Exploiters versus Experts

From Dr. Judith Curry’s Climate Etc.

by Planning Engineer (Russell Schussler)

The unfolding saga around FTX, the cryptocurrency exchange currently in bankruptcy, appears to share some similarities with factors which led to the demise of Enron. Enron and FTX both initially achieved success because they were able to exploit some of the inefficiencies present in a complex system.

While it is a great thing to identify and correct inefficiency, the abilities of those who do so may be greatly overestimated at times.  As with Enron, it may have taken a special brilliance for Sam Bankman-Fried to capitalize on some shortcomings in crypto markets. But is the influence he received, the many speaking engagements and the adoring press commensurate with accomplishments and abilities?

You don’t have to be an overall expert in regards to a complex system in order to discover and tinker with particular inefficiencies and shortcomings within that system. In fact, successful exploiters may be grossly ignorant or worse, misinformed about major factors of the complex system. The ability to exploit a system does not mean that the exploiter is capable of redesigning the system, building a system ground up or even maintaining their edge. This post examines the initial success and ultimate failure of Enron’s attempt to transform the energy market before concluding with some thoughts around exploiters and experts.

Before Enron

In the period prior to the emergence of Enron and other power marketers, utilities operated in a more isolated fashion when developing, operating and scheduling their power supply. While there were power sales between utilities which might be triggered by supply and demand imbalances, the concept of short-term sales of energy based on incremental cost differentials was not even on the radar of many within the power industry.

Transmission lines put in to make the system more stable and enable long term sales allowed for such exchanges. However, the mindset of the industry was not there. A common thought was that any energy sales should at least capture incremental as well as the fixed costs of those resources. While economists and utility personnel today can easily see the flaw in such thinking, it was not the case in the 90s. I remember my Vice President in the 1990’s saying, “Why should I sell the output of my plant to my neighbor for less than it costs me?”  Now he clearly was an expert on the functioning and economics of the overall power system, but there was a blind spot there. It often took a while and a lot of effort for the argument that “we will best reduce costs when we use every opportunity, we have to make a nickel”, made sense to such experts.

The Power Marketers Emerge

While utilities were very good at economically dispatching their own resources, they were not yet good at working with their neighbors to get overall system costs down. It was common for situations to occur, for example, where one utility would be ramping up a plant with incremental costs of 40 mills/kwh while their neighbor was ramping down a plant with incremental costs of 24 mills/kwh. While the individual systems were efficient on their own, greater efficiencies could be garnered the more their joint operation approximated working together much as a single system would. Great savings can result when margins allow ramping down the more costly plants in an area while increasing generation levels in lower cost plants. There were many challenges in getting multiple utilities to work together. But working together had the potential to provide great benefits to all parties. Enron and other power marketers swept into this environment. Bolstered by better communication technology, good transmission capability and Federal Regulations encouraging efficiency, marketers were able to put together and market deals to richly benefit buyers, sellers and themselves. (For information on Enron lobbying efforts that opened the system to marketers see this.)

Initially the marketers provided a great service. They coordinated numerous useful transactions, many of which might not have occurred in their absence. Cheaper surplus energy replaced more costly energy. They found buyers for temporary and limited capacity surpluses allowing some to defray excess costs and others to reap savings from delaying capacity additions. There were win-win-win situations for buyers, sellers and marketers. The industry underwent a lot of change quickly and at this time many thought that Enron and their ilk were the “smartest guys in the room”. But as it turned out the positive change and impact they could have upon the system was limited. Their knowledge base lacked breadth and depth.

A Turn for the Worse

As I mentioned earlier, my VP was an expert on power systems despite having a temporary blind spot when it came to recognizing the benefits of potential sales and purchases, and we were slow to act. The power marketers were great at exploiting such shortcomings in the system, but they were not power system experts. Because of their contributions, some gave them credit and deference far beyond what was deserved. They were in an enviable position. They had done great things and they were big and growing, but the situation they were exploiting would not provide for continued unchecked growth. Competitors flooded the markets and utilities gained expertise and confidence in doing such transactions on their own such that potential opportunities to reduce cost differences became scarcer. While many of the power marketers had big goals, they were exploiters not experts and their knowledge and capabilities would not be sufficient to maintain their existing market shares let alone allow for their desired growth.

