The Iowa Utilities Board recently approved a plan to construct wind farms capable of generating 1,001 megawatts of additional electricity in the state. According to a new cadre of green economists, increased investment in clean energy sources is just what is needed for our faltering economy. Green investment begets green jobs they claim. But, locking local Iowa ratepayers into funding long-term energy investments now could be a big waste of money down the road. Here is why:
Currently, power production occurs a short distance from power consumption. However, new, federal investment in Smart Grid technology may allow producers to deliver electricity far beyond their own back yard. Combined with President Barack Obama's desire to impose a price on carbon through a cap-and-trade system, these policies could be the necessary first step toward a deregulated, free market for electricity without the need for guarantees from state regulators.
Smart Grid is an electricity network that permits efficient transmission of electricity generation at great distances from the consumer. Consumers will be able to choose the energy that they want, at the time they want it, from the source they want, and will be able to pay the current market price, not a regulator's established price. Smart Grid will require an enormous investment, but would allow for the transmission of energy from the point where it is easiest to generate to the point where it is in most demand. The 2009 stimulus bill included $4.5 billion of federal funds for Smart Grid, probably just a down payment from Washington.
A common rejoinder is that if electricity sales became an ordinary retail market then consumers would buy the dirtiest, cheapest energy available. For this reason, leveling the playing field by internalizing the cost of carbon emissions will be the other important step to building a fair and competitive market. Yet, misdirected legislation and state-level bureaucratic inertia could help promote state-regulated vertical monopolies.
The Waxman-Markey legislation, for example, solely gives permit rebates to regulated local distribution companies. Taking the issue one step further, David Sokol, chairman of MidAmerican Energy, testified before the House Energy and Environment Subcommittee and said that climate change legislation should give states the option to bypass the trading by using their existing regulatory framework to determine the most efficient ways to get there. In other words, let the current command-and-control structure of state utility boards run the system instead of the free market.
It is MidAmerican Energy that received approval from the Iowa Utilities Board to build more wind capacity this month. In its regulatory filing, MidAmerican asked for a guaranteed rate of return on its equity investment to build these wind farms. But Iowa already has more than enough energy to meet demand. So, while the cost of this guarantee will fall on Iowa consumers, the new electricity generation will likely be exported to other states, most likely into Illinois to help power Chicago and its suburbs.
But, with a developed Smart Grid and an energy policy that creates a source-neutral framework for energy demand, these kinds of agreements should become obsolete and markets could become deregulated. Energy companies would compete for consumers' business. When the wind blows hard, consumers will buy wind from the Plains states. When the sun shines bright, consumers will buy solar from the Southwest. On quiet nights, consumers will buy nuclear and coal. Furthermore, utility competition creates incentives for product innovation. For example, in Germany's highly deregulated energy market, one large utility recently unveiled a power meter that is connected to broadband Internet and can tweet consumption levels to consumers.
Some states, like Texas and Pennsylvania, are heading in the right direction by promoting retail competition among locally produced electricity. Equally important, states should encourage investment in smarter energy infrastructure to build a better backbone. Such an effort would benefit consumers by creating more choice and more efficient utilization of electricity. This will lay the ground work for deregulation of electricity and, in the end, help create a greener planet.
Alex Brill is a research fellow at AEI.