Thursday, January 29, 2009

The Department of Energy Is Clearly Trying to Piss Me Off

Sometimes I wonder if the government anticipates that I will read their reports, and puts little things in them specifically to get to me. Today's episode occurred while reading a (mostly well-done) new report from the Department of Energy's Electricity Advisory Committee, "Keeping the Lights On in a New World."

On page 66 of the report, the Committee's authors note that investments in new generation capacity predictably follow a cyclical pattern. To illustrate why this is the case, please consider the following fictional example. Fake City is served by a large, centralized coal plant which produces baseload power, and several natural gas plants which satisfy peak load. Over time, the demand for electricity in Fake City rises, but the centralized coal plant is unable to increase its generation sufficiently to satisfy it. Electricity prices rise, and investors notice that profit opportunities exist for anyone who can help to meet the shortfall. The existing natural gas plant operators ramp up their generation, and several new natural gas and wind facilities (which can be built relatively quickly and inexpensively) are brought online to take advantage of the high prices.

Eventually Fake City's utility operators come to believe that future electricity demand will be sufficiently high to justify investment in a large new coal plant (these are very expensive and take a long time to build, but are less costly to operate). They begin construction on the plant, and in the mean time, the new natural gas and wind projects rake in the earnings which justified their construction in the first place. Eventually, the new coal plant is brought online, which decimates the market price for electricity, flooding the market with new, inexpensive supply and effectively pricing out the natural gas plants (the wind projects are less costly to operate, so they'll likely stick around, but new ones will not likely be built).

This cycle is immediately predictable to anyone thinking about how electricity generation works. It ensures that market demand is met in times when large new plants cannot be economically justified, and helps to communicate the need for new investments (whether in large plants or small ones) through the price mechanism. In short, the cycle is an illustration of comparative advantage at work.

Hopefully, anyone reading the above will be thinking, "Wow; it's really neat that the price mechanism is able to coordinate different technologies to satisfy the different needs of electricity consumers as they change over time! The big plants are built when they're needed, and there's a way to address consumer demand when those plants aren't economical -- that's great!"

But not the Electricity Advisory Committee! They write:
...large baseload capacity projects are limited to those times when demand and prices are significantly higher, thus reinforcing the cyclic investment process. Making new projects economically viable during lower demand growth periods will require policies and actons designed to stabilize investment returns, capacity, and energy prices.

There's only one coherent response to this statement: AAAAUUUUUUGGGGGHHHHHH!!!!!!!!!


Anonymous said...

Thank god for the sun.
"The highest excellence is like (that of) water".

Danny said...

I dunno, dude...sunburns are very un-Tao.

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