Financial markets drove great efficiencies in the power markets. Increasing such efficiencies eventually leads to a point of diminishing returns. How did many power marketers respond in this situation given their financial pressures?   Often power marketers created deals that were increasingly complex and risky. Eventually many ended up making deals that flew in the face of basic goals and principles of power supply. Some approaches at times crossed over into ethically questionable and occasionally outright morally wrong illegal practices.

An example of an unsound practice concerns the supply of dependable generation capacity for emergency situations such as during unplanned major unit outages or extreme weather. For emergency situations utilities often relied on older plants which were no longer able to run economically. They received costly maintenance just so that they could be ready to supply power in emergency situations. While originally each utility had extra units on hand to provide firm dependable power (usually at a great cost) marketers brought about great benefits through instruments that allowed the sharing of excess capacity, so everyone didn’t need their own exclusive backup units. Initially when contracting for such emergency power there was a physical resource that could be pointed to as available to provide power when needed. Who had priority for each resource under what conditions was well understood by all participants. Those with top priority had “firm power” based on a physical resource on the ground and they could point to it and know when it should be expected to help them out under what conditions. Eventually, power marketers went beyond that and developed an instrument called “financially firm power”. What that meant was that although they did not have an identified resource on the ground, they would “ensure” firm power when needed by the purchaser through their willingness to go into the market and buy energy at whatever price it took. They projected that they would save so much money by not providing actual firm capacity that they could afford to buy it on the spot market in the rare event that they ever needed to actually provide it in an emergency.

While many in the industry were suspicious of such products, overall, the industry bought in to it. In some cases, power supply engineers accepted the new approach; in others they were over-ruled by accountants, rate makers and others who prioritized the benefits from lower costs. Some entities held the line and insisted on products that they could ensure were connected to identifiable physical resources. The short-term financial situation was better for those who trusted the marketers. One reason such instruments could work was because the system was built to be extremely reliable and although these contracts tended to reduce reliability, the system was robust enough it was not observable. While it seemed apparent to many, most did not admit that the system was becoming inherently less robust. (For a discussion concerning why it’s difficult to observe erosions in grid reliability see this.)    

Federal regulations intended to support competitiveness and open access pushed utilities towards more outsourcing of supply side resources. FERC did not like transmission owners allowing their affiliated generators to have a monopoly on power supply or even to get a slight advantage when selecting power supply options. So, marketers would develop power sales contracts which utilities had to compare against self-supply options. Regulation forced utilities to select the options that were “best” in the regulators’ eyes. In addition to products like “financially firm power”, utilities entered long term purchase contracts which may or may not be tied to specific plants, where they hoped anticipated market changes would benefit them down the road. The utility self-generation options were based on in-ground projects that did not allow such leeway to become more competitive (but maybe ultimately more costly). Unlike previous planned resources which a utility could control and see, they were now more dependent on markets and the interactions of many other industry players. Things were fine for a while. Eventually the competitiveness of the market and diminishing returns made it harder and harder for marketers to make money as they had in the past. Some took shortcuts and employed questionable and unethical practices.

While costs were going down, these new arrangements left the power systems without as much redundancy, robustness or resilience as they had had in the past. Previously, although there were not formalized sharing agreements in place, utilities would come to their neighbor’s aid with their excess in times of emergency. But in an efficient market such excess capabilities are increasingly rare and in theory should disappear. At times when emergencies happened, there were not enough resources on the ground to supply the load irrespective of the complex financial arrangements intended to support the system. When multiple parties are committed to provide “financially firm” power and there are insufficient supply sources available, the market price tends to infinity. This causes default or bankruptcy. When market conditions do not jibe with forecasted assumptions of market costs, long term power supply arrangements can force the supplier to default or go bankrupt. When resources are not available the purchasers of such instruments see little relief from their bankruptcy.

Utilities acting on their own had a lot of skin in the game. At the end of the day, they were responsible for keeping the lights on. From my experience they all took this very seriously. Marketers providing efficiency took away a lot of control the individual utilities had in the past. Bad practices, incomplete understanding of power supply and poor market conditions all but guarantee failure. Creative/illegal practices may forestall but will not pre-empt the inevitable crash. Extreme conditions happened, markets did not perform as forecasted, and many marketers went out of business either from the financial or legal impacts of their poor decisions. While it looked like many utilities were saving money along the way, the cost of the failures imposed a crushing financial burden for many.

