The Big Problem With the Modern Electricity Grid

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1:23Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Weisenthal. And I'm Tracy Alloway. Tracy, I feel like we've already done kind of one episode or maybe multiple, depending on how you define them. But, you know, we're understanding the incredibly complex, opaque, crucial world of how electricity markets work in the U.S. and what's good about them and what's bad about them. We just got to we got to do more. Here's what I've learned from multiple hours of this topic. Let's hear a summary. It's complicated. No, it is. But that's it. And also, also, actually, I'll add one more thing.

2:02It seems to be kind of the worst of multiple worlds. Like in a sense, there's a lot of regulation. But in another sense, there's a lot of deregulation. In one sense, you have these dominant players. And I have to say a lot of this is informed by my experience in, I guess, New York and Connecticut, where you have Con Edison and then Eversource. And so you have these big players that you have to pay a lot of money to in terms of distribution. But then if you want, you can go out to an independent energy supplier and pay them for the actual electricity that is going through the pipes or the wires of ConEd or an Eversource.

2:43But it never ends up making a difference, as far as I can tell, because the distribution costs are still so high. Yeah. I mean, I think the part about it that like why it feels like a mess intuitively is this attempt to essentially create a market on top of something that we know is a natural monopoly. Right. Because obviously you're not going to have like multiple companies or ideally, or I don't think it makes sense. Maybe it does to have multiple companies like running their own wires in distribution. I think we all sort of get why there is this natural monopoly aspect. But then, of course, you try to introduce market aspects.

3:18And so different producers, whether it's solar, whether it's nuclear, whether it's coal, whether it's natural gas, whether it's wind, et cetera, are kind of in a market. And it depends. So I think in Texas, there's probably different than Virginia versus Tennessee. That's the other thing. There's state by state differences, obviously. Texas, there's a lot of competition where you can basically just do whatever you want. and whoever is the cheapest price at any given moment, that's who is supplying the power. So you try to overlay on top of this natural monopoly some sort of market-ish thing where different people compete.

3:50And then, of course, you have the issue of because it's not a market, these utilities are, as you mentioned, heavily regulated, constrained on what they can invest, constrained on what they can price, constrained in the connection they can link between their own investment in, say, renewables versus then capturing that with higher prices. And everyone complains that for whatever kind of energy they make, the system isn't working well. Yeah. But I think you put it perfectly. It's like imposing market forces on a natural monopoly. And it just seems like there are some downsides to that model. I'm going to put it that way.

4:25Downsides for consumers and then downsides in terms of maybe the transition to decarbonized energy. And this is the key thing we are putting. There's so much riding at stake of the power system, right? Because obviously we're attempting to take the old model that was in place for decades and then replace a lot of the generation sources with zero carbon versions, whether they're solar or wind or maybe nuclear, though there's not a ton of nuclear construction. But that is one attempt. Then there's also booming demand for the first time in decades. And this is something we have talked about in the context of AI data centers.

4:59Tracy wrote that great post recently, just talk about how like every question an analyst calls now for these companies is basically about demand from AI. Oh, it was crazy. I looked at the transcript for Dominion's most recent earnings call, and I think there were like five or six questions asked and four or five of them were about data centers. And Dominion's doing a bunch of interesting things, but people only want to hear about data centers at the moment. Totally. So you have two really novel things. You have the decarbonization effort and you have the increase in load growth, I think they call it for the first time in decades.

5:31And so it's like, are the markets that we've designed, this combination of natural monopolies with some sort of market mechanism, do they work for all this? And I think the jury is still out to say the minimum. I am ready to confirm my prior that this whole space is very complicated and I don't quite get how we ended up with this particular system. So let's do it. All right. Well, I'm psyched to say that we have two perfect guests to sort of help us understand how we got here in these markets and what the flaws might be. We are going to be speaking with Matt Huber, who is a professor at Syracuse in the Department of Geography and Environment.

6:08And we're also going to be speaking with Fred Stafford. He's a pseudonymous energy writer who works in a separate industry, but he's someone who's writing I have enjoyed for a long time. I've learned a lot from. And so we're disguising his own voice so that he can keep his professional life and his writing life separately. So Fred and Matt, thank you so much for coming on Outlaws. Thanks for having me. Thanks for having us. Happy to be here. So why don't I just start with a simple question. You two have been writing in various places. You had a piece recently in, I think, Damage Magazine and Jacobin and elsewhere.

