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. 

  • Mhmjjj2012

    To Paul F. Levy’s bio, I would have added recently retired from ISO New England’s Board of Directors.

    • Paul Levy

      I wrote this mainly from the point of view of retail rate-setting, the jurisdiction of state public utility commissions. Wholesale markets already reflect many of the running costs of power generation across the year during the day and night. Many retail rate designs do not.

      • Mhmjjj2012

        Considering one of ISO New England’s critical roles is to design, run, and oversee the billion dollar wholesale market where electricity is bought and sold, it would have been helpful if you went into some detail on how wholesale markets reflect many of those those costs.

        • Paul Levy

          That’s for others to do. Or you could check the ISO website for lots on that and other items.

  • NortheasternEE

    Electricity is delivered to the end user by a system of independent generators interconnected to a power grid designed to always supply load following power that is instantaneously equal to the variable load of user demand. Renewables, wind and solar, connected to the grid act as a variable negative load that combines with user demand load that increases the need for load following by conventional generators on the grid.

    The primary function of metering is to fairly share the cost of running the system. The addition of renewables to this system adds cost to the system and unfairly shifts that cost to users unable to take advantage of renewables. A 100% renewable system is unsustainable because it leaves no one to pay the cost of running the system.

    • Paul Levy

      It’s important to distinguish between average costs and marginal costs, both in business economics and rate design. Even if renewables currently increase the average cost, they can result in zero marginal costs during parts of the day. And, in the future, they could conceivably decrease average costs as well.

    • Andrew

      Ahh it’s you again. :) Most likely a lobbyist, lawyer for the industry, energy investor, or former exec I’m guessing. Well, we do have ways to deal with a more dynamic variable grid and these systems (batteries, storage, etc) have been advancing as with increased usage of renewables. Just this last year I teamed my solar system with National Grid so they can adjust energy usage in my home remotely (thermostat adjustment mainly) thereby lowering my draw on the grid at certain times. This enables them to up the output of my solar array onto the local gris so they don’t have to power up any generators. It’s a pilot program, but it works pretty good and I didn’t notice. Also more dynamic generation can be applied to the ISO grid by smaller independent power generators if need be. You’re pessimistic view and lack of faith in new technology that ISO NE can take advantage of surprises me. The market and ISO NE is dynamic and can handle less than 10% renewables.

      • NortheasternEE

        Actually, to get to 10% renewables our rates have just about doubled and ISO-NE is calling for seasonal energy storage, which does not exist. Forcing renewables beyond this point will give us skyrocketing rates, an unstable grid, and power shortages.

    • Electricity might be “too cheap to meter” some day, but, more likely, given the way some utilities are opposing grid-connected renewables, due to arguments like those @NortheasternEE repeatedly espouses, what’s more likely to happen is that customers are likely to put legions of generation BEHIND meters, banding together to form their own small, microgrid utilities, and there’ll be less and less electricity traversing the grid. What happens when all those big non-renewable plants have way too much capacity for people to consume?

      Say, I know: Let’s PAY them to consume it! That way, electricity will have NEGATIVE cost. And that’ll work because, in reality, the payoffs will come from NOPR-like doles handed out to utilities from the federal government.

      • NortheasternEE

        The grid does not have a problem with individuals or groups generating there own power as long as they disconnect from the grid. The BEHIND the meter generation wants it both ways. They want to generate their own power but stay connected on the grid for backup. As more and more renewable energy is connected, grid operators are left unable to calculate precisely how much power the grid needs to generate. As a result, the power (MW) needed from conventional sources cannot be decreased, while the energy (MWh), the measure by which power plants earn revenue is reduced by renewable generation. That is why the grid ends up with power plants that cannot support themselves like Salem, Brayton Point and Pilgrim. Since the grid still needs then for rainy windless days, new support subsidies have to be added to prevent power failure.

        Disconnect wind and solar power from the grid, and grid power, using competitive wholesale market signals will adjust itself without the need of new subsidies.