TCS Daily

A Fast Answer to Energy Shortages - Supply Management

By Lynn Scarlett - March 19, 2001 12:00 AM

Energy issues -- nearly dormant for two decades -- are back on the minds of Americans.

Last week, President George W. Bush linked his decision not to move forward with carbon dioxide (CO2) regulations to concerns about rising energy costs and inadequate supplies. Across the nation, shocked Americans are opening up their natural gas bills to see price tags for a month of service that are triple what they were used to paying. And, of course, there's California. The state's residents reeled in January from rolling blackouts. Everyone expects more -- and longer -- blackouts when summer heat has Californians powering up their air conditioners. Western governors fear the Golden State's problems may spread.

But while attention to energy matters is high, understanding their nature -- and what to do about them -- is low. To get out of the current energy and electricity mess will require a three-pronged effort that includes increasing generating capacity, fostering conservation, and, most important for the near term, better managing existing supplies.

Consider California's problems. The state needs more electricity supplies, but getting new generating plants on line will take several years. And so-called alternative energy supplies are still costly, unreliable, or both.

Solar energy, the darling of many environmentalists, costs 20 to 50 cents per kilowatt-hour, depending on the size of the system. For an average California household, installing a photovoltaic (solar) system for total needs would cost around $50,000. Yet this high-priced system wouldn't provide reliable service to the homeowner nor would it solve the state's supply problems. Solar systems linked to the electricity grid automatically shut down during blackouts. They generate most electricity supplies during the middle of the day, not at dusk or in the evening when demand peaks. The only way to meet peak-time needs using solar is to store daytime, solar-generated supplies in banks of batteries, which adds more costs.

Wind energy fares somewhat better. It's cost competitive -- at 5 to 8 cents per kilowatt-hour -- with current high-priced electricity. But it does not provide reliable supplies during peak demand times. This means neither electric utilities nor other users can contract with wind power producers to supply guaranteed peak-time supplies. Again, storing wind energy in batteries could provide reliability, but including this kind of storage capability doesn't pencil out economically.

In the long run, state permitting of new generating facilities using old-fashioned fossil fuels will bring supply in sync with demand. But that prospect diminishes as the state threatens to commandeer private power assets. Already, some would-be investors are getting cold feet about entering the chaotic California energy marketplace.

Federal plans to increase oil exploration and further private-sector natural gas exploration may, eventually, help ease basic fuel prices. But they will have no near-term effect on California's problems. Nor will they reduce near-term strains on electricity supplies in Western states generally.

Of course, conservation is an option. No amount of moral suasion can supplant the power of prices to prompt conservation. Yet subsidies, rebates, and moralistic appeals are the standard fare offered as conservation policy - for electricity, at least. In the early 1990s, during a major drought in Southern California, city officials in Santa Barbara allowed water prices to rise. Water use plummeted 40 percent almost overnight. Charging peak prices for electricity during peak-demand periods might accomplish similar results. Only letting prices rise is precisely what California's lawmakers don't want to allow, fearing a consumer backlash.

Fortunately, this is one matter in which the feds seem to have the right idea. The Federal Energy Regulatory Commission (FERC) has generally resisted price controls on wholesale energy supplies flowing into California, despite requests to FERC by California officials. Unfortunately, as long as retail prices remain frozen in California, energy use at the retail level will remain stuck in high gear.

Even with price rises, though, conservation opportunities, especially in California, may be limited. So what can be done? With generating electricity supplies helpful only in the long term - and muddled by unrealistic posturing about alternative energy resources - and the near-term option of conservation of limited utility, made worse by price controls that provide consumers no tangible reason to cutback usage, is there any other option?

Indeed, there is. Almost entirely ignored in energy policy discussions is the option of energy management -- better using existing supplies in the context of current demand levels. And not only can energy management help in the near term, it can be implemented at relatively low cost.

How would it work? By adding some battery storage capacity at the household level and technology that converts battery power back into the kind of power (AC power) that flows through household wiring, excess, non-peak power can be stored, then reused in the evening when demand loads are highest. This would "shave" peak-time power use, exactly what is needed to avoid blackouts in the near term.

Costs to consumers for such a system would be around $2,000 to $4,000 for equipment and installation. Households equipped with such systems would, in effect, be reducing demand on the total power system during peak periods. They would also avoid blackouts by having access to stored battery power. In addition, they avoid the air emission and fuel storage problems associated with household generators. And an added bonus to this approach is that households would have a temporary power source in the wake of power outages resulting from natural disasters.

What lawmakers need to do most is to let markets work across all three aspects -- generation, conservation, and management -- of energy and electricity supply and demand. That means encouraging rather than putting roadblocks in the way of investment in new supplies of fuel and generating capacity. It means fostering conservation by allowing market prices to function. And it means permitting the use of supply management -- and not discouraging it by subsidizing alluring, but overly costly, alternative energy.

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