Deploying clean energy
Overcoming regulatory barriers for your clean energy project.
Many of the world’s best brains are focused on reducing fossil fuel use to mitigate climate change. Strangely, little attention is paid to the source of the greatest inefficiency — the generation of heat and power, which accounts for 69 per cent of carbon dioxide emissions. Capturing and recycling the currently wasted energy could displace nearly 30 per cent of U.S. fossil-fueled generation, slash U.S. CO2 by 20 per cent, and save $150 to $250 billion per year.
December 17, 2008 By Thomas R. Casten
Such numbers sound too good to be true, largely because everyone assumes electric utilities and large manufacturers must be optimally generating their electricity and thermal energy. That assumption, however, is totally flawed. In fact, current energy and environmental regulatory policies block the deployment of clean and efficient generation.
That these barriers exist is proven by the fact that the power industry has made no overall efficiency gain in the past five decades, since Dwight Eisenhower occupied the White House. Electricity generators burn three units of fuel to deliver just one unit of power, resulting in an efficiency rate of only 33 per cent. Monopoly utility regulation had already stopped efficiency gains when Congress enacted the 1970 Clean Air Act, which failed to recognize efficient generation as pollution control and inadvertently penalized investments in efficiency.
In fairness, global warming and problems with fossil fuel use were not on the radar screen when monopoly regulations were formulated or when the Clean Air Act tackled air quality. But these rules block efficiency and force society to pay to warm the planet. Since the needless release of carbon dioxide is threatening life as we know it on earth, these rules must be modernized.
How is it that true markets drive optimal efficiency, but electric generation efficiency stays frozen? Producers in truly competitive markets face constant threats of value destruction when entrepreneurs build more efficient capacity. Economist Joseph Schumpeter named this process “creative destruction,” noting that competitors build new production to undercut the prices of existing producers, even when existing production capacity exceeds market demand. Facing constant threats of lost sales, producers in free markets must continuously reduce costs and increase efficiency or lose market share. In Schumpeter’s view, the freedom to build more efficient production facilities creates more value than it destroys, allowing society to enjoy an improved standard of living.
This creative destruction is largely blocked for electric generation. The electric industry operates as a planned economy with monopolists and regulators adopting five-year rate plans and other protectionist policies that block entrepreneurs from building more efficient, cleaner generation. Most regulations were never designed to address current problems such as climate change, or reflect outmoded technology and fuel options. Society would benefit by modernizing these rules. Until that happens, entrepreneurs wanting to build more efficient generation will continue to be blocked by the barriers inherent in these obsolete rules.
Consider outright barriers, policies that block or severely penalize non-utility generation. All Canadian provinces and all U.S. states, for instance, have century-old bans on transmitting electricity through private wires that cross any public property. Such legal prohibitions allow distribution monopolies to kill distributed generation. Local energy developers, in fact, are forced to sell power to their competitor at a low price. Even the few territories, such as Alberta and Texas, which require monopoly distributors to move an independent’s power, still allow ‘postage-stamp’ rates that reflect the cost of transmitting electricity across the entire territory, even though the power actually moves to the nearest users.
Roughly 15 states ban any non-utility entity from selling electricity directly to any consumer. An entrepreneur recycling waste energy from a steel smelter, for instance, is forbidden from selling power to that smelter and is left selling the power at a discount to the local utility monopoly, even though the electrons will flow to the host without ever entering the utility’s transmission and distribution system.
Other barriers are value deniers that prevent local generators from being compensated for the benefits they create. For instance, electricity from distributed generation, regardless of who purchases the power, always flows to the nearest users and thus reduces demands on the existing transmission and distribution system. As a result, line losses drop, benefiting all users. In fact, since line losses are proportional to the square of current flow, a little bit of local generation provides significant benefits. Yet local generators seldom, if ever, receive any value for reducing line losses or for enabling society to avoid investments in new transmission and distribution wires. PJM Interconnection and the New England ISO recently provided some locational value to local generation, but most jurisdictions do not pay clean local generation for avoided transmission capital or for line-loss savings.
Noting that an assortment of power plants is more reliable than a single generator, local generation significantly lowers the requirement for redundant generation and transmission capacity. Recent studies at Carnegie Mellon University show that a system of many distributed generators, having three per cent to five per cent redundancy, would provide the same system reliability as the current system of large central generators with 18 per cent redundancy. Deploying efficient local generation across the U.S. and Canada would eliminate the need to invest $350 to $500 billion in redundant generation and associated transmission and distribution wires. Yet regulatory commissions seldom, if ever, pay local generation anything for reducing system redundancy requirements.
Finally, playing field tilters provide differential advantages to existing or new electric-only generation plants versus local units that recycle wasted energy. In fully regulated provinces and states, commissions raise rates to provide target returns to the utility, which effectively guarantees profits on all approved utility investments, at the expense of ratepayers.
By contrast, more efficient local generation plants receive no comparable financial guarantees, making their capital either more expensive or even impossible to obtain. Territories with deregulated generation no longer provide such ratepayer guarantees, but it remains to be seen whether anyone will build new capacity with neither a rate guarantee nor a long-term contract. Society could level the playing field either by guaranteeing capital returns to both central and local generation, or by giving no guarantees to either approach but providing long-term contracts to power plants deemed to best serve society.
The bad news is that all of these regulatory barriers block efficiency. The good news is that efficiency opportunities abound, so efficiency will improve as soon as policy barriers are removed.
Thomas R. Casten (email@example.com) is chairman of Recycled Energy Development LLC and spent 30 years developing decentralized energy recycling projects.
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