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Solar isn’t the cause of high electricity costs – It’s the outmoded utility business model

This piece was published in Commonwealth Magazine on March 29, 2016

 

Like many utilities across the country, National Grid blames high electricity costs on net metering while claiming to protect ratepayers. But that’s not the real reason utilities object to this highly successful policy that enables ratepayers to take control of their own energy future and use independently owned electricity generation to reduce and stabilize their utility costs.

In fact, it isn’t net metering or the way we compensate solar generators, but the inadvisable way that we compensate utilities that is the primary cause of our escalating electricity bills.

Electricity costs are high in large part because of our outmoded utility business model. Though obscured by all sorts of technical and regulatory complexity, the basic utility business model is really very simple. Regulation and rate-setting for utilities is designed in a way that encourages utility investment in distribution system improvements. The more utilities can persuade regulators to allow them to invest, the more they earn. That basic driver of utility revenue in our regulatory system is the fundamental reason that everyone’s electricity bills are so high.

In his commentary in CommonWealth, Ed White, senior vice president at National Grid, implies that the utility is not concerned with reduced electrical demand that would result from large-scale solar deployment. He references electric rate decoupling, which uncouples a utility’s profits from its sales of electricity and instead provides utility revenue based on meeting service goals approved by regulators. He suggests that “National Grid and our fellow utilities have led programs that have made Massachusetts No. 1 in the nation in energy efficiency.” What he doesn’t mention is that, unlike with net metering, utilities earn a good financial return for their role in energy efficiency programs.

Even with decoupling, solar projects connected directly to the distribution system reduce the key drivers of utility revenue. The real problem with local solar for utilities is not a reduction in the sales of electricity, but rather a reduction in the need for additional distribution system investments.

Local solar generation tied directly to the distribution system also reduces peak demand and the long-term need for the utilities’ very profitable transmission services, which are governed by entirely different regulators and rules. National Grid and Eversource own about 80 percent of the New England transmission system, which costs ratepayers twice as much as any other transmission system in the country.

Numerous studies have shown independently owned, locally connected solar generation provides value for all ratepayers that significantly exceeds costs to ratepayers, with benefits like reduced need for distribution system investment and transmission services. Even the Massachusetts Net Metering Task Force that National Grid and Eversource took part in has confirmed that. Reducing these costs to ratepayers means reduced profits for utilities.

White suggests that: “The bottom line is that we support efficient investments of our customers’ dollars.” But unlike competitive businesses in which cutting costs and delivering services more efficiently is rewarded with higher profits, the monopoly utility compensation model encourages more utility spending in order to increase their shareholder revenue. The utilities’ real objection to net metering is not an altruistic defense of ratepayers, but protection of their own financial interests. The real bottom line is the bottom line on National Grid’s income statement.

Utilities have been granted monopoly status in the distribution business in return for providing critical services maintaining wires, transformers, and other infrastructure that would be inefficient and unwieldy to deliver through multiple providers. Legislators and regulators should assure that markets for other energy services that are better delivered through competitive providers are not restrained or distorted by the financial interest of monopolies.

The 1997 Massachusetts electric utility restructuring act required distribution utilities to get out of the electricity generation business. Restructuring was intended to lower electricity costs, reduce long term risk to ratepayers, keep monopoly utilities from distorting energy markets by unfairly competing with independent generators, and encourage utilities to become less resistant to innovative solutions.

The upcoming omnibus energy bill provides legislators with an opportunity to address the real cause of high energy bills. Legislators should require the Department of Public Utilities to finish the work started under the electric utility restructuring act and rethink the role of monopoly distribution utilities. Leading states, including New York and California, have already started this important work.

Rather than the inflexible centralized utility system we have today, utility distribution should be reconfigured as an open platform enabling independent service providers to competitively sell energy, efficiency, demand response, energy storage, and other innovative services to help ratepayers stabilize and reduce their utility costs.

Former New England Electric System CEO John Rowe suggested in 1989 that if we want utilities to change, “the rat must smell the cheese.” We should be paying utilities less for business as usual and reward them much better for transforming their systems to enable all kinds of transactions between independent energy services providers and their customers. Appropriate mechanisms for the utilities to earn a reasonable return on facilitating and integrating third-party and customer-driven energy solutions should be developed. Let’s reward the utilities for moving into the future rather than clinging to a sclerotic old business model that stifles innovation.

Once utility incentives are properly aligned, they will have no reason to object to fair and reasonable compensation for independently owned distributed energy resources. In the near term, legislators should eliminate the caps on net metering, leave net metering compensation formulas as they are, and focus regulators attention on the real reasons that Massachusetts’ electricity costs are high.

