The deep freeze-induced Great Texas Grid Failure was not because of the electricity market. If anything, Texas doesn't have enough of a market for electricity. So says R Street's Devin Hartman, standing by his description of an enhanced Texas-style approach to electricity, a market-based approach, as the "gold standard" all policy makers should embrace to meet the Biden administration's goal of a zero-emissions grid by 2035.
The deep freeze-induced Great Texas Grid Failure was not because of the electricity market. If anything, Texas doesn't have enough of a market for electricity. So says R Street's Devin Hartman, standing by his description of an enhanced Texas-style approach to electricity, a market-based approach, as the "gold standard" all policy makers should embrace to meet the Biden administration's goal of a zero-emissions grid by 2035.
The Energy Markets Podcast, Episode 4, with Devin Hartman
Transcript (edited for clarity purposes)
Intro: Welcome to the energy markets podcast, curated conversations with policy experts and thought leaders on how to chart the best path toward a 21st century clean energy economy. I’m your host, Bryan Lee. My energy and environmental policy expertise stems from more than three decades of experience as a journalist, federal government official and utility executive.
EMP: 99.9999% That’s the standard of reliability for the electricity grid. They even have a name for it. They call it the four nines. It’s an incredibly high standard of reliability. Most times the supply interruption is so fleeting, you wouldn’t even notice except for the need to reset the clock on your microwave. Other times, like we saw in Texas last month, it was catastrophic and deadly. Obviously, we don’t see such an event often, else we wouldn’t have the four nines of reliability. Still, maintaining this exacting level of reliability is an incredibly complex high-wire act that requires keeping the grid humming at exactly 60 Hertz. It’s a finely tuned and far-flung machine that requires exacting oversight to ensure that, as we flip a light switch and start drawing electrons off the grid, a resource somewhere else is injecting enough electrons into the grid to maintain that high-wire balancing act of precisely 60 Hertz. But now we confront a new level of complexity in what is already a very difficult exercise. We clearly and inarguably have passed the tipping point on climate change, which makes it imperative that we radically change the types of generation technology, the Wallendas, if you will, that we have traditionally relied upon to support this high wire reliability act in order to meet the Biden administration's goal of a zero emissions grid by 2035. We need to replace fossil fuel technologies -- generators, which can be scheduled or called upon to meet demand -- with renewable technologies like solar and wind, which are passive and intermittent resources dependent on the vagaries of the sun and wind. While these technologies and others allow us to feed electrons onto the grid without spewing carbon into the atmosphere, they amp up the already incredible degree of complexity involved in keeping the grid at exactly 60 Hertz, with 99.9999% reliability. Now all of these questions and more erupted into the public square in the wake of the Texas grid fiasco, which is why I’m so pleased today to have a discussion with Devin Hartman, Director of Energy and Environmental Policy at the R street Institute, a libertarian-leaning think tank in Washington D.C. Devin, welcome.
DH: Thanks for having me, Bryan.
EMP: Well, I’m especially pleased that we’re talking today because you were originally scheduled to be our guest on Episode 2. Thanks for the Mulligan. But my computer’s solid-state drive crashed and we lost the recordings. Interestingly enough, that personal disaster happened just before the Texas grid disaster, and we spent much of that lost episode, just before that historic event, talking about how you see the Texas market-based regulatory model as the lodestar that all policymakers should be following. Do you still feel that way?
DH: I do, I think the early debrief on what happened in Texas -- while we don’t have all the data in, it’s important to caveat all that -- but in many regards half of the problems that were revealed in Texas is that Texas in many ways isn’t enough of a market, rather than being too much of one. And that is a big piece of the missing story on all this. And it’s also important to note on the areas where there were market deficiencies, really understanding what the root cause of those issues was. And then also talking about what in the overarching picture with Texas was so effective. You know up until February, it was really common to hear the most sophisticated energy consumers, pro-market advocates and environmentalists all rallying around the idea that Texas was the gold standard in electricity policy. Now no one said it was perfect. In fact, a lot of the criticisms came in from the barriers for customers to directly interface with the marketplace more productively. That includes making sure that distributed resources can participate in the market better, but especially as relevant to February’s events, making sure that customers’ value of reliability is getting baked into the market preferences as we start talking about making sure that, when we have periods of scarcity on the electricity system, that we’re allocating resources according to how actual end-users value that electricity. And the breakdown in some of that process and deficiencies there were revealed in Texas, and in many cases, that is something that we've been harping on for a number of years as an area that Texas could improve upon. And that it turns out an area that if Texas were in a better position to behave more like a market, again on that demand side of the equation in particular, you actually would have seen a lot of these long duration outages have far better managed than what many Texans had to endure.
