Rocky Mountain Institute/ volume xvi #2/fall/winter 2000 RMISolutions newsletter CALIFORNIA’S ELECTRICITY SUPPLYMYTHS by Thomas Feiler T’S RARE WHEN DISCUSSIONS OF A Once heralded as the nation’s leader in commodity dominate dinner-party restructuring its electric utilities and cre- chat, but that was the case on many ating competitive markets for electricity, I California is rethinking the wisdom of its California patios this summer. And everyone seems to have an opinion about actions. And the rest of the country is why the lights went out in San Francisco watching. All 49 other states and the fed- for several hours one day in June, why res- eral government are considering restruc- idents in San Diego saw their summer turing the electricity industry in their electric bills double, and why dire public jurisdictions. They can learn from warnings to reduce electricity use or risk California’s mistakes—or repeat them.5 blackouts have become commonplace When it comes to essentials like electricity, throughout the Golden State. the public is of two minds about markets and competition. Enthusiasm is strong CONTENTS when markets deliver lower costs or A wind farm in THE IMPACT OF GLOBALIZATION ... page 4 continued on next page southern California: NAT CAP IN CLEVELAND ...... page 6 the electricity supply is in- DESCARTES MEETS DARWIN .... page 7 creasing, just not in the way DEAR ROCKY ........... page 9 most people expect. AUSTRALIA’S CLIMATE CHALLENGE . page 10 CHINA:OVERCOMING COAL..... page 12 THAT’S LEADERSHIP ....... page 14 HOT SEAT............ page 16 RMI NEWS ........... page 18 LIFEAT RMI .......... page 21 THANKYOU,DONORS ....... page 27 STRATEGIC INFLUENCE IN CANADA . page 31 photo: Norm Clasen continued from maintenance and repair continued to political objectives. As a result, the type of previous page operate throughout the summer, proving competition that the new market has deliv- greater value, but ebbs quickly when mar- that the electricity supply infrastructure is ered is imperfect and immature in some kets produce pain. in fine shape. very important This past summer’s market volatility However, the entire electrical system—the ways that energy offered a vivid reminder of the funda- grid—is vulnerable. Four summers ago, a cannot be mental dependence of the economy and series of technical and human failures on a explained by society on reliable electric power. For a hot August day knocked out power to either classical economics or conspiracy growing number of high-tech companies, about 7.5 million customers in eight theories. Most notably, the architects of the cost of even tiny outages can be spec- western states and British Columbia. That the market focused almost entirely on the tacularly high. Increasing demand for reli- disruption, the second worst ever experi- supply side of the business (and the polit- able power has heightened political enced in the United States and the worst ical deals necessary to get the buy-in of the reactions and the search for quick fixes. In to hit this region, can be traced to the three large California utilities) but neg- inherent instability of lected, and in some cases obstructed, the a system that is ability of consumers to obtain energy serv- designed around a ices in more rational and cost-effective California’s power problems small number of ways. large, centrally con- In this half-baked competitive environ- are not the direct result of trolled facilities. ment, the wholesale power markets are competitive markets, but Simple and cost- behaving rationally, although quite errati- effective ways to cally, to supply and demand signals. San rather of a lack of robust increase the relia- Diegans’ electricity bills doubled because bility, resilience, San Diego Gas & Electric executives gam- competition. and stability of the bled in the marketplace and lost. Rather system, such as than secure supplies in advance to meet using small-scale, their customers’ summer needs, they gam- distributed generation technologies and bled that they could buy cheap electricity one of the bigger ironies of the electric end-use efficiency, are well known within in the spot market, and that rising summer industry restructuring debate, former free- the industry, but have not been pursued demand wouldn’t drive prices up. Both market proponents are proposing increased with any discipline or enthusiasm by the bets were terribly wrong, and now their government regulation, mandatory mem- traditional utilities. The utilities are used to customers are left holding the bag. bership in industry organizations, central- doing business the old way, delivering elec- The good news is that because of restruc- ized governance of grid operations, and tricity created by central power plants—a turing, Californians can now choose from a government price controls. system that is easily controlled and monop- rapidly growing number of alternative elec- In thinking about appropriate responses, it olized, but vulnerable to large-scale disrup- tricity suppliers (with several offering envi- is helpful to look past five troubling myths tion. ronmentally friendly renewable electricity) now circulating about the cause of the that might take a more measured and cau- recent problems and the role of competi- tious approach to purchasing electricity for Myth #2: Competitive tion in the electric power industry. their customers. Consumers were initially power markets are to slow to realize they could switch elec- blame tricity companies, but a growing number of Myth #1: The electricity California’s power problems are not the San Diegans are now voting with their supply system is failing direct result of competitive markets, but feet. Such signals should motivate utilities California’s power supply crisis has come rather of a lack of robust competition in to improve their practices. even though none of the state’s power the markets. The structure of the new plants or transmission lines has failed. In power markets, after all, was designed to fact, many parts of the system that were serve not only economic efficiency but also supposed to be taken off-line for regular continued on page 22 page 2 S THIS ISSUE OF RMI SOLUTIONS in which readers are EDITOR’S NOTE came together, it took on a geo- invited to pose ques- Agraphic perspective. tions to RMI about You’ll find insight into the causes of Cali- the contents of the newsletter. by Brent Gardner-Smith fornia’s spike in electricity prices, why We’ve created a guest column slot, called China’s consumption of coal is down, how “Other Voices,” to showcase complemen- the fight to limit greenhouse gases in Aus- tary ideas and insights from colleagues out- Finally, “Board tralia is going, why the Canadian finance side RMI. We found the inaugural column Spotlight” intro- minister sounds more like an environment by Harlan Cleveland to be a thought-pro- duces the vital, minister, and what manufacturers in voking piece on how the world is interesting, and Cleveland are doing to put into practice changing, and will continue to change. exceptional people who serve on the principles of Natural Capitalism. Making a return appearance in this issue is RMI’s Board of RMI staffers fanned out across the globe “Dear Rocky,” a feature where we share a Directors. The first this year to work on different projects, and few of the hundreds of questions posed to spotlight is shining on Christine Loh, who it spurred our reporting on topics as our outreach specialists each year. has made waves as a member of Hong diverse as the green Olympic village in Answering these questions is a big part of Kong’s legislature and now as a citizen Sydney and why Taiwan shouldn’t com- RMI’s mission, and we devote a consider- activist trying to improve the city’s envi- plete its fourth nuclear power plant. able amount of our time and energy to ronment. Also in this edition, you’ll find some new being a clearinghouse of information for I hope you enjoy this issue. features. We’ve added “Hot Seat,” a forum people trying to make a difference. Don’t Drop Off Our List— If you are already a donor of $20 or more, Donate and Keep you don’t need to do anything except sit back and enjoy the newsletter. (Thank you RMISolutions Coming! for your support!) 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