The Corner

Smart Grid, Dumb Idea

I asked my colleague Will Yeatman, co-author with me of the article about electricity infrastructure in the current NRODT, what he thought about all the new announcements about investment in the grid and he came back with this:

Today in Florida, President Barack Obama will draw attention to $3.4 billion in taxpayer giveaways to utility industry. This massive subsidy is earmarked for “smart grid” meters that would give utilities the ability to control electricity demand, so that they could avoid a supply crunch by, say, remotely turning down everyone’s air-conditioner during a hot summer afternoon. 

Obama’s smart grid is dumb policy, if only because it could be achieved without spending a dime and—more importantly—without seizing control of our thermostats. Thanks to an outdated regulatory model that effectively socializes the electricity industry, state governments outlaw free market solutions that would render a smart grid superfluous. 

For example, utility bills are set by politicians rather consumer demand. As a result, electricity consumers have no incentive to modify their behavior when electricity is scarce. If electricity were priced according to market forces in real-time, consumers would use less during periods of higher demand because the price would be higher. 

There’s another problem with Obama’s smart grid spending, but this one is administrative. Obama chose to use Department of Energy clean energy grant program from the stimulus bill enacted last February. Yet the same stimulus bill specifically provides for DOE loan guarantees to smart grid projects. Why does the President give the utilities freebies instead of loans? This is in no way an endorsement of the DOE’s loan guarantee program, which I have critiqued. Perhaps what troubles me the most is the incredible diversity of taxpayer-funded favors to politically-favored industries.

On that subject, about $502 million has been given out in grants to renewable companies recently. $295 million of it went to Spanish company Iberdola. The Spanish government has recently realized that subsidies to renewable companies are too high and has reduced them. Nice to see the U.S. taxpayer is taking up the slack.