EMP: Now, I want you to elaborate on that, but first let me take you back to -- you and your R Street colleague, Beth Garza, wrote recently about the Five Truths surrounding the Texas experience. Why don’t we elaborate on those one-by-one. The first one you said was the problem extended to other states outside of the Texas market. What was the problem. And how did it extend outside of Texas?
DH: Sure, so I’d start off by saying, of course, Texas had the greatest number of outages and especially the most potent long-duration outages, So that’s why you hear all the attention in Texas. But of course the arctic air blast that hit really knocked out over 100,000 customers ranging from Oregon to Virginia. So we had problems all across the country, and in particular we saw three regional grid operators had to institute rolling controlled outages, or you could say, rolling blackouts …
EMP: So you mean not just ERCOT, but what were the other two? SPP?
DH: So SPP and MISO. And MISO actually had to do it for the second time in six months.
EMP: Wow.
DH: This was the first time SPP’s ever had to do it. And that alone would have been a huge story, right? So, the problems that Texas witnessed a lot of times overshadowed the severity of the event outside of Texas. And so it’s really important to keep that in mind going forward. And, of course, one of the inherent physical limitations in Texas is that it’s, by and large, on an electrical Island. Whereas, the rest of the country is split into just two giant grids, the eastern half and the western half. And you can really import and transfer power across really vast geographic footprints. To be clear, I don’t think interconnecting Texas would have saved the day at all. It probably would have helped mitigate some degree of the issue. But it’s very important to note that what we have is a cold weather issue that affected every type of major regulatory paradigm across this country.
EMP: So in short, you can’t say it was a problem unique to Texas, like the market structure or what have you. It affected the region, not just Texas. Number two, you said, while we often hear the Texas market referred to as ‘deregulated’, air quotes right there, it’s actually still highly regulated, particularly when it comes to reliability. Elaborate on that.
DH: Sure. So the challenge with reliability policy is that it actually falls into multiple state and federal agencies’ bailiwicks. But the one that is most relevant here is the standards that apply to power plants on their operations and planning side. And so in this case, clearly the biggest cause of the supply shortfall in Texas, and in the other regions that we mentioned here, was insufficient weatherization and fuel-supply issues that were affecting power plant generators. Now those types of issues in particular are examined by the Federal Energy Regulatory Commission and the North American Electric Reliability Corporation, respectively known as FERC and NERC. And NERC develops reliability standards for these power plants, and then FERC approves them. And based on recent cold weather events over the last, oh, really the last decade, these issues have been really under the microscope for a long time. These standards apply to Texas, as well as the rest of the Eastern and Western interconnects. And so when we look really look at the root causes here, that’s where the issue becomes -- is how do we make sure that we target weatherization mechanisms and fuel procurement mechanisms for power plants, because that was really the root cause of this. And so that’s the common thread that’s going to connect all of this.
EMP: Yeah, Jon Wellinghoff who was our guest, our substitute guest for you on episode 2 (laughs) he pointed out some very interesting aspects of the regulatory concern and, you know -- how can you extend electric reliability to encompass the freezing pipes that are delivering the gas to the power plants? And it’s a lot to chew on. Number three was ... oh, but before we leave too, I think too, by putting quotes around deregulated, I think maybe we’re trying to draw the distinction between the regulated price in other states and the lack of regulation in terms of price setting in a competitive market. Not to say that that market isn’t highly regulated as well.
