Wind Will It End?

Please forgive me for the cheezy post title, but if you choose to read on I think you will see it is relevant. When we discuss the challenges facing wind energy we hear about the intermittency and storage issues, destroying the visual landscape, lack of transmission and even the dangers posed to birds. Many people also raise valid concerns regard whether or not wind can be economically feasible without government subsidies, regulations and mandates. A recent Scientific American article shows that wind proponents should also worry about the challenges we don’t hear about every day.

Not surprisingly, a lot of these less discussed challenges are coming from wind’s competitors. The Coalition for Fair Transmission Policy believes wind producers should fork over the funds needed to expand the transmission infrastructure from the areas of the country where wind energy is produced (the Midwest) to the areas with the highest energy demand (the East Coast). While this seems like a reasonable idea on the surface you should be asking yourself who is this Coalition?  Turns out the Coalition for Fair Transmission Policy is made up of East Coast utilities.

Closer to home we have players in the natural gas game demanding that wind developers be held responsible for some of the costs associated with running backup natural gas generators. These generators are essential in providing electricity when the wind slows down and is unable to produce the needed amount of electricity. As before this appears to be a reasonable suggestion. Why shouldn’t wind energy producers help foot at least part of the costs generated when a gas turbine is turned on to make up for a decline in wind energy? At the same time this seems like an attempt by the natural gas industry to increase their competitions costs and help keep natural gas competitive on price.

Anyone who is familiar with the wind industry understands the large role played by the government. While people can certainly debate whether the government should be involved at all and if so to what level, nobody can deny the importance of politics in the past or in the future. In my podcast I touched on the concerns Senator Charles Schumer raised regarding the spending of stimulus funds on projects that were creating more jobs in China than in the United States. Now Schumer and three other Senators proposed a plan that would prevent federal grants being issued to any project used blades or turbines manufactured outside of the U.S. opponents of the Senators’ plan claim that the U.S. cannot afford to slow or limit the growth of the wind industry because it will only put us at risk of falling behind Chinese and European manufacturers. They also point out that Schumer and his colleagues are simply trying to funnel jobs to their states and the number of jobs going overseas has been exaggerated. As with most things in politics the number of jobs being created in and outside of the United States differs significantly depending on who you talk to and before you know it the whole issue has taken a nasty turn towards “he said, she said”-ville.

It is obvious each of these parties (Senators, utilities, the natural gas industry) and their actions are motivated through their own self-interests, but it should be just as obvious that we cannot simply dismiss these legitimate concerns simply because we do not support the people raising them. In a perfect world we would be focused on finding solutions for the “natural” problems facing wind instead of creating additional artificial roadblocks. In that same perfect world everyone would be working towards the common goal of creating clean renewable energy and the traditional utility, natural gas and coal industries would be okay with that. Reality is the world isn’t perfect and the future of wind energy is hardly certain. For the wind industry to continue its impressive growth they will have to learn to be just as focused on navigating the wonderful world of politics and viciously competitive energy industry as they are with coming up with solutions to their storage issues.

Only Sunshine with Decoupling?

As discussed in class, decoupling is a method to get utilities away from having an incentive to sell more electricity towards being revenue neutral about the sell of electricity.  Former President Bill Clinton endorses this approach and believes the federal government should mandate it.  Before coming back to school, I worked for a utility that used decoupled rates in 3 of our 6 jurisdictions.  After reading up on decoupling and experiencing it at my utility, I started to see that decoupling is not all good and no bad; there is some down side to the method.

First, let’s define again what decoupling is.  In general, decoupling is when utilities get paid per customer instead of per kWh sold.  At my utility we calculated this by looking at the previous year and the revenue we made per customer and applied that rate going forward.  In our case, it was a very easy calculation to determine and implement.

In class we discussed the major benefit of decoupling, i.e. utilities being revenue neutral, I want to discuss one other positive and a few arguments against.  As a benefit to utilities, decoupling protects from a downturn in usage.  The first summer I was at my utility, we had to increase rates by 75% in one jurisdiction.  Usage dropped per customer there, and in turn, we lost revenue.  Utilities make money on a very thin margin and decoupling stabilizes the utilities revenue from big drops and big gains.  In was no coincidence that the next year we pitched decoupling in our rate case in that jurisdiction.

Decoupling does have some downsides.  First, utilities have to file more rate cases to adjust the decoupled rate so that they can earn their required rate of return on capital.  Rate cases are expensive.  The utility has to hire expert witnesses, lawyers for their side and for the consumer side, and spend months getting ready and defending them.  At my utility, they had not had a rate case for 6 years as the market deregulated and then hired five new people, out of a 15 person department, in a matter of months to prepare for one.  Some of rate case costs are passed on to customers with a rate increase; the rest is absorbed by the utility which hurts the bottom line and thus may make them file a new rate case earlier.  Utilities could build the decoupled rate such that it would adjust over time to reflect increasing costs, weather, and economic conditions; but this mechanism could become outdated, or not reflect the true cost, and thus would have to be changed in court.  Second, others have wondered if decoupling is even needed to promote conservation.  The Florida Public Service Commission believes that the current conservation programs in place in their state are working to reduce usage without the costs and burden of applying a new rate structure and the administrative complications that come with it.    In the end, I believe that decoupling is good platform to utilities to promote conservation, but utilities need to be aware of the costs.