In California, market prices resulted in utilities seeing incredible price spikes and blackouts. These were blamed on market manipulations. While there were market manipulations and gaming of the system, such problems could emerge without “evil” market participants. The large investor-owned utilities (IOUs) were heavily into the market approach. However, the large municipal entity, the Los Angeles Department of Water and Power (LADWP), perhaps because they were not pressured by regulatory authorities, followed a more traditional planning approach during this period. At the time, I saw the difference as providing a “control” group for the marketing approach. During the electricity crisis LADWP did quite well. They had sufficient energy to serve their needs and made a killing with sales into the market while helping their neighbors mitigate its impacts.

I’ve talked to regulators from California since and read many media accounts, but I don’t know that others have seen the dots as I did, let alone connected them in the same way. Overwhelmingly it seems the consensus is that market manipulation rather than market failures caused the problems. A full examination of the evidence should lead to the conclusion that market manipulations were just exacerbating a bad situation of an already vulnerable system. It seems prudent to ask if market failures and emerging potential disasters “caused” the market manipulations rather than resulting from them. We might be best served by assuming that this type behavior is inherent and largely unavoidable in failing markets. Such reasoning is not widespread, unfortunately. When the market is responsible for meeting emergency loads, no individual entities have skin in the game. There is a loss here that needs to be reckoned with. Worldwide systems where availability is dependent on markets continue to see problems.  However, conventional planning approaches, particularly those with lesser commitments to intermittent resources, continue to do well.

Dangers for Exploiters

While it’s possible to be both an expert and an exploiter, one should be wary of exploiters claiming broad expertise. Initially, exploiting inefficiencies in a system is a good thing. However, exploitation can get out of control and the recipe for failure seen by Enron could apply around innovation in many complex systems:

  1. Exploiter spots an inefficiency/improvement and use it to make significant profits within the system.
  2. Initial success leads to greater success, particularly during good times, and that party expands and others begin to enter that space.
  3. Success leads the exploiters to over-estimate their capabilities and overestimate their understanding of the overall system.
  4. Success leads the exploiters to plan for and expect continued growth and expansion.
  5. Success, money and influence impact policy makers to be overly optimistic such that they make the system more open so such exploitations.
  6. Eventually opportunities to exploit inefficiencies become less available and exploiters see diminishing returns.
  7. Pressure for growth, or maintenance of profits, leads to riskier and more questionable decision making.
  8. The realities of the system come crashing down in times of market stress.

It will be interesting to watch this as more is known about FTX to see if their trajectory followed a similar path.

Exploitation and Innovation in the Energy Arena

In the energy arena the limits of exploitation can be seen on smaller scales as well. The first to capitalize on innovations reap benefits but opportunities often close soon after for existing and new participants. For example, in many circumstances it may be possible to make money by displacing generation which has high variable costs with cheaper intermittent energy. Wind generation and solar applications can be successful. But as more participants enter that space you quickly see diminishing returns. Systems can only accommodate a limited level of displacement from intermittent resources. Furthermore, what worked on a small scale likely will not work when scaled up. (See this posting as to why the continual expansion of intermittent generating resources is inherently limited.)

However, when it comes to wind and solar, we are not as a society recognizing that we are attempting to use these resources at levels far beyond their potential. We have seen some who have made money with intermittent resources seeking to expand their operations, claiming expertise and arguing that the system can absorb their expansion and seeking to impact policy makers and regulators to aid with their expansion. But they are not overall system experts and unfortunately their plans cannot work.

It’s one thing to take apart a system. It takes a lot more ability to put it back together again. Taking apart a system, changing the parts and asking others to put it back together doesn’t take a lot of ability, but the ask is near impossible. Energy “plans” that call for wholesale changes but do not consider how the final overall system might work are not plans but rather only naïve wish lists. “Experts”, be they exploiters, innovators or highly specialized geniuses who call for sweeping change without a broad foundational background, should be meet with a high degree of skepticism. If the plans don’t account for system needs, but rather rely on innovation down the road, the skepticism should be increased further.