DH: Yeah. And so this might actually be part of the bridge between the, I think the second and maybe the third, you know, points here in that …
EMP: … that competitive markets result in a higher level of behavior among generators that promotes a reliable grid?
DH: Exactly, because you start bringing up price signals, and that starts speaking the language of economists like me and market advocates real quickly.
EMP: Go get nerdy. Get nerdy.
DH: Perfect, well, we’ll really dive in now if we thought NERC standards weren’t nerdy enough, right? Here we go. And so aside from the actual mandatory rules that apply to power plants, nationwide, there’s also varying market designs that go by either state-specific or, usually, region-specific areas. Now, because the concept of deregulation really applies to that rate-setting aspect within the industry, it means that these independent power producers, these competitive suppliers, they make their margins, they make their investment decisions, based on the revenues they get from the wholesale market after their costs are accounted for going forward. Whereas a monopoly utility, even if they are participating in a wholesale market -- an organized market with these prices -- they’re actually taking their revenues and their operating costs and they just pass them through to end-users through automatic rate adjustment mechanisms that state regulators oversee. Which means that the profit motive is fundamentally different. And what we’ve seen is that when you are in the business of literally making money by being able to produce power, that motivates you to be available more often. And in particular, prices go up when system conditions are really scarce. And that’s what we saw in Texas. And so what we’ve actually seen over the last decade is that Texas generators have really been the gold standard performer relative to their peers in other regions because they’ve been so motivated to chase those high price signals during periods where they would anticipate scarcity on the system. So, actually, when you look at generator outage rates, it shows that the so-called deregulated, or competitive generators, actually have lower outage rates and a superior reliability performance record as opposed to monopoly utilities, who really don’t have any financial motive to make sure that they’re available.
EMP: And that’s because in the market, as you explain, they’re relying on the market to provide their rate of return on their investment.
DH: Correct.
EMP: Now, in a regulated-price environment the utility monopoly – under the monopoly utility regulatory model, you decide what to build and they start passing along the cost of building it when it may be 10 years off in terms of delivering a single electron onto the grid. And I use that as a segue to Vogtle and what we saw in South Carolina, which I see as, you know, remarkable examples of the failure of the over-a-century-old model of monopoly regulation. The utility industry is really the only one, the only industry left that we haven’t restructured and allowed competition to work. All the others we’ve done it, but not this one. And so, we should continue on our list. I’ll get off of my soapbox and say, number four, competitive markets have a superior track record when it comes to reliability.
DH: Yeah, and I think there’s a few things that we’re starting to see really emerge in this space and that’s that – first off, when I talk about a competitive marketplace, we’re talking about these regional grid systems, right? ERCOT or SPP or MISO – there’s seven around the country. Now, the composition of market participants can vary, right? Monopoly utilities can participate in those, as well as these independent competitive suppliers, or merchants. And so what we’ve seen is that, regardless of the market participants, we have seen that areas that join one of these organized wholesale electricity markets tend to have superior operating reliability conditions. One area that we saw this a lot in is MISO South. And so MISO has been around for a long time, but the earlier part of the last decade, they decided to expand and got stakeholders on board and we got MISO South.
EMP: Now, MISO South, you mean mostly Louisiana right? Or is it Arkansas too?
DH: Yeah, there’s four southern states that are baked into that, and Louisiana was the primary load center that got pulled into that, and it was really …
EMP: And FERC was having problems perennially with the rate structure for that setup.
DH: Exactly. And as we saw that the thing that’s interesting about MISO and similarly we saw this with SPP over the Great Plains again both these regions have primarily monopoly utilities that participate in these systems. But what happened as these regions started to integrate into an overall market architecture is that the grid operator, SPP or MISO, sends dispatch instructions to the power plants, and they say, hey, based on where we see transmission system constraints, and the way that all the hundreds of power plants on our system and their coordinated operating status across a vast regional footprint are behaving, we can start to send signals to those power plants that incorporate all of those previously largely unknown variables that get incorporated into the way that those power plants are operated.
EMP: You’re talking about creating the same kind of seamless marketplace that we have for everything else that allows just-in-time warehousing and all that kind of stuff.