6:40Why? What is it about the nature of electricity markets that you feel like you have to write about and explain? So I love to answer the question, why electricity? Why electricity markets? Because for me, as kind of a stem-brained person on the political left, I got excited hearing about things like nuclear power. And that seems really important and really necessary for climate issues and so on. And what I found was that in electricity, when you start looking at like, why isn't there more nuclear power? You quickly run into this fascinating domain in which central planning runs right up against all these markets.

7:18And this like really interesting tension of some things are planned, some things are markets. Why is it like that? And then what I also saw on the political left is that nobody really was talking about this. There wasn't really any clear analysis of why there wasn't more nuclear power or anything, because I think a lot of this sort of discussion was really guided by kind of environmental politics. So that's really what drove me into this as like an intellectual subject. Yeah. Also, when you look on the political left, there's a tendency to kind of fetishize the kind of like small is beautiful vision of small scale decentralized energy generation.

7:56and when you look at the scale of the climate crisis and how much we need to build and how much we need to transform that vision of decentralized energy sits well with kind of decentralized markets and price signals but it doesn't really sit well with the need for centralized planning for large-scale building and investment and to try to deal with the kind of load growth that you both mentioned at the top. And so the small is beautiful vision seemed to be totally out of step with the kind of large scale challenge we have in front of us. And trying to kind of think through how we could reform the electricity system to meet that challenge is, I think, why we got into this topic.

8:38So I'm going to ask the obvious question then, which is, how did we end up with this system? Because my understanding, reading some of your work, is that there was a time in the early 1900s where we had very centralized, very regulated power companies, utilities, basically. And then later on in the century, we moved to this weird sort of pseudo deregulated market where we had independent operators plus the regulated utilities. How did that transition actually happen? Like, basically, walk us through the history of the U.S. energy industry in under 20 minutes, preferably? You know, it really does go back to early 20th century, where a lot of sort of progressive lawyers and progressive political thinkers sort of realized there were these parts of the economy that were seen as sort of essential services, like water, like gas, like railroads even, that were sort of not really best left totally to the private sector and totally to the market, and that are better sort of regulated as public utilities, because there's a fundamental kind of public interest in making sure that those utilities are kind of running smoothly and offering those essential services.

9:58And pretty soon when electricity came on the scene, it became pretty clear that electricity was one of those essential services. And therefore, it came under the domain of public utility law. Now, the problem was the sector of electricity was controlled by capitalists, like people like Thomas Edison and others, and eventually like Samuel Insull, who, you know, wanted to run the system for profit. And that kind of tension kind of played out for a while. But eventually they realized that, OK, it doesn't make sense for society to have multiple competing electric distribution companies sort of laying wires against each other.

10:35So what we really need is to actually have a single electric utility. And the industry sort of fought and compromised to make sure that that electric utility would be run by a private investor-owned utility. They'd be given a monopoly franchise over a given territory. And in exchange, they would be regulated by public utility commissions, which we still have in this country. They still regulate your distribution utilities. And they're supposed to regulate them for the public good for the public interest, make sure these private utilities aren't like gouging consumers. And so that created a kind of compromise or utility consensus that lasted throughout much of the 20th century.

11:16And these sort of monopoly regulated utilities, you know, they built the grid. You know, if we talk today about the return of load growth, there was a lot of load growth in the post-World War II era. And they developed this model where their investments were regulated and the prices they charged to consumers were regulated, but they were really effective at building out the grid and building out generation, transmission, distribution. Now, by the 1970s, they started to come into disfavor. There was, as many would call it, this kind of shift towards neoliberal ideology where really all the kind of big hulking institutions of the post-war era, like government and unions and utilities, were seen as kind of inflexible and not competitive.

12:02And we need to kind of really smash these institutions and deregulate them and break them into smaller and competing parts. And so at that point, you get this long process of trying to break up this utility system that, again, used to be run by a single entity, and they could use central planning, they could really invest with long-term considerations. And then you break it up. And as you both talked about in the introduction, now we kind of have competition and generation. You have all these different independent power producers that are competing to sell electricity onto wholesale markets. And the wires, the transmission and distribution still tend to be owned by utilities, but they've also found ways to insert competition into the retail side where consumers can have of so-called choice over things.

12:49And so what they've done is kind of broken up this highly integrated and complex physical system called the grid and broken it up into parts where they can subject it to competition and markets and price signals. Now, this is where we kind of reach this impasse where if we really want to totally restructure the grid, totally grow it in ways that can serve decarbonization and AI and all this stuff, that perhaps like maybe this sort of more integrated, more central planning, more coordinated and socialized investment model could be more useful than this very scattered and sort of fragmented system we have now.

