Could electricity become too cheap to meter?

Could electricity become too cheap to meter?

Renewables and power storage could make it possible

YEARS AGO, DURING AN ERA in which nuclear power had great promise, advocates for this energy form said that it would produce electricity “too cheap to meter.” While that prediction did not provide a useful preview of the future of nuclear power, the economic premise behind it had some merit. While each nuclear power plant would have a substantial capital cost, the running cost—the cost per kilowatt-hour produced—would be so low that it wouldn’t be worthwhile to spend the money on meters and accounting to send out bills based on usage. And, with ever-improving technological advances, the capital cost of each new nuclear power plant would decline.  Electricity would truly be a decreasing cost industry, and it would be to society’s advantage to use a rate structure that would promote consumption.

Inconceivable, you say? Well, for many years we billed for telephone calls based on usage. Recall, too, that in 1993 MCI mail charged people 50 cents for the first 500 characters of a digital message, increasing by 10 cents for each extra 500. Now, it is almost impossible to find a rate plan that even measures your calling volume or number of text messages. Instead, you pay a fixed monthly fee. Why? Because the marginal cost of delivering phone calls and data has fallen to zero. And the cost of new switching and delivery capacity keeps falling. It is to society’s benefit to encourage usage.

Could it ever be desirable to adopt a similar pattern of rate design for electricity? At a conference earlier this year, Cheryl LaFleur, a commissioner of the Federal Energy Regulatory Commission, posed the issue this way: “We have taken it as axiomatic that electricity is a product we pay for by volume, but, given new technologies, less of the cost of making it varies by volume, and we may see new forms of pricing in the future.” To be clear, Commissioner LaFleur was not advocating for this result: She was asking us to think through the possibilities.

So, is it possible that someday we won’t be charged for each kilowatt-hour we use?  Let’s take the long view.

In the past, the manner in which electricity was generated represented a layered wedding cake.  Power plants with high capital costs and low operating costs formed the foundation for baseload demands on the system.  During the day, as peak demands for power grew, customers’ needs were served by power plants with ever-higher operating costs. At the hottest or coldest part of the day, gas turbines—characterized by low capital costs but very high operating costs—filled in the peak.

But state and federal policies have now given strong incentives for the use of wind and solar powered generation.  Thousands of megawatts of such units are now in service. The peak demand that used to be satisfied by gas turbines has now been dramatically shaved by these energy sources, generating power with zero marginal costs.

While we’ll still need gas-fired generation for some time to come, there is every expectation that use of solar and wind will expand. In addition, many energy storage experiments are in place—with flywheels, batteries, and the like supplementing renewed interest in pumped storage. These technologies, too, will be characterized by zero marginal cost when they are called upon.  The flattening of the high-cost peak loads will continue.  We can envision the day when the demand for energy that previously would have been served by high operating cost machines will be satisfied with no running cost.

Of course, all such generating or storage capacity will have capital costs, and investors and utilities will expect to earn a return on that plant and equipment.  But there is nothing about rate design that requires such costs to be collected volumetrically when the marginal cost of production is zero.  Likewise, as renewable and storage technologies mature, we can envision the production of electricity, like telecommunications, to become a declining cost industry. If it does, rate design could be adopted that encourages usage, so society can reap the benefit of ever-decreasing costs. Perhaps this will also be viewed as an opportunity to persuade people to shift from fossil-fueled vehicles to rechargeable electric cars. In such a world, volumetric pricing might fall out of favor. You might pay a fixed fee per month for your home and vehicles.

Rate design, though, takes place in a political context, as well as an economic one. Questions of equity arise along with questions of efficiency. If electricity does in fact become too cheap to meter, would regulatory agencies have the nerve to eliminate volumetric pricing if it turned out that large commercial and industrial users would appear to reap the lion’s share of the benefit? Or would the agencies decide that the advantages to residential and small businesses were also substantial enough to warrant a change in this direction? Or a politically acceptable outcome might be somewhere in between. Perhaps large customers would pay a higher share of the fixed costs than small users but not through a fee tied strictly to usage.

Meet the Author

Paul F. Levy

Former hospital executive and chairman, Massachusetts Department of Public Utilities
Nuclear power as the expected energy source that was to be “too cheap to meter” may have run out its string because capital costs rose rather than fell. Unlike nuclear power, we are, in fact, seeing a continuing decline in the capital costs of renewables and storage. The implications for how we are billed for each kilowatt-hour we use will be an important topic for regulators and consumers over the coming decades.

Paul F. Levy, a resident of Newton, was chairman of the Massachusetts Department of Public Utilities from 1983-1987.