done with the TVA Act of 1935 after an IPO-and it would probably need to be repealed to attract investors-TVA would operate largely as it does today, maintaining similar relationships with its management, employees, retirees, customers, bondholders, suppliers and distributors. But shareholders, not the federal government, would own the corporation, elect the board of directors, and expect a return on their investment. It is the need to provide a competitive return to shareholders that frightens those who argue for continued federal government ownership. However, the obligation to provide a return to the shareholders would also provide TVA with greater access to capital via the equity markets.

Instead of paying the five percent of its gross power revenues (not including sales to other federal agencies or utilities) payment-in-lieu-of-taxes to states and counties today, an investor-owned TVA would pay taxes to the states and counties as other businesses do. TVA paid the federal government $27 million this past year in repayment for the initial government funds appropriated for TVA’s power program and a return on those appropriated funds equal to the average interest rate payable on treasury obligations, which presumably it would no longer pay were to go public. Given its upcoming capital expenditures, TVA would have a significant federal tax shield, paying little or no federal taxes, as it does today. And the market-not Congress-would determine the proper amount of debt TVA should carry.

Alternatively, the federal government could bundle TVA’s assets in a manner that would provide for the sale of the most assets for the most proceeds, auctioning any remaining assets. But there are several hurdles with respect to an asset sale:

• Buyers would have every incentive to take as little of the workforce as possible, thereby upsetting the existing TVA workforce.
• Similarly, buyers would be acquiring assets, not liabilities, so TVA’s underfunded pension plan would not be purchased.
• Buyers would not be bound by TVA’s contracts with its distributors.
• Bondholders would be concerned that the market value of TVA’s assets is less than the book value, leaving them in the lurch and potentially prompting them to seek an assurance that they will be kept whole by either the federal government or the new owners of the assets. Failing to secure such an assurance, bondholders likely would oppose an asset sale.

In short, the number of parties who believe that they would suffer adversely from an asset sale makes a sale of TVA’s assets far less likely than a stock sale or transfer.

Divestiture to the States

Another way to divest TVA from the federal government would be to give TVA to some or all of the states in which it operates. There is precedent for this; the federal government all but gave the Alaska Railroad to the state of Alaska in 1985, selling it for a mere $22 million, which was tantamount to giving it away. TVA could be incorporated under state law, and each state in which it operates would get a percentage of the stock based on one or more metrics, such as the allocation of revenues, assets or employees by state. Congress could authorize the Department of Energy to work with the TVA board to devise a fair stock allocation methodology.

For example, using TVA’s 2012 operating revenues as the determinative metric, the stock would be allocated as follows:

• Tennessee: 62.25%
• Alabama: 14.06%
• Kentucky: 11.1%
• Mississippi: 9.38%
• Georgia: 2.22%
• North Carolina: 0.62%
• Virginia: 0.44%

Divestiture to the states could be the least disruptive option if they were afforded maximum flexibility as they assume their new non-federal responsibilities. The day after the divestiture, operations could be as they were the preceding day. TVA would look like most other public power entities, with the states determining the policies to assume and the direction they want TVA to move, through an elected board of directors. States could decide whether the stock should be negotiable-and when and with whom it is negotiable-and whether the other TVA states would have a right of first refusal when one state offers to sell some or all of its interest.

After all, some of these states, particularly those in which TVA’s presence is relatively small-Georgia, North Carolina and Virginia-may want to sell their holdings. Just as the federal government has several options with respect to divestiture of TVA, if any or all of the TVA states decided for any reason to dispose of their stock holdings, those states could sell their shares through an IPO, sell the assets, or sell their stock to one or more private purchasers (such as a neighboring utility or utilities or TVA distributors), thus eliminating the risk of “Too Big To Fail” for state taxpayers, too.

Repeal or Amendment of the TVA Act and Other Predicates to Divestiture

Any divestiture plan would require a determination of what should be done with the TVA Act of 1935. There are multiple options. Upon the actual divestiture, the entire TVA Act could be repealed (along with related provisions in other federal laws). Among other things, a total repeal would shed the $30 billion statutory debt cap, some antiquated provisions related to national defense, and anti-competitive legal restrictions that include what’s known as the “fence,” as well as the “anti-cherrypicking” provision in the Federal Power Act. The “fence” was enacted to stop TVA from expanding beyond its existing service territory, and the “anti-cherrypicking” provision was enacted to keep potential competitors out of TVA’s service territory. Both provisions are profound barriers to competition and deprive TVA consumers of other sources of power, as well as depriving TVA of the authority to be an alternative power supplier outside of its service territory.

