The Perverse Economic Effects of Green Energy

A recent article in The Wall Street Journal tells of the effect that solar energy use is having on the nation’s power grid.  The issue is that the power grid maintenance is paid for by fees on power use.  As more people are using solar panels and otherwise reducing the amount of energy that they consume from the power companies, the per kilowatt-hour charges that the power companies are collecting are decreasing to the point where they may not be able to maintain the power grid.

Before you say,”Good riddance, who needs the power grid if we have solar energy,” realize that the only way that solar panels are viable is if they are attached to the power grid.  When the sun is shining, you produce more than you consume and sell power to the grid.  When it is not, you pull power from the grid.  Without being attached to the grid, consumers with solar panels would need to have big batteries that they would charge and discharge.  Anyone who has ever dealt with batteries can tell you what an expensive maintenance headache that is.

Power companies, looking for a way to get the money needed while the amount of power use continues to decline, may first try to raise rates per kilowatt-hour to make up for the lost revenue due to those not consuming power.  Because those using solar power or simply using less power are still using the grid (or at least the availability of the grid), but are using fewer kilowatt-hours, those who are left end up paying more since they are picking up their share of the grid maintenance plus that of those who are not paying.  This makes some of those who are left start to conserve power or buy solar panels, which causes the prices to go up still more for those who are left.  This results in a death spiral.

To avoid this, power companies are looking to charge a flat fee for the maintenance of the grid, plus a cost per kilowatt-hour.  For example, everyone would pay $60 per month, plus a lower charge per kilowatt-hour than they were paying before.  This has those who installed solar panels upset because it would take them a lot longer to get enough savings from their power bills to make up for the cost of the solar panels.

And this is the issue with conservation.  There are fixed costs such as buildings and manpower that a utility must bear.  If people use less of the utility, the utility must raise the cost per unit sold or charge a base fee to pay for these fixed costs.  This means that everyone ends up paying more for less.  People have also discovered this when trying to conserve water.  At first their water bill went down as they used less water, but if enough people cut their water use, the utility raised rates to pay for their fixed costs.  You now have a brown lawn but are paying just as much as you were when you had a green lawn because you were using a lot more water but paying less per gallon.  Really the best thing for consumers is to use a lot of power or water since that makes their standard of living go up.  You just need a way to make power that is relatively limitless and have enough rain falling to cover usage.

Another area seeing this issue is the national highways.  For years the maintenance of the highways has been done through a gas tax.  This made sense because the more gas you bought, the more you drove and used the highways, and therefore the bigger the portion of the maintenance costs you should pay.  In recent years, however, people have started to drive hybrid cars, which use a lot less gas, and coal powered cars (plug-in electric cars that use electricity, which is primarily generated by coal, are therefore coal-powered).  This means that less money is being collected for road maintenance.

This case is even worse because at least in the case of the electrical and water utility, people were using less electricity and water so the utility didn’t need to spend as much on fuel to generate electricity and power to clean and pump water.  With hybrid and coal powered cars, people are still using the highways just as much (more, in fact, in the case of hybrids since they are paying less for gas and therefore driving more), but they are not paying for that use.  For this reason, now that we have seen a dip in gasoline prices, politicians want to raise the gas taxes so that they can pay for highway maintenance.  Again, those with normal cars would be subsidizing those who were wealthy enough to buy hybrid cars or foolish enough to buy electric cars.

Clearly what would make sense in this case would be for the owners of hybrid cars and electric vehicles to pay an extra tax, either a flat yearly rate or based on the mileage driven, to make up for the money they are not paying to maintain the roads.  An alternative would be to simply go from a gas tax to a toll on all roads, but this would be very expensive since we’d either need to hire lots of toll collectors or install all sorts of automated systems to detect use.  It would probably be easier to simply charge a flat vehicle licensing fee, although that would be very difficult for a lot of people to pay since they would need to pay it all at once instead of once per fill-up as it is now collected.  Few people could afford to pay a couple of thousand dollars each year at vehicle registration time  It looks like the tax on electric and hybrid vehicles is the easiest option that affects the fewest number of people.

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  1. Interesting. I never really thought of it this way and it does make sense. Infrastructure maintenance is definitely something which can not be avoided and money for this has to come from somewhere.

    • It’s the old issue of economies of scale making things cheaper per item. To make people’s lives better, you really want them to be able to use a lot of energy/water etc…, yet you don’t want to cause a lot of pollution/environmental damage. It makes you think it is better to find ways to generate power cleanly and cheaply than it is to find ways to conserve power.

