Saturday, October 1, 2011

Centralising power - markets rule

‘For the first four decades of its existence the U.S. nuclear power industry was run by regulated utilities, with most companies owning only one or two reactors. Beginning in the late 1990s electricity markets in many states were deregulated and almost half of the nation's 103 reactors were sold to independent power producers selling power in competitive wholesale markets. Deregulation has been accompanied by substantial market consolidation and today the three largest companies control more than one-third of all U.S. nuclear capacity. We find that deregulation and consolidation are associated with a 10% increase in operating efficiency, achieved primarily by reducing the frequency and duration of reactor outages. At average wholesale prices the value of this increased efficiency is approximately $2.5 bn annually and implies an annual decrease of almost 40 million metric tons of carbon dioxide emissions'.

You can read this bit of analysis, from researchers at the University of Berkeley, California, in variety of ways. Free market enthusiasts may see it as confirming the wonders of competition and the horrors of state regulation; liberals (in the US sense) may quail at the spectacle of 'reconsolidation' and the creation of powerful monopolies- able to control prices as they see fit (e.g. not passing on any savings to consumers). UK observers might note that 'liberalisation,' or what we call privatization, initially created a lot of small power supply/ distribution companies, who later got swallowed up into a few foreign owned giants, big enough to run nuclear plants. And, allegedly, to do that more efficiently, as in the USA. However, consumer prices haven't benefited much, indeed they (and profits) seem to march relentless upward, with minimal regulation and a continued enthusiasm for nuclear.

Faced with all this, nostalgic lefties may look back to the days when the whole UK power industry was nationalized and managed in an, allegedly, more coherent and planned way. Lastly, environmentalists may look at the last sentence in the quote above and ask, are these carbon savings real- wouldn't you have got more cash and carbon savings by investing in renewables/ energy efficiency.

So the Berkeley study seems to raise more questions than answers. For example, if degregulation makes the market safe for nuclear, is that a good thing? Has liberalisation led to investment in new more efficient plant and distribution? Does 'concentration' improve the level of service and security of supply? From what has happened in the US in recent years, the answers to all these questions seem to be 'no'. After deregulation, California famously suffered major power blackouts, as a result of the lack on investment in new plant and grid infrastructure- that in turn being partly due to the high cost of running the increasingly uneconomic nuclear plants. Price hikes followed to try to keep the show on the road.

If deregulation and privatisation continue as the major theme world wide, we can expect more problems like this- outages and endless price hikes. Of course attempts will be made to blame this on the enchroachment of renewables- leading to higher costs and grid instability, due to the variable outputs of wind farms and so on. It may well be true that prices will have to rise initially in order the set up a sustainable energy system, and that one option for balancing grids is to have dynamic demand management- i.e. rephasing some loads from peak times. But once the system is fully in place, running cost should be lower, even given the extra costs of grid balancing- indeed peak shaving/ time shifting should cut costs.

All of this would get much easier if we could reduce demand and also avoid nuclear- the latter just pushes prices up and gets in the way of a flexible, interactive grid system. Otherwise we may have to prepare ourselves for more chaos. Interesting then that the International Energy Agency has just published a report on 'Dealing with Temporary Shortfalls in Electricity Supplies', which includes 'problems in electricity market liberalisation' as one possible reason why we might have to resort to 'saving electricity in a hurry'. Others include 'heat or cold waves', no doubt worsened by climate change, and 'safety problems at power stations', as has now been demonstrated so starkly in Japan.

You won’t get any sense of these looming problems if you read the tirades against ‘wasted subsidies’ on renewables emerging from free market enthusiasts like the Renewable Energy Foundation and Lord (Nigel) Lawson’s Global Warming Policy Foundation. They seem to be so concerned about the short term costs of subsidues, and what they see as their negative impacts, that they are willing to forgo what others see, given the inevitable rise in cost of fossil fuels, as the longer term benefits of developing future-proof renewable energy systems.

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