A new idea for energy: Let markets work

Last week, Sen. Majority Leader Harry Reid had his annual green energy summit. The keynote speaker was President Barack Obama who stated, “For decades we've been told it doesn't make economic sense to switch to renewable energy. Today that's no longer true.”

That sounds wonderful, right? The implication is that government is no longer going to pick winners and losers in the energy marketplace; instead they’re going to let businesses compete on their merits. If only that was true. From the Las Vegas Review-Journal’s report on the summit:

[Obama’s] almost 30-minute speech came on the heels of executive actions aimed at increasing green energy use — and solar power in particular — across the nation. They include $1 billion in additional federal loan guarantees for renewable projects and another $10 billion in loan guarantees for so-called distributed energy projects such as micro-power stations and rooftop solar arrays, according to White House advance materials.

The Department of Energy is also paving the way for states and state-affiliated "green banks" to loan money for green energy projects, while the Federal Housing Administration will provide FHA-backed loans to finance home energy projects. …

The president began his speech by touting previous green energy initiatives launched by his administration to combat climate change, spur innovation and create jobs.

"Now is not the time to pull back on these investments," he said.

Here’s an observation. If the government has to offer loan guarantees on top of tax credits and rebates to get consumers to use a product, that product doesn’t make economic sense on its own.

With that perspective, let’s examine the two major energy debates Nevada is facing: Net-metering and NV Energy’s new rate case.

Chuck Muth has a great explanation on net-metering here, but basically the government provides the previously listed financial incentives to lower the cost of purchasing the solar panels, and then forces NV Energy to pay homeowners a certain rate for the excess solar that they generate.

Installers of rooftop solar panels want NV Energy to pay homeowners 11.6 cents per kilowatt hour generated by rooftop solar panels. NV Energy wants to pay homeowners 5.5 cents per kilowatt hour.

The other issue is the rate case NV Energy has submitted to regulators. The Daily Caller News Foundation reports that NV Energy’s rate plan seems to be designed to create the need to build a new power plant. As NPRI has noted previously noted, as a regulated monopoly, NV Energy’s financial interests don’t always align with the financial interests of consumers.

As a regulated monopoly, NV Energy is guaranteed a return on equity of 10.5
percent. It is from this return on equity that NV Energy’s shareholders derive their
profits.

This regulatory structure gives NV Energy and similarly regulated utilities a
perverse incentive: It financially rewards them if they can get state lawmakers to
impose on them more costly and inefficient production methods.

The math is simple: If the utility is required to produce through more costly means
and shareholder profits are guaranteed as a percentage of those costs, then
shareholders make more money by producing less efficiently. Ratepayers — facing a
private, yet government‐enforced monopoly — have no choice among providers and
so are effectively forced to pay the higher rates that result.

The problem isn’t that one side is right or wrong in either of these debates. The problem is the system is broken and needs to be fixed by eliminating government mandates and monopolies.

If you’re a consumer and you want to buy power from a company that freely pays you 11.6 cents per kilowatt hour for rooftop solar — and such a company exists — you should be able to do that. If you’re a consumer and you don’t want your power company paying 11.6 cents per kilowatt hour for your neighbor’s rooftop solar, because you think it’ll increase your costs, you should be able to do that.

If you want to pay more for power generated from “green” sources, you should be able to do that. If you want to buy cheap and reliable power from coal, you should be able to do that. That’s how energy deregulation has worked in Texas where companies advertise not only their rates, but the amount of energy produced by renewable sources.

When consumers can make these decisions, there are many different decisions made, because individual consumers value competing priorities differently. But when the system forces regulators to make a single, binding decision, there will always be winners and losers and unintended system-wide consequences.

Or in the wise words of the rap-version of F.A. Hayek:

Let prices work.
If we don't try to steer them,
They won't go berserk.