DH: Yeah, exactly.
EMP: And you capture all these efficiencies that you don’t have in the regulatory system. You know, I remember MISO and PJM and all the other organized markets every year used to put out a press release saying how much their organized market saved consumers in terms of millions of dollars, many millions of dollars, than if they had continued under the old system.
DH: Yeah, and a couple of things that we witnessed right away. Even then, like in SPP and MISO is that power plants started to be operated in a way that lowered costs overall on the system, but it also boosted reliability, because they were operating the fleet in ways consistent with both current and expected conditions. And as we start integrating more complex resources, like wind and solar under the system, it becomes increasingly important to incorporate these uncertainties on things like renewable energy forecasts and extreme weather conditions, speaking of the cold weather, that we can be better prepared for, and have a much more healthy and well-integrated system overall. And one of the high-profile issues, I’ll also point out for you, Bryan, is that we always hear this idea that a lot of these old fossil power plants, especially coal plants, have to be run in a baseload fashion. You have to run them in this so-called steady state. Well, actually, the economics, and a lot of times for reliability purposes nowadays, with more renewables, you want to operate these units much more flexibly. Really the whole thermal fleet. The coal plants are an interesting case study in this. And what we’ve seen actually is that monopolies were always prone to run these in this sort of simplistic steady state, whereas the competitive power producers were actually responding to market signals. And so, you saw a big advantage for these organized wholesale markets that consisted of competitive suppliers, but even in yhe ones with monopolies, at least those power plants were now getting instructions to not operate their power plants at a steady state. At least they were getting instructions to incorporate the constraints on the broad regional transmission system that saves consumers money and boosted reliability.
EMP: Yeah, so I see why you combine three and four because in both instances, you’re talking about this Big Brother institution that’s setting prices in a way that has nothing to do with market forces. And so by introducing a market, you’re capturing the inefficiencies that are inherent in that kind of a backward way of doing it. And a prime example I think very early on was the improved performance of traditional nuclear plants. The statistics were, what, prior to competitive markets. The average availability rate was in the 60% range, and today it’s up some plants are operating at 97%, 98% efficiency. It’s amazing.
DH: And the scholars that have looked into that, this is in peer reviewed literature, directly attributed that to the so-called ‘deregulation’ of the industry, or as I would properly, encourage people to say restructuring.
EMP: It’s the deregulation of Big Brother setting prices. I mean, we learned that when the Berlin Wall fell, I mean come on, the market works.
DH: Right. And again, if you’re in the business of just being a cost-of-service monopoly you’re motivated to increase book value. You’re not interested in squeezing more efficiency out of your power plants. That’s the last thing you actually want. And so what we saw is when you shifted the paradigm, not just the nuclear fleet -- we saw it with the gas fleet, the coal fleet, everything -- we’re starting to see the contrast with the way renewables and storage are built and sited and operated. It’s far more efficient under competitive ownership than it is under this really archaic cost-of-service monopoly model.
EMP: Okay, I think we beat that dead horse. Number five, last point. And the monopoly price regulation model is increasingly disadvantageous for reliability. In other words, reliability is -- you said it’s improving in the markets, but it’s going down where you have monopoly regulation?
DH: So this is sort of the new frontier. The real challenge is that what we’ve seen, over the last two years in particular, is that the monopoly utilities have started to say, alright, we’re no longer going to buy renewables and storage so much from third parties, through what we call power purchase agreements, we’re just going to build and own and operate this stuff ourselves. And so they’re throwing it into this rate-base concept. Well, under that model, this means that this sort of centralized planning process has to get approved by state regulators. Now, in theory, as in any system really with central planning, the gap between how a centralized system will perform and a market system will perform -- the performance gap widens when investment decisions are more complex and more difficult for a central planner to have the available information to make the right investment decision. So to your point on Vogtle and all these others, right, what we’ve seen historically is that the monopolies made a lot of bad decisions historically, when the choice was really as simple as get an accurate demand forecast, and then choose between nuclear, coal, for a while, and then it was choose between coal and natural gas. But now they’re choosing between conventional and a whole family of unconventional resources. And that really means that the complexity of capital investment in this industry is growing by a step function, and that means that decentralized essential decision making for markets is going to be increasingly advantageous. And we’re starting to see that bear out in the last year here with some initial evidence.
