Hillary’s Energy Policy

Well, one part of it at least. I don’t know what prompted me to go look at her plan, but I did. One thing that struck as a bit…well ignorant was this part,

An aggressive comprehensive energy efficiency agenda to reduce electricity consumption 20 percent from projected levels by 2020 by changing the way utilities do business, catalyzing a green building industry, enacting strict appliance efficiency standards, and phasing out incandescent light bulbs;

The italicized part struck me as just plain ignorant of how the utility industry works. Utilities don’t really care how much people use, at least when it comes to electricity. Most utilities are regulated monopolies. As such, they don’t have to worry too much about marketing…at least their overall product. Sure maybe marketing different rates or rate options, but not for electricity. You either buy from the utility or…you don’t get electricity.

Further, as a regulated monopoly, the utility is guaranteed recouping any expenditures that are deemed “reasonable”. And if in the past the entity regulating the utility approved expenditures for transmission or distribution systems, then by definition those expenditures are “reasonable”. So even if you manage to get the utility to reduce the amount of electricity that they generate, transmit and distribute the utility will still recover its costs. Further, the utilities rate of return is also set by the regulatory process as well. About the only way a utility would be bothered by this would be in the long term as its “rate base” shrinks meaning that its revenues will shrink and so will its profits.

However, there isn’t much there for Hillary’s plan either. You see, utilities are generally required by law to provide service to customers who want it. That is, if a customer says, “Screw Hillary, I’m going to increase my consumption by 20% by 2020!” There really isn’t a goddamn thing the utility can do. The utility could cut off the power, but then it would be breaking the law, so that isn’t going to happen.

And the rest of the plan is just dopey as well. While it might result in lower consumption, Hillary and her advisers seem to have forgotten about Jevon’s Paradox.

In economics, the Jevons Paradox is an observation made by William Stanley Jevons, that as technological improvements increase the efficiency with which a resource is used, total consumption of that resource may increase, rather than decrease.

The explanation is simple and one that would probably gall Senator Clinton to no end given her antipathy towards the market mechanism. As something is used less, the price declines. A decrease in price means that people consume more. Thus, the new consumption due to lower prices could offset the savings due to technological efficiencies.

Now it isn’t certain that electricity usage would have to increase (ceteris paribus), but getting a 20% decrease from projected levels in about a decade is almost surely not going to happen.

FILED UNDER: Campaign 2008, Economics and Business, US Politics, , ,
Steve Verdon
About Steve Verdon
Steve has a B.A. in Economics from the University of California, Los Angeles and attended graduate school at The George Washington University, leaving school shortly before staring work on his dissertation when his first child was born. He works in the energy industry and prior to that worked at the Bureau of Labor Statistics in the Division of Price Index and Number Research. He joined the staff at OTB in November 2004.

Comments

  1. legion says:

    Utilities don’t really care how much people use, at least when it comes to electricity.

    Well, they do care when they can artificially shrink the market, manipulate shortages, and then economically rape people who use electricity, the way Enron did…

  2. Christopher says:

    Economically rape people, legion??? You should really stop reading those late night romance novels.

  3. Bithead says:

    What you need to understand about that, Steve, is that her “changing the way they do business” means rationing of energy. Utter state control over who uses energy and for what purpose. And you know, that’s not unlike McCain’s proposed policy. Neither one even comes close to suggesting increasing energy production and reducing costs, Nothing about economic growth which is invariably tied to energy production. No, they’re about rationing, the both of them. Oh, and taxing the hell out of it, of course.

  4. Tlaloc says:

    Neither one even comes close to suggesting increasing energy production and reducing costs

    What we need is a change in energy usage. I would prefer some means to achieve that besides rationing, but people simply aren’t willing. Our current policy (which can be described as “use as much energy as possile as quickly as possible with no thought about the future”) is simply unsustainable.

    Particularly with Indian and china and their combined 2.5 billion people racing to catch up to our SoL.

    We need to change perspective on energy. It used to be abundant. It’s quickly changing into a constrained resource, and we have to accept that and deal with it before the problem gets critical.