Elon Musk has spoken of revolutionizing our energy system, but that is just talk. I appreciate the genius of Elon Musk and he has done an incredible job in developing and manufacturing electric vehicles. He has a strong expertise and presence in the battery market. Kudos for his efforts in rooftop solar even though he may or may not one day reach his early projections there. He may yet help reshape the grid but there is a lot of work that needs to be done before anyone can outline how the grid could be replaced or radically changed. We should be highly skeptical of those with lesser credentials who say they can get us there. The grid is far too complex for wholesale redesign by policymakers. We need to watch our “experiments” with the grid and power supply and be ready and willing to put on the brakes as needed. In formulating energy policy there will be an interplay between old and new types of expertise, but serious respect must be given to proven experience.

Where do policy makers look for expertise?  There is risk in looking solely toward the utility industry. As discussed, industry insiders can be to set in their ways and fail to see the benefits that exploiters can realize by eliminating inefficiencies. It’s possible also that industry insiders might be overly skeptical of newer technologies brought about by innovators. On the other hand, ignoring the wisdom of industry insiders also poses a danger as innovator and exploiters likely do not have a great understanding of the broader system. Policy makers should seek broad input from many segments. But care should be taken when evaluating their input. The initial successful track record of Enron and other Power Marketers was not sufficient for entrusting them to transform the energy industry as policy makers did. However, we still see areas of the country that have overly optimistic hopes for the capabilities of markets to provide capacity and energy (See this posting for one example).

On the Ground versus Financial Expertise

Perhaps the biggest problem plaguing Enron (and likely FTX) is that they were too far removed from producing anything of direct value: energy, food, physical resources…. I certainly believe in markets but they don’t work everywhere.  Providing value through financial instruments has great potential to do good. Financial instruments can encourage enhancements while they capitalize on the work and products of others. But those who develop and employ such instruments are not experts in the areas they support. Policy makers, investors, and customers should not place too much faith in their expertise. When we place all our faith in the market and handicap and ignore those who provide the goods, we face a high likelihood of market failure. As may prove out with FTX as well, policy makers coupled with exploiters may be the worst combination for developing policy around a complex system. More importantly, we should not expect policy makers to work solely with exploiters and innovators to transform complex systems. Financial instruments are great, but in the end, you probably need to pay a lot of attention to experts who understand real physical things on the ground.

Thanks to Roger Caiazza for reviewing and providing comments.

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insufficientlysensitive
November 29, 2022 6:24 pm

Would that all green dreamers could first understand, then read this essay. But the ‘understand’ item is beyond most of them, and the ‘read’ would offend them. After all, they’re knowitalls.

markx
November 29, 2022 7:11 pm

I certainly believe in markets but they don’t work everywhere.

Yes. The idea that every problem can be solved with a market solution is very simplistic thinking.
Market systems have great power and resolve values and supply to meet demand with great simplicity. Complicated market structures get further and further from the basic supply/demand situation and corrupt everything, for example Australia’s national energy ‘market’, the NEM).

But…. all markets do require rules to operate; and a free for all inevitably results in big players dominating the market.

n.n
Reply to  markx
November 29, 2022 9:23 pm

Only to the extent of single/central/regulatory/monopolistic intrusion. A viable market self-corrects with minor perturbations to mitigate progressive prices and authoritarian collusion.

Ron Long
Reply to  n.n
November 30, 2022 1:45 am

Yes, n.n., and the regulatory intrusion in the case of energy markets is the addition of a much higher weighing of the Risk element of markets, that is, the price is controlled by supply and demand, except that regulatory risk means developing additional supply must consider future regulatory interference.

old cocky
Reply to  markx
November 29, 2022 11:31 pm

a free for all inevitably results in big players dominating the market.

Strictly speaking, that’s the case when economies of scale come into play.

Leo Smith
Reply to  old cocky
November 30, 2022 12:31 am

And in many cases the economies of scale can favour smaller operations. Big operations can fine tune a system to produce a lot of identicals at low cost, but they cannot change direction in a hurry.
I dont see this essay as altogether implicating big operators, but also implicating the idiocy of attempting to use other people’s capital to implement political ideals and make a larger government mandated profit.