EMP: Yeah, well I mean, this is 2021. Why are we investing in a pressurized nuclear reactor, which was technology developed in the 1950s? I mean come on, you can put a Corvette engine in a ‘57 Chevy, but you’re still driving a ‘57 Chevy.
DH: Right.
EMP: And just the whole technological paradigm as markets have, you know, they’ve got their beachhead but, but there’s still this monopoly wall that they're bumping into.
DH: Right.
EMP: So, that’s a good segue to the point I wanted to go to, which is, we’ve had about 20 years now, where we’ve had these two sets of states involved. Twenty years ago it was like a fait accompli we were going to have competitive markets. It was the last domino to fall, in terms of, you know, introducing market-based policy to the industry. And then California happened, and everything, you know, the whole thing went off the rails. And so, we’ve had this awkward hybrid thing for 20 years now where we’ve had roughly a dozen states, according to how I look at it. I mean, everybody will assess which states are competitive differently, but I view it as about a dozen states that have competitive markets at the state level and operate within a regional competitive market. And the rest which have some degree or other of the old, you know, this philosophy that evolved in the 19th century and was cemented in the early 20th century: monopoly regulation. We still have that dominating most of the country. So we have 20 years where we’ve had Justice Brandeis’ ‘laboratory of democracy’ at work. We’ve got one set of states working competitively and one working under the regulated-price model. What have we learned in those 20 years?
DH: We’ve learned a couple things. One is that the only state that followed the original blueprint from the get-go was Texas. And we’ve seen some states then not go down the path at all. And then we’ve seen some states go down the path to some degree (laughs). Which is where I would kind of say there’s a murky middle, where there are states that have done various degrees of competition.
EMP: But let me interrupt you. Isn’t there a 50,000-foot level? Can we say this has happened in this set of states in terms of price? Because everybody wants to make this simply about price. I mean, what other commodity do we expect always to be lower in price tomorrow than it was yesterday, right?
DH: Right.
EMP: But what happened in terms of the trend in pricing over those 20 years?
DH: Right. So once the transition policy started to fall out what we saw is a very clear downward trend. Especially on the power generation component, the supply component in the market states. And then we saw the exact opposite direction, upward (price) pressure on power generation costs in the states that cling to the monopoly model.
EMP: The people in Georgia will attest to that right now.
DH: Yes, yes, absolutely. And that’s really important to single out for folks. And that the transmission and distribution component of the system remains more under that cost-of-service regulated utility model. And thus the all-in costs of that -- when you see these total retail bills -- it’s really important that we actually dissect it further and we say, wait, we broke off a component of this industry to competition. What do we see is the price pressure within that? And that’s where we can really delineate the benefits of competition and driving innovation and cost pressures downward so …
EMP: So just to really dumb this down. What I thought I heard you just say was that, in these dozen or more states (with competition) we had downward price pressure. But in the regulated states we had upward price pressure. Do we -- can we draw any parallels, too, in terms of the onset of clean-generating technologies?
DH: So it depends how you define clean.
EMP: I include natural gas.
DH: Okay, that’s perfect.
EMP: And I include upgrades to nuclear plants. I include, you know, extending the license of nuclear plants. That’s all clean energy through my lens.
DH: Sure. And I think it’s great to start with nuclear and natural gas just, because we have more data over that 20-year stretch with those facilities than we do with renewables and storage, which have really picked up in the last few years. And we have some takeaways from that. But it’s (renewables and storage) an understudied area just because of how limited that data set has been. But going back, you know, you made the point on how nuclear fleet (performance) was drastically improved under competitive ownership.
EMP: I worked for Exelon. That was a talking point.
