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Freeing the Electrical Grid

As important as production is for our energy market, distribution is nearly as critical. We have seen the political battle that raged over the Keystone Pipeline. Regardless of where you stand on that particular issue, you must recognize there is a lot of big money at stake. It turns out, moving energy from where it is produced to where it will be used can be as significant a part of the cost as the production of the energy itself. So he who controls the means of distribution, to a large degree, controls the resource itself.

In our present economy, most energy is transmitted in one of two forms: Chemical energy, such as oil or gas, in a tanker or a pipeline, and electrical energy, as you would find flowing through a transmission grid of wires. This proposal suggests we deregulate the distribution of electrical energy in much the same way as the telephone system was deregulated in the 1980s. Prior to that time, the government sponsored monopoly, AT&T, owned both the infrastructure for distributing telephonic signals, as well as the organization providing the service and equipment such as telephones, switchboards and the like. Not only did it possess a monopoly in a geographical sense, but it also had an effective monopoly over the entire sector of telephonic communications.

The process of telephone deregulation made a distinction between wired infrastructure and the provision of telecommunication services. After deregulation, the transmission wires in any particular region would still be owned by a single company. And that company would continue to be regulated by government. But now anyone could get into the business of producing telephones or operating telephony networks. And if they did not want to install their own wired infrastructure, they could freely use the wired infrastructure owned and managed by the government regulated monopoly.

Today you are likely to get your electrical power from one of three sources: a city owned power company, a cooperative, or a private company regulated as a monopoly by government. In either case, you can most likely only get electricity from one provider, based on who “owns” the territory in your particular area. However, if you want to sign up for telephone service, you can probably pick from any number of service providers even though you may still only have one set of physical telephone wires entering your home.

Similarly, we should separate the business of operating electrical energy distribution grids from the business of generating and selling electricity. We need to recognize that an electrical grid is much like a road system. It is often impractical to have more than one such system in any given physical location. This implies the possible need for a government regulated monopoly. And in this type of case, it is probably appropriate. Until technology shows us a way to allow two or more separate electrical grids to coexist without making things unduly complicated, unsightly or dangerous, we can be content to have a monopoly in that area and hope our state and local governments will do a good job of regulating it in order to keep costs reasonable for consumers.

But particularly in light of the technology we have developed recently, there is no reason why multiple power generation and distribution companies cannot coexist on a common grid. In fact, it should be possible to have any number of operators running “virtual grids” on top of the physical grid. We just need computers to measure the energy going into or out of the grid at each location, and each of the different providers can then pay their share of the costs attributable to the transmission infrastructure for the power they are moving through it.

Let’s say you wanted to build a solar array on some spare land you have that is not very good for development or farming. At the time of this writing, you could probably produce electricity for somewhere in the range of $0.05 to $0.08 per kWh depending on how you amortize your capital costs. Most likely, utility costs from your local provider will range from $0.11 to $0.40 per kWh depending on where you live. Some utility companies will already allow you to do “net metering.” This means if you install solar or other renewable energy production on site, you can offset your own energy use with the energy you are producing from the solar panels. When you produce more than you use, the meter will “run backwards” and will give you a credit against costs incurred when you are consuming power and the meter is running normally.

But there are several things the utilities don’t typically let you do: First, if you have net credits at the end of a year, you probably lose them. You don’t necessarily get a payment for the excess power, unless you are able to set up a separate power purchase agreement with the utility. Second, you may not earn as much in credits on the power you are generating as what you pay for the power you are using. So your net metering might not be as cost effective as you would hope.

And finally, you can’t typically aggregate multiple meters or uses. For example, you cannot generate power at one location and use it at another location somewhere else on the grid. If you could somehow consider a whole group of meters in a pool, combining all the net energy uses into a single net bill, and hold credits indefinitely over time, you would, in essence have created your own virtual energy service company or cooperative, overlaying the public electrical grid.

You could then search for good places to put solar arrays where it is most economical—perhaps because other types of land use are not as profitable. You could carry out your own marketing campaign to obtain customers who want to purchase your power. Then, by installing computer-networked net meters at each point where power is put in or taken out of the grid, you could perform the necessary accounting to determine how much to bill your customers.

The regulatory structure that manages the grid can determine the service costs you, and every other provider, would pay for using the grid. Obviously, if you are shipping power a great distance to your customers, the price would be proportionately higher. If you can produce power at peak need times, or use it at low need times, you should similarly receive more favorable pricing. But if the infrastructure is priced fairly and is the same for all providers, there is no reason why a small business provider could not compete with a larger, more established company.

By owning only the wired infrastructure, the publicly regulated monopoly will have an incentive only to worry about the quality and reliability of the network rather than having the conflict of interest associated with also owning the means of production and selling of power. The service providers will be on their own to buy and sell power at the most competitive rates. Because the owner of the grid is not allowed to be in the business of providing electrical service, it will not be tempted to show favoritism toward the large players and small business will be able to compete with big business.

Some have argued that all we need is more legislation to force power companies to buy the extra power generated by renewable generation sources. But this approach is not so friendly to the concept of choice. We should not have to force companies, whether small or large, to buy something they don’t want to buy. We only need to maintain a level playing field, absent government favoritism, where all providers can have equal access to customers as well as the infrastructure for delivering power to them.

Although this reform would require the cooperation of government in order to put in place, it does not, and should not have to be done at a national level. Furthermore, it should not involve further layers of regulatory overhead but rather should be structured as a process of de-regulation. Legislation can simply make it possible for existing companies to continue managing distribution infrastructure under regulation by the government, but any activities involved in the generation and selling of power would have to be spun off to a totally separate and private entity. Government could get out of the business of setting prices and otherwise monitoring energy providers. Instead, we could rely on competitive forces to naturally regulate prices through the process of negative feedback inherent in the laws of economics.

Local and state jurisdictions could put in place the necessary legislation, experimenting with the process to refine it and make it run more smoothly. As the process becomes perfected, it could be adopted by other jurisdictions until electrical service companies could include businesses from the very large, all the way down to a cottage industry. It could develop much like internet service providers did during the dawn of the Internet and the information age. Eventually the system would reach a healthy equilibrium where electricity prices could be counted on to represent true market levels without the need for artificial regulation by government.

Perhaps one good way to get started would be for one or more entrepreneurs to attempt to install a power generation facility on the grid with the intent to sell it to their own customers, also located on the grid. Presumably, this would create a condition where applicable permits would have to be obtained from the government regulated utility operating the grid. If and when such permits are denied, the opportunity would then be ripe to educate state legislators on the benefits of a free and open electrical grid and lobby them for the necessary reforms. If the public understands the benefits of enhanced choice in electrical energy providers, they can show the support necessary to convince lawmakers that reforms are needed.

This proposal addresses a small, incremental step we could take right now toward increased freedom of choice and decentralization of our energy distribution economy. But it does not do much to address the huge amount of energy transmitted in chemical forms such as oil and gas. As is the case with nuclear energy production, we may still be waiting a while for technology to provide the means to accomplish similar disruptive, revolutionary changes in the way chemical energy is distributed. But let us next take a brief glimpse into what could be our future if we try to approach that subject with a mind toward individual choice and a market free from the monopolistic tendencies of big business and big government.
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