by Henry L. Henderson, Director, Midwest Program, Natural Resources Defense Council
It is a genuine honor to be a guest on Richard Longworth’s blog. Dick is an exceptional reporter, analyst and elegant writer. His work on the state of the Midwest in the 21st Century, set forth eloquently in his book, Caught in the Middle: America's Heartland in the Age of Globalism, is indispensable for those of us interested in the fate of our region.
Caught in the Middle examines the present constraints on the Midwest economy and culture, against the backdrop of a past that in many ways constituted the “Silicon Valley of the 19th Century.” Here, new and powerful ways of organizing industry, agriculture, personal mobility and the industrial economy that defined the 20th century were invented and successfully deployed. Thus, a dilemma confronts the Midwest today is that our current economic structures are in significant ways a legacy of a vibrant past that is out of touch with current needs, challenges and opportunities. The legacy structures act as a drag on the future, limiting our ability to create, compete and embrace a vibrant, productive and healthier economy in the new 21st century.
Nowhere is the example of a past vitality and present exhaustion more visible than in our current energy economy.
The modern electric system of regulated, regional utilities was invented in the Midwest, in significant part in Chicago, and through the extraordinary work of Sam Insull. His successful vision was to integrate electric generation and delivery into regional utilities, regulated by state utility commissions, and insulated from competition, with a guaranteed return on investment from an expanding customer base with continuously expanding energy demands.
There are two key elements to Insull’s system that worked to build out the massive electric system we have today. First, utilities realize higher earnings for making large capital investments; the larger the better, because of the guaranteed return on investment from ratepayers, ordered by regulators. Hence the persistent impulse from utilities to make enormous investments in expensive power plants that are profitable only because of captive utility customers. Second, customers pay for these investments on a per unit consumption basis, so the more a utility sells, the higher their earnings. Here lies the reason utilities are allergic to energy efficiency under the “traditional” electric utility structure we have inherited. More sales equal higher earnings, while efficiency equals lower earnings.
For a developing economy that lacks electric infrastructure and access to resources, Insull’s “demand” model, with regional utilities insulated from competition and able to depend upon captive ratepayers while they build out their capital intensive infrastructure, may make sense. But for our contemporary, mature economy, the model is economically and environmentally ruinous. It rewards utilities to drive up usage, to build excess capacity to meet projected new peaks in demand, and direct limited resources to ever larger capital projects rather than invest in efficiency. The current system punishes efficiency and conservation at a time when the economy needs to radically reduce waste in the business, public sector and residential sectors, in order to compete globally, service debt and not least to create the domestic jobs that an aggressive energy efficiency commitment would require. Investment in research and development, as well as in manufacturing, installing and operating energy efficient buildings, lighting, roofs and windows, machines and appliances, will create jobs, squeeze waste out of the economy, and build upon the American tradition of invention and deployment that made this country a place where things were actually made, not just consumed on debt and over-extended credit.
It is particularly important that we get this right in the Midwest. In the Midwest, industry is more energy intensive than the rest of the country. The legacy energy system rewards wasteful demand, punishes conservation and directs massive capital investment in unnecessary generation, stunts needed investment in energy efficiency, and chokes off promising new investment in a clean energy economy.
Fixing this legacy energy economy is one of our great challenges. Significant work has begun. Witness the important report produced by The Chicago Council on Global Affairs Task Force on National Energy Policy and Midwestern Competitiveness, Embracing the Future: The Midwest and a New Energy Policy. The report identified the immense potential for economic renewal to be gained by aggressive embrace of energy efficiency policies and practices that can reduce costs to businesses and residents, improve services, and jumpstart a new economy.
In 1997 and again in 2007, Illinois legislators passed laws partially unraveling this system but failed to create a new business model for utilities that more appropriately reflects the needs of the 21st century. The utilities got out of the business of owning power plants, so their return on their capital investment is solely related to investment in the distribution system (wires, poles, and meters). However, they still earn more by selling more power, and their economic interest is therefore to encourage greater consumption.
And although the utilities have less motivation to support new generation, a willingness to use taxpayer and ratepayer money to subsidize unnecessary new power plants is alive and well among Illinois policymakers.
This phenomenon and its problems are illustrated by the proposal for a new coal-fired power plant in Taylorville, Illinois. If built, the costs of the plant would be automatically passed through to utility customers in Illinois. And the plant will cost $3.5 billion to generate 3.9 million megawatts of power per year, which would cost customers between 11 and 19 cents per kilowatt hour.
If instead, our utilities would invest one-quarter of that amount in energy efficiency, we could save the equivalent amount of power (3.9 million mega watts) for just 2.7 cents per kilowatt hour---not a bad economic gain. Further, we would avoid the air, land and global warming consequences of a new generation of coal-fired power plants. The $2.5 billion we could all save in electricity bills would cycle back into our economy, when people use that money to buy other goods and services or when businesses use that money to invest in their companies and make more widgets.
There are more signs of progress in Illinois and around the region. For example, four states have adopted new laws requiring that utilities invest in cost-effective energy efficiency programs to offset an increasing proportion of their sales. In Illinois alone, in the first year and a half of this program going into effect, utility customers realized net savings of $211 million. And as for the Taylorville coal project, the Illinois Commerce Commission issued a report warning that the plant was a costly and risky enterprise that could significantly drive up electricity costs. If the General Assembly heeds this warning, we may yet avoid this expensive boondoggle. If not, it will sit like a parasite on the economy of Illinois, sucking scarce capital and resources out of our business and ratepayers and dumping pollution into our communities.
A thoughtful overhaul of the utility business model is still critically needed, not just to ensure that we maximize the benefits of energy efficiency but also to ensure that promising new technologies, like smart meters and electric vehicles, are integrated smoothly and cost-effectively into our energy system. Among Midwestern states, Michigan, as part of an aggressive effort to reposition its economy for the 21st century, has taken a lead in creating innovative pilot programs to test new rate structures both to spur energy efficiency and to integrate electric vehicles.
The new energy economy requires a down payment in the form of thoughtful policies and an investment in infrastructure. We can make smart choices by developing appropriate policies on where and how to site clean energy resources like wind turbines, developing clear policies on installing smart meters in our homes and businesses, and building new transmission capacity to get clean energy to customers. If we do this, we create jobs in the short-term and make the down payment needed to ensure that Americans take the lead in the most important technological races of the coming decades to protect our economy: the race to a clean energy future.
Further, we need to change the very model of our energy economy by embracing smart design of how we pay and utilities earn for their services. If we embrace smart rate design, we can make it possible for utilities to earn money for efficient, smart service, and eliminate the need for silly projects like the Taylorville boondoggle.
In short, we can embrace the legacy of bold social, economic and technical invention that once characterized the Midwest. That is a legacy worth embracing as it will re-engage our region with the global economy---allowing us to re-emerge, no longer caught in the middle.
To learn more about guest blogger Henry Henderson, visit the NRDC staff blog Switchboard.