In this essay:
1) THE RECEDING CENTRAL STATION ERA & THE EMERGING MODERN RENEWABLE ERA ARE DRIVEN BY THE DIFFERENT ECONOMIES OF SCALE
2) RENEWABLE POWER LOWERS BARRIERS TO ENTRY FOR COMPETITION
3) IF RENEWABLE POWER IS GETTING CHEAPER AND MORE COMPETITIVE THEN WHY DO SO MANY UTILITIES CLING TO THE OLD CENTRAL STATION POWER PLANT MODEL?
4) THE UTILITIES’ NUMBER ONE MOTIVE IS MARKET SHARE
5) UTILITIES BUILDING RENEWABLE POWER IN A WAY THAT MIMICS THE CENTRAL STATION MODEL AS A WAY TO DEFEND MARKET SHARE
6) ARCHAIC RULES ENABLE UTILTIES TO EXTERNALIZE TRANSMISSION COSTS
7) SO, WHAT IS WRONG WITH THIS MODEL? IT ENABLES MONOPOLY CONTROL AND PUTS UP BARRIERS TO COMPETITION
8) THE BENEFITS OF DISPERSED AND DISTRIBUTED POWER BEYOND ECONOMIC DEMOCRACY AND ACCESS
9) BEING “AGNOSTIC ON OWNERSHIP” PUTS PUBLIC APPROVAL OF RENEWABLES AT RISK
THE RECEDING CENTRAL STATION ERA & THE EMERGING MODERN RENEWABLE ERA ARE DRIVEN BY THE DIFFERENT ECONOMIES OF SCALE
For many years, we have been in a long, extended cusp between two eras in our electric utility system. First, we have the still largely intact but certainly receding 20th century energy system based on massive central station power plants (most often coal, nuclear or gas plants located away from big population centers but are connected through high voltage transmission lines). Second, we have the emerging 21st century energy system of renewable power being deployed on a widespread scale.
The first thing to distinguish is how these two different systems have their own different versions of economies of scale.
Here is how economies of scale drove the “Central Station Era” of electrical generation in the mid-20th century. The newer and bigger power plants which were built at that time could produce electricity cheaper and more reliably than the smaller power plants that they outcompeted and replaced. Economies of scale drove the industry toward building ever bigger and more expensive power plants that produced ever bigger amounts of increasingly cheaper power. As a result, investor-owned utilities quickly became natural vertically integrated monopolies. The transmission and distribution infrastructure were already a natural monopoly because building a whole new grid would be overly expensive and redundant. But utilities became vertically integrated monopolies with their electricity generation as well, because energy generation all became so big and expensive.
The central station era was destined to continue for as long as the price that utility customers paid for electricity from central station machines was less than the price that the same utility customers would pay for electricity from newly competing sources, renewable wind and solar power.
RENEWABLE POWER LOWERS BARRIERS TO ENTRY FOR COMPETITION
From the 1970s moving forward, the managers of the electric utility industry knew that renewable technologies were slowly getting better and cheaper. And the reason for that was also economies of scale. Renewable wind and solar have a quite different economy of scale than central station power plants because it relies upon mass-produced components. All the components of renewable energy devices are mass produced. So therefore, the more components of the wind, solar and other renewable devices get manufactured in factories, the cheaper each discrete unit of electrical generation becomes and the cheaper they become for the rest of us. So, if you want to make a living in the renewable power industry, you want to make lots and lots of them. And then you want to keep on making more until it reaches some future saturation point.
Renewable power has since used these economies of scale to gain increasing shares of electric utility markets. As a result, it eventually became cheap enough in terms of cost effectiveness and performance. By the mid-1990s, even the most fervent institutional backers of central station power model could no longer deny that these renewable energy alternatives were becoming increasingly competitive. When utility scale renewable energy began to be deployed, the management programs required to deploy them and integrate them into the electric utility system became mature enough. That enabled renewable power to enter competition in the wholesale energy markets. Retail energy markets in contrast, where individual everyday electricity consumers buy from, are run by the regulated utilities that were at first quite afraid of renewable power out of protectiveness toward their monopoly.