  5. Bithead says:

    It is only constratined insofar as we refuse to go looking for it,a nd providing enough infrastructure for it, in the name of ‘the environment’.

  6. Tlaloc says:

    It is only constratined insofar as we refuse to go looking for it,a nd providing enough infrastructure for it, in the name of ‘the environment’.

    No that’s just not true, BH. Fossil Fuels are constrained by the process of creation which is extremely slow. Nuclear is constrained by the finite amount of fissionable materials we have on this planet. Biomass and Solar are constrained by the surface area required. Wind, geothermal, and tidal are constrained by the limited appropriate locations.

    In addition all of them take a toll on the environment (yes, even the supposedly green energy sources like solar and wind).

    There are no free lunches. Every energy source we have available has limits and it has drawbacks.

    There’s nothing wrong with oil, for example, unless you use too much. Then the drawbacks becomes critical. But of course that’s obvious when we say “use too much.” The problem is our current energy policy is to use it all, right now. No matter which energy source(s) we use if we insist on growing our energy apetite in an unbounded way we will hit the critical threshold.

  7. Bithead says:

    Fossil Fuels are constrained by the process of creation which is extremely slow.

    That makes the asumption that there is no more to be found, which, when we’ve actually looked around for it… IE; Drilled for it, has always proven inaccurate in the past. If past be prolouge, the limits of the technology have yet to be scratched, even.

    Nuclear is constrained by the finite amount of fissionable materials we have on this planet.

    Again, the limits of the technology have yet to be scratched, even.

    In addition all of them take a toll on the environment (yes, even the supposedly green energy sources like solar and wind).

    A spectacularly luddite argument.

    The problem is our current energy policy is to use it all, right now.

    The reason is simple; the technology of it is improving to the point so as to overcome the shortages… IF we allow it. Rationing energy is not the way to go.

    And just for the record, I’m with DavidL on this one….

    Any energy rationing plan starts with the Washington politicians. That is before Dirty Harry Reid and Mrs. Pelosi starting tell how much energy we are allowed to use, they had better be walking, or pedaling their bicycle, to work.

    Al Gore, call your office. Trust me when I tell you that energy rationing, and ‘the environment’ are about central control, and nothing more.

  8. The force is strong in this one.

    By force, I mean the totalitarian impulse to use force to impose one particular vision of utopia. That pesky freedom thing just keeps gumming up the works.

  9. Tlaloc says:

    That makes the asumption that there is no more to be found,

    No it doesn’t make that assumption at all. What I said is that we are using it faster than it is being replenished. It is certainly possible that there are reserves we haven’t found, but no matter how much there is in the world that number is counting down towards zero.

    Again, the limits of the technology have yet to be scratched, even.

    I for one do not wish to predicate the survival of our society on the hope that a miracle technology shows up. If and when it does show up, great, in the meantime let’s deal with the situation before us.

    A spectacularly luddite argument.

    I don’t think you understand who the Luddites were. They were people who lost their livelihoods to advances in textile manufacturing. They had nothing at all to do with environmentalism.

    Are you trying to argue that there is an energy source that has no impact on the environment? If so I’d be eager to hear about it.

    The reason is simple; the technology of it is improving to the point so as to overcome the shortages… IF we allow it.

    Based on what? You are betting humanity’s future here. So what is this awesome evidence that is worth the gamble?

    Where has all this technology been the last hundred years? Why are we *still* burning coal, a technology that goes back over a hundred thousand years?

    Give me some reason to believe that you faith in a deus ex machina is more than wishful thinking and a desire to make money in the short term at the expense of the long…

    can you do that?

  10. yetanotherjohn says:

    I can’t believe I am going to defend Clinton, but there is a rational point behind what she says. Can it lead to 20% reduction, I doubt it.

    As you point out, the only way the utility really gets in trouble on capacity is if they allow black outs. Black out/ brown outs can occur when demand exceeds capacity. So the utility needs to build enough capacity to meet the peak demand.

