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Read the Q & A from the Amory Lovins event.
Amory Lovins
Physicist; CEO (Research), Rocky Mountain Institute, Snowmass, Colorado
To understand what's been happening with California electricity and its relevance to the rest of the nation, it's important to start with some facts.
• California's electricity consumption did not soar in Silicon Valley or anywhere
else due to the Internet or anything else.
• California did not stop building power plants in the '90s. Reserves tightened but
stayed adequate.
• The supply expansions already under way may well already be an overshoot,
which means building more than you need.
The electricity mess in California started around '94 when people with strong ideological views decided to fix a system that wasn't broken and they didn't understand. The West Coast had vibrant wholesale electric markets. California had ample supplies of electricity at modestly higher than average rates that were stable or declining. But the governor at the time thought it would be a good idea to refinance nuclear debt with cheaper public debt in order to reduce rates particularly to industrial customers. A political deal was formulated with enough consumer and environmental goodies to get the deal. The sales pitch had to do with customer choice and competition but that was soon sacrificed.
The resulting mess has been appallingly misreported more than for any other energy story I can remember. The actual causes of what happened are quite complex and interactive. I'm going to quote a few numbers which will generally be in a unit called "gigawatts," Each of those is a billion watts, about enough to run San Francisco. The statewide maximum or peak demand for electricity has been running just over 50 gigawatts.
The California electricity system met a 53 gigawatt peak load in the summer of '99. It then crashed at a 29 peak load in January 2001. How on earth could that happen?
There was a hydro-drought. Some plants were out for maintenance. But nowhere near enough to account for a 20 gigawatt difference—nearly half the system suddenly disappearing. It didn't disappear; there was enough capacity, but for some reason not enough electricity. So what happened?
We are told that the cause of a supposed shortage of supply was soaring electricity demand. If you look at the published data, it's very hard to find any such thing. From 1990 through 1999, the average growth of electricity use in California was 1.15 percent a year.
We're told the culprit is huge electricity demand growth from the Internet. This is a fiction created by the coal lobby to try to get us to believe a prosperous, digital economy requires us to burn more coal. So they put out the deliberate lie that the Internet uses 8 – 13 percent of the US electricity. All the digital equipment—the computers and routers, and servers and stuff—and all of the telephone switch gear and all of the other office equipment that has nothing to do with the Internet, like photocopiers, and all the energy to make them, add up to only three percent of US electricity. The server farms—the data centers we've heard so much about—use no more than 1.6 percent of Bay Area and 0.12 percent of US electricity. There is no evidence that demand is going up because of the Internet. In fact there is some evidence it may be going down because of the structural changes that it brings in the economy.
There weren't any environmental or siting constraints that prevented people from building power plants of any size in California in the 90's, but they didn't want to build big plants. There was about four years in which nobody applied to build any big plants. After that they came in with smaller proposals, which were approved.
And there was also—as ten eminent economists recently found after carefully studying this—excess or concentrated market power. Because half of what was supposed to be the competitive bidding space was actually pre-filled, and, of the remaining space that truly was open to competition, two-thirds was controlled by only seven companies. So each by itself could move the market. It didn't take them long to figure that out.
Under the nutty bidding system that had been set up they found they would actually make a lot more profit—which is the business they're in—by selling less electricity at a higher price rather than more electricity at a lower price, as had been promised. So since late summer 2000 until about a year later, ten or fifteen gigawatts was calling in sick. Anybody who runs a power plant will tell you if I don't want to run this plant today I can easily find 20 good reasons not to run it. I'm not suggesting that any collusion occurred between these or other companies.
It appears that both statewide and in the Western regional power pool, there's been adequate capacity at historic forced outage rates throughout all of the power emergencies. But much of it was systematically offline because the system rewarded gaming of the market. It was a ticket scalper's paradise.
As a measure of how wrong things went, from December '99 when we had normal prices, to December 2000, the independent system operator reported load went up 0.7 percent. Monthly peak load went down 1.9 percent—also not much. So not much change. Except the price of electricity wholesale went up 13 times. And the price of what's called spinning reserve—instantly available to back up anything that fails—went up 120-fold.
A clue may help us understand what happened. There was little or none of this price volatility for most of 2000 in the 16 other states and provinces and in the California municipal utilities like Los Angeles and Sacramento that did not do this sort of restructuring. And yet they shared all the same power plants in the same regional power pool. Doesn't that tell us something?
There was another part of the mess—what you might call public policy malpractice. The Public Utility Commission had delegated the portfolio managers' function—buying enough supply to make sure the lights stay on and getting a diverse mix and so on—to customers. They said customers will be free to buy whatever financial hedges they wish, to protect themselves from price volatility.
The independent system operator was put in charge of all of these arrangements. Though they tried valiantly, they were not equal to the task. One analyst believes that if California power plants were transported across the Oregon border, they would increase their output 30 to 50 percent because they would be run in a more effective way. Anyway, the Independent System Operator isn't really independent as the name implies. Many of the generators actually sit on its board and it keeps secret the data one would like to have open for analyzing.
To make it all much worse the Federal Energy Regulatory Commission has had the duty since at least 1935 of insuring that wholesale electric prices nationwide are just and reasonable. In the midst of this crisis they radically abdicated that responsibility and decided that whatever the market will bear or very close to it, is just reasonable by definition.
Power reserves were tightening in the regional pool because the 16 other states and provinces that shared the same capacity did little or nothing on the demand side but many of them had very rapid population and economic growth. The typical Las Vegas house ended up using two or three times the annual electricity of a typical Bay Area house and therefore, California, being the biggest net importer suffered the most price volatility as the other reserves tightened.
In short, the market performed brilliantly. Nobody looked after the public interest. The political motivations of many parties continued to distort choices and decisions. The principle of "best buys first" or "least cost investments" got abandoned early.
However things are getting better. Starting in early June, electricity prices suddenly fell again for a lot of reasons. Five gigawatts came back from maintenance outages, real or imagined. About five gigawatts of independent power that had been off because they weren't getting paid came back on when the debts were settled. The Bonneville Power Administration freed up a couple of gigawatts in the Northwest by paying smelters to shut down. Customers were heroes. They saved about five gigawatts even before the big price increases hit. The state signed up long term power contracts that greatly diluted the volatile spot market. The price went down to seven then to three-and-a-half dollars.
Californians cut their weather corrected electric energy use by 10 percent, peak load by 12 percent. Per dollar of gross state product, electric energy use went down 12 percent, peak load by 14 percent. In half a year they reversed five or 10 years of previous load growth, a stunning result.
We need to think carefully about how to diffuse excess market power because if the same firms that now occupy Boardwalk and Park Place build still more capacity as they're doing, won't that just further increase their already excessive market power which they'll have no less reason to exercise? We need to think carefully about diversified ownership and scale of what's being built or we may make matters worse.
We certainly need full and fair competition on both the supply side and the demand side so that power-plant owners have an incentive to run their capacity, and saving electricity can compete fairly with making more of it.
I think the genius of the market place in a funny way is starting to reassert itself. Customers are figuring out that it is a lot cheaper to save electricity than it is to produce it or to buy it. I think that will be our salvation as long as we don't draw any conclusions and don't assume that any kind of supply at any price is also going to be necessary. Because then we will exacerbate the historic boom-bust patterns and forego many of the benefits we've had.
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