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15:23So, Fred, why don't you jump in? Because as you said in the intro, you got interested in nuclear power. And in your view, the current market model is not amenable to the scale of nuclear power expansion we need. And we know that there's hardly any building. I think there was a new reactor last year, but it's incredibly slow. So what is the core flaw of putting nuclear into the existing electricity model? So the major issue is that nuclear is this extremely capital intensive infrastructure that costs so much and it produces very cheap power once it's built, where the operational expenditures are very low.

16:01And it does so in a way that is just sort of constant. It's not flexibly moving like power increasing and decreasing. It's just sort of dumping 24-7, what people call baseload power, out into the grid. And because someone has invested so much capital in this thing, to recoup the costs, they have to run this and try to get revenues 24-7 max capacity. Unfortunately, the way that revenues are assigned for power generators in these sort of restructured areas that are really dictated by marginal prices at any given unit of time, the price of electricity on the market is the price of the marginal unit, which often tends to be a price of natural gas.

16:43Sometimes it's even close to zero because there will be a lot of renewables at that particular time and place. but you kind of lose the guarantee that you can recover your costs, you being the owner of the nuclear plant. So it just makes it very hard to know you're going to recoup that investment. It means that all this wind and solar energy, which is at any given time might be on the grid, maybe isn't, but when it is, it's bringing down the market prices. So it basically just disturbs this way that nuclear and hydroelectric power, pumped hydro storage facilities, all these big, big infrastructures were invested in, in the way they recouped costs.

17:23And because the utilities had this sort of cost of service regulation, where the idea is they would invest in the infrastructure and they would get a profit on the capital investment. They'd be allowed that, you know, roughly nine to 10 % profit, but the total costs for everything that they had invested in and were spending to run the electricity system to provide electricity service to customers was being socialized to those customers. When you don't have that model, the revenues are less guaranteed. The revenues are just whatever the market revenues are. And there's just various reasons why that competition from the other forms of energy and the way the prices are set according to whatever the marginal unit of power is, it just doesn't work well for these big power projects.

18:08Wait, can you give us a specific example of a utility that might be doing something or have more money to make renewable energy investments. I'm sort of leading you on here. But one thing that you mentioned in your writing and going back to our intro is Dominion building its own ships to install wind turbines. And that was kind of stunning to me. I hadn't heard that before. So talk a little bit more about like the concrete examples of utilities maybe doing this. at a larger scale than some of the independent operators. Yeah, so I love the Dominion example. I think it's so interesting that we do open our recent essay with that.

18:50So let's say you're a state and you're a state that has democratically determined that you want offshore wind to be part of resources that the state is using. That is a result of some kind of democratic process. People might disagree with that, but that was a state policy aim. Now, if you're the state of New York and you want offshore wind, you say, all right, we have some power markets already, but that's not going to be enough to attract any investors in this massive, massive capital intensive project that's long-term infrastructure. So instead, we're going to design, we the state, are going to design increasingly bespoke financial policy instruments called the Offshore Renewable Energy Certificate as a subsidy.

19:31And we're going to force all the utilities, like the con eds and your utility you're paying bills to, to have to purchase a certain number of these instruments, these certificates, so that it's kind of socializing the cost of the subsidy among electricity consumers. But now we've designed this new kind of financial instrument. We are augmenting the existing power markets with this as a subsidy because the power markets weren't enough to attract investors. Then we're going to design a competitive auction process to take competitive bids. So we say, please, please, somebody, oh my God, we want offshore wind.

20:04Please, someone come and build it. here's the subsidy on top of the power markets and whatever forecasted revenues you think you'll make based on your forecast of the market price, you get to keep whatever's left. Place your bids, we want to procure it, and we'll see which one offers the best price for us, the state. Now, that is the kind of deregulated or restructured market approach to this. Now, let's look at Virginia, which has Dominion as an investor-owned public utility. Virginia passes legislation, we want offshore wind. They then just task the public utility to build offshore wind. Dominion then, it doesn't need to, no one needs to design all these additional subsidies, these additional markets or auctions or anything.

20:46Now the state public utilities commission just needs to be working in tandem with Dominion Energy to kind of approve whatever investments they think are needed, determine what's prudent of those investments, what they're allowed to socialize to the customers. and they have such a scale. It's actually the largest of all the Atlantic coast offshore wind projects by a fairly large margin. And because of the economies of scale here, well, you mentioned the ship. One of the major kind of supply chain issues that offshore wind projects are facing is there's not enough ships because there's this law, the Jones Act from 100 years ago that says - We've heard of it.