  2. It reminds me of the short term thinking people have in regards to home heating. Where I live the most common method to heat a home is an oil fired appliance. People start crunching numbers and discover it’ll be cheaper to heat with wood, propane (or natural gas) or electricity (air to air heat pumps for example). Word spreads, the masses jump on the bandwagon and then the price of said fuel raises due to the increased demand. At the end of the day they are no farther ahead.

  3. Interesting article… but how come this is deemed the “problem with conservation” rather than the “problem with pricing models”. In net terms, its better to be using green energy than fossil fuels, so why don’t we just adjust pricing models and get on with it? It seems that paying for fixed costs for access to a utility and then paying for ongoing usage of that utility on a per unit basis makes a lot of sense. Solar panel people don’t like it? Tough. If your product doesn’t make economic sense, make a better product. At least then people are making decisions on solid economic grounds.

    • Amen. We need to have a pricing model that works for the new reality of distributed, small scale power generation, but regulation and protectionism makes it difficult to change. The issue with choosing conservation to solve the problem rather than finding ways to increase supply is twofold. First, if people use less of something like energy it means they give up standard of living yet they’ll end up paying just as much. The second is that you can never solve the problem with conservation alone because populations keep growing and you eventually will reach the limits of what you can supply if you aren’t always building new and coming up with better ways to do things.

      • When you say ‘conservation’, I presume you are talking about green energy (as opposed to saving endangered species and recycling, etc).

        Green energy IS increasing supply. It’s just changing the method in which that supply is provided from a limited source (fossil fuels) to practically unlimited sources (gravity through tidal forces, the sun, the wind). I don’t think it necessarily equates to a reduction in living standards. It’s not a choice between more or less energy, it’s a choice between which energy.

        To you second point, we are always coming up with new and better ways to do things. Green energy is actually evidence of this, isn’t it? At the moment I think the yield from a solar panel is quite low (percentage of solar energy turned to power), if that doubles, triples and quadruples over the next 10 to 20 years, there is no reason why this isn’t a totally viable way of replacing our residential energy needs. In the span of 66 years we went from taking flight to landing on the moon. We’re a very industrious and innovative species.

        I guess my question is… why is green energy viewed as a net drag on the system rather than a potential new technology? If anything it sounds like its financial pricing models, government regulation and industry protectionism that are backing the incumbent technology. From an economic point of view, that doesn’t seem to be a good way to ‘win’ the fight.

      • I think you miss my point and we’re in violent agreement. I’m saying that instead of trying to solve energy problems by using less, we should be looking for ways to produce more that are effectively “limitless.” Things like solar can be part of that equation, although the issue that will always remain with solar is storage because you need a way to save up energy when you’re producing more to use when the sun isn’t shining. I’m thinking something like algae that you can grow in large ponds when it’s shining and then store up and transport around like oil will be the ultimate solution.

        I’m also agreeing that traditional power companies will use regulation to protect their industry as incumbent companies do.

      • Ah, I see. It wasn’t immediately clear upon reading your article that you were pro-green energy. Violent agreement is the best type, though, don’t you think? 🙂

      • I’m pro green energy development (although the term is somewhat oxymoronic –I’ve never seen any form of energy production that doesn’t do some sort of environmental harm) but I don’t think that there are any alternative energies that are ready to replace fossil fuels and nuclear, so I’m against forcing a conversion yet. I’d rather see us continue to fund research until someone comes up with something that becomes the new norm just because it is better and the market forces drive us that way rather than trying to force a conversion. We saw from First Solar, Solyndra, and other Brobdingnagian failures that simply doing more of a power source that isn’t ready for prime time isn’t the solution.

  4. Don’t you think that leaving the pricing model the way it is helps green energy then? If the per-kilowatt pricing model remains as is and the cost of energy rises as the cost base is shared by fewer and fewer people… surely this makes green alternatives more attractive on a comparative basis. Like how high oil prices 5 years ago spurred on the development and commercialisation of electric vehicles.

    • The problem is that the replacements need the power grid to be viable. Having a bunch of solar panels on your work only makes sense because you can sell power back to the power company when the sun is shining and pull power off of the grid when you are not. The reason the grid is not getting enough money for maintenance is that people with solar cells are using it but not being charged for their use because they are using fewer kilowatt-hours. They are still moving kilowatt-hours around the grid. This is like the hybrid vehicles that are using the roads but not paying for the share that they use because the costs are collected at the gas pump.

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