Efficiency gains, if not properly managed, can quietly take away most of the present market for electricity. But they also offer alert utilities an unprecedented opportunity to control risk,...
Saving Gigabucks with Negawatts (1985)
In an age of costly electricity and cheap efficiency, smart utilities will sell less electricity and more efficiency.
on 1980 technologies and prices, has shown that by 2025 the difference between the official estimate and the least-cost requirement for United Kingdom generating capacity is a factor of nine. If I am even party right about the even larger savings available from newer technologies, demand uncertainty is far larger than any utility appreciates.
Is the solution to uncertainty, then, to build more thermal power plants so as to ensure adequate electrical supply? Emphatically not, for three reasons:
- The financial risk of misforecasting is too great. For example, the August 1983 report of DOE’s $3 million electricity policy project (though effectively disavowed by the Deputy Secretary of Energy) called for building a big power plant per week starting now, based on forecast demand growth averaging 3 percent per year plus or minus one percentage point. But by 2000, that plus or minus one percent is equivalent to a quarter of today’s entire national generating capacity, with a capital cost of a third of a trillion 1983 dollars. Nobody can afford an “insurance policy” with such a huge premium.
- Construction at high marginal costs heightens the risk that higher prices may reduce the revenues needed to pay for that construction (and, in the shorter run, will exacerbate utilities’ inherent instability of cash flow, risking a “spiral of impossibility”). Ironically, a main cause of today’s uncertainty in demand is the rate volatility caused by construction — which was undertaken in a vain effort to hedge against uncertain demand!
- The plethora of decentralized sources, many already competitive and others fast becoming so, will make new big plants obsolete before they are finished.
Escaping from this maze requires rewriting the conventional tenets of utility management. If demand is uncertain, and building plants in self-protection is unaffordably risky, the answer is not to bet still more on becoming able to forecast better; it is rather to reduce uncertainty and risk to an affordable level. That is, rather than trying to project demand and build to meet it, the best-managed utilities are seeking to become indifferent to demand — flexible enough to meet it ad hoc. Rather than staking survival on any one of many conflicting forecasts, not all of which can be right, successful utility managers seek to become able to accommodate any of them in case it turns out to have been right. Such “management by open field running” requires that utilities:
- reduce the level of demand;
- reduce the uncertainty of demand; and
- reduce the unit cost of hedging against residual uncertainty of demand.
Reducing the level of demand saves two critical resources: money and time. It saves money in three ways: It saves operating costs in the short term (efficiency costs less than fuel plus operation and maintenance plus grid losses); it saves construction costs in the medium term; and it saves replacement costs in the long term. All three savings decrease the present value of revenue requirements. Reducing demand also stretches operating reserves and operating lifetimes, postponing capacity decisions as long as possible so that more information will be available.
Reducing the uncertainty of demand