AGW is Not Science
Reply to  markx
November 30, 2022 6:41 am

The thing causing the electric “market” not to work is not the “market” per se, but the stupid government force-feeding of wind and solar INTO the “market.”

Without “prioritization” of the use of wind and solar by government fiat, no utility would accept such erratic, inconsistent, unreliable and unpredictable power into the grid, and these worse-than-useless things would never have been built.

Chris Hanley
November 29, 2022 7:42 pm

Perhaps the biggest problem plaguing Enron (and likely FTX) is that they were too far removed from producing anything of direct value: energy, food, physical resources….

Phew, the author finally got there.

n.n
November 29, 2022 9:20 pm

green wishes upon Green less greening

John Pickens
November 29, 2022 10:03 pm

These “experts” can’t provide a single example of PV, wind, or battery manufacturers using only the outputs of their products to make more of them. Yet they are hell bent on requiring all power systems to switch over to these unreliable systems. Some experts…

Louis Hunt
November 29, 2022 10:26 pm

So many people, from President Biden to the Pope, want to end the use of fossil fuels. But none of them propose real alternatives, other than unreliable wind and solar, to replace them. They want to force society into a green future before its time. If they get their way, only energy poverty and chaos will result. Civilized society as we know it will not survive without reliable energy. But with reliable energy, we have a good chance of adapting to even the worst case scenario of global warming. In fact, the positives associated with a little warming might even outweigh the negatives, making climate change a net positive for our planet. Nobody knows for sure. But one thing is for sure, when the cure is worse than the disease, it makes no sense to waste trillions on the cure.

Earthling2
Reply to  Louis Hunt
November 29, 2022 11:32 pm

Wind and solar can’t even keep up with new demand growth, let alone manufacture their own product with their own produced energy. Well I suppose a solar farm could smelt aluminum 3 hours each side of noon, but would be the most expensive aluminum in the world. I don’t think the climate zealots really understand the complexity of all the issues, which at the end of the day is actually quite simple to understand.

AGW is Not Science
Reply to  Earthling2
November 30, 2022 10:15 am

Climate zealots are blissfully ignorant of how things work, how things are made, how raw materials are sourced, and how their stomachs are kept full, among other things.

Because if they were not blissfully ignorant of those things, they wouldn’t BE climate zealots. Nobody with the slightest notion of how all we get to take for granted in modern society would ever campaign against fossil fuel use.

Louis Hunt
Reply to  AGW is Not Science
November 30, 2022 1:52 pm

You’re right. They are blissfully ignorant. The ones in Europe calling for an end to farming must think that they don’t have any need for farmers or truckers because they can just go to the grocery store to get what they need. Are they really that stupid?

Tony_G
Reply to  Louis Hunt
November 30, 2022 4:25 pm

Sadly, Louis, they really are. (At least many of them). I’ve pointed out in the past around here that these are people who think you should just buy your food in grocery stores instead of growing it in the dirty ground or killing cows for steak. I’ve seen this first-hand.

AGW is Not Science
Reply to  Louis Hunt
November 30, 2022 8:14 am

Two things –

1. There IS NO ‘GREEN FUTURE’ since there is actually nothing “green” about industrial wind and solar, and since low density, intermittent energy simply cannot power a modern, high density energy society.

2. What they’re trying to shove down everyone’s throats is not “premature,” since it is not possible.

People deluded into believing the “climate crisis” nonsense are like dogs chasing their hindquarters attempting to eat their own excrement because their master told them it was good tasting and nutritious. If the ever get what they’re after, they’ll find it doesn’t taste very good and is in fact harmful as opposed to beneficial.

Most of what you said is right, just time you dismiss the ridiculous notion of some magical “green” future, no matter how far off. It will never come to pass.

