Interesting Energy Regulatory Policy Idea from Anthony White, formerly of Climate Change Capital

On Wednesday night, the law school here hosted Dr. Anthony White, a well-known former UK energy regulator, transmission company executive, and bank executive focused on utility investments. Until a few weeks ago, he was an executive at Climate Change Capital, which is probably the world's largest climate-related investment group based on London. Next week in London, we'll be meeting with one of his CCC partners, James Cameron, the former Baker and McKenzie attorney who was one of the key architects of the Kyoto Protocol when he represented the Alliance of Small Island States.

White was a big proponent of the UK's move from regulated utilities to a free market electricity system around 1990, but he's now rethinking whether deregulation is a good idea in the age of climate change. In order to meet the UK's goal of reducing their greenhouse gas emissions by 80% by 2050, most everyone here agrees they will need to completely decarbonize their electricity generating sector. That means efficiency, renewables, and probably either nuclear or carbon capture and sequestration for baseload (unless energy storage advances enough to allow for storage of intermittent resources like wind, solar, or wave).

As is the case in the US, many existing British power plants are old and will be shut down soon, meaning they need to be replaced with new investment. But while there's been a lot of talk of investment, there's been no action. White laid out a scenario similar to what we heard from Consumers and Detroit Edison during Michigan's energy reform debates last year - competitive electric markets make it difficult to efficiently invest in large new plants. Because no one company wants lose market share by investing in a new plant (and having to raise prices to cover that investment), it means there won't be any investments until there's a shortage of electricity, when prices go way up (and maybe blackouts happen). Further, the high prices in the UK will not occur at the same time as high prices in other countries - putting British businesses at a competitive disadvantage and putting jobs at risk. The high prices then trigger a bunch of investment from all the utility companies at once, usually overinvestment, and prices drop significantly again. It's a classic commodity market. It works exactly as it was designed to - in an era of fossil fuel electricity.

At the same time, White argued the even if we get a price on greenhouse gas emissions, it likely won't drive the sorts of large investments necessary to decarbonize because any greenhouse gas price by its very nature will be new and volatile. Banks are very conservative, and when it comes to investing in things like wave farms or nuclear energy or CCS, they will factor in very low carbon prices when making investment decisions because they don't like the trust the price will be high. (At the same time, their conservatism may have them betting on HIGH carbon prices when considering loans to things like coal plants) .

White's main thesis is that markets don't necessarily provide the CHEAPEST outcome - they lead to the most FINANCEABLE outcome. When nothing is financeable, no investment is made. And this is a serious problem for a country that hopes to decarbonize. Or the solutions that are financeable are solutions with lower capital requirements but higher operating costs (like gas-fired plants...which are cheaper to put up, but have an ongoing cost of fuel). Most renewables have higher upfront costs, but their ongoing fuel source is free.

White's solution is to allocate risk differently than we do today. He wants to retain competitive markets for site selection, but does not want private companies to have to bear the risk of deciding WHAT to build and WHEN to build it. So the UK government would set-up an single energy purchasing entity and would decide what to build (nuke plant, wave farm, CCS, etc) and when to build it. It would then issue an RFP for 20 years of generation and open it up to competitive bidding amongst electricity generators to build the plant. Once the purchaser got the energy, it would resell it to the UK's electricity retailers, who would continue to operate in a competitive market. It's financeable because the single-buyer is a low credit risk.

This would have the impact of gradually phasing out utilties' concerns about their type of generation and energy trading, and in White's mind get them more focused on customer service as they focus on the retail energy business. This would be a radical cultural shift from what White sees as a "utilities build power stations" focus.

Interesting idea, and much easier to implement in places like the US that have regulated utilities than it would be in the UK . White's speech same immediately following a speech from my fellow fellow Demus King, one of Australia's chief energy policy advisors who is as strong an advocate of electricity deregulation as anyone. It was a really interesting and throught-provoking contrast.

White's also a huge fan of changing the utility-customer relationship from utility-person to utility-property...which could open up a boom in energy efficiency investments if the investments are financed via the electricity bill. Michigan's trying to work on a system like this now - which could be a really powerful tool to save people money on their electric bills.