Pricing the Public Good

Deck: 

Weighing green energy’s costs and benefits.

Fortnightly Magazine - July 2011

As I was editing this issue of Public Utilities Fortnightly, I was struck by the competing arguments presented in three different articles—all of which consider the relationship between energy policies and the public welfare.

One author—Mike Hall, CEO of developer Borrego Solar—examines California’s solar feed-in-tariff (FiT) and its potential for bringing solar into the generation mix. In “Cali Gets it Right” he argues that the California FiT has the potential to accomplish “virtually all of the major policy objectives.” Namely, it will award power purchase agreements based on the results of a reverse auction, effectively letting market forces determine the value of solar generation, rather than having policy makers set the subsidy price. Additionally, the program is tailored specifically to distributed solar projects, which Hall says “make good use of real estate from which no other … public benefit can be derived.”

Hall’s argument presumes that more energy from solar power is, by definition, a public good. And as a general matter, this assumption is fairly easy to accept. To the degree solar energy displaces coal-fired generation, for example, it reduces air pollution, as well as the consequences of coal mining and transportation. And to the degree building solar projects helps to accelerate solar’s race toward cost-parity with traditional power sources—e.g., by supporting technology advancements and manufacturing scale economics—then such projects expand the range of viable energy alternatives. That improves the nation’s fuel diversity—obviously a good thing for multiple reasons, including the fact that local solar plants can power electric vehicles and thus reduce oil imports.

That’s indisputably a good thing. But another author writing in this issue presents a compelling argument that just because a thing is good, that doesn’t mean it’s the best possible thing. As a result, policies aimed at promoting one good thing can diminish a better thing, for a net loss to the overall public welfare.

Insidious Movement

In “Lighting Up the World,” scholar Jude Clemente observes that over the past century, electricity has vastly improved the health and welfare of Americans. Everything from cleaner drinking water (via electric-pumped wells) to better education for girls can be correlated with improved access to affordable electricity. Moreover, Clemente argues that the cheaper electricity becomes, as a percentage of per-capita income, the more good it will provide to the public—most notably by supporting economic growth and prosperity.

Again, this argument is easy to accept; electrification is categorically a good thing, and cheaper electricity is certainly better than more expensive electricity. But as Clemente points out, such self-evident facts sometimes get lost in the public policy debate. When NIMBY activists are fighting to stop development of a transmission line or power plant, for example, they tend to disregard the vast benefits that such facilities bring to the public—perhaps because those benefits are widely socialized and delivered over a long period of time, whereas their own gripes are personal and immediate.

But lawmakers also miss the forest for the trees, Clemente says, when they enact green energy policies that force consumers to pay more for electricity in the name of efficiency, environmental benefits or renewable energy development. He calls this an “insidious movement” to promote a social agenda that aims to reduce consumption and make green alternatives more competitive by raising the price of electricity. Such a movement, he says, actually hurts the public welfare by saddling the economy with higher costs, and making electricity less affordable and less accessible to the same low-income consumers who have benefited so much from electrification.

That brings us to the third article, by Hannes Pfeifenberger and Adam Schumacher of the Brattle Group. In “Restructuring Realities,” Pfeifenberger and Schumacher show that relatively higher electricity prices in many restructured states don’t necessarily translate into less-affordable electricity bills. “[T]he impact of higher rates in fully restructured states is mostly offset by lower consumption, yielding fairly similar monthly residential bills,” they write. The same phenomenon is especially evident in partially-restructured California, “where much lower average electricity use and higher household incomes make electricity bills more affordable on average.”

This assertion is almost a mirror image of Clemente’s argument. Clemente seems to assume that electricity demand is basically inelastic. When prices rise, consumers are forced to shift resources to pay the bill; they can’t stop their electric pumps from bringing clean water into their modern kitchens, so they’ll curtail contributions to their daughters’ college funds. Meanwhile, jobs are lost when commercial and industrial customers leave the area in search of cheaper energy supplies. As I read it, this is the basis of Clemente’s argument against policies that result in higher electricity prices.

Pfeifenberger and Schumacher, however, assert that demand today is actually quite elastic—and that higher prices don’t necessarily result in either demand destruction or personal deprivation. Instead price hikes can encourage conservation, or at least load shifting, as customers take advantage of programs to control their electricity bills. Although Pfeifenberger and Schumacher include many factors in their analysis, they acknowledge “the basic effect of demand elasticity, which reduces consumption in response to higher prices.”

So who’s right?

Supporting Change

The fact is, in all three of these articles, the authors leave ample room for debate. We might reasonably argue that advancing renewable energy, especially solar, is a fundamentally good thing that merits public support, in anticipation of public benefits. We might also expect lawmakers to weigh such future benefits carefully against the present-day cost of subsidizing immature technologies. We might insist, justifiably, that our energy policies first ensure that electricity service is at least as accessible and affordable as it is today, before we start sending price signals to encourage any particular alternatives.

We might also recognize that time-of-use metering and other demand-side technologies are altering the way electricity is sold, and catalyzing much greater demand elasticity than would’ve been possible when utilities were first bringing power to the masses.

And even though we might abhor the notion of intentionally raising prices to drive a social agenda, we might also understand that artificially low prices can themselves create social ills—by preserving a status quo that’s economically unsustainable, environmentally irresponsible, or both.