Econ Winter 2012: Professor Bushnell The US electricity industry after 20 years of restructuring Severin Borenstein and James Bushnell: UC Berkeley, UC Davis, and NBER

Econ Winter 2012: Professor Bushnell

Econ Winter 2012: Professor Bushnell Central Premise The last 30 years of electricity policy has been largely influenced by attempts to avoid paying for fixed/sunk costs. –Regulated prices = average costs (“own”) –Market prices ~ marginal costs (“rent”) The attractiveness of this strategy fluctuates. What is sunk one day can be a cash cow the next –As “reforms” work it can reduce costs (sunk and otherwise) and provide benefits But those efficiency gains are likely dwarfed by the transfers at stake,

Econ Winter 2012: Professor Bushnell The Electricity Industry: Generation –Production of electric energy Marketing –Buying and selling “bulk” power Transmission & Distribution –High voltage transportation of energy –Low-voltage, local “delivery” of energy Retailing –Buying from generators - selling to end-users Historically fully integrated (1 company) and either state- owned or regulated under cost-of-service principles

Econ Winter 2012: Professor Bushnell Rate of Return Regulation Produced Widely Varying Results: 1998 Average Retail Prices

Econ Winter 2012: Professor Bushnell US Generation Capacity Reserve Margins

Econ Winter 2012: Professor Bushnell Retail Choice is Thriving only in Texas

Econ Winter 2012: Professor Bushnell Residential Sector is Avoiding Choice

Econ Winter 2012: Professor Bushnell Defining Liberalization (3): Deregulation of Generation

Econ Winter 2012: Professor Bushnell Wholesale Prices in US Power Markets

Econ Winter 2012: Professor Bushnell

Econ Winter 2012: Professor Bushnell Retail Price Increases

Econ Winter 2012: Professor Bushnell Retail Price Changes:

Econ Winter 2012: Professor Bushnell The difficulty in judging the impacts of restructuring The challenges with a focus on retail rates –Tremendous time lags between wholesale and retail outcomes in many regions –Controlling for diversity in starting conditions –Isolating impacts of restructuring from other changes Marginal Cost (deregulation) will at times be above and at times below Average Cost (regulation) –Which looks better depends upon when you look

Econ Winter 2012: Professor Bushnell Average Retail Price of Electricity, Source: EIA,

Econ Winter 2012: Professor Bushnell Average Retail Price of Electricity, Source: EIA, Source for Black Line: Artists Rendering (I.e. I made it up) MC or “market price” (“rent”) Rates  Average Cost (“own”)

Econ Winter 2012: Professor Bushnell Source: Completely fictional data made up by me. MC Rates  Average Cost Theoretical (hoped for) Impact of Restructuring: both costs go down

Econ Winter 2012: Professor Bushnell Retail Rate Changes Since 1997

Econ Winter 2012: Professor Bushnell The Next 20 Years Tension between average and marginal cost has migrated to the arena of distributed generation. Renewable power has lowered marginal costs (market prices) while increasing average costs Retail rates remain time-invariant and volumetric based on average cost Customer level renewables (rooftop solar) offer an escape from most fixed and sunk costs –Problem is exacerbated by increasing-block retail rate structures in many states –Almost certainly constitutes inefficient bypass

Econ Winter 2012: Professor Bushnell Recent Technological Change Huge cost improvements in wind and solar technologies Smaller, but significant, improvements in distributed solar installation costs Large-scale deployment of “smart-meters” Advances in development and acceptance of home-automation systems. Improved sensor/switching/computational capabilities for large-scale grids Talk, and some reality, of household storage

Econ Winter 2012: Professor Bushnell

Econ Winter 2012: Professor Bushnell Solar City (largest distributed PV company) is doubling capacity installed every year

Econ Winter 2012: Professor Bushnell Technology and the Utility/Consumer Relationship: Two Pathways Path 1: Technology tightly integrates individual energy users with their regional grid –Two-way communication between users and wholesale market operators. –Massively distributed responses to changes in wholesale market conditions. Responses largely automated through home automation of thermostats and management systems –Distributed generation where it offers true social benefits Path 2: Technology and policy enable agile response by customers to pricing inefficiencies –Customers use technology to bypass system when MC of alternative is lower than AC-based price offered by grid provider

Econ Winter 2012: Professor Bushnell Wind power has bad timing in North America

Econ Winter 2012: Professor Bushnell Hourly Renewable Output on CAISO System

Econ Winter 2012: Professor Bushnell Hourly Renewable Output on CAISO System

Econ Winter 2012: Professor Bushnell

Econ Winter 2012: Professor Bushnell

Econ Winter 2012: Professor Bushnell The Duck Graph: Rapid net demand changes with high solar PV penetration

Econ Winter 2012: Professor Bushnell

Econ Winter 2012: Professor Bushnell

Econ Winter 2012: Professor Bushnell

Econ Winter 2012: Professor Bushnell Not everyone agrees on prices that reflect costs PUC Must Reject PG&E Plan to Cut Incentives Mercury News – Letters to the Editor, September 22, 2014 PG&E has proposed changes that protect its monopoly and could cripple the market for its main competition: rooftop solar. The crux of PG&E’s proposal is to add $10 in monthly, unavoidable fixed charges to your bill. By making customer bills less dependent on actual energy consumption and forcing people to pay no matter how much energy they use, the incentive to produce your own energy and reduce dependence on dirty grid power is dramatically reduced. Matt Vespa Senior attorney Sierra Club

Econ Winter 2012: Professor Bushnell Distributed Storage: How will it be used?

Econ Winter 2012: Professor Bushnell

Econ Winter 2012: Professor Bushnell Conclusions Motives for structural change in power industry not always “pure” –Driven by opportunities to shift costs as much as to cut costs. –That doesn’t mean its not working. As large capital bets have turned bad, pressure for structural change increases The next arena for this pressure is micro-grids and distributed generation –These can be good things, but we need to ensure investments are taken for the right reasons.

Econ Winter 2012: Professor Bushnell Thank You!