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Ahmad Faruqui, Area Manager, Retail & Power Markets, Electric Power Research Institute (EPRI)
Daniel Kammen, Founding Director, Renewable & Appropriate Energy Laboratory, UC Berkeley
Nettie Hoge, Executive Director, The Utility Reform Network (TURN)
Bruce Brugmann, Editor & Publisher, The San Francicso Bay Guardian
Betsy Rosenberg, News Anchor, KCBS Radio; Creator, Host & Producer of "Trash Talk"; Moderator
Ahmad Faruqui: The nation's largest state, with 34 million residents, and the world's sixth largest economy, is engulfed with what can truly be called "the mother of all energy crises." Our expenditures on electricity quadrupled last year, from $7 billion in 1999 to $27 billion in 2000. This year they're expected to approach $70 billion. We may experience, in addition, as many as 260 hours of rotating blackouts this summer. The state's multibillion-dollar budget surplus is rapidly becoming a distant memory. The only consolation is that we are not alone. The crisis has now spread to our neighboring Western states. On the East Coast, New York and New England are showing symptoms of stress as well. Overseas, Brazil is experiencing a significant power crisis driven by a shortage of rainfall. So how did we get here?
California's crisis has been many years in the making. It cannot simply be blamed on what has erroneously been called "deregulation," but is in fact a pernicious form of re-regulation. For decades, the state's utilities were subject to cost of service regulations. The process worked well until the energy crisis of 1974 took place. Subsequently, the process became mired in controversy, became cumbersome, led to inordinate delays in power plant construction and produced rates that were significantly higher than the national average. In the early 1990s, cuts in the U.S. defense budget, triggered by the collapse of the Soviet Union, produced a recession in California. The economy contracted two years in a row, sending the unemployment rate to 10 percent. Our political leaders made a decision to introduce market freezes into the heavily regulated power sector in the hope of lowering power prices. Unfortunately, the specific market design they adopted was flawed. In 1996, it was hailed as a landmark piece of legislation, but the cure has been worse than the disease.
Firstly, it disconnected the retail and wholesale markets by freezing retail rates, letting market forces determine wholesale prices. This essentially guaranteed the bankruptcy of the utilities, which have become middlemen in the business. Secondly, by providing a 10 percent price cut to all residential and small commercial customers, it prevented customer choice from becoming a reality. Only two percent of the customers switched providers, and the utilities were forced to retail power; 90 percent of the power sold in California went through the utilities, which was contrary to the original intentions.
Thirdly, to control the vertical market power of utilities, Assembly Bill 1890 required the utilities to sell off a large portion of their fossil fuel generating capacity. Fourthly, it forbade the utilities from engaging in long-term formal contracts to hedge the wholesale cost of electricity. And as you know, electricity is the most volatile commodity known to man, for the simple reason that it cannot be stored; it has to be consumed immediately on production. A lopsided fuel mix exacerbated the effects of the imbalance between demand and supply: Our generation is heavily dependent on natural gas - to the extent of 50 percent - and 85 percent of the gas is imported from out of state into California. Prices of natural gas went up nationwide, even more in California. About 25 percent of the generation comes from hydroplants, which of course are operating substantially below capacity because of insufficient rainfall.
So where do we go from here? California is expected to be short of capacity by approximately 5,000 megawatts this summer. To get a sense of scale, the state as a whole has a peak demand of about 55,000 megawatts. New capacity is on its way, so they say, but it will not make any impact this summer, and will not fully resolve the problems by next summer either.
Therefore we need to focus on demand response, the customer side of the equation, which has been sorely neglected in this market redesign effort. When I say "demand response," I am not referring to involuntary rationing, otherwise known as blackouts. Blackouts are a terribly irrational way of balancing demand and supply; they hit everyone alike. Regardless of the value that that particular customer may place on electricity, they have no option except to be cut off, even if they are willing to pay more for their power. Los Angeles County has estimated that power cuts and blackouts through January of this year alone have cost $2 billion.
What we need are educational and incentive programs that will encourage customers to use less, especially during peak periods when reserves are short and wholesale prices are high. We need to take a portfolio approach to implementing demand response. Among the options that need to be considered are real-time pricing and load management for large customers, time of use prices for small and medium-sized customers and energy efficiency programs for all customers.
Other research at EPRI has shown that real-time pricing can reduce peak loads by up to 2,000 megawatts this summer, representing about five percent of the system peak demand. Such a reduction can reduce wholesale costs by as much as 40 percent. Load management is an additional avenue that can be pursued. Time of use rates, which are very popular in Europe, need to be implemented on a large scale in California, as they are already being implemented near Seattle, by Puget Sound Energy.
Demand response programs are not free, of course, and cannot be implemented simply by asking people to conserve. There is no free lunch, even for conservation. However, these programs are less costly, faster to implement, and cleaner than most supply-side options. For example, it costs only $50 a kilowatt for a year to implement load management or real-time pricing. Energy efficiency programs cost on average about two cents per kilowatt hour. Compare those numbers with what you have been reading in the newspapers, and you see they pay for themselves very quickly.
