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Mindbender: Efficiency Thrashes Supply

By June 18, 2018Energy Rant
Mindbender: Efficiency Thrashes Supply, Michaels Energy

A couple months ago in Outside the Boxer, we considered efficiency as a resource to be compared with supply-side resources. In May, we challenged minds with We All Un-Bundle, suggesting that utilities get markups for services delivered over their infrastructure.

Let’s advance these concepts!

Efficiency – A Utility Perspective

Utilities are slow to change for many reasons:

  • Every interest group and intervenor wants more from them.
  • They are rewarded for 30-40 year investments and not breakthroughs like iPhones.
  • Customers demand reliability, resilience, and low cost above all else.
  • Utilities have captive customers with few (but growing) options.
  • They deliver a commodity that makes brands of bottled water look wildly diverse.

So where does efficiency and demand-side management land in the boardrooms of utilities? Good question. If only I were a fly on the wall. My hunch is it varies from a necessary pain in the keister, a gadfly, to a profit center. It depends on state policy!

Why Efficiency’s Low-Cost Matters

We can deliver efficiency at a small fraction of the cost of delivering supply-side resources as demonstrated here, here, and here.

So what? What is the significance of achieving efficiency resources at a cost of 2.3 cents per kWh versus a supply-side resource of 12.3 cents per kWh? Well, I can’t make toast, bacon, and eggs served with cold orange juice using an avoided kilowatt-hour.

Delivering kilowatt-hours (kWh) over old-school utility investments, depreciated over series of continuously-overlapping thirty-year periods, is considered the cost of doing business. This cost of doing business, and serving all customers, is smeared over all customers.

Efficiency, on the other hand, is considered a mandate that monopolies owe their customers as penance for having captive customers. Efficiency, perversely, is considered a wealth transfer from many customers to few customers – as though supplying big technology[1] with renewable energy and a few hundred miles of transmission system paid by thousands of customers who have no idea how this works, is not.

This is wrong!

Why is Efficiency Different than Supply?

Why, instead, do we not consider utility-delivered efficiency, or non-use, on par with windmills, transmission, substations, and combined cycle power plants? Answers include:

  • Utilities are not awarded or duly compensated for delivered efficiency.
  • Too many stakeholders view efficiency merely as the right thing to do.
  • Efficiency is treated differently in the counterfactual.

Regarding that last point: isn’t it interesting that efficiency is evaluated versus what would have happened in absence of any efficiency resources (programs)? I.e., “Wellllll, that efficiency project would have happened anyway” – even though the efficiency program is responsible for making a bleeding edge technology, like high bay fluorescent or LED lighting, the next cool thing. In the words of Dr. Evil, “Riiiiight.”

Penalties for Efficiency

If it weren’t for efficiency programs, unquestionably, we would still be picking up 60-100 Watt incandescent light bulbs from our favorite retailers.

There is no way. No. No. No. No way to wipe away the effects of thirty years of accumulated technology development, behavior, intellectual and institutional know-how, and momentum and say – you, customer, would have done x, y, or z without all that. To declare any move toward greater efficiency a 100% free rider is absurd.

On that note, a full fifty percent of states, as surveyed by ACEEE in 2012, are “net” states. That is, program administrators, which are mostly utilities, only get credit for savings that were declared to happen because of the program (i.e., not free riders).

Let’s compare this to supply-side resources.

No Penalties for Supply

Supply-side resources are planned, built, and paid for by all ratepayers with a crystal ball of load forecasting. Have you ever seen a load forecast curve? Good, because I happen to have some data to show you.

The chart shown nearby includes trailing loads and forecasts for six states in the region controlled by the Mid-Continent Independent System Operator. The forecasts are smooth, but trailing loads fluctuate rather wildly.

Utilities plan and build on the forecast, and get paid for it. Nobody looks back after the fact and says, “Your forecast was wrong. Too bad for you. You are a 30% free rider, and we are going to reduce your income for over-building by 30%.”

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How is this different than: “Gee, we didn’t expect the uptake of technology X to be so swift, and it became the market norm much faster than anticipated.” “No savings for you, administrator.” Where is the equity in that?

Furthermore, why are coal and nuclear plants being shut down in droves? Because they are no longer “cost effective.” Compared to what? Other generating assets. What about efficiency?

Mindsets Are Wrong, and Stuck

The paradigmatic mindset that efficiency is a resource that should compete with supply-side resources does not exist, at all. Last week, I showed the cost of power generation from several sources, supplied again for your convenience here:

These costs are for generation only. The cost of efficiency is less than the cost to generate, PLUS, efficiency reduces cost for energy delivery!

Takeaways

Efficiency is a resource, not welfare, penance, or do-gooderism. It requires less wealth transfer, speculation, and cost to all customers, compared to supply-side resources. However, it comes with one big difference with supply-side resources: profits for the utility.

As I commented from the Fortnightly article a few weeks ago, we should un-bundle utility services and allow a rate of return to utilities for demand-side resources that is comparable to the return for building supply-side resources.

Like supply planning, we should learn and adjust from free riders but not gash administrators for it.

Go!

[vc_single_image image=”14071″ img_size=”full” onclick=”custom_link” img_link_target=”_blank” link=”https://www.wsj.com/articles/a-costly-deadly-obsession-with-coal-1528282800″]
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[1] Google, Facebook, Microsoft, et al

Jeff Ihnen

Author Jeff Ihnen

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Join the discussion 2 Comments

  • Thor Skov says:

    Nice article, Jeff. I particularly found interesting the point about electricity being treated differently in the counterfactual. But isn’t it also true that regulated utilities can be on the hook for unproductive assets, i.e., stranded assets? Or, they can sell excess generation so capacity isn’t necessarily wasted.

    The chart of generation costs is confusing to me. Any chance you could parse a little in a subsequent article, especially the “incremental cost of compensating for intermittency”?

  • Jeffrey Ihnen says:

    Thanks, Thor. There are at least two cases of stranded assets that I can think of. One is in the case of deregulated markets where vertical utilities sold their generating assets, or kept them to sell into the market. They their transmission and distribution in the fully regulated market. First Energy and Oncor (formerly TXU as I recall) are two examples. Both sold their generating assets, which ended up in bankruptcy because they were no longer needed or profitable. In Oncor’s case, there were lots of bidders for their regulated poles and wires business but no one wanted the coal generation. All the wind generation drove down prices or made it such that coal wasn’t needed much of the time in Texas. The coal plants became stranded assets thanks largely to the American Tax Payer via product tax credits for wind.

    In another case, for those utilities that are still fully regulated, they will get their money for their assets, period. The result is higher prices than they otherwise would need. This isn’t good for them because it drives more customers into alternative (solar) generation. This would fuel the so-called death spiral, but that hasn’t and won’t happen, most likely. I think a lot of assets are fully depreciated and no longer earn money for utilities, so why not shut them down and build new? It’s all about keeping prices reasonable and having decent rate base for investors.

    Regarding incremental cost for intermittency, I’m sure that is some compensatory cost for backup power when the wind isn’t blowing or the sun isn’t shining. Utilities have to buy power elsewhere or generate it themselves. That cost is higher than renewables which of course have no fuel cost. Hope this helps. Thanks for writing!

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