DH: And then we look at natural gas and -- I think this is probably the best natural experiment between markets and monopolies out there -- was looking at the fracking revolution also combined with the Obama-era environmental regulations that went into effect. The merchants, right, these competitive suppliers, immediately went to work and said, wow, we’re going to change the composition of our portfolio to reflect the shift in market fundamentals now that we have cheap gas, and we’re going to minimize our compliance costs with environmental regulation. That shift was rapid and swift. And we saw not only the competitive suppliers make better-timed decisions in the transition to gas, and better technology choices, but they were siting these facilities where you could optimize for lowering your costs for transmission interconnection as well as having access to the cheapest natural gas. And then they were also minimizing their costs on their coal fleet when they had to comply with environmental regulations. In many cases, they said, no, it doesn’t make sense. We’ll retire this (coal or inefficient gas) plant, whereas a lot of monopolies sunk another billion into a lot of these plants when it would have been cheaper just to build a new, cleaner plant from scratch. And so we saw a huge gulf in the behaviors. And then the last point I’ll make is, even where they made comparable decisions, it was real common to see monopolies earn 10%-plus regulated returns on these assets. Whereas the competitive power generators -- a lot of them that I know that invested in that sort of combined-cycle natural gas revolution -- a lot of them invested upfront just to get 6% returns. And they’d be happy. So not only did they absorb the investment risk upfront, but they were doing it actually at a lower implied rate-of-return than what the regulated utilities were getting.
EMP: So, in other words we saw -- if you use my parameters in which we include nuclear upgrades and gas-fired generation as part of the transition to clean energy -- then we’ve seen coal reliance drop off a cliff just in the last few years. While we’ve seen consumers increasingly demanding the opportunity to purchase these ‘new’ generating technologies -- I say new with air quotes -- you know, sun, wind, and efficiency and demand response and storage. There’s just this whole avalanche of technological advancement that’s being held off by this big wall of monopoly regulation, right?
DH: Yeah, absolutely. And now we’re in this era where really we’re talking about consumer empowerment as the path forward. And this is something that not only competitive generation but especially the consumer choice angle plays in. And it’s huge. And this is big for both small and large customers alike. And so you see it, you know, as I used to do a lot of work with the really large consumers, the big industrials and the data centers. And as we saw, going back historically they’ve always wanted a ton of autonomy. They wanted a choice in choosing their supplier. They wanted the ability to provide for themselves, to whatever the degree they wanted, and then buy off the market. And they wanted to have different types of financial (risk-management) products that they could use. So they wanted more autonomy. Now you layer on all these corporate sustainability goals. Whoa, it’s like a whole new motivating factor for consumer choice going forward. And you start throwing in now your ma-and-pa commercial interests on the consumer side, as well as residential -- whether it’s people wanting rooftop solar or whether it’s people wanting to actually contractually finance for cleaner energy and (emissions) offsets on their own (energy) consumption – you’re just seeing this groundswell of demand for different types of retail electricity products going forward. And it’s really going to behoove state policymakers to say, you know, we need to recognize where technology and consumer preferences are going and make sure that we have a market architecture that gives them choice and gives them autonomy.
EMP: Well, we spent a lot of time now talking about what we’ve experienced and, you know, the overall way we think the market should be designed to accommodate a zero-emissions grid by 2035 Let’s look a little more near term. We’ve got a new (FERC) commission, led by Rich Glick, a longtime Washington pro. And we have a Biden administration. I’m still in whiplash to go from an administration that called climate change a hoax and wanted to bring back coal generation to reward his political cronies and to buy votes, you know, to go now to embracing the Paris Climate Accord and setting a very ambitious goal. We’re talking about less than 15 years. We’re talking about 14 years from now. And so, you know, how do we get there? That’s like warp speed for this industry. We’re talking about an industry where resources have a 20-, 30-, 40- or more years’ planning and depreciation schedule. How do we do this at least cost to the consumer? How do we keep the consumer from having whiplash? And maybe the infrastructure bill that’s coming up is going to tie all that together. Are we going to see transmission lines in that bill?
