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Zapp: Electrical energy has its own economic considerations

Economists consider electrical distribution companies natural monopolies. Because of the need to wire each customer directly to the distributor, competition would not lower the cost of the service for the user. Imagine having five or ten firms stringing their wires down each block. Besides being unsightly, this would actually increase the cost of delivering electricity to customers if each distributor would serve only one of each 5 or 10 houses on every block.

In the past we also considered local phone service to be a natural monopoly. Technology, however, changed the delivery system from direct wiring to wireless and now we have several firms competing for our phone business. Until we find a way to send electricity wirelessly to users, we are better served by having one electrical supplier.

We cannot, however, allow monopolists set their own prices. We economists have taught them how to select prices that maximize their profits at the expense of consumer well-being. Therefore, we have created regulatory agencies that set prices for our natural monopolies so that sellers and buyers benefit.

The regulatory agency is directed or expected to set prices so that the company is able to maintain credit and attract new capital investment (when necessary). This means that the firm’s profits should be adequate to enable it to borrow funds at reasonable or market interest rates and raise new equity capital at reasonable rates of return for investors when capacity expansion is needed to meet demand increases.

The issue of future capacity needs is central in the regulatory process. When capacity expansion is needed to meet expected demand increases, the agency allows the firm to earn higher profits in order to attract and compensate the new capital needed.

In Georgia, the regulatory agency is the Public Service Commission. Its five commissioners are elected in regional districts. Last week we re-elected Tim Echols to represent us in District 2.

I was surprised to read earlier this year that a Georgia Power representative said his firm expected the demand for electrical energy in our region to grow 21 percent by the year 2030. (Bill Obrien, North Atlanta Business Post, January 2016.) In 2015, the U.S. Energy Infor­ma­tion Administration reported that the demand for electrical energy is expected to grow at a modest 0.3 percent annually through 2040. This is about half the expected growth in population over this period.

The EIA expects residential demand will be flat through 2040. The impact of population growth will be counteracted by efficiency improvements that will continue to reduce our residential electrical usage per person. Transportation consumption will decline slightly.

The good news is that we are using electricity more efficiently at home. The bad news is that the Georgia Power-estimated future demand would take hundreds of years to achieve at the EIA projected growth rate. To make this more confusing, in another online statement, Georgia Power projected a 27 percent growth by 2030. How is this possible?

I asked a PSC commissioner to provide the projections the company has given the agency. His answer: “GPC’s electricity demand estimates are trade secret so they don’t share them publicly.” He added some information about the EIA’s projections through 2040 (20-23 percent) but stated that these figures are total sales which include all the non-generated sources power such as solar, wind, etc. The EIA 0.3 percent annual growth is for instantaneous demand or the amount of power they must generate.

Georgia Power has received approval to build two new nuclear power plants (Vogtle 3 and 4). When fully operating, each will generate 1,117 MW of new electrical energy annually. The PSC has already allowed the firm to charge current customers for part of the construction costs.

The company claimed three reasons for building the new plants: 1) to meet new demand for electricity, 2) to remove older, polluting coal-fired plants, and 3) to reduce the cost of their energy production.

The third reason seems invalid. We taxpayers subsidize nuclear power through federal programs including the limit on damages which may be collected in case of a nuclear accident. No insurance company is willing to cover all possible costs of such an accident without these limitations. We also haven’t decided how and where to store nuclear waste for the long run. While many salute the demise of dirty coal-burning plants, the need for such a major increase in capacity remains unknown. I still wait for the company to answer my question: Which projection of future instantaneous demand was the basis of their decision to invest billions into Vogtle 3 and 4?

Where does our state stand in relation to the rest of the country on energy usage? We rank 33rd in energy used per capita and 39th on energy costs per person. Our average price of electric KWH is 12.29, which ranks us 25th. We rank higher on net electric generation (6th), total carbon dioxide emission (12th) and residential electrical consumption per month (11th). That last fact might be a result of our relatively large houses. In 2009, Georgia averaged 2,304 square feet per house compared with 1,944 in the South and 1,971 in the nation.

More good news: Our total energy usage, measured by million BTU per person, has fallen from 369 in 1996, 305 in 2011 and 282 in 2014. This compares with the global average of 80 million BTU per person. (Our country has about 4.5 percent of the total global population but we consume almost 20 percent of world energy.) Also, our economic energy intensity, BTU per dollar of GDP, has fallen 16 percent between 1997 and 2011.

For our country, we are seeing a decoupling between electricity demand growth and economic growth. Between 2007 and 2015, the real American economy grew 8 percent while electric energy demand was flat.

Finally, two recent studies pointed to economic advantages which might result from a further reduction of our dependence on carbon-based energy. One from Georgia Tech found that a modest carbon tax, in the range of $10 to $20 per metric ton of CO2 emission, would lead to the enhancement of business efficiency in the south. Another concluded that monthly electric bills might fall by $35 from the deferral of building new generating plants and the retirement of old inefficient ones.

 

Kenneth Zapp, Ph.D, is professor emeritus, Metropolitan State University, and mentor for SCORE Savannah.

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