Policymakers may be tempted to retain the TVA Act’s “fence,” and the “anti-cherrypicking” provision in the Federal Power Act in some form, while repealing the remainder of the TVA Act-or at least those provisions that overtly stand in the way of divestiture-thereby changing only the ownership of the entity. However, this would be ill-advised, as retaining the “fence” and “anti-cherrypicking” provisions would preclude any new owner from effectively managing the entity.

In any event, there would need to be a short period of time-perhaps a year, after enactment but before actual divestiture-allowing for the transfer of the non-power and non-transmission functions to other federal agencies, the determination of the stock allocation methodology, and preparations for the final transfer of stock.

In the case of a divestiture to one or more states, a waiting period would give each state one year after enactment of the federal law to prepare its laws to receive the stock and manage its ownership, including decisions about where in each state to house its ownership of TVA, how the state will cast its board vote, and how it will regulate the new state-owned TVA. For example, assuming ratemaking is no longer done by the TVA board without legal redress for disputes-as it is under the current federal law-the state of Tennessee would probably want to give the Tennessee Regulatory Authority jurisdiction over TVA’s in-state electric rates to protect ratepayers from unreasonable electric rates and practices and assure legal redress of disputes.

Conclusion

TVA no longer requires federal participation, and there are several potential paths toward divestiture. Overall, from the federal perspective, the primary objectives of any divestiture plan should be deficit reduction, risk management and removing itself from a non-essential function. If the federal government moves forward with divestiture, which it should, it will have assigned the risks associated with TVA to the beneficiaries and stakeholders of TVA, thus shielding taxpayers from another “Too Big To Fail” situation.

William B. Newman, Jr., is Senior Adviser to HC Project Advisors in Washington, DC. He is a former executive of Conrail, and worked on Conrail’s successful sale by the federal government. Conrail was sold in an initial public offering in 1987, then the largest initial public offering in history.

The post Obama and Reagan Agree: Divest the Tennessee Valley Authority appeared first on Reason Foundation.

In May, the U.S. Fish & Wildlife Service gave San Diego wind power company Terra-Gen an exemption from prosecution if a turbine on its proposed wind farm 100 miles north of Los Angeles accidentally kills a California condor, one of the rarest species in America.

By exempting Terra-Gen from liability if its wind turbines kill a condor, the federal government has given the company a break that, based on how it implements the Endangered Species Act, it would likely never give to oil or coal companies.

It’s hard to overstate the symbolic importance of the condor to the federal government and environmental groups. The condor is one of the “poster species” of efforts to protect and save endangered species. By the 1970s, biologists realized that the condor was headed for extinction in the wild. So, in 1982, with the blessing and help of the federal government, zoos began a captive breeding program, and in 1987 the last wild condor was taken into captivity. The program has been successful. This year the condor population is up to around 400, with more than half of them in the wild.

However, soon after releases into the wild began it became apparent that condors could not survive without human-supplied carrion and that large numbers of condors suffered lead poisoning from bullets ingested from carcasses of sport-hunted animals. And now a new threat to has emerged in the form of wind turbines, which kill at least 600,000 birds annually. The turbines are a particular hazard to large, soaring birds, like condors, because they frequent the same windy ridgelines and hillsides that are also good sites for turbines.

One might have expected most of the big environmental groups to be up in arms about the government’s condor exemption. After all, they rarely miss an opportunity to oppose the construction of roads, power plants or even new school buildings that pose any potential threat to endangered species. Yet in the case of wind turbines, many environmentalists are exhibiting willingness to compromise.

“We want to see wind prevail, but we also want to see it done smartly [when it comes to the condor,]” Kim Delfino of Defenders of Wildlife told National Public Radio’s Marketplace in an unusually frank admission of her group’s priorities.

Terra-Gen’s spokesman on condor habitat, Greg Wetstone, previously led the Natural Resources Defense Council’s government affairs efforts. In 2001 Wetstone opposed the nomination of Gale Norton as Interior Secretary because he said “she will not enforce laws with which she disagrees,” such as the Endangered Species Act. Now, however, Wetstone thinks the Interior Department shouldn’t enforce the Endangered Species Act for his company’s proposed wind farm.

The threat to the condor from wind turbines and the exemption granted to Terra-Gen’s planned wind farm underscores some of the problems with government picking winners in the marketplace. In its push for wind power, the government is providing preferential treatment and ignoring very real environmental costs. Many experts believe it’s only a matter of time before a wind turbine kills a condor. If or when that happens, the environmental costs of wind power may finally become widespread knowledge and spur policy changes on the special treatment government gives to “green” companies.

