The California Public Utilities Commission (CPUC) held a two-day workshop on rate design principles for commercial and industrial customers. To the the extent possible, rates are designed in California to reflect the temporal changes in underlying costs–the “marginal costs” of power production and delivery.
Professor Severin Borenstein’s opening presentation doesn’t discuss a very important aspect of marginal costs that we have too long ignored in rate making. That’s the issue of “putty/clay” differences. This is an issue of temporal consistency in marginal cost calculation. The “putty” costs are those short term costs of operating the existing infrastructure. The “clay” costs are those of adding infrastructure which are longer term costs. Sometimes the operational costs can be substitutes for infrastructure. However we are now adding infrastructure (clay) in renewables have have negligible operating (putty) costs. The issue we now face is how to transition from focusing on putty to clay costs as the appropriate marginal cost signals.
Carl Linvill from the Regulatory Assistance Project (RAP) made a contrasting presentation that incorporated those differences in temporal perspectives for marginal costs.
Another issue raised by Doug Ledbetter of Opterra is that customers require certainty as well as expected returns to invest in energy-saving projects. We can have certainty for customers if the utilities vintage/grandfather rates and/or structures at the time they make the investment. Then rates / structures for other customers can vary and reflect the benefits that were created by those customers making investments.
Jamie Fine of EDF emphasized that rate design needs to focus on what is actionable by customers more so than on a best reflection of underlying costs. As an intervenor group representative, we are constantly having this discussion with utilities. Often when we make a suggestion about easing customer acceptance, they say “we didn’t think of that,” but then just move along with their original plan. The rise of DERs and CCAs are in part a response to that tone-deaf approach by the incumbent utilities.
Finally, a real world example of how benefit-cost analysis should be used in practice. Alberta takes the revenues that represent a portion of the society wide benefits and distributes those to the losers from the policy change. Economists have almost always ignored the problem of how to compensate losers in changes in social policy, and of course those who keep losing increasingly oppose any more policies. Instead of dreaming up ways to invest carbon market revenues in whiz bang solutions, we first need to focus on who’s being left behind so they are not resentful, and become a key political impediment to doing the right thing.
Wine Country wildfires may have been caused by PG&E electrical lines.
PG&E proposed to the California Public Utilities Commission in an ex parte meeting with a Commissioner that ratepayers rather than shareholders should bear the liability costs from the Wine Country fires. This is part of a larger pattern where the investor-owned utilities have pushed off procurement and management risks onto ratepayers. Yet, the IOUs continue to ask for investor returns that reflect much higher shareholder risks at 14% pre-tax.
If ratepayers are not getting the single most important benefit from investor-owned utilities–that is risk insurance–then it may be time to consider cutting our the middleman–the shareholder–and just go with public ownership. In the end, it looks like there will be no real differences in costs and risks, and we are no longer unduly enriching the wealthy who hold shares in the utilities.
The analogy to Netflix is fascinating. As GTM points out, Netflix started out competing with Blockbuster in video DVDs, but then spilled over into video streaming (BTW, a market that Enron famously thought it could corner in the last 1990s.) So Netflix is now competing with both cable and broadcast companies. One can see how renewables could jump out of just electric service to building space conditioning and water heating, and vehicle fueling. Tesla is already developing those options.
Source: Renewables May Become the Netflix of the Energy Sector | Greentech Media
Alison Silverstein, who drafted the technical portions of the DOE grid study, says its summary and recommendations missed key points on grid reliability and resilience.
Source: Silverstein: If I’d written the DOE grid study recommendations | Utility Dive
The Vogtle nuclear power plant cost is projected to balloon to more than $12,000 per megawatt. In a study we did for the California Energy Commission in 2009, even at $4,000 per megawatt, nuclear power was uneconomic. This explains why nuclear power is not taken seriously as a solution to reducing greenhouse gas emissions.
Source: Vogtle nuke cost could top $25B as decision time looms | Utility Dive
GTM compiles the studies done over the last month in anticipation of the release of the study ordered by Energy Secretary Rick Perry to examine how increased renewable energy threatens grid reliability.
Source: The Rising Tide of Evidence Against Blaming Wind and Solar for Grid Instability | Greentech Media