electricity security and markets

I read an article in RFF's (Resources For the Future) magazine titled, "Electricity Markets and Energy Security: Friends or Foes?" by Timothy Brennan, an RFF fellow. The article discussed the relationship between energy security and electricity market deregulation. Brennan discussed how electricity markets may affect different types of energy security including short term security, long term security, environmental security and national security. For short term security, Brennan considers two risks: blackouts and price. He says,

Blackouts are harmful, but so are high energy prices, particularly for those with low incomes for whom utility bills constitute a significant fraction of their monthly spending. Importantly, and unfortunately, mitigating one of these security interests can exacerbate the other. The cost of preventing blackouts is quite high.

He didn't conclude with a recommendation for minimizing short term security risks, but rather indicated the importance of weighing the relative importance of the two concerns noted above.

Second he considered the security in the long term, the issue being overall expansion of generation and transmission capacity. One of the main barriers to creating a secure network for transmission and generation is NIMBYism and he noted that recently the secretary of energy was granted the authority to order states to allow the construction of transmission lines, even lines that may not power the state. These long term security issues will be difficult to deal with in a deregulated electricity market.

Brennan also considered the environment as part of security. Fortunately in the electricity sector, there are fewer "actors" than in the transportation sector, so GHG regulation should be easier to implement than say regulation of auto fumes. His main point was that deregulation should be a positive in regards to environmental security because a carbon tax or cap and trade system would operate more effectively.

Lastly, Brennan discussed the implications of electricity markets on national security. Terrorists may target our electricity transmission grid, but contended that market regulation would not affect national security: "Because the system is so interconnected, it would remain regulated even if wholesale and retail markets for electricity became open." He did note, however, that deregulation would cause even more interconnectedness in the electricity grid, possibly making an attack on the grid even more destructive.

His general message is that markets, in general, improve security. This opinion falls out of basic free market concepts: innovation will reduce prices and improved security measures will be developed as demand rises for these measures. He also predicts that free markets will result in redundancy and that security will be improved because the country isn't relying on a single supplier, a single point of failure. He qualified his recommendation, though, discussing the role of electricity as a "collective good." The reliability and security of the electricity must not be left solely to independent sellers and buyers because blackouts and price spikes won't just affect single customers or single sellers. He ended with a useful illustration of our options:

At one extreme,we might need no more central planning than air-traffic controllers exercise in the airline industry. Air space can be policed to avoid collisions without precluding competition among carriers to transport passengers and freight. At the other extreme, a central controller may need to control dispatch of generators in the short run and investment in generation over the long run to ensure reliability as well as efficiency.

I generally agreed with Brennan's analysis, although I wouldn't have had he ommited his consideration of the "collective good" aspect of electricity. Markets can and often do produce benefits to all consumers, but they don't necessarily care for those who can't afford to pay premiums for security or who can't afford to lose a refrigerator full of food. For Americans, electricity has become nearly a basic need on par with food and shelter. Everyone (except maybe for the few who have a generator and a big gasoline tank at their houses) would be affected by brownouts and blackouts, but not everyone would be affected by a rise in electricity costs. For some, electricity represents a significant fraction of their income, so care must be taken in all considerations of electricity regulation and policy to avoid taking this vital resource from those who can barely afford it.