    Now most utilities get their power from different sources. Hydroelectric tends to be the cheapest, but you can’t get it every where. Coal vs Gas vs Oil vs Nuclear are going to have different costs to produce a KWH. So the utilities are going to use the cheapest to produce the base power (the first KWH generated) and only turn on the most expensive generators as they approach peak demand. So the cost per KWH can change depending on the demand which in turn changes with time of day, season and weather.

    So if utilities could distinguish between when you are using the power, they could in theory have the costs to generate track the prices charged. In turn, this could create a demand for consumer devices that would be price sensitive to when they use power. As an example, imagine an air conditioner controller that let you set the temperature you have the thermostat based not only on time of day/day of the week, but also on the cost of the electricity. Consumers overall are likely to be cost sensitive to their use of power to some degree so you would in theory get some cost savings.

    Now the air conditional controller change would be relatively minor once you figured out how to get the price quote to it. What it costs to get that price quote may be expensive or cheap and will certainly have different availability (as an example, most people have a phone line so the incremental cost would be low, but not many people have a phone line near their air conditioner controller).

    Now why this is a typical leftist load of BS is why most liberal ideas are BS. The problem isn’t the idea, but the reality of the world.

    Start with needing to change out the meter on the house to be able to record how much power was consumed of what kind. The cost delta of the meter is likely to be relatively low. The real cost is in retro fitting the homes. Say the meter is $50. 125 million homes means $6.25 B just to get the meters changed out. Now add in the cost of communicating with the meters (and yes the meter reader is going to be less productive as they have more to record now). Further, add in the cost of the the air conditioner controllers for another $4.5 billion. Also start adding in the cost of other appliances that can take advantage of this. Are we going to put an unfunded mandate on consumers (change or go to jail?) and utilities? Are we going to raise taxes or increase the deficit to pay for it.

    The devil is in the details and the democrats tend to not like to deal with the details. Those who get attracted to the bright shiny idea without thinking further can vote democratic. Those who tend to think beyond to the unintended consequences or unaccounted for details will tend to look elsewhere to vote.

  11. Dave Schuler says:

    A really good place to start and, consequently, the least likely place that legislators will look, would be to start removing the incredible network of subsidies on energy consumption and production we’ve woven over the years. This would reduce energy by consumption by the normal action of market forces but it would also do something even more useful: it would allow the market signals which are now being muffled to be communicated more efficiently.

    More efficient and freedom-supporting than imposing new regulations but politically difficult because the benefits of the subsidies tend to be highly concentrated.

  12. Tlaloc says:

    A really good place to start and, consequently, the least likely place that legislators will look, would be to start removing the incredible network of subsidies on energy consumption and production we’ve woven over the years. This would reduce energy by consumption by the normal action of market forces

    Market forces don’t work. They pretty much don;t work period but they especially don’t work when talking about things people cannot really live without (because of the way their life is structured, not because they are biologically indispensable).

    Besides which we tried letting the market run things, what did that get us? Oh yeah Enron.

    Thanks, but really, *no thank you*. We’ve been screwed enough by that particular fantasy of the economics crowd.

  13. Dave Schuler says:

    Market forces don’t work as long as you don’t allow them to work, Tlaloc. Enron wasn’t a case of a failure of a market. It was criminal fraud.

    The only thing we can be confident that will be achieved by doing anything other than freeing market forces to work is creating scarcity. It’s hard but we can’t repeal the laws of supply and demand. Soviet Russia couldn’t do it. Communist China couldn’t do it. We can’t do it either.

  14. Tlaloc says:

    Enron wasn’t a case of a failure of a market. It was criminal fraud.

    Funny how that’s what always happens when we “let the market work.” Almost as if there were a lesson to learn there…

    The only thing we can be confident that will be achieved by doing anything other than freeing market forces to work is creating scarcity.

    Right. You haven’t been to a library recently, have you? Last time I checked they had books in them, and yet they aren’t even vaguely run by market forces. Whereas, returning to the Enron debacle, there was a serious scarcity of power in california, precisely because of unregulated market forces.