21:22It's a common, yeah, everyone mentions it, but and everyone just acts like there's no legitimate basis for that. I'm not going to make that argument. That's a fact regardless. So there's not a lot of ships. So Dominion just says, OK, we know we can recoup the costs of all this stuff because we're a public utility, a regulated monopoly utility. So we're just going to build a ship. And just a couple of weeks ago, that ship was built and it sailed out of a port in Texas. It's called the Shribdis, like Scylla and Shribdis, you know, questionable sea monster naming for your offshore wind vessel. But now they can keep this project going despite what kinds of cost increases there are with supply chain issues and so on.

21:58Whereas in New York state, a lot of the contracts that were the results of these competitive processes had to be canceled because supply chain problems and other issues meant that the projects at the agreed upon contracts and subsidies were no longer profitable. And the state said, well, we're not going to let you renegotiate the price. We're canceling it. Rebid later. All right. So what are the people of New York left with then? Tracy and I were just talking earlier today about how the Jones Act has probably now come up on like 20 episodes, but we've never actually done a proper Jones Act episode.

22:29And now I think we'll just never do one. So it can be this running joke of never having done a Jones Act episode. Matt, I want to go back to you. You know, you said something that certainly rings true to me. In fact, I brought it up recently on another episode. You say the political left pushing renewables, the certain fetishization of the small is beautiful. I sort of put it as like the more bucolic forms of energy, solar and wind. But what is the problem with relying on solar wind? Because as far as I can tell, when I look at charts, and especially when you augment them with batteries, it looks like we're installing more and more and more.

23:04Why is that not the path? If we're installing more under the existing market structure, why is that not the path towards decarbonization, decarbonizing the grid? Well, it's certainly part of the path. In one sense, we are trying to figure it out, but the intermittency issue is still an issue. You'll see headlines. Like once I remember the UK and the Financial Times, it was like 66 % of their energy was coming from wind one week. But if you read the whole article, two weeks before that, 2 % was coming from wind, right? And so there are challenges to what they call firming that intermittency. And you can do some with lithium batteries, but those batteries can only last about four to eight hours.

23:49So there's really still a challenge of long duration energy storage that we're still told we're sort of a couple of years away from. But obviously, solar and wind are going to be part of the decarbonization equation. One thing our writing has tried to point out is that because of this deregulation process and because of the very specific policy on the part of the United States to incentivize renewable energy production with tax credits, it's virtually ensured that all the solar and wind development, nearly all is being developed by the private sector and by these independent power producers who are sort of dislodged from the old utility system.

24:28So one issue we have is that the large majority of solar and wind development, independent power producer development, are kind of just these capitalists who are separated from the kind of social good of the utility system where they kind of have to sort of, again, like the Dominion case, justify their investments to a public commission and kind of sort of try to integrate their investments into a sort of larger public infrastructure. No, they're just scattered capitalists trying to compete with each other to sell renewable energy into the grid. And as Brett Christopher's book has pointed out, you know, it's actually quite hard for these sort of scattered renewable producers to actually make profits on these complicated wholesale markets.

25:12So we think solar and wind is going to be a crucial part of the equation. But unfortunately, the investment model for it so far has been more aligned with these quite chaotic and quite fragmented markets. And so trying to plan a whole sort of decarbonization of the whole grid would really be about trying to integrate solar and wind with nuclear and geothermal and long duration storage. And that, again, requires a much more central planning, much more of this kind of socialized investment model. And I would just add on to what Fred said earlier. The utilities do have a socialized model of investment, which is really what you need if you want to grow the system rapidly.

25:53but they socialize it through the rate base, through ratepayer financing, which is actually kind of a pretty regressive form of financing because it's coming from the customer. And that's one reason why you're not going to find a lot of people who love their utility and sort of really love getting those utility bills. So we actually advocate that the most progressive way to finance this kind of investment in a socialized way would be more towards progressive taxation and actually, you know, taxing the rich more to actually fund this kind of essential public infrastructure that really all of society needs.

26:32And it shouldn't be that the poor are paying the same rates as the rich and that's what's financing our decarbonization of electricity. We should have a much more progressive sort of tax approach to that investment. I'd like to jump in on this question of renewables and why not have them. I think sometimes if you advocate for big things like nuclear, you can be put in a box where you're a nuke bro, you hate renewables. And that might describe some people. But for us, our concern is that by restructuring the entire way that the electricity sector is organized and the way revenues are accrued and all that in finance, in the interest of supporting renewables, that's what we think the problem really is.