Brian Seasholes is a research fellow at the Reason Foundation. This column first appeared in the Orange County Register.

The post Cronyism Threatens California Condors appeared first on Reason Foundation.

Environmentalists advocate wind power as one of the main alternatives to fossil fuels, claiming that it is both cost effective and low in carbon emissions. This study seeks to evaluate these claims.

Existing estimates of the life-cycle emissions from wind turbines range from 5 to 100 grams of CO2 equivalent per kilowatt hour of electricity produced. This very wide range is explained by differences in what was included in each analysis, and the proportion of electricity generated by wind. The low CO2 emissions estimates are only possible at low levels of installed wind capacity, and even then they typically ignore the large proportion of associated emissions that come from the need for backup power sources (“spinning reserves”).

Wind blows at speeds that vary considerably, leading to wide variations in power output at different times and in different locations. To address this variability, power supply companies must install backup capacity, which kicks in when demand exceeds supply from the wind turbines; failure to do so will adversely affect grid reliability. The need for this backup capacity significantly increases the cost of producing power from wind. Since backup power in most cases comes from fossil fuel generators, this effectively limits the carbon-reducing potential of new wind capacity.

The extent to which CO2 emissions can be reduced by using wind power ultimately depends on the specific characteristics of an existing power grid and the amount of additional wind-induced variability risk the grid operator will tolerate. A conservative grid operator can achieve CO2 emissions reduction via increased wind power of approximately 18g of CO2 equivalent/kWh, or about 3.6% of total emissions from electricity generation.

The analysis reported in this study indicates that 20% would be the extreme upper limit for wind penetration. At this level the CO2 emissions reduction is 90g of CO2 equivalent/kWh, or about 18% of total emissions from electricity generation. Using wind to reduce CO2 to this level costs $150 per metric ton (i.e. 1,000 kg, or 2,200 lbs) of CO2 reduced.

Very high wind penetrations are not achievable in practice due to the increased need for power storage, the decrease in grid reliability, and the increased operating costs. Given these constraints, this study concludes that a more practical upper limit for wind penetration is 10%. At 10% wind penetration, the CO2 emissions reduction due to wind is approximately 45g CO2 equivalent/kWh, or about 9% of total.

Attachments

• The Limits of Wind Power

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Spain was one of the first nations to embrace subsidized green energy, but with unemployment now at nearly 23 percent, Spain recently halted all new subsidies to renewable energy. In 2009, economists from King Juan Carlos University in Spain found every green job created in Spain cost nearly $750,000, including a staggering $1.3 million for every job created in the wind industry. And for every green job created in the country, the private sector could have created at least 2.2 jobs using the same resources.

These policies did little to make renewable energy more efficient. But instead of passing the high costs on to consumers, Spanish utilities have been required to eat the losses, racking up $32 billion in state-backed debt by the end of 2011. If companies actually charged what it costs to deliver green energy, Spanish citizens would be paying roughly $4 to $5 billion more in energy bills each year.

Even as President Obama vowed he “would not walk away from the promise of clean energy” or “cede the wind or solar or battery industry to China or Germany because we refuse to make the same commitment here,” German officials were debating whether to cap, reduce, or scrap the country’s subsidies to solar.

Germany is home to nearly half of the world’s solar panels, which is to produce 7 percent of its energy needs – if the sun was always shining. But the sun does not always shine, so they actually only produce 3 percent of the country’s energy (solar accounts one-tenth of one percent of America’s energy). In recent weeks, Germany’s solar panels have produced almost no electricity, due to overcast skies and winter’s short days.

This inconsistent energy source has cost Germans more than $130 billion in subsidies to date, including more than $10 billion last year. Unlike Spain, higher costs are passed on to the consumer, and Germans, who already pay the second highest electricity bills in the E.U., can expect to pay more than $250 in higher bills this year.

One thing that Germany, Spain, and U.S. have in common is their tendency to promote one type of energy and lambast others. Last year, following the panic from the nuclear power plant disaster in Japan, German officials voted to phase out all of the country’s nuclear power plants – even though Germany’s vast solar energy systems produce less electricity than two of the country’s remaining nine nuclear plants (8 plants were forced to close in 2011). Siemens recently estimated that the exit from nuclear power could cost German families more than $2 trillion by 2030, roughly two-thirds of the country’s GDP.

