On Tuesday, Arkansas utility regulators and advanced energy business leaders got a lesson on the future from utility expert Karl R. Rabago, and by extension from H.L. Mencken.
“For every complex problem, there is an answer that is simple, clear and wrong,” Rabago told a luncheon of the Arkansas Advanced Energy Foundation on Tuesday at Copper Grill in Little Rock.
Rabago, an energy lawyer, Army veteran and former member of the Texas Public Utility Commission, was quoting Mencken, who expressed a similar sentiment if not exactly in those words.
The complex problem on Rabago’s list was electric grid modernization, which he likes to call “transformation,” and his simple-to-grasp but hard-to-achieve answer came down to creating “the sharing utility,” akin to the sharing economy.
The other plain answer, just as difficult to reach, is a world of 100 percent renewable energy, Rabago said in a comprehensive talk and slide show before a crowd of about 60, including Arkansas Public Service Commission Executive Director John Bethel and PSC member Kim O’Guinn. The audience was also filled with business people dependent on clean energy and efficiency.
“This country needs to go to 100 percent renewable energy,” Rabago said, calling it eventually essential to human survival. “Here’s my reason,” he said, pointing to a slide show picture of one of his grandchildren.
But he said the first steps to utility transformation should be harnessing technology, emphasizing community solutions and shared resources, and turning consumers into what he called “prosumers,” who would not only consume but also produce energy.
Another key, said Rabago, executive director of the Pace Energy and Climate Center at Pace Law School in suburban New York, is for power to be generated more locally, and for it to be stored in battery facilities for later use.
“The old thinking for utilities was growing the rate base, using sensors for controlling a grid that’s becoming more diversified at the bottom. The newer thinking is envisioning interaction — a system that’s interactive.”
Rabago described living next to a neighbor in Austin, Texas, and envisioning a new world.
“In this world I could call and say I’m going to be gone for a few days, you can get the electricity I’m not using from me based on price information that I got from the utility. The utility would broker the transaction, make a little money off it, and my neighbor would get the electricity I wasn’t using at a price slightly lower,” he said. “Maybe it would just come from the fact that my Volt would be parked in the garage, but it would be able to run in a different direction, discharge, to provide that electricity because I was flying off to see the grandchild in Denver.”
This kind of world would depend on utilities’ willingness to rethink their business model, seeing themselves less as generators and sellers of kilowatt-hours and more as a platform profiting from customers’ access to electric services and transmission infrastructure.
Utilities should be “a vessel for moving through a range of technologies, actions and interactions that ensure that we have reliable, safe, affordable electric service,” Rabago said.
Consumers must recognize that they don’t have to own everything that they benefit from, just as Uber users don’t have to own a car and server-farm clients don’t have to have their own computer servers.
Solar power is “the tip of the spear” in transforming the grid, Rabago said.
“Solar is probably the most charismatic energy resource we’ve come across since the invention of the megawatt,” he said. “The solar community has got the responsibility to take leadership in this fight. I was a cavalry officer, and I know that’s what comes from being out front.”
The new thinking holds inherent risks, and utilities have a traditionally conservative outlook, he noted, but he also said electric utilities have held a unique place in America’s business world for well over a century.
“This is the largest, most successful free-market capitalistic nation that has ever existed on the face of the earth, and one of our most capital-intensive industries, providing an absolutely essential service, electricity, generally operates throughout this nation, with a monopoly,” he said. “You free-market fans ask yourself why did we create that monopoly, and how long should we continue that? And why would we continue it?”
The answer, Rabago said, was that monopoly was a good way to provide a service with economic efficiency, and to speed up electrification when most of the country didn’t have electric power. He compared the old utility model to the company store.
“With the company store, you didn’t have to have a garden to raise your own vegetables. All you had to do was take a paycheck from the mine mouth to the company store. It was a much more efficient way. And the food provided to you would be provided at pretty affordable mass-purchased prices. It was an instrument of economic efficiency. It was also an instrument of absolute domination and control over workers.”
The monopoly structure has been challenged over the last 40 years as utilities have encouraged efficiency, bought power from exchanges, and adapted to power generation at the point of consumption, called distributed generation.
“There has been a revolution in how energy is generated in this country, and our electric utilities have managed to bring us the benefits,” he said. “We have wind farms that don’t operate 24/7. We have solar farms that don’t produce power all the time, but they’re integrated into our grid and the lights are staying on. Utilities have embraced this change, somewhat reluctantly at times, in a way that has been good for us in terms of pricing for our energy. But more change is coming.”
Low natural gas prices, which are expected to stay low, have moved utilities away from using fossil fuels like coal and petroleum to power generators.
“The economics of central station generation have been obliterated,” Rabago said. “It is no longer true that the bigger the power plant, the cheaper the electricity. The result has been better economics, because there are real costs and we’ve included them in the pricing.
Distributed energy resources used to be too expensive, but they’re now affordable. Customers want to control their bills. Even if they don’t want to make decisions about it, they want tools to help them manage their electric bills.”
Rabago offered one conclusion from his studies at the Rocky Mountain Institute some 15 years ago.
“A revolution in scale means that small is profitable. We made that, small is profitable, the title of our report.” He said a revolution in scale would encourage private investment and the use of local fuels for generating power.
“One of the things I’ve learned about local economic development I’ll share with you. You want to keep your money, and not give it all away,” Rabago said, drawing laughs. “All these distributed resources tend to create more jobs per megawatt. It’s kind of simplistic, but it’s essential. This is all a question of when, not if.”
The lesson for regulators is to encourage utility transformation, a “very different model including for-performance regulation,” Rabago said. “Tell utilities they can have more money if they do good things.” He said the new utility world will require marketing monitoring and competitive fair dealing oversight. “We need it.”
More than 90 cases rate cases filed by utilities last year sought to raise fixed charges on customers, arguing that the utility business is characterized by high fixed costs, so rates should necessarily include high fixed charges.
“A huge number of regulators find the symmetry of that argument appealing, but there is no evidence in economic literature anywhere that rate design should reflect cost structure to maximize economic efficiency,” he said. “If that were the case, we’d pay a cover charge at hotels, airlines, for bus tickets. In fact, we’d pay a cover charge to go to Starbucks.”
The future requires planning, Rabago said, and utilities must get off what he called their treadmill.
“We’ve got to make more kilowatt-hours to sell more kilowatt-hours, got to sell more kilowatt-hours to build a power plant so we can make more kilowatt-hours. We have to get out of that loop. We have had a consistent, thorough energy policy for at least the last 100 years. By the way, it’s the same policy we’ve had for food, education, and for health care and for housing. We want it as cheap as we can get it, no matter what it costs. It drove us to economic dominance… but we can’t afford the cheap stuff anymore.”