DH: Yeah, there’s a lot of interest in transmission reform. And I would say, off the bat, especially, prior to the weather events of February, it was pretty clear that probably transmission policy reform was the top item at FERC, after one really nuanced issue on state subsidies and federal jurisdiction that we won’t get into. But I think transmission was huge, and it’s huge for Congress. The thing that is so fascinating right now is that, while there’s always this temptation -- and we saw the green New Deal type of mindset to just spend a ton of money, right? Hey this is infrastructure. We can just expand public expenditure. Actually, what we really need is to liberalize the marketplace and have better regulation that lets all technologies compete on their merits. And that is absolutely what’s critical going forward. Really, the most important and transformative effects that Congress and FERC can enact don’t even require spending a public cent. It’s actually overhauling the regulatory architecture that currently rewards incumbents and really opens it up to competition from new entrants. Like full-throated competition. And that is the platform that facilitates rapid capital stock turnover. And so, to your point, to hit these really ambitious goals of rapid emissions reduction, you need a platform that lets capital turnover happen quickly and efficiently, and puts …
EMP: Let me interject, Devin, because I anticipate -- maybe I’m wrong but my anticipation is public funding of these mega (direct-current) DC ties to tie everything together -- you feel that could be accomplished better by the market?
DH: Yeah, so, first off a lot of the transmission work -- we already spend just tens of billions of dollars on a regular basis for transmission infrastructure. There’s already mechanisms that fund it, that are out there. But that regulatory architecture is really outdated. And it’s something that, you know, Chairman Glick, that you mentioned, and I’d also throw Commissioner Clements, who just started this year, in the mix there too because she’s a true expert on it, are really, really motivated to transform this. And what we see is that, right now, it still rewards these same monopoly utilities that sit there and say, hey, I’m going to keep investing in the most expensive options. And they’re leaving a lot of really lower-cost technologies on the sidelines. Because, again, they make money based on spending more capital, not less. And so we really need to flip those incentives overall. And then also put projects out for competitive solicitations and that, you know there’s evidence already that the Brattle group and others have done that have shown 20%, 30% cost reductions just by introducing competitive mechanisms into this industry. That’s huge. And that’s even just for building the same type of line. That’s before we even get into the idea that there’s all these grid-enhancing technologies and other really fun, shiny objects that are chronically underutilized in this industry because it actually deters low-cost new entry in the transmission space.
EMP: So what you’re saying that is that, let the market work. Create effective competition and -- Jon Wellinghoff alluded to this in episode 2 when he said that we shouldn’t stop competition just with the (electricity) commodity. We shouldn’t assume that transmission and distribution are natural monopolies, but to apply pro-competitive policies throughout what used to be the vertically bundled monopoly-utility provider. So we have competition in the commodity. Inject competition -- particularly with these new technologies -- into the transmission and distribution space.
DH: And it’s still, to be clear, it’s a very administrative process that goes into transmission planning. It’s still done through these regional grid systems and everything. And there’s ways to do, really getting the minutia, to do that better. But that process can really be overhauled and integrating new technologies is a huge opportunity to move forward in that arena. And I also think that just broadly we need to be thinking too about policies that talk about bottom-up grid infrastructure investment as well as these big macro projects too. And one of the things that we actually see that’s a problem, regardless of this incumbent-versus-new-entrant debate is that just any form of infrastructure buildout, especially these linear projects like transmission or pipelines for that matter, it is so hard to get stuff built in this country. And this is something that the Biden administration, and even going back to the Obama administration, has really struggled with. Permitting and siting for even just a major transmission line over several states can a lot of times take eight to 10 years to get through the full process and to get built. So if you’re talking about a 13-year target to get things built.
EMP: We’ve got acronyms for that. It’s NIMBY and BANANA, right? (laughs) Not in my backyard and build anything nowhere anywhere near anyone. And Congress even tried to tackle this a decade or more ago, allegedly giving FERC the veto authority to step in in those sorts of instances. But that’s never happened.
