Archive for February, 2009

Smart Grid Financing

Sunday, February 22nd, 2009

I have been asking people why the utility industry is seeking government funds to implement a smart grid instead of using traditional utility financing.  Below are my thoughts and questions.  Anyone who reads this may feel free to jump right in with their opinion.

Everybody seems to be talking about smart grids this year. Much of the capability was there when I was in grad school, especially time-of-day/peak load pricing, although the technology to do such things is much more advanced these days. There is much talk about government funding and how the government absolutely MUST fund this upgrade to the power grid (not to mention that there is $11 billion or more in the stimulus package to fund the smart grid, but I have not really dug into this yet). Two things I do not really understand and I cannot seem to find any information on so far:

1) Why do the power companies not use traditional utility financing? After all, this is an addition to rate base if they do. I know capital markets are in terrible shape right now, but I believe using public money was the game plan even before the current difficulties.  Is there an argument that the smart grid is a public good, because benefits to ratepayers in other states cannot be captured by the investing electric company?  What are the
other arguments?

2) How will FERC/PUC’s treat public funding? I don’t think FERC has rate incentives for efficiency or DSM, but the PUC’s generally do. What if government money improves efficiency? Will any of this smart stuff impact supply competition?

There’s lots and lots of articles and even local presentations about the “oh wow!” aspects of the smart grid. But so far, nobody can tell me the regulatory and pricing implications other than the assumed advanced peakload pricing capability.  This has been rejected by most electric retail sellers for decades, even though the technology has been there in simpler form than the “smart grid.”

In response to a hypothesis that regulators and utilities
might be reluctant to invest in something with a fast moving technology that could be obsolete sooner than they might wish, I replied:

“These guys had microwave along the grid in 1967, when I had a summer job with Georgia Power. They loaded their rights-of-way with fiber optic prior to Enron.  I did a little research on this back around 2000-2001 (National Academy of Sciences white paper) and figured many utilities thought they were going to make unregulated profits and wound up with unregulated losses instead after Enron’s broadband market proved to be a fraud.

However,  “lighting up the grid” is rather simple, and there is a
potential broadband over powerline market. Everybody, including the power companies, buys laptops even if they might be obsolete next year. They keep obsolete meters forever now. Why would it bother them to get brand new soon-to-be obsolete meters if it is an addition to rate base?   Decades ago the telcos were able to put in new metering to separate the lines such that the customers were given control over inside wiring.

It’s not like they have to lease right-of-way, build new transmission lines or do any of that really expensive stuff to create a smart grid.  In fact, Dominion just won a court battle to do some heavy duty investment in new transmission and they will use traditional financing.  It makes no sense to me at all from an investment standpoint.  Is it that there is just no profit to be had in a smart grid investment, since it reduces the need
for new generation/transmission?”

I was kicking this around a bit further today and found an article titled,  “Electric Stimulus Crunch? Generating Utilities May See 10% Revenue Declines” by Nick Gogerty (http://seekingalpha.com/article/115196-electric-stimulus-crunch-generating-utilities-may-see-10-revenue-declines).”  Is this part of the reason why the industry does not wish to pay for the smart grid itself?

More to come as I find answers.

HEK

Gasoline Taxes and Demand

Saturday, February 7th, 2009

This draws upon a recent editorial in the Washington Post by Warren Brown, “Clean the Air With Higher Gas Prices” (http://www.washingtonpost.com/wp-dyn/content/article/2009/01/29/AR2009012903487.html?sub=AR) as well as an astute observation made by Steve Forbes, as quoted in energybiz (http://energycentral.fileburst.com/EnergyBizOnline/2009-1-jan-feb/FA_roundtable_Tsunami.pdf).

Mr. Brown states:

I’ll put it bluntly: When it comes to motor fuel conservation and mobile-source emissions control, we don’t need a California waiver to EPA mandates. Neither do we need the EPA, nor the California Air Resources Board nor Corporate Average Fuel Economy.

We need gasoline at a base price of $4 a gallon for regular unleaded — the price that last summer boosted sales of fuel-efficient vehicles, reduced unnecessary driving and cut the speed of road trips taken.

Mr. Brown then points out that we are likely to go back to gas guzzlers with $2/gal prices.  I believe he is correct.  Perhaps we can allow California to set its own clean air standards without regard to EPA, and require more rigid CAFE standards from Detroit.  However, consumers will negate the effects of both without higher prices at the pump. Higher gasoline taxes, if the past is a guide, will be difficult to achieve, as Brown says.  Maybe we can do it now.  Maybe we can’t.

Steve Forbes’ observation is that one of the ironies of energy efficiency is that we use more energy as we improve efficiency.  So once demand is kicked back with $4 gasoline, it will begin to rise again with increased energy efficienct autos and income growth (plus population growth).  Don’t expect to reach Nirvana with $4 gasoline.  It will certainly help though.

Further Thoughts on Protectionism

Friday, February 6th, 2009

I believe Paul Krugman gets it right in this New York Times editorial: http://krugman.blogs.nytimes.com/2009/02/01/protectionism-and-stimulus-wonkish/.  As the title hints, his piece is rather wonkish.  Here is part of his explanation of  why a country’s attempts to retain its stimulus dollars domestically may be a second-best solution that expands the world economy more than it hurts it by trade distortions.

“And one part of the problem facing the world is that there are major policy externalities. My fiscal stimulus helps your economy, by increasing your exports — but you don’t share in my addition to government debt. As I explained a while back, this means that the bang per buck on stimulus for any one country is less than it is for the world as a whole.

And this in turn means that if macro policy isn’t coordinated internationally — and it isn’t — we’ll tend to end up with too little fiscal stimulus, everywhere.”