Louis Hunt
Reply to  AGW is Not Science
November 30, 2022 2:06 pm

Yes, a zero-carbon future is not possible, but a low carbon future could be achieved with nuclear power if the nut jobs would allow it. And who knows what other green technology might be developed in the future. My point was that it’s not possible today. Even with nuclear, it would take years to get there. So why are they so anxious to throw us all into the darkness now when they have no viable substitute for fossil fuels that they are willing to accept?

old cocky
November 30, 2022 12:09 am

One of the things we covered in our Economics lectures was the “spider web” diagram of time responses on the supply and demand curves. In some cases you get convergence to a new equilibrium, but in other cases the responses can spiral out of control. Large supply response times compared to demand changes is Not A Good Thing[TM]

What seems to have happened with the electricity arbitrage market was that excess capacity was utilised, reducing the safety margin (and thus resilience) and crowding out the addition of new capacity.
There are ways to handle this, largely involving long-term contracts with uptime guarantees and meaningful penalties for non-performance.
There is a good chance that the IT stampede to move everything to The Cloud[TM] will cause similar problems as a result of poorly thought through resilience strategies.

Peta of Newark
November 30, 2022 12:11 am

Ever come across the phrase: “Fat of the land

It alludes to (strictly called) ‘redundancy’ or maybe spare-capacity, back-up reserve, (financial typically) ‘savings’ or ‘insurance’

Insurance is what we can all understand – especially that if you buy insurance – you will never need it
But if you don’t buy insurance, sure as eggs are eggs by this time tomorrow you’ll wish that you’d bought some yesterday.

Enter the relentless quest for ‘efficiency’ = that it is ‘more stupid than a stupid thing‘ to be leaving all that ‘fat’ lying around, we should be ‘efficient’ and make use of it.
i.e. Consume it
Do you see where we’re going? Hint: Stanley Jevons

And so we are here and now, consumed all the fat, spent all the savings and living a hand-to-mouth existence for even the most basic essentials.
We’ve entrusted everything to Just In Time Delivery or
Get on the Phone and demand demand expect expect that everyone has nothing else to do but be at your (your, not anyone else’s, your) Beck & Call

It had nothing else to do but fall over – and it has.

2 nice examples:
1/ Maybe 20 or 25 years ago there was, sitting around in warehouses mountains of ‘food’ (there’s the fat analogy for you even though it was actually sugar)
There was sufficient ‘food’ to cover 15 months of global consumption
When I last went to check, that mountain was barely a molehill of 70 days worth consumption

2/ Some while ago I ‘did’ electronics and was employed on a small apart of the MIL STD 1553 better known as ‘Fly By Wire’
Seemingly, NASA had a lot to do with that and the Saturn launcher that got to the Moon was equipped with this new fangled loveliness.
The Saturn Launceher was indeed controlled via Fly By Wire and it had 5 (five) parallel and equal systems.
NASA equipped their moonshot with 4 redundant systems supporting the primary one.
And they made it to the Moon. and back

Compare to their feeble and pathetic efforts of late……………..
That is what comes from consuming the Fat of the Land

And you know me, Fat of the Land is an actual tangible thing and is being consumed in humongous amounts
Fat of the Land is = Soil Organic Matter
And we know it’s being consumed because when it is, it turns into CO2.
Plenty commentators on here know that, without knowing it.
Almost unimaginable amounts of CO2
Measurable yes. Still unimaginable

Leo Smith
November 30, 2022 12:27 am

It all boils down to yet another example of ArtStudents™ colluding with profiteers to redesigning complex system to deliver moral arguments and profit, but not a concrete solution to anything.

I am reminded of the latest Woke initiative that finds that London Fire Service is comprised of racists homophobes and misogynists. But says nothing about how effective they are, or not, at fighting fires.

In the end, it all boils down to whether we have the power to demand that the electricity grid delivers reliable low cost electricity, or a moral and political excuse for profiteering.

AGW is Not Science
November 30, 2022 4:25 am

Something missing in your otherwise fine anysis is that wind and solar have never been, are not, and never will be “profitable.” The “policy maker” idiots shoved their inferior product down the throats of the utilities, and dumped the bulk of the actual costs of the worse-than-useless “power” they produce on facilities that actually produce useful power. That is, coal, oil, gas and nuclear (and where available, hydro) power that can be dependably produced on demand, which by being forced to the back of the line to stand behind (and back up) worse-than-useless wind and solar, are forced into part time and inefficient use cases they were either not designed for or were designed for to accommodate intermittent sources that nobody actually needs.

