Making Electricity Ubiquitous, Ubiquitous But Not Necessarily Cheap

I attended the 37th International Association for Energy Economics International Conference 2014 June 15-18 in New York City.  During the Wednesday “Dual Plenary Session: Utility Business Model” Michel Derdevet, Secretaire General, Electricite Reseau Distribution France, the French distribution utility, raised the issue of getting electricity to the billion people in the world who don’t have access to electricity.

During the audience discussion period, I raised the concept of a different business model, unregulated micro-grids owned by non-utilities.  I mentioned that a friend thought this concept could be applied to the nearly ubiquitous cell phone tower.  Cell phone towers require a power supply.  My friend thought that the provider of a cell phone tower should be granted a 10-year license to provide power on an unregulated basis.

My thought was that owner of the cell phone tower should be allowed to provide electricity and compete against anyone else that wanted to provide electricity.  Competition can better drive down prices than can regulation.  Regulation in terms of getting electricity to be ubiquitous would just stifle innovation.

Over the years, newspapers and newsmagazines have had pictures of the electric grid in some countries that look like a spider’s web on LSD.  Local entrepreneur’s buy their own diesel generators and provide “backup” electricity to their neighbors over wires strung in parallel or across the wires of the local utility.  The electricity is “backup” electricity in that it is used only when the local utility doesn’t have enough central station power to provide electricity to the entire national grid.  The utility then blacks out some neighborhoods.

The neighbors buy only a small amount of “backup” electricity from entrepreneur because the “backup” electricity is so expensive, being produced by diesel generators, which are less efficient and use a premium fuel.  The “backup” electricity is used for lights and a fan at night, perhaps for a refrigerator, not for those devices that might otherwise by electricity guzzlers.[1]  When the utility once again has enough power, competition drives the price down, putting the high cost entrepreneur out of business.

These micro-grids, whether run by the owner of the cell phone tower or by a neighborhood entrepreneur, can make electricity ubiquitous, even if the electricity is not cheap.  After all, Michel Derdevet said to me after his panel was done that some people were pushing for ubiquitous power supplies so they could make money selling electricity, not just for an eleemosynary purpose.  Thus, the power might not be cheap.

During the plenary session, Jigar Shah, Founder, SunEdison, LLC, claimed that California, with the highest electricity rates in the U.S., does not have the highest energy bills, because California residential consumers use less electricity. [2]  This is consistent with my comment about the lower usage of “backup” electricity relative to central station power.  However, elasticity may not be the only explanation for the lower consumption in California.  There is also the issue of climate and rate design.

Standard rate design practices also result in higher prices for customers with smaller consumption levels. The standard residential rate design has a monthly customer charge (say $10/month) and a commodity charge (say $0.09/KWH).  These rate levels nominally reflect the way that a utility will incur costs, a fixed cost per customer and then a cost that varies with the amount of energy the customer consumes.  A customer using 100 KWH per month would have a monthly bill of $19 and an average cost of $0.19/KWH.  A customer using 1000 KWH per month would have a monthly bill of $100 and an average cost of $0.10/KWH.  Thus, an area of the country with lower electricity consumption can be expected to have higher average cost and lower overall bills.

The micro-grid could be operated by the above mentioned owner of the cell phone tower or an entrepreneur.  I like to think of innovators who decide to install their own electric systems and then share with their neighbors, which is a form of the first type of owner.  The generation is put into place for a purpose other than selling electricity but if the sales are lucrative enough, the owner may decide to upsize his generating capacity until the owner looks like a utility.

A friend built such a system during the 1980s while in the Peace Corps in Africa.  He had an engineering degree from MIT.  So he took the concepts learned dabbling in the MIT labs in Cambridge, Massachusetts and applied the concepts in the field in Africa.  Later my friend worked for a Westinghouse subsidiary building power supplies for remote micro-wave towers (the same concept as a cell phone tower) and remote schools.  His company used mostly renewable energy, such as solar and wind, because diesel was so expensive in the remote areas he electrified.  Diesel was used to top off the associated batteries when there had been insufficient renewable energy supplies for extended periods of time.  It was during this period of his life that I met this fellow MIT alumnus.

Yes, we can make electricity ubiquitous.  But it will take competition to make it cheap, or at least not quite so expensive.

[1] As an aside, the consumption reduction during periods when “backup” electricity is being used demonstrates the concept of the elasticity of consumption.  When prices go up, consumption goes down.

[2] Looking at Table 6 of the EIA’s utility data for 2012, the average price to residential consumers in California was $0.153/KWH, or 8th most expensive.  The average consumption for residential consumers in California was 6,876 KWH/year, or the 3rd lowest after Hawaii and Alaska.  The average bill for residential consumers in California was $1,053/year, or the 10th lowest in the U.S.