Smart Grid, Dumb Economics
Yesterday, the National Clean Energy Product Summit was held in Washington, DC to discuss the Center for American Progress’ s February 2009 white paper titled “Wired for Progress: Building a National Clean-Energy Smart Grid.” Participants included Steven Chu, Al Gore, Robert F. Kennedy Jr., T. Boone Pickens, Bill Clinton, Nancy Pelosi, Harry Reid, and pretty much everyone else who thinks they know a priori how to most efficiently organize and manage the electricity sector. As one might expect, no good came of it.
There is no doubt that, if we’re going to build more central station wind, solar, or nuclear power plants, we’re going to have to build more wire to get that electricity to consumers. But the price signals we’re seeing in electricity markets suggests that building a small number of remote power stations with a lot of wire to get that power to market is less efficient than building a relatively large number of smaller, more accessible power stations with fewer long distance transmission lines. The reason we don’t have more long distance transmission, after all, is because it has been more than 30 years since large central station power plants made more economic sense than smaller, more local power generation.
What almost everyone on both the Left and Right miss is that transmission and generation are economic substitutes for one another. The optimal (most efficient) mix of the two is an economic puzzle, not an engineering puzzle, and the best means of solving that puzzle is to ensure that prices for both are correct and to then let market actors to sort this out.
Ironically, it may very well be that, to the extent that there is suboptimal investment in transmission, the culprit is primarily vertical de-integration, not local “not-in-my-back-yard” sentiment. That is, the wave of state-induced restructuring (popularly but inaccurately known in some quarters as “deregulation”) might be the real problem here.
As an aside, it’s interesting to me that the Left is all a-gog over a massive federal program to build this transmission super-highway and in so doing preempt state siting authority. Since when did the Left support dropping the hammer on local communities or property owners who object to development because of concentrated costs and diffuse benefits? And haven’t many of these same parties at one time or another echoed Amory Lovins and evangelized for “distributed energy” - that is, an electric power system characterized by neighborhood or even on-site power generation and a correspoding abandonment of the “big power, big-wire” model?
I don’t have any brief one way or the other, but I can’t believe that central planning works surprisingly well when it comes to electricity markets but, for some mysterious reason, not very well anywhere else. The fact that the grid at present is essentially a public commons certainly requires some central planning from somebody just to stay in operation. This implies the need for policies to privatize that commons and return the electricity planning back to market actors.
Update: Lynne Kiesling comments on the conference and nicely hits another issue – the “smart” part of the grid conversation that is frequently overlooked. My take - when residential consumers get – and pay! – accurate price signals for the electricity they are buying, pigs will fly.