 

Meet the Author

 

Fred Unger is president of Heartwood Group, a clean energy development company. He has coordinated development of about 10 megawatts of solar and wind projects in Massachusetts, most of which reduce and stabilize electricity costs for affordable housing communities.

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Rethinking the Grid

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Rethinking the Grid – How Our Changing Electrical System Will Impact the Ways We Produce, Distribute, and Use Energy.
BuildingEnergy 15’s Opening Keynote Session, March 3rd, Boston, MA.

by Fred Unger

A few months ago, BuildingEnergy 15 conference chair Matt Root asked Stephan Wollenburg, Carter Wall and me to organize what we hope will be an inspiring opening plenary forum for BuildingEnergy 15: “Rethinking the Grid – how our changing electrical system will impact the ways we produce, distribute and use energy“

Our plenary speakers are among the most thoughtful people in the electricity arena today:

Karl Rabago, Executive Director at the Pace Law School Center for Energy and the Environment, is a creative and passionate advocate for clean energy policy, with a background in the private sector, government and military. He has served as a Texas utility commissioner, deputy assistant secretary at the US Department of Energy and managing director at the Rocky Mountain Institute, among other roles.

Mary Powell, CEO of Green Mountain Power, has turned her company into arguably the most clean energy friendly utility in the nation. She also transformed the company into the first B Corp utility in the world, independently certified to meet rigorous standards of social and environmental performance, accountability and transparency. The company has also grown impressively under her leadership.

Ron Binz is a utility policy consultant today after a successful stint advancing clean energy policies as the chair of the Colorado Utility Commission. Ron was nominated by President Obama to chair the Federal Energy Regulatory Commission, but his nomination was aggressively opposed by the coal industry and senators who expected he would be too friendly to renewables and energy efficiency.

After more than a century of relative stability, today the utility industry faces more change, risk and challenges than at any time in its history. We’ll explore how the changing electrical distribution system will impact the ways we all use energy. We’ll explore the complex implications from affordable viable electric cars, air source heat pumps and other transformative uses for electricity, coming at the same time that major coal, oil and nuclear generating plants are being retired.  Most importantly, we’ll explore the technology and policy solutions evolving to enable a more reliable, resilient, environmentally responsible and affordable electricity grid.

For the architects, builders and building owners in the audience, we’ll explore how emerging realities will change the way your buildings interact with the grid, not only as consumers, but also supplying energy, load balancing and other services to the grid.  On-site generation and building based electrical storage will have significant impacts on building design and provide both utility cost savings and revenue generating opportunities.  Emerging changes in policy will impact the buildings NESEA members are building today.

Rate reforms allowing for options like real time retail pricing, grid modernization including smart metering and advanced communication technology, and other fundamental changes will transform the traditional utility business model and energy markets, while making the services NESEA members have to offer far more valuable.

A clear vision for the 21st Century energy system can create massive opportunities for distributed generation, storage, demand response and other new services and businesses. Enabling those solutions will flatten our electric load curve, drop peak rates and reduce the need for new transmission investment. All that, in turn, will lower electricity costs for ratepayers and reduce adverse environmental impacts from the utility industry that today is the most wasteful energy sector in our economy.

Unconstrained opportunity for distributed energy resources, more dependable profits for utilities, more reliable electrical service, lower costs for ratepayers, and more effective support for low-income households can all result from policy changes that should eventually unite current day energy policy adversaries with a new shared vision. But getting there won’t be easy and everyone does not yet share that same vision.

I look forward to our NESEA community gathering for what promises to be an interesting opening for the conference. If the forum inspires you to learn more, the plenary speakers will be joining us in a follow up session called “Rethinking the Grid – Q & A”, in which they will dig deeper into the conversation and answer your questions about our emerging energy future.

For registration and more info about BuildingEnergy 15 visit:

http://nesea.org/be15

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Addressing The Worlds Most Vexing Problems

Interesting TED talk about how to reverse desertification and climate change, while ending hunger and social chaos, all using the exact opposite solutions that I was taught studying environmental studies in college – with increased herds of cattle, sheep and goats.

This is a really amazing presentation that provides an excitingly simple solution to the worlds most vexing challenges.

The immediate challenge to its implementation that came to my mind is around fencing, property boundaries, and all the complexities of ownership.

 

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March 9, 2013 · 9:34 am

Doing Math vs Political Posturing on Federal Budgets

With all the noise about federal budgets, sequesters, debt ceilings and taxes, its sometimes hard to figure out what’s real.

So I spent a little time doing some research using government statistics and basic math this evening. The results are shown on the spreadsheet below comparing various economic factors.

In summary, between 1967 and 2011:

Population growth was 159% and inflation was 673%, which combine to create a normalized growth basis of 1,071%.

Gross Domestic Product grew 168% relative to normalized growth.

