- We have seen a wave of deregulation in the electricity sector since the early 1990s. We have seen new challenges that have arisen, and we also have noticed a step back towards regulation, in many markets. From your point of view, in the end, did we really liberalize the markets?
We have certainly changed the markets. I think deregulation was always an inappropriate term to describe what was happening, because what we were doing was changing from one form of regulation to another. That’s why I always refer to it as electricity sector “restructuring” as opposed to “deregulation” in order to open the market to competition and entry and move towards efficiency. But, that’s a difficult challenge. And we have a lot of problems in designing the markets in an efficient way. We are still working on various problems such as the climate challenge and global energy, and the electricity sector is going to be an important part of that. But I think the restructuring and liberalization of markets has not been perfect but has been largely successful when it has been done correctly. There are places where they tried to do things which did not work in theory and also did not work in practice, hence, we had a lot of trouble.
- Are we restructuring to prevent market failure or is it because we failed to deregulate properly at the first place?
There are two kinds of problems here. One is the inherent nature of the electricity system. If you want have a market with entry and competition by generators you have to adopt certain rules about how to handle the use of the high voltage transmission system because that’s a natural monopoly and everybody has to participate in that. And that’s the central piece of the market design problem. Namely, how to handle interaction of high voltage grid. That’s a fundamentally different market from typical markets in network industries such as the natural gas market. We know how to do it but not everybody has gone all the way to do it the right way. There is a second problem which is how to deal with market externalities and market failures like climate change issue and carbon dioxide. There we are having a debate on the different methods applied in different parts of the world. I consider that to be a work in progress. We haven’t proposed a unique solution that has been adopted anywhere. I think it is sustainable, but we are working on it and I think we can do better.
- A researcher can either approach these issues fundamentally or be involved in more operational research. What do you think is the optimal and what is the most effective way in order to convince politicians?
I think both ends of the spectrum are important. I think the trick here is that as many people as possible should try to balance them and do both of them at the same time. You have to keep in mind the focus on the first principles. If you don’t have an argument that fits into the general framework based on economic efficiency and the engineering requirements you are going to have trouble. But you always have to translate it in practical realities of how it might be implemented and that requires some care, and thinking about what to do in that process. Then I believe another necessary condition is that you have to have champions for the ideas. Somebody has to stand up and say “this is a good idea” and explain why it is. And then these champions have to go through the process of endless repetition during which they can transmit their ideas through their continuous interaction with people. But this process goes on and on and on. I am just having conversations at lunch about some of these orders in the US where it’s clear that what they adopted is not going to work and they have to change it. We have to go back to remind them of the first principles, and keep reminding and we are getting better at this. The market is also getting better and I’m optimistic about making progress but it’s certainly not guaranteed. So thinking about first principles, having advocates of good ideas and then repeating the story over and over in the practical implementation phase, I think these are all necessary but not sufficient conditions for success.
- We would also like to discuss another topic: costs and benefits of renewable energy. Do you think there is a trade-off between redistribution and environmental issues in the generation area of the electricity market?
Coalfired technology, for instance, might increase the amount of carbon dioxide you are emitting, but, at the same time, also reduce prices and thus benefit the consumers. Do you think that protecting the environment may harm the consumers by limiting competition? Well, there are always trade-offs in any of these policy decisions, and I think this one is actually a little less stark than you might think because consumers are all affected by environmental problems. Thus in the aggregate there is less of a conflict than you might think. Now there are always winners and losers within particular groups, that is always true, but I would always come back again to the efficiency and first principles arguments. So if there are harmful effects associated with emissions from power plants, such as carbon dioxide, we should try to internalize these externalities as much as possible and do it in a way that’s economically efficient, and that doesn’t go too far, and that’s an important part, so you’ll have to have a benchmark of: I’m willing to pay a lot in order to internalize these externalities but there is a limit of how much I am willing to pay. And then when you go to pass the limit then you should stop. We often have the problem that we think carbon is bad, renewables are good, therefore more renewables must be better. And that’s not true because an increase in renewables is expensive. So some more renewables is better, now the question is defining some, how far should you go, and that’s where the debate gets actually much more difficult, much more dependent on these arguments from first principles.
- Are we moving with an appropriate speed toward renewable technologies? Or are we perhaps going too fast to allow markets to adapt, or too slow to meet the environmental challenges imposed by climate change?
I think speed is not the right question necessarily; I think it’s more about choosing the right kinds of technology. We have technologies today we could use to reduce carbon, but they’re too expensive. We don’t want to introduce them faster, we want to introduce them slower. Then we have other technologies which would be highly beneficial and are not too expensive and then you want to introduce them faster rather than slower. Hence, I think the speed question depends more on analyzing the fundamentals of when is the technology ready and unfortunately I am afraid, my own view is that most renewable technologies that are available today are not really ready. So it’s a research problem, not a deployment problem, and we should be spending a lot more of our resources on trying to improve the technologies and a lot less on trying to deploy technologies that we already have. If we don’t get the cost of the technologies to be low enough, so that the developing world adopts some on their free will, we’re not going to make any difference on this problem. The challenge is enormous, so I think in terms of new technology the emphasis should be shifted much more towards R&D and trying out new ideas rather than deploying things that we already have.
