The environmental left in Florida ignores the economics on distributed generation

Distributed generation amounts to a reverse hammer use of government to severely limit not only the entry of the poor into energy markets but to severely regulate their consumer behavior once they have entered the markets for energy.  The constraint on consumer behavior manifests itself in cost shifting, where a utility that is unable to recover from participants in distributed generation the fixed costs of maintaining its facilities has no choice but to recover those costs from non-participants.  This means that for consumers who are not able to purchase and install wind turbines or solar panels for their residences they will find their rates increasing which puts a further squeeze on their energy consumption choices.

In Florida, the staff at the Florida Public Service Commission appears to have recognized the adverse economic impact distributed generation could have on the majority of electricity consumers when it recommended last week that the state’s solar panel pilot programs be discontinued by the end of 2015.  The staff determined that the programs have not proven to be cost-effective for the utilities and represent a subsidy between the general body of ratepayers and the few participants that installed solar panel systems.  The staff also determined that even without rebates to consumers who install solar panels, they would still go ahead and make the decision to go solar and spend the daylight hours “off grid.”

I would add another observation that was not made by either the staff, the utilities, and definitely not the environmental groups pushing for continued subsidization of solar in Florida.  If we look at energy production in Florida in total as one big grid, shouldn’t we have expanding energy production as a result of economies of scale?  Shouldn’t the addition of additional energy producers lead to the marginal cost of energy production falling and taking prices down with it?

The environmental groups never made this argument for had they been able to show declining marginal costs of energy production in aggregate in Florida, they would have eliminated the cost shifting argument.  They would have shown that subsidizing the expansion of energy production via solar would lead to falling costs and falling prices.

Section 366.82 of the Florida Statutes requires the state to reduce dependence on fossil-fuel generated electricity and encourage the use of demand side renewable energy sources.  To meet conservation goals, Florida utilities subsidize demand side management energy programs designed to encourage energy efficiency or conservation.  These programs must be cost-effective to the utility if they are to be implemented.

The decentralized nature of distributed generation doesn’t help with cost-effectiveness.  A utility could expand its own portfolio of renewable energy sources to meet existing and growing demand, taking advantage of its ability to leverage economies of scale.  Unfortunately Florida law emphasizes demand-side management and a compensation structure for distributed generators that does not require that distributed generators pay both fixed and variable costs involved in the generation, transmission, and distribution of electricity.

It may be time for an update of Section 366.82 that allows a utility’s own expansion of its renewable energy portfolio to be counted toward conservation goals.  Where such an expansion leads to falling marginal costs for producing energy, that would be an added benefit.

About Alton Drew

Alton Drew brings a straight forward and insightful brand of political market intelligence. Alton Drew graduated from the Florida State University with a Bachelor of Science in economics and political science (1984); a Master of Public Administration (1993); and a Juris Doctor (1999). You can also follow Alton Drew on Twitter @altondrew.
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