Bush on Energy--Incongruous?

[jshore]

Sam Stone,

Here is a link to an article on the subject; I don’t think it is the article that I actually was thinking of, but it does have some critiques of why the market system might fail with electric power: http://www.prospect.org/print/V11/21/roberts-w.html

Actually, it talks about the problem not of volatility but of meeting peak loads. A quote from the article:

As George C. Loehr, an industry consultant and former executive director of the Northeast Power Coordinating Council, says, “In the past, utilities had an ‘obligation to serve’ all of the load all of the time… . Thus they planned, built, and operated as much generation as was required by the peak load [the highest demand the system faces during a year]. But today there is a real question as to whether, in an industry driven by competition and the marketplace, investors will be willing to commit financial resources to supply customer load, which will be realized only a few hours a year.”

Richard O’Neill is the chief economist at the Federal Energy Regulatory Commission (FERC), which has been at the vanguard of the campaign to deregulate. He was asked recently how a free market could guarantee that sufficient plants would be built to provide an adequate capacity margin, and he was unable to answer. Three times he started to explain, only to end up saying, “Someone will probably have to …”–and then he’d break off. To finish that sentence, of course, would be to advocate new regulations.

I have some mixed feelings on this because I worry that regulation, as it is done, can give people too little incentive to conserve power, as you point out.

Ah…Actually, this is the article that I think I read most recently: http://www.prospect.org/print/V12/4/schrag-p.html
The relevent part is mainly the last third of the article, starting with the paragraph

Such second thoughts are powerfully reinforced by the slow emergence of fundamental economic arguments pointing out how different electricity is from all other commodities–or from phone service or the airline industry. In an important analysis, Richard Rosen–executive vice president and director of the Energy Group at the Tellus Institute, a Boston consulting firm–and two of his colleagues conclude that “even under the best of circumstances, the deregulation of the electric industry cannot be trusted to deliver on its many promises.”

Anyway, I don’t exactly know where I come out on the whole deregulation of electricity thing, but I thought I would throw out these articles for your perusal.

[Sam_Stone]

Please remember that you are reading an extremely biased source. The problem of peak demand has been addressed in market models. Specifically, energy becomes extremely expensive at peaks, because power companies have to kick in expensive generators or run the current ones above normal operating capacity. The real cost of power can be as much as 100 times more expensive during peak than off-peak.

This presents several market-based solutions. First, if a company was charged for their power on a sliding rate that adjusted for demand throughout the grid, then it would factor that added cost into its business decisions. This may prompt them to cut back peak power demand by time-shifting a production run, or working off-hours, etc. Likewise, if consumers know that power between 5 and 6 PM is much more expensive than at 7 PM, they are more likely to shift the night’s laundry ahead an hour.

Allowing the power company to charge true cost does two things then - first it compensates them for supplying peak power, which means that they have an incentive to improve that part of their company. Second, it provides an incentive to the public to stop demanding those peaks, which will make it easier on the power companies and reducing our overall consumption of resources.