DH: Yeah, and this is something that is in the congressional package that they’ve been looking at. You look at the Clean Future Act and some other proposals that have come up. Siting and permitting reform is really something that all transmission developers and also customers just agree is a must have. It’s huge just to get anything built having -- really delaying these processes really gums up and runs up the cost bill. It’s not so much the regulatory compliance as much as it is the delay and capital. You have to sit there and delay a project three to six years. In additional terms that means the financing for it gets a little bit more challenging. So we really need to start cutting a lot of red tape in this arena overall just so we can get some infrastructure built, because there’s quite an appetite for it now. And there’s a lot of opportunities to make progress going forward.
EMP: Well, so we’re going to see quite a full-blown debate then in Congress over transmission. Do you see it as early as the infrastructure bill? Is that going to kick it off?
DH: Yeah, there’s some stuff -- I think the big question will be, do they just want to spend a lot of public money, kind of conflating stimulus with infrastructure? Or do they actually want to get after the structural regulatory reform items that are going to cause a steady stream of infrastructure investment by the private sector for decades to come? The latter is what really matters from the public policy perspective and so hopefully that’s something that Congress can develop more of an appetite for. But it’s something that maybe doesn’t resonate as much with the electorate (laughs) with all these acronyms as it does just, hey, let’s spend a trillion dollars to build something under a green banner.
EMP: Let me bore you with one of my, one of my stories, one of my early stories I covered as a new reporter in Washington was a NASA press briefing where they had taken this military jet and flown it right through the ozone hole and they’d done atmospheric sampling as they went through. And they actually captured smoking-gun evidence of how these chlorofluorocarbons were wafting up into the stratosphere, reacting with the ultraviolet light and breaking down the ozone molecule. And they went through this elaborate discussion of how they had done this, and then I think it was somebody with, you know, one of the reporters with ABC said, could you explain all of that again in a way a seventh grader would understand it? (laughs) I thought that was her job.
DH: And you know what, Bryan, that’s really an interesting parallel because arguably from an international environmental perspective those CFCs and those other ozone-depleting substances -- that later the world got together under the Montreal Protocol and said we’re going to address this -- the thing that greased the skids to even get global collaboration on that was that we had cheap substitutes. And we could start -- the economics were increasingly favorable. And this applies immensely to climate change. Because what we see is globally, we’ve got to make it really cheap and advantageous for individual countries to cut their greenhouse gas emissions profile. If we are to hope, either through a global protocol, or just voluntary through more fragmented actions, to see a lot of traction. And this is where getting into both the technology development, as well as the regulatory architecture that unleashes market forces, is the critical combination to drive these emissions-reducing costs downward and to make it more in the self-interest of countries to address climate change. And the grid is the first place to start.
EMP: Yeah, I know you’ve had some discussions with environmental groups about the role of markets in terms of meeting environmental objectives. You know, I dated myself now with that NASA anecdote. But I was a reporter covering FERC when they were debating Order 888, which was the mega order that opened up wholesale (electricity) market competition, and the environmental groups were all opposed to it, just like they were opposed to emissions trading when it was available in the 1990 Clean Air Act, to really date myself. That was one of the first things I chased as a reporter here. And, you know, the environmental groups didn’t like it. But emissions trading really allowed us to address acid rain at least cost to consumers. Fast forward to the Order 888 debate, the environmental groups didn’t want competition because it was going to be a pathway to dirty coal. And so, Elizabeth Moler, who was the chair of FERC at that time had directed the staff, well, the whole commission did, had directed the staff to do an EIS. And that environmental impact study showed that, no, actually coal would be disadvantaged and that natural gas would become the favored generation. Of course, and that’s exactly what happened. And that was part of the trend line I was trying to identify earlier, in terms of the greening of generation technology that we’ve seen. It’s just incredible that coal’s dominance of the electricity market has just collapsed.
DH: Right.
EMP: What is it, 20% now? That’s astonishing to me.
DH: Yeah, this is probably the last decade where we’re going to see a very meaningful contribution from coal.
EMP: Oh, God, it has to be. We have to have a zero-emissions grid. No way. Sorry folks. You know, park those ‘57 Chevys, please. Devin, I thank you for my Mulligan and I hope we get to play another round through here down the road. I’d love to talk with you again.
DH: Great talking to you, Bryan. Thanks for having me.
EMP: Thank you. Bye-bye.
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