Worldwatch Paper #119: Powering the Future: Blueprint for a Sustainable Electricity Industry

June 1994
Christopher Flavin and Nicholas Lenssen
ISBN: 1-878071-20-3
74 pages

New technologies and a more competitive market will severely shake the $800-billion-a-year electric power industry--one of the world's largest--in the next few years, reports the Worldwatch Institute.

Pressured by real competition for the first time, some of today's large, debt-burdened power companies may break up, and many high-cost nuclear and coal plants may shut down, according to the findings of Christopher Flavin and Nicholas Lenssen, senior researchers at the Washington, D.C.-based research organization, and authors of the new Worldwatch report Powering the Future: Blueprint for a Sustainable Electricity Industry.

Investors, users and producers of electricity will all be affected by these changes. The companies at risk range from California's Pacific Gas & Electric to state-owned Electricite de France and Ontario Hydro.

"Traditional electricity brokers are held back by large, outmoded plants and rigid planning, and may be overtaken by a host of smaller energy-service firms, independent power producers, and locally-based utilities."

Although the electric power industry is now the world's second largest polluter, a well-regulated and more-competitive industry could speed the transition to an efficient and less- polluting electricity system.

"Power generation has already become more competitive during the past decade," the Worldwatch report says. "Unregulated, independent power producers built more new power plants in the United States in 1992 than public utilities did, and their role is also growing rapidly in several other countries."

A host of new technologies has accompanied the rise of the independent power industry, leading to a dramatic decline in costs and increased potential for decentralized power generation. Already, combined-cycle power plants employing gas turbines are nearly 50 percent more efficient than the average utility generator in use today--and continue to improve. As a result, a new generation of small, economical power plants are being built very quickly, with some so small that they can be placed in existing commercial buildings.

Power generators based on wind, solar, biomass, and geothermal resources are becoming economical as well, report Flavin and Lenssen. At recent power auctions in California and Texas, renewables have shown themselves to be nearly competitive with gas-fired plants. In several countries, these generators are being added in large quantities to electricity grids.

A new generation of "micro" generators are also on the way. Fuel cells are being installed in hundreds of buildings in Japan, and in thousands of European buildings solar cells are being integrated into roofs and facades. These will one day allow millions of homeowners to generate their own power, and--if they wish--sell it to other customers.

"A typical company with 50 large power plants connected to its system today could have 5,000 or even 50,000 small plants by 2010--similar to a corporation switching from three mainframe computers in 1980 to 30,000 personal computers in 1994," say the Worldwatch researchers. "Such a power system would be far more efficient, less costly and less polluting than the one in place today."

"Modern telecommunications will make it easier to inter- connect the new mass-produced micro generators to the rest of the power system. By installing direct, two-way communication between power users and a utility's computers through existing coaxial (television) cables or fiber optic lines, each coal plant, solar power generator, refrigerator and air conditioner would be linked together so that the grid operates as a single 'smart' system, avoiding overloaded lines and turning generators on and off as needed."

Even as the power generation market heats up, a market in saved electricity is opening up in some countries, according to the Worldwatch report. In these cases, electric utilities are financing investments in improved energy efficiency, saving customers money by installing highly-efficient light-bulbs and "super-windows" that let light in but don't let heat out. Some building owners are cutting power bills by 50 percent or more.

U.S. utility investment in efficiency rose from less than $900 million in 1989 to an estimated $2.8 billion in 1993. Studies show that such programs save electricity at an average cost of just 2.1 cents a kilowatt-hour, half the cost of building and operating even the least-expensive, new power plant.

But even as innovative technologies begin to shape the electric power system, a fierce debate over how to re-structure and re-regulate the power industry has emerged in the early nineties, say the Worldwatch researchers. Particular attention is focused on California, where, in April, 1994, the Public Utilities Commission proposed a reform program known as retail wheeling, which could turn the industry into a freewheeling commodity market.

But as the Worldwatch report points out, retail wheeling would only partially provide the benefits of increased competition while severely undermining the long-term planning that has been so vital to the recent evolution of an efficient, environmentally sound electricity market.

"Retail wheeling allows large customers--the strongest proponents of the concept--to avoid paying their fair share of the fixed utility costs--costs that then fall on smaller customers. This is exactly what happened in Great Britain and Norway, which already permit retail wheeling."

U.S. financial markets have already reacted negatively as discussions over retail wheeling heated up. The Dow Jones Utilities index plummeted 27 percent between September 1993 and June 1994, representing $70 billion in book losses to U.S. utilities at a time when the broader Dow Jones Industrials index recorded a 3-percent increase.

The Worldwatch report suggests an alternative, two-tiered approach to reforming the electric power industry. For generating and transmitting electricity at the wholesale level, an open, competitive and diverse power market would work best--provided that environmental costs are figured in.

At the distribution level, however, a competitive market in electricity services would be more effective. Distribution utilities would offer their customers not only electricity, but also more efficient lights and refrigerators and other power-using devices. The key is that these local distributors be rewarded by regulators for doing that job well, and that the entire industry be committed to long-term planning and the achievement of an environmentally sustainable power system.