A classic case of the failure of top-down dictation, not a failure of “markets.” Absent the Godzilla sized government hoof on the scale, utilities would have rightly demanded on-demand production from wind and solar salesmen, which the could not have provided. And the stupid things never would have been built.

AGW is Not Science
Reply to  AGW is Not Science
November 30, 2022 4:42 am

Analysis

Beta Blocker
November 30, 2022 11:02 am

———————————-
AGW is Not Science: “Something missing in your otherwise fine analysis is that wind and solar have never been, are not, and never will be “profitable.” The “policy maker” idiots shoved their inferior product down the throats of the utilities, and dumped the bulk of the actual costs of the worse-than-useless “power” they prodce on facilities that actually produce useful power.”
———————————-

In public policy overreach lies great entrepreneurial opportunity for those smart individuals who are of a mind to exploit it. Especially if you are a corporate CEO.

For one good example, if we look at what Dominion Energy is doing in Virginia with its offshore wind project, we see that utility executives have an incentive to go with the flow in supporting renewable energy targets at the expense of maintaining a reliable supply of electricity for their customers.

Taking a devil’s advocate position, let’s ask this question: Could anti-carbon regulatory action working in combination with direct financial incentives be supercharged in a way which would greatly accelerate America’s transition into a wind and solar energy future? Could it be done in a way which greatly improves the profit margins of the participating utilities?

The only way to get from here to there in achieving Net Zero for the United States is to impose an aggressive anti-carbon plan of action on the nation’s economy, one which uses a carrot and stick approach for getting the job done. 

Energy conservation must be the foundation of any anti-carbon agenda. Getting the job done on President Biden’s Net Zero schedule means that starting immediately, America must be consuming less energy than we do today. Moreover, the pace of the transition into a Net Zero future must be greatly accelerated — and the severe collateral impacts must be ignored.

For purposes of simplification, let’s define what Net Zero should mean here in the United States, using the year 2005 as the carbon emission baseline.

Let’s define the 2035 Net Zero target as a 70% reduction in US carbon emissions from the power generation sector plus a 50% reduction from the industrial and transportation sectors. The 2050 Net Zero target will be a 90% reduction in US carbon emissions from the power generation sector and an 80% reduction from the industrial and transportation sectors.

The carrot of a supercharged Net Zero action plan is to guarantee a 12% annual rate of return on every dollar invested in wind, solar, and battery technology; with utility ratepayers supplying all the needed capital up front and continuously through unconstrained charges to their utility bills.

The stick of such a Net Zero action plan is for the Biden administration to declare a climate emergency, to unilaterally impose a scheme of energy rationing on the American economy, and to employ every tool in the federal government’s regulatory toolbox to reduce the supply of fossil energy while also greatly increasing its price.

A carrot and stick action plan like the one described above will precipitate a mad scramble into renewable energy production and deployment. Furthermore, greatly higher prices for all forms of energy, and a corresponding lack of supply, will encourage the massive efforts at energy conservation needed to make any Net Zero action plan work.

However, there is risk for those who would promote this kind of plan. It is possible that a carrot and stick action plan — one that is a completely open and transparent means of achieving Net Zero — it is possible such a plan could also kill the goose which lays the golden egg of keeping many thousands of otherwise useless people employed inside the manpower sink which has become the renewable energy promotion industry.

Could we predict a strong political backlash if the Biden administration adopted this kind of Net Zero action plan — a plan which involves greatly higher prices for energy; and over time, a greatly reduced supply of energy?

The answer here is, unfortunately, no. If the outcome of the 2022 mid-term election is any indication, President Biden has nothing to fear politically from imposing a highly coercive and expensive scheme for reaching Net Zero. If he doesn’t do it, then he has some other agenda in mind than saving the world from climate change.

Tim Gorman
November 30, 2022 2:15 pm

It just seems to me that this is very much a battle between Marxists and the left on the side of central planning works best versus Adam Smith, Hayek, and Friedman on the side of the dispersed free market and the “invisible hand” works best. We are actually seeing the battle play out in almost real time today in the power generation industry – and the Marxists and the left are losing as reliable power based on central planning is no longer a guaranteed product. It’s not an unexpected result. We have all kinds of evidence in the 20th century that predicts this result.

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