The Social Risks of Energy Transition
As we plan new energy policy, Democrats and Republicans should pause to remember how we got where we are.
There is no other commodity like electric power.
Because of its essential and unique nature, we built a commercial infrastructure around it different from anything else in our lives. We built that commercial infrastructure — an unusual blend of private/public ownership and oversight — to make sure we would all have access to plenty of affordable electricity.
The infrastructure — both physical and commercial — we built around electric power is centralized. Just like the big power plants which, until recently, were the only places to make it.
Now, as decentralized electricity generation and storage are made possible by new technology, the central infrastructure we spent so much to build in the later 20th century, is showing its limitations.
Fixing those limitations, while avoiding unintended consequences, will require careful thought and planning. This is something renewable energy advocates impatient for change often forget.
When electricity was new. When households didn’t have it. Not long ago, our society — everyone — prioritized making electricity to every single citizen, no matter where they lived.
In the 20th centurty, we built a system to generate and deliver electricity that is relatively clean, affordable and available to all. I’ll argue we are far better at supplying electric power than we are at delivering most other public goods — health care for example.
Today, electric power is in its early steps down a new road that will change forever how we make, buy and use it.
Before we leave the old road — the road of the centralized utility — to walk a new path, let us pause for reflection.
When we think about electricity policy we often jump quickly to the topics of fuels and carbon emissions. But big questions also loom about how to fairly bring competition into a market that has never really seen it, and how to make sure we protect our most vulnerable citizens as we do so.
The Unique Electrification of Nebraska
It is worth a moment’s thought about how it came to be that Nebraska is the only US state allowing only publicly owned electric power companies.
There are no for-profit utilities in Nebraska.
In the 1920’s, amid leaping consumer electric use, private companies were working furiously to lock down monopoly service territories. This boiled over in the state of Nebraska where — for several reasons — a maze of private monopolies emerged, offering overpriced electricity only to those who could afford it.
In 1933 Nebraska took a radical step — requiring public ownership of utilities — this move helped set the stage for the federal government, in 1935, to pass the Public Utility Holding Company Act which setup our modern system of regulated public utilities.
It’s easy to forget that the formation of our current system of electric utilities by FDR was seen by free market Republicans as a socialist power grab. They were furious.
Today of course, Republicans tend to rise much more quickly to defense of the utilities, with Democrats more often pushing back. In the past decade in fact, the battle lines around renewable energy policy have mostly been drawn with Republicans and existing utilities on one side, Democrats and private renewable energy companies on the other.
In fact, it’s not uncommon for Democrats to lose sight of the fact that much distributed solar and storage and the like is financed not by public utilities, but by big banks. This creates competitive forces but is also at odds with why Democrats created the public utility system in the first place.
Private finance — by its nature — is less concerned with access for all, and more concerned with maximizing profits. Utilities have a low cost of capital due to their protected status and in turn, are tasked with keeping rates low and making sure everyone has access to electricity.
Renewable energy assets, whether solar arrays, home batteries or electric vehicles, are natural assets to be owned by big finance and rented back to their users. Car companies are retooling both their business models and their production lines as they prepare for the mass shift to electric vehicles. A much larger percentage of EV’s are leased vs. owned and the lease model brings in additional recurring revenue opportunities. In fact, we are now even seeing a subscription model to replace traditional car ownership.
Renewable energy advocates are not the only ones anxious for change in the electricity business. Free market capitalists look on the emergence of distributed electricity generation and storage with hungry eyes. Energy consumption is a highly desirable business for financiers and one they have been shut out of for nearly 100 years. Here is a business where assets are long lived and expensive — perfect for financing by patient, deep pockets.
Once in place, these assets produce a valuable and perfectly fungible commodity for years or even decades. Their ability to hold and deliver value is well understood and financial returns are easily modeled.
Moreover, the commodity they produce — if not used on site — can be shipped for free (or nearly free) to another buyer using a reliable network already in place, thanks to decades of publicly regulated investment. Customers are in ample supply and easy to reach. Why do you think private finance loves renewable energy? Because it’s green? No, because it prints green.
An important message here, is not to let current political fashion of party brands cause us to forget what those brands are supposed to stand for.
Democrats who feel public utilities are holding back distributed solar and storage should remember that it was Democrats who created our publicly regulated/publicly owned system of utilities in order to protect against price discrimination and ensure access for all.
Republicans, who all too often have a reflexive dislike for any energy labeled “renewable,” must shelve that irrational bias and acknowledge that renewable, distributed energy is becoming cheaper than other energy in many places. Consumers expect competitive choice and traditionally look to Republicans as guardians of an open marketplace.
Electric power is a market that requires a healthy measure of government involvement in order to protect its most vulnerable consumers. It is also an outstanding example of a market ripe for disruption by new technology. While the disruption stands to make our power much cleaner, it runs the risk of also making that power more exclusive.
As more privately owned assets make their way onto the grid, private finance will not accept the limited rates of return guaranteed to public utilities. New costs will appear — we must remain watchful that competitive forces drive other costs down enough to compensate.
Let us strive to give careful thought to our priorities for the next generation of electric power. Those priorities must not only include encouraging more clean energy, but also ensuring access and affordability for all.
We have an opportunity to continue to set an excellent example for other public goods with our energy policy. Public policy around electricity has long been an example of how to think long term, be open to compromise and get it right for all.
Amid all the change we will see in energy in the coming decades, that fact is one thing we must work hard to make sure stays true.
