Friday, June 27, 2008

America's irrational energy incentives

CleanTechnica, a blog about...clean tech...has a post up about the perverse incentives that American energy producers face thanks to government regulation. The thesis of the article – a guest post by Sean Casten, CEO of a green energy company – is that electricity generation hasn't improved in efficiency since 1957 because the government has been removing the incentives to generate energy cheaply and efficiently. It's a pretty bold claim, and he only backs it up with two examples: regulation that forces companies to take profits only on capital costs, and the Clean Air Act (which one, it's unclear) which mandates specific technologies that may not actually be that effective at reducing overall air pollution. It's an interesting read, though I feel entirely unqualified to judge the veracity of some of its claims (though they jibe with what I'd expect). However, the part about regulation forcing companies to make money only on capital costs is pretty easy to understand:

Our century-old electric regulatory model pays utilities a return on their capital investment, but compels them to pass along all operating costs to consumers at zero mark-up. This creates a great incentive to build capital-intensive boondoggles. It completely isolates electric utilities from the economic principles that drive “normal” businesses, wherein capital and operating cost reductions are a route to greater profits. This has conspired to make our electric sector openly hostile to efficient power generation. It explains why their efficiency hasn’t moved since 1957, and why that sector now accounts for 42% of US CO2 emissions.

Some questions I have: Is the US the only country to do this, or are there others? Are there any countries that adopt a more laissez-faire approach to energy generation (leaving aside Somalia), and who achieve better efficiency in energy production because of it? And what are the interests that keep this system in place, or has it kept going on sheer inertia?


miggs said...

Hi Stephen. I am associated with Recycled Energy Development, Sean Casten's company. For a few more examples of how the government has been removing the incentives for efficient generation, you should check out this background document we put together: -- but bear in mind that there are numerous others.

You asked specifically what interests keep the current system in place. Mainly, it's that utilities are doing well under the rules we have and don't want them changed. Think about it: utilities get guaranteed returns on their investments, unlike anyone else (a major regulatory hurdle); various rules make it very tough for competitors to emerge (e.g., independent power producers, unlike independent phone companies, can't lay an electric wire across a public street); and most basically, if we had more efficient production, everyone would be buying less power. That's a sweetheart deal that utilities don't want to lose. I don't blame them, either. But it's our job as citizens to pressure lawmakers to change the rules.

In terms of other countries, Denmark has tons of efficient power production that utilities the technologies Sean mentioned, getting over half their power from energy recycling and cogeneration. The U.S. rate languishes in the single digits. Sean and his dad Tom, who chairs the company, doubtless know more about Denmark's regulatory scheme, as well as that of other countries that produce power more efficiently than we do.

Stephen said...

I am curious how Denmark achieved its efficiency, and more specifically, if it was through liberalization (i.e., letting power companies realize the benefits of increased efficiency in the form of high profits), or through mandates and regulations. On the page you (or whoever wrote it) mentioned that the process allows you to generate more power while emitted the same amount of greenhouse gases and that this allows companies to sell the unneeded pollution credits, which just makes me wonder if the technology and processes are viable/profitable in Denmark because of extra profits inherent in efficiency, or because of that plus the regulatory benefits.