Here in the U.S., government officials are quick to deride energy sources that have fallen out of favor (oil, coal, nuclear) and promote less reliable, trendy sources of energy. In 2007, President George W. Bush said, “It’s in our vital interest to diversify America’s energy supply, and the way forward is through technology. We must continue changing the way America generates electric power by even greater use of clean-coal technology; solar and wind energy; and clean, safe nuclear power.”

The Obama administration has followed up by pouring billions of dollars into renewable energy sources.
A U.S. Energy Information Administration report found, “The value of direct federal financial interventions and subsidies in energy markets doubled between 2007 and 2010, growing from $17.9 billion to $37.2 billion.” In 2011 alone, $12.2 billion in loan guarantees were doled out to green energy companies, the same program that gave Solyndra $535 million. President Obama just called for an “all-of-the-above strategy that develops every available source of American energy.”

The best thing President Obama and Congress could do for the nation’s energy future would be to remove the subsidies and corporate welfare programs that prop up Solyndras and benefit everyone from green energy startups to oil companies. It can be done. Even the long-protected ethanol tax credit was finally allowed to expire at the end of 2011, after 30 years of fleecing taxpayers.

Instead of wasting billions of taxpayer dollars on inefficient energy programs, the best long-term policy is to level the playing field and let consumer demand determine the winners.

The post Should We Double Down on Clean Energy? appeared first on Reason Foundation.

The “Mercury and Air Toxics Standards” (MATS) is the first of its kind to require installing expensive equipment on over 700 power plants. It has been estimated that this, and other related regulations, will shut down nearly ten percent of coal generating electricity in the country. This could be considered worth the cost if the regulation produced a significant impact on public health.

Clean air is an important aspect of a healthy society and its economy. And mercury, when exposed at high concentrations, is a dangerous neurotoxin. But despite its name, the regulation does almost nothing to reduce mercury or toxic emissions. Less than one-tenth of one percent of the regulation’s benefits come from reductions in mercury. But this fact has not stopped the EPA and its supporters from exaggerating the regulation’s benefits.

EPA Administrator Lisa Jackson said of the rule, “By cutting emissions that are linked to developmental disorders and respiratory illnesses like asthma, these standards represent a major victory for clean air and public health – and especially for the health of our children.” The Center for American Progress claims that “slashing mercury and other contaminants will save 11,000 lives annually” and “provide economic benefits” that the EPA estimates to be between $33 and $90 billion. With these kinds of figures, surely mercury exposure is an epidemic destroying our economy and families.

Hardly. For a regulation that will cost $10 billion a year, the EPA estimates a benefit of only $500,000 to $6 million in benefits from the reduction of mercury.

So how does one get from $6 million to $90 billion in benefits? The answer lies in what is essentially a bait and switch accounting trick at the hands of the EPA. Almost all of the regulation’s “benefits” come from the reduction of soot. Soot, or “particulate matter,” develops both naturally from forest fires, volcanic ash and through man-made processes including cars, power plants, and even dust from unpaved roads. Even if the reduction of soot was an appropriate use of industry and taxpayer resources, there are three main problems here.

First, the EPA already regulates soot through other national standards. Second, since MATS focuses on reductions of mercury and toxic emissions, the EPA can only count health benefits for reductions in soot already below the level it currently considers safe through soot national standards — otherwise they would be double counting.

Third, if the EPA can identify up to $90 billion in health benefits from one set of regulations, one could logically conclude that the EPA should spend more time focusing on the reduction of soot from all industries across the country. But the EPA isn’t doing that.

Under the Clean Air Act, the Agency is required to review current science every five years and set standards accordingly. The EPA missed this deadline in October and announced last month that it would delay setting new standards until June 2013. The Agency stated that reviewing all of the relevant science associated with exposure to soot is “a massive undertaking.”

The EPA’s estimates for MATS are based on two cherry-picked studies that affirm the data that toe the line of the Agency’s objectives. Harvard toxicologist Dr. Julie Goodman recently told a House committee that “the fact that EPA only considered studies that suggested an association [between soot reductions and health] means that it conducted a biased assessment of the available data.” She noted that “dozens of other studies are available and many report no such correlations.”

MATS claims to target one pollutant but draws all of its benefits from another pollutant that is already below EPA-approved safe levels. The air is cleaner than it’s ever been, but at $10 billion a year, MATS will be the most expensive EPA air regulation ever. Last week, the closure of nine power plants in four states was announced directly because of the regulation, and more are looming. Affordable energy is key to a recovering economy and when the costs and benefits are weighed, it’s clear that this regulation’s costs are enormous and the benefits to society are minimal at best.

Adam Peshek is a research associate at the Reason Foundation.

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