Renewable power certainly has long had the potential to upend this continued monopolization because there is yet another important contrast with the central station model. Unlike the economies of scale from the central station era, renewable energy and energy storage projects are modular. This means any renewable project could conceivably be as large or as small as you want it to be, all things considered. As a result, renewable power has vastly broadened opportunities for non-regulated utility players to participate in the production of electricity. In contrast, the central station model required massive capital formation in hundreds of millions or billions of dollars. In the new emerging renewable power system, a huge amount of concentrated capital was no longer a prerequisite for participating in electric energy markets. Incumbent utilities became quite concerned about modern renewable technologies giving them increasingly stiff competition.
This dramatic shift in economies of scale along with a lowering of the financial barrier of energy into energy markets presented the energy monopolies with a paradigm shift that they could either embrace and follow or resist and try to cling to the old paradigm. At the very least, this lowering of barriers to competition had profound implications for energy monopolies.
IF RENEWABLE POWER IS GETTING CHEAPER AND MORE COMPETITIVE THEN WHY DO SO MANY UTILITIES CLING TO THE OLD CENTRAL STATION POWER PLANT MODEL?
If renewable power makes such continually improving economic sense, then why would so many utilities cling to the central station paradigm rather than hop onto the surfboard and ride the waves of that downward sloping renewable cost curve? While technology has evolved to push us beyond the central station model, the regulatory and policy compact which utilities exist in have not been updated. These statutes, rules and regulations are slowing the transition to the new energy era, rather than any technological shortcomings. The ratemaking formula that state regulators use to determine how much customers pay for electrical energy is a relic that was designed to suit the central station era but is still in place today. It was a time last century when each unit of electricity production got cheaper as central station power plants got bigger.
Once state regulators approve of a utility building a power plant, the utilities are promised guaranteed return on investment. Guaranteed profits were the systems’ way of getting private capital to be willing to invest in an essential public service. Us customers pay the utilities for their cost recovery on our monthly utility bills – a little bit at a time. If all customers had to pay for the cost of a nuclear power plant in just one month’s electric bill, then that bill would be astronomical, and customers would protest. So, it takes years for a utility to get cost recovery from a central station power plant. Keeping a power plant running for longer that the point which they reach cost recovery is the gravy, the real profits that a utility makes. So, what would happen if a utility was pressured by a carbon mandate to shut down a coal plant before their initial investment gets paid off, and there was a renewable solar farm all ready to go to replace the generation? Under the rules of the old system, the utility would be willing to shut the coal plant down as long as customers would be obligated to pay them for the revenue they would have made on it. Customers are considered legally on the hook to pay off the sunken costs of utility infrastructure investments. Such a scenario would create an illusion, and a talking point, that adding renewables would be responsible for rate hikes when that is not necessarily true.
The archaic rules of the old utility regulatory compact system allow this stunting of the transition. Yet the central station era is being kept intact for far longer than it should be because the rules of the old system incentivize utilities to try to ring every last cent of return on investment out of their existing fleet of fossil fuel generators before they retire.
In sum the central station era isn't completely over yet, even though it is certainly on a long and slow decline. The central station era is receding because the old central stations themselves have a finite lifetime and will go away when they are not replaced with newer central station power plants.
Yes, the general trend is toward not replacing central station power plants with newer ones of the like. But the question is now how much more environmental, and pollution damage the massive custom built power plants will inflict before most of them are retired and replaced by and use efficiency improvements, renewable energy, and energy storage technologies.
THE UTILITIES’ NUMBER ONE MOTIVE IS MARKET SHARE
The central station era itself reached a saturation point in the late 20th century. There came a point when building central station power plants, even bigger than before, no longer yielded greater marginal returns. So, instead of bigger power plants, the utility business model sought to acquire a bigger service territory as the new way to maintain market share. The utilities went wild with mergers, such as the one that created Xcel Energy. Utilities did this so that they could get big enough to avoid being eaten by wholesale competitors like the infamous Enron. This all goes to show that for utility monopolies who have grown accustomed to the central station model, their number one priority is maintaining market share over the source of power they generate.
Electric utility cartels different from fossil fuel extraction companies in how stopping renewable power is not their core motive per se. For energy utilities, their more particular question was how to stop renewable energy resources from being deployed at a substantial utility scale before the industry cartels could figure out how to deploy them in a manner that does not infringe upon their market share and protects their monopoly status.