Daniel Kammen: While we're dealing with an energy crisis, the crisis in fact has very little to do with energy. It has a great deal to do with greed, and it's unfortunate that that's really what we're dealing with in a backhanded way through the energy markets. Let me put a few numbers in perspective. The price for a megawatt of power only a few years ago was $30. It is now peaking over $2000. This means California is hemorrhaging about one billion dollars a week now.
In 1980, national oil imports for the U.S. as a whole cost $80 billion and GDP was $4.5 trillion. That two percent expenditure on energy helped to cause a recession, but it didn't cause it directly. In 2001, California is going to spend almost the same amount, and its Gross State Profits are about $1 trillion. That six to seven percent energy bill will do something far worse than the two percent budget expenditure on energy did in 1980. Another way to put that is California, this year, will spend as much money as the whole United States did towards the energy bill 20 years ago. And that's consumed by a far smaller population.
AB 1890 is certainly a flawed bill, but the goal of it was to diversify the energy supply, and in fact it's been manipulated in ways and has done exactly the opposite. Qualifying facilities, some providing power with gas, some with renewables, have been marginalized in the market. Those of you who signed up for green power providers received a letter saying that your company is out of business; basically all of the mechanisms designed to develop a diverse energy supply have been perverted and circumvented in ways that while possibly not illegal, are certainly close to immoral.
I'm going to list a couple of fallacies about the energy crisis. One is that "California is an energy hog, and that's part of the problem." Completely false. California uses a very small amount of energy per capita compared to other parts of the US. "California didn't build enough power plants to keep up with demand." Also false. There was a great excess of supply at the time when this planning process went on, and California was never designed to be energy independent from the rest of the Western block of states. So that's not the issue either. "California has also claimed excessive environmental regulations stopping new power plants from being permanently constructed." Also false. The CEC (California Energy Commission) has, in fact, approved almost all of the plants that have been presented for review; most of those that have not been approved have been denied through various complicated bickering among some of the competitors. "California froze rates below market prices, driving utilities to bankruptcy." Also false. The rate freeze, was in fact, intended as a floor and the rate freeze benefited utilities greatly because they got to be repaid by consumers for the so-called stranded costs that in other language might be called "bad investments where the public is being stuck with the bill."
Another fallacy is that the Federal Energy Regulatory Commission (FERC) has investigated, but not found, examples of market manipulation. Also false. It's not seen dramatic examples of what is now being euphemistically called "market power," which means good old-fashioned monopoly or collusion of prices. Another fallacy is that the conventional fossil fuel supply will resolve this imbalance. In fact, that's false. What you're hearing here is the people who have taken Econ 101, but certainly have not taken Antitrust 102, and have not figured out how this process really worked. In fact, the market was designed to treat qualifying facilities as part of a diverse energy supply, but what we've seen is that they've been marginalized as relief valves for when utilities needed a bit of extra generation capacity - not what AB 1890 was designed to do.
Another fallacy you hear is that energy efficiency and renewables have marginal value, or are possible stop-gaps, but are not the basis of an overall policy. Totally false. The U.S. has saved a huge amount of money on energy. The year 2000 energy bill for the U.S. was around $600 billion. We have gotten 30% more efficient at generating GNP for a dollar spent on energy since the 1970s. If we hadn't done that, almost the entire disposable budget for the U.S., that not allocated to set programs and the military, would have been spent on energy.
Let me tell you now why the energy crisis is in fact a crisis of leadership and not a crisis of energy. If we look at the sources of energy out there, we find out that there is much more energy supply available than we're talking about and that this crisis is largely manufactured. The number of these qualifying facilities that are offline right now because utilities have not paid them illegally for many months now accounts for 1,000 - 2,000 megawatts. Our total summer shortfall is around 4,000. The number of qualifying facilities like wind plants that have not been connected to the grid because of various forms of foot-dragging by the big utilities is over 1,000 megawatts. The power wasted by not having efficient appliances, that use great amounts of energy when they're not even in use, called standby power, accounts for about 1,000 megawatts as well; we sometimes call that "vampire power" or "wasted energy."
We've already passed the point of having a shortfall of 4,000 megawatts. We're roughly even if we did those programs. That's before we get to things that Ahmad mentioned, like net metering, where a kilowatt bought and used at 4 a.m. does not have the same value as one at 4 p.m. during the peak times. If those programs are put into place, estimates are that between 2,000 and 4,000 megawatts will be saved, putting California from an energy deficit to an energy surplus. That wasn't fancy math, voodoo economics or any such thing; that was simply taking advantage of things online and things we could be doing relatively rapidly.
The point of deregulation was to diversify, and the way to solve that is to set up a market so that new entrants, notably clean energy, are in fact given an equal footing if not somewhat of an advantage. That's not what we've seen in the process so far, and the really unfortunate thing is that as soon as we invest too heavily in gas, for example, it means that we live with that for decades, because those plants go online and you have to pay them off. The ironic final twist in this whole picture is that if you look at the energy capacity being planned in response to this crisis, both by Governor Davis and by the Bush-Cheney anti-energy task force, 96 percent of new capacity planned for the Western United States is gas. We're setting ourselves up for the exact same problem down the road that we're trying to get out of now.
Continue the Panel Discussion >>
Marwan Muasher
Arianna Huffington
Ben Stein