- Would it be better to adapt new technologies to the existing framework?
Let me give you an example. We’re working with a team at Harvard on a new kind of battery technology you can read about if you want to. It’s called flow-based batteries, Michael Aziz is the principal researcher, there is an article in Nature recently about it, but what’s relevant here is that the target goal we are working on right now is to produce a battery which costs 10% of the cost of the best technologies available today. Now if you can do that, you could make a huge difference to electricity markets, so we’d penetrate very rapidly if we actually get it to work and demonstrate it. It already works in principle, it works in the laboratory. The question is now how to scale it up to a particular size and do all the things we have to do, to get it ready. That’s the kind of radical breakthrough that we need. Now, we don’t need a battery that’s 10% better, it won’t be adopted by anybody if it is only 10% because it is too expensive. That’s where we should be focusing our attention, in upstream research.
- What is the best way to provide incentives for the usage of renewables: targeted subsidies, making them market responsive, or maybe subsidizing research?
I think we need all of those in the right mix. Let’s take solar PV technology for example. It’s too expensive and you could imagine spending money in order to investigate new technologies that currently don’t exist (R&D investments). Furthermore, you could imagine providing subsidies for deployment because of learning by doing. But it turns out that if you estimate that externality –so learning by doing from solar PV– it’s a very small number. You can do it, but it really isn’t going have an important impact. The final thing are the benefits from carbon production what you do through a carbon tax. My optimal policy would be a carbon tax, larger than what we have in Europe today. Spending more in the R&D upfront, by probably a factor of 10, in terms of what we are doing globally on this matter, and then a very, very small subsidy for actually deploying this technology, which probably wouldn’t make any difference. I think that’s what conceptually is the right thing to do. What we have done is the reverse: We have a low carbon tax, no work on the R&D and huge subsidies to deploy.
- Having witnessed the events which occurred in Japan three years ago. What is your personal view on the trade-off between efficiency and safety of nuclear energy. Isn’t it that operating costs of nuclear power plants are among the lowest in the industry?
I know people say that, but I’m not sure if that is actually true because – at least in the US – we have very high safety standards for nuclear plants. If you look closely at the components which we have in the cost, the fuel consumption part of it is a very small part of the problem. That is low, you are just burning uranium. But every year you have to make new investments in these plants in order to keep them up to the safety standards. This is an extra operating cost. So, I think they are actually more expensive than people are willing to admit. There was a conference on the future of nuclear energy at MIT a few years ago. I was asked to chair one of the sessions. We had speakers from the industry from different perspectives. At the end of the session, the organizers asked the participants what would be the biggest surprise in this technology in the next 20 years. They all gave slightly different answers about smaller reactors, new kinds of new technologies that were coming along. My answer was “the biggest surprise for me would be if somebody built one of these plants with their own money”. I was trying to make the point that everybody talks about nuclear being such an attractive technology. Conversely, I always hear stories why I can’t pay for it but someone else has to do so: We have to make people buy it, make people pay for it, the government has to deliver it, has to subsidize it. That makes me really suspicious that actually it is such a good deal. My view of nuclear is that we must have very high safety standards. I don’t want Fukushima to happen in my neighborhood, and I was very unhappy when it happened in Japan and sorry for the Japanese. I think these things are a problem. But we have safety standards and we should enforce them. Then, if people want to build them with their own money at risk, we shouldn’t stop them. But I’m not going to subsidize it!
- Do you have any remarks or comments that you would like to add?
Let me tell you a story. I run an organization called the Harvard Electricity Policy Group. It involves people from all over the energy system the United States: regulators, utility companies, independent power producers, NGOs. When we started that group in 1993, we made everybody promise that they would stick with it for at least two years. Because it wasn’t worth gearing up and getting started if they had not committed; they had to commit money, and things like that. If they didn’t want to commit for at least two years, then it wasn’t worth the trouble; and I thought we would get all this done in 5 years Last September, we had our 20th anniversary of the operation for this group. It’s still growing strong, it is a completely voluntary thing, so that people could leave in a minute, but they haven’t. I think what has been demonstrated during this process is that these challenges are complicated, they are continuing and they keep changing because of our concerns about related problems like climate. If you had asked me in 1993 whether I’d be sitting here talking about electricity market reform and energy policy, I would have said “no!” If you ask me now, if in 2034 I was going to talk about these issues, the answer is “yes!” (Laughs.) So I think there is a great future for you!