The fear of the utility cartels was that renewable energy technologies would achieve utility scale and would penetrate electric utility markets before the industry cartels knew how to monopolize them. It would have been great to see large amounts of renewable energy generation come online before the power companies could figure out how to deploy it in ways that protected their market share and their monopoly. At first, energy utilities in general had a hostile attitude toward renewable power. But eventually that changed once utilities were able to mangle and distort the deployment of renewable power enough to get it to fit nicely into their monopoly playbook.
UTILITIES BUILDING RENEWABLE POWER IN A WAY THAT MIMICS THE CENTRAL STATION MODEL AS A WAY TO DEFEND MARKET SHARE
Knowing all the above, it came of little surprise that the utility monopolies took the route of clinging to the old paradigm as trends toward ever more competitive renewable power continued and intensified.
So, utilities were able to have it both ways: 1) Reaping the economic benefits of renewables’ economies of scale while 2) Maintaining their market share because the archaic rules and regulations from the receding central station area have remained firmly intact. These archaic rules provided the utility monopolies with a toolkit for which to prevent broader participation (and competition) in the systems that deliver electric utility services.
The advantage of modern renewable power technologies that the utility monopolies mangled and distorted was their modular nature. Utilities like Xcel had figured out that all it had to do was make renewable energy “facilities” big enough to mimic central station power plants. This means taking large numbers of the largest available wind turbines and clumping them all together into large, centralized remote wind farms. This also means having perhaps hundreds of acres of solar panels all neatly laid out row upon row, way out, somewhere remote. When the corporate energy cartels get involved with renewables, their intent is to maximize the amount of power generated by their investment into your wind and solar farms. These interests are therefore served by cramming as much wind and or solar generating capacity as possible into specific areas that have the highest number of wind/ solar resources and when possible, other pre-existing capacity factors. That is and of itself understandable. So, what could the problem with this be if they were deploying renewable power?
ARCHAIC RULES ENABLE UTILTIES TO EXTERNALIZE TRANSMISSION COSTS
The downside of deploying renewables in a highly centralized model is that this results in wind and solar farms being built in remote locations that tend to be distant from the big population centers. But the central station utility players still have the rules and regulations of the bygone era in place that force their captive ratepayers to pay for building the transmission infrastructure needed for wind and solar farms remote from the population centers. The key to making this business model for renewable power feasible is to be in the privileged position to force captive consumers to pay for the transmission infrastructure that it takes to deliver the distant power to them. In the central station era, as in today, people tend not to want to live next to big power plants that would make them sick. So the rules of the system were developed to give utilities a guaranteed return on investment for building transmission lines. Under the rules of the old central station system, utilities are given guaranteed profits for investing in such infrastructure as long as regulators agree that it is in the public interest and not more than we need.
So, the utilities faced the paradigm shift driven by the economies of scale in renewables by using the obsolete rules of the system to defend their monopoly status. The electric utility industry, including wholesale competitors, hence had an ace in the hole in terms of not being obligated to pay the transmission costs for renewable projects they own that require interconnection enhancements to hook them up to the existing grid. All they really need is to get the state regulators (the Public Utilities Commission) to rule it as in the public interest and stick their captive consumers with the bill for the new high-voltage transmission lines required to transmit the power to distant load centers and the cities. Again, transmission costs are externalized from the bidding process because they would cost utilities like Xcel Energy nothing since ratepayers pay for them.
SO, WHAT IS WRONG WITH THIS MODEL? IT ENABLES MONOPOLY CONTROL AND PUTS UP BARRIERS TO COMPETITION
This corporate model development model is what dominates renewable energy development in the United States – involving remote electrical generation development with transmission infrastructure requirements that often accounted to several hundred million dollars that could be publicly financed.
What could possibly be wrong?
Many well-intentioned public officials and community leaders have been making public statements that more high voltage transmission lines are necessary to unleash the renewable transition because that is what the loudest voices in the room say.
The passive assumption that this is how the renewable transition must be carried out only is able to persist because utilities are granted the freedom to externalize transmission costs. That ability to externalize provides the cartels with a powerful competitive advantage. Deploying renewable power in a way that mimics the central station model also recreates the financial barriers to access of the central station era. It tilts the playing field to the point where you need a large capital formation to develop, own and profit from remote renewable energy projects.
Because of the modular nature of renewable technologies, we of course know it does not have to be this way.
The public officials and community leaders who act with this assumption that “this is how the renewable transition has to be” could really benefit from hearing the alternative story on how it could be.
