New Opportunities Aboundin the Supply and Demand for Electricity

Issue 10 and Volume 100.

New Opportunities Aboundin the Supply and Demand for Electricity

By Douglas R. Bohi, Energy and Natural Resources Division, Resources for the Future

Looking beyond the next 25 years, two technologies stand out that have the potential for drastically altering the supply-demand picture for electricity: electric-powered vehicles and decentralized, small-scale power supply systems. Neither technology is economic today, and major technological barriers need to be overcome before they can become successful; yet success in either dimension is not a wild stretch of the imagination.

Transportation is the one broad category of energy consumption for which electricity makes only a small contribution today, but where a major shift toward electrification could cause a quantum change in the volume of consumption of electricity in the future. Traditional uses of electricity change slowly over time and in response to small incremental adjustments in the stock of electric equipment.

Although the changes over a long period of time may add up to be very important, and the stock of electric equipment may change to look very different than today`s, it is difficult to identify individual technological changes that would make an important difference to either the stock of equipment or the volume of consumption. Not so in transportation. Here, advances in fuel cells or in electric batteries can make the difference in drastically altering the demand for electricity and petroleum.

Even with the needed technological break-through on the power system, producing an efficient, economical electric vehicle that will compete with a gasoline-powered vehicle is not assured. Moving down the average cost curve for new vehicles depends in part on a learning process and in part on economics of scale. Both take time and financial impetus.

One factor that could speed up the innovation process is environmental policy. Imposing requirements for zero emission vehicles, imposing gasoline taxes to discourage consumption or providing hefty subsidies to develop and implement electric vehicle technologies could rapidly move forward the day in which a competitive electric vehicle becomes available. This

is not to argue for such an environ-mental policy; only to point out such a policy may be necessary to achieve the end result.

It may be argued that normal market incentives are not strong enough to encourage the commitment of resources necessary to research, develop and implement electric vehicle technologies as long as the real price of gasoline remains anywhere near its historical trend. This is an argument for government policy to provide additional incentives, and it is a reason why the environmental benefits to be gained from electric vehicles must be large enough to warrant the economic costs.

The second prospective techno-logy offered for consideration is decentralized power production. Today`s electric power industry is characterized by a set of large generation units tied to consumers by a vast integrated transmission grid. All of today`s issues regarding market power, access to the grid, stranded costs and regulated rates arise from the established techno-logy of power production. All of these issues would evaporate if the technology embodied in central power stations and the intercon-nected grid were no longer economically dominant.

Indeed, as decentralized power supply systems became smaller and more competitive with power supplied by the centralized system, the burden of fixed costs carried by the centralized system would hasten its destruction. As more and more customers leave the centralized system, the price to remaining customers would have to rise to cover those costs, making the centralized system an even less desirable alternative.

Douglas R. Bohi is a senior fellow and director of the Energy and Natural Resources Division at Resources for the Future (RFF) in Washington, D.C. Since joining the staff in 1978, he has conducted research on the economic behavior of energy markets, the relationships between energy and the economy, and the regulation of natural gas and electricity industries. He has authored or coauthored eight books on energy economics and policy, and has also published numerous articles in professional and public policy journals.

Dr. Bohi also holds a joint appointment with Oak Ridge National Laboratory, where he is a Senior Research Scientist for Economic Policy.

During 1987-1988, Dr. Bohi was on leave from RFF to serve as chief economist and director of the Office of Economic Policy at the Federal Energy Regulatory Commission. He was responsible for advising the Commission on economic matters related to the regulations of the natural gas and electricity industry and was in charge of the effort at the Commission to initiate changes in the regulation of the electricity industry.

Before coming to RFF in 1978, Dr. Bohi was a Professor of Economics at Southern Illinois University (1970-1978), an economist with Caterpillar Tractor Co. (1969-1970) and an economist in the Office of the Assistant Secretary of Defense for Systems Analysis (1967-1969). Dr. Bohi was a Fulbright Scholar at the Netherlands School of Economics in Rotterdam and a Visiting Professor at Monash University in Melbourne, Australia. He received his doctorate degree in economics from Washington State University in 1967.