Average  household income increased 119% relative to inflation but only 45% relative to GDP growth.

The official poverty level stayed flat relative to inflation but increased only 38% relative to GDP growth, while the number of people living below the poverty line increased 105% relative to population growth.

Federal spending grew 214% relative to normalized growth  and grew 127% relative to GDP growth.

The deficit portion of federal spending has increased 1,411% relative to normalized growth. In dollars it has increased 15,112%.

Our federal debt has increased 4,337%.

So what conclusions can be drawn from those numbers?

1)   Government spending has clearly grown far more than the economy, inflation, population or average family incomes.

2) Our economy is growing faster than normalized growth expectations so productivity is improving.  That’s good news. Our society has extra resources to solve problems. We shouldn’t have to borrow.

3)   The disparity between GDP growth and average household income growth indicates significant wealth is accumulating that is not accruing to the average household, thus wealth disparities are clearly increasing.

4)   Growth in average household income has been better than inflation, but the average household income data shown is presumably skewed by the increasing share of  income accruing to wealthy households.  Average middle class family incomes are likely holding steady or improving a bit, but that data is hard to tease out of the statistics.

5)   Poverty is getting worse in America. Significantly increased government spending has not helped at all to alleviate poverty and likely hasn’t done much good for average middle class households either.

6)   It appears that there is plenty of room to cut federal spending to be more in line with normalized growth.

7)   Growth in federal deficit spending and debt is dangerously unsustainable and needs to be addressed.

The “tax the rich” vs “cut the budget” rhetoric in Washington is not solving the urgent problem we have of getting the deficit and debt under control. We need to do both.

What the statistics don’t show is there are smart ways and stupid ways to implement both spending cuts and tax revenue increases. There are plenty of programs and entire federal departments that can be selectively eliminated because they frankly aren’t doing anyone any good except the government employees who take home paychecks. Raising tax rates is not the answer when the byzantine tax code is riddled with loopholes for the wealthy to exploit. We should be eliminating all tax loopholes, eliminating the corporate tax altogether and then treating capital gains, dividend income, carried interest and all the other specially favored income categories of the wealthy as regular income taxed at regular rates.

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Kiesling On Thinking About Complex Systems And Economic Liberty

Lynne Kiesling recently wrote a great overview of the elegant complexity and beauty of self organizing free markets. Read it here.

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The Emperical Truth About The Economy

Several of my “progressive” friends sent me links to Robert Reich’s recent entertaining video proclamation of “The Truth About The Economy” . In it he suggests that all our nations fiscal problems stem from the Bush tax cuts and the resulting shift of political influence going to wealthy individuals. He implies the obvious cure for those problems being simply more taxes on the wealthy.

If only things were that simple.

I fully agree with his implication of the need to get special interest money out of politics. Even more important is the need to get politics out of being so thoroughly enmeshed in our economy, an area where I suspect Professor Reich may not agree with me.

Looking at the numbers, it is highly unlikely that increased taxation would realistically bring in the revenues need to match federal spending that is now at its highest level as a percentage of GDP since World War II.

In 2000 Federal spending was $2,290 billion with revenues of $2,593 billion and on Dec 28, 2000 President Clinton proudly proclaimed the entire federal debt would be eliminated by 2010.  Instead, by 2010, thanks to the wild spending binges of both Presidents Bush and Obama, spending was up to $3,618 billion, and revenues are only at $2,118 billion.

But tax cuts don’t appear to be the problem. The Bush tax cuts were fully in effect in 2007, when federal revenues were at $2,709 billion, well ahead of the 2000 numbers. Revenues are down now mostly because of the nasty recession we are still in despite economists proclamations to the contrary.

On the revenue side, income tax accounts for approximately 45% of federal revenue, while payroll taxes for social security, medicare and unemployment insurance accounts for another 36%. Corporate taxes, already the second highest in the world, only accounted for about 12% of federal revenue in 2008.

According to the National Taxpayers Union, in 2008 the Top 1% of income earners paid 38.02% of all federal income taxes. the top 10% of earners paid 58.72% of all income taxes while the bottom 50% of earners paid only 2.7% or income taxes.  Perhaps these proportions are unfair and the rich should pay much more. From a perspective of social justice, perhaps the tax system should be overtly used to confiscate and redistribute wealth to provide a more level economic playing field. That kind of policy doesn’t seem to be something the nation will reach clear consensus on any time soon.

Rather than raising tax rates, simplifying the tax code and eliminating the staggering abundance of loopholes that allow many very profitable companies and high income people to pay little or no taxes at all, would seem a much better and more generally supported avenue toward increasing both revenues and fairness. It would also help minimize the economic distortions and corruption inherent in government subsidies through obscure special interest tax deals.