    Sooner or later you have to give up the fantasy, Dave. It sounds good on paper and in econ lectures, but in the real world it just doesn’t work.

    the number of things that have to perfectly align for a real “invisible hand of the market” to function is staggeringly high. Much like communism, it is simply far too unlikely to really work in practice.

  15. Dave Schuler says:

    If you were to say “markets don’t work with perfect efficiency” or “sometimes markets don’t work”, I’d agree with you. It’s why I’m not an anarcho-capitalist. But your last couple of comments are so looney they cast anything you might write on any subject into disrepute.

    Markets do work and it’s obvious that they do. Saying they don’t work is the equivalent of saying that people don’t respond to incentives. They do. Every single darned day.

  16. William d'Inger says:

    You haven’t been to a library recently, have you? Last time I checked they had books in them, and yet they aren’t even vaguely run by market forces.

    I live between a big main branch library and a Barnes & Noble bookstore. At any given time, the library has maybe six to eight cars in the parking lot. Barnes & Noble, on the other hand, has a continuously full parking lot (maybe 60 – 100 spaces) with cars circling ’round and ’round waiting for someone to leave. That ought to tell you something about government versus market forces.

    Our current policy (which can be described as “use as much energy as possile as quickly as possible with no thought about the future”) is simply unsustainable.

    I don’t buy that either. It’s like Malthus’ claim that the population rise of his day was unsustainable. Here we are 210 years later and we haven’t run out of food yet. Sure there are absolute limits, but they are so far beyond our usage that they can be considered infinite for current policy purposes. The Clinton plan is a power grab pure and simple. The only difference between her and Hugo Chavez is that Chavez is ahead of her on the power curve evolution.

  17. Bithead says:

    No it doesn’t make that assumption at all.

    Oh, yes it does. Because without that point why reduce at all?

    Oh, yeah… that ‘control’ thing.

  18. Bithead says:

    Based on what? You are betting humanity’s future here. So what is this awesome evidence that is worth the gamble?

    Why, All of history.

    How many times in the last 100 years have we been told there was no more oil to be had, as an example? Do you even know?

  19. Bithead says:

    They were people who lost their livelihoods to advances in textile manufacturing.

    Quite correct. But why? Because they refused to adapt, and deal with new technology. They decided that such technology could never support hem, and they went about trying to destroy it. IN short they tried to control the situation and could not.

    Rather like what the energy nazis and enviro-whackos are doing just now.

  20. Tlaloc says:

    Markets do work and it’s obvious that they do.

    Where is the proof, Dave? You claim it is obvious, then establishing it through evidence should be easy.

    Saying they don’t work is the equivalent of saying that people don’t respond to incentives. They do. Every single darned day.

    No no no. That’s not the same thing at all. For the market forces to work people have to *not* respond to incentives. They have to choose not to game the system, by say colluding on prices, developing monopolies or any other way that manipulates the markets, because as soon as they do the market no longer behaves like it is supposed to.

    Again same thing as communism, it works so long as everybody for some reason decides to put the integrity of the system before their own interests, hence it never works.

    We have ample proof of this Dave. There’s a good reason that there are no purely capitalist systems on earth- it is intensely unstable. It pretty much immediately devolves. regulated capitalism works, but regulation is an explicit repudiation of the idea that you can simply let market forces operate.

  21. Tlaloc says:

    Bithead:

    Oh, yes it does. Because without that point why reduce at all?

    What part of “counting down towards zero” is unclear?

    Why, All of history.

    We still use coal as a primary energy source. That’s 100 millenia old technology. So where in human history are you finding support for the concept that any day now a miraculous energy source is going to pop up? I want details, BH. You are so sure it should be easy to flood me with examples…

    How many times in the last 100 years have we been told there was no more oil to be had, as an example? Do you even know?

    There is, again, a finite amount of oil. People may certainly make errors in estimating the amount of reserves, but that amount gets smaller every day. It will run out. That’s not subjective, it is fact, unless we change our habits of usage.