The alternative, common sense business model is developing wind and solar capacity to serve a specific community close to where their generation is sited. The economies of scale created by the mass production of renewable energy components provide a wonderful advantage that we must not see go to waste. Because their economies of scale are during production, renewable energy technologies can lend themselves perfectly to strategically sized projects that most appropriately serve the local community for which they are located. The capital requirement for this model vastly differs from the huge capital formations that the corporate players have access to in order build their remote wind and solar farms. This alone is great for economic democracy and access.
The reason by we do not see very many of these community-scaled renewable projects yet, is because the rules and regulations from the bygone era are still locked in place - rules that were designed to guide and protect the owners of increasingly obsolete central station paradigm machines. We must understand why the deployment of these new renewable technologies needs to mimic the central station model to get the interest to the central station players. By developing wind and solar projects in this manner that mimics the central station model, the incumbent utility interests can preserve the market share that they have grown accustomed to enjoying during the central station era at the same time as they reap the economies of scale benefits of renewable technologies.
Investor-owned utilities (or independent power producers) who still act on the Central Station model, have a built-in bias or preference toward energy projects that require very large capital formations and not just because it raises the bar of financial access so high that it protects their monopoly. For example, a 10% guaranteed return on an investment for a billion dollars yields a lot more in raw dollars than a 10% return on investment for a project that is $50 million. When utilities and other energy decision makers are acting on behalf of the old monopoly central station paradigm, the smaller and more community-scale renewable energy projects cost them more than their returns are worth. So, these central station proponents may not voluntarily choose to build community-scale energy systems despite their societal benefits.
THE BENEFITS OF DISPERSED AND DISTRIBUTED POWER BEYOND ECONOMIC DEMOCRACY AND ACCESS
There are numerous and major advantages for dispersed and distributed electric generation development. It creates an electric utility system that is much more resilient and robust to climate disruption than a system dominated by relatively few big central station power plants. This resilience stems from the same reason that trees don't have just 3 or 4 very big leaves but lots of smaller once. It also evens out power supply to become less intermittent making natural gas backup less necessary.
Again, the renewable energy technologies of the emerging era cost much less to install and operate per unit than the central station power plant technologies they are replacing. What if we give renewable power a chance to be intelligently deployed and connected in large numbers in a dispersed and distributed manner relatively close to the load centers they serve? Then it would elevate the security and reliability provided by modern technologies way above the standards that were applied in the central station era.
There are opportunities to develop literally thousands of similar strategically sized and sited projects throughout the upper Midwest. What if harvesting renewable energy resources at a community scale where the dominant objective and incentive of the system? Then the combined wealth such projects would produce would amount to billions of dollars per year. This wealth would serve interests within the communities where the power was generated, circulating many times over. Instead, this wealth that could be circulating across the community gets siphoned off to serve the private interest of incumbent energy managers and shareholders who are clinging to the central station paradigm. Yet so many public officials and community leaders do not call out this siphoning off because it is so normalized.
BEING “AGNOSTIC ON OWNERSHIP” PUTS PUBLIC APPROVAL OF RENEWABLES AT RISK
As far as evaluating an energy system as equitable, we must consider who benefits from developing renewable energy in a certain structure. This question is often overlooked by the more mainstream environmental & clean energy advocates. There are some who openly claim to be “agnostic” on who gets ownership. Why would the more mainstream advocacy organizations claim to be agnostic regarding who owns the means of production in the burgeoning renewable energy economy? Some claim not to care about who owns renewable energy infrastructure and instead insist that whoever is equipped to get it done just simply must get it done. These mainstream groups recognize the environmental imperative of getting lots of renewable electric generation capacity aligned and deployed quickly but then jump to the assumption that the deep pockets of the electric utility industry are what would make that happen (if only these utilities were ordered to do so).
We must consider rather than overlook the welfare of each community that receives electric utility services for the sake of supporting a mass deployment of renewable power itself. We are quite certain that if people and communities affected by renewable energy projects had a direct economic stake in those projects through ownership of them, then the projects would smell a lot like money. In contrast, for people living in communities where the power lines go through, their wealth gets extracted and they tend to develop a resistance to renewable energy projects because of that way it is rolled out, if we don't plan it right. Otherwise, there is a growing concern that communities affected by massive central station-like renewable energy developments, would become not just indifferent, but actively opposed to wind and solar projects.