From a strictly economic perspective, the real problem with our federal budget is on the spending side more than the revenue side. Federal spending is now about 25% of GDP, significantly higher than the historic average of about 20% since 1960.

Who would seriously suggest that the government was significantly too small or spending levels inadequate at the end of the Clinton administration? Yet its grown 58% from 2000 to 2010 and continues to grow. In the mean time  incomes for most people in the private sector have stagnated.

Bottom line – no matter how the big spenders like Robert Reich, Paul Krugman or President Obama like to spin things, the serious problem we have with the nation’s budget is a spending problem. While perhaps additional revenues should be considered, there is no way the nations fiscal problems will be solved until spending is dramatically reduced.

Jay Amrose published an interesting article contrasting Texas vs California  public policies and resulting job creation, fiscal condition and economic performance over the last decade. Texas created 730,000 jobs over the last decade while California lost 600,000 jobs. Separately, the federal reserve reports that since 2009 thirty-eight percent of all jobs created in the US were in Texas. For those concerned with social justice, as Ambrose suggests: “nothing helps the poor like jobs”. For what it is worth, Texas also leads the nation in renewable energy development and outperforms California on  educational standardized test scores, both areas that California’s activist government aspires to lead and succeed. California meanwhile faces massive unsustainable deficits in budgets that even Governor Jerry Brown describes as fantasies.

Historic evidence from both here in the US and elsewhere throughout the world suggest that at a certain point increasing tax rates actually leads to declining government revenue and economic performance.  The California vs Texas example seems to confirm that trend.

Europe seems to be finally facing the hard realities of unsustainable government spending as the risks of sovereign default by Portugal, Ireland, Italy, Spain and Greece are forcing governments throughout the continent to slash spending.

Professors Krugman and Reich have won all sorts of prestigious awards, degrees and professional positions and apparently some people still buy their arguments for even more of the Keynesian economic voodoo that has worsened and prolonged economic problems in every instance it has ever  been tried. But for most folks, even in the socialist governments of Europe, their arguments are seeming pretty tired.

Rather than accelerating the same ideological agenda that is primarily responsible for causing our current economic  problems, perhaps we should consider empirical evidence to determine what public policies will help the economy. Despite all the incumbent advantages California had and still has, the contrast in economic performance between California and Texas over the last decade provides a pretty good case study for what kind of policies actually work and which are just long worn academic fantasies. At some point perhaps even professors Krugman and Reich will have to notice.

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GM Was Profitable For Who?

While some commentators are heralding Government Motors recent announcement of a profitable quarter, Megan McArdle runs the numbers on the government’s investment, the political calculus and the likely ultimate major loss for tax payers.

What lesson, exactly, are we supposed to learn from this “success”? What question did it answer? “Can the government keep companies operating if it is willing to give them a virtually interest free loan of $50 billion, and a tax-free gift of $20 billion or so?”  I don’t think that this was really in dispute. When all is said and done, we will probably have given them a sum equal to its 2007 market cap and roughly four times GM’s 2008 market capitalization.

No, the question was not whether GM could make a profit after a bankruptcy that stiffed most of its creditors and shed the most grotesque burdens of its legacy costs, nor whether giving companies money will make them more profitable.  The question is whether it was worth it to the taxpayer to burn $10-20 billion in order to give the company another shot at life. To put that in perspective, GM had about 75,000 hourly workers before the bankruptcy.  We could have given each of them a cool $250,000 and still come out well ahead compared to the ultimate cost of the bailout including the tax breaks.

And in doing the deal that they did to bail out general Motors and the auto workers union, the government broke all the rules of bankruptcy, favoring political considerations over creditors, market stability and the rule of law.

At the Wall Street Journal, David Skeel outlines not just the losses but the violations of law involved in the special bankruptcy proceedings dictated by the federal czar in charge of the auto bailouts at the expense of creditors and the unintended consequences may be the most expensive part of this crazy kind of policy.

The indirect costs may be the worst problem here. The car bailouts have sent the message that, if a politically important industry is in trouble, the government may step in, rearrange the existing creditors’ normal priorities, and dictate the result it wants. Lenders will be very hesitant to extend credit under these conditions.

Some politicians may celebrate the news of GMs first quarterly profit in years. But surely GM’s prior investors aren’t celebrating. Nor are the bondholders or investors that got screwed in the political manipulation of the bankruptcy process. Nor should the tax payers that McArdle suggests will be facing a $20 to $25 billion overall loss.

Nobody should be celebrating these “profits”. The uncertainty that this kind of political manipulation of the economy creates is precisely why most businesses are reluctant to invest and banks are reluctant to lend. If business can no longer depend on the rule of law, our nation is no longer a safe or rational place to invest.

 

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