The recent excitement about homes and businesses someday soon operating off the grid—courtesy of rapidly improving solar panels and the potential of Elon Musk’s batteries—isn’t exactly a new phenomenon: In the late 1970s and early ‘80s I attended a high school completely off the grid. It was nobody’s idea of a hippie commune—it was a Catholic high school in Peoria, Illinois. Its self-sufficient oil-powered power plant was an experiment borne of the idealism and fanciful impracticality of the committee in charge of constructing the school a decade earlier.
The motivation back then for being off the grid was a desire to avoid what were, at the time, relatively common power disruptions resulting from the severe weather that befalls Central Illinois. However, by the time the 1980s arrived, the local power company had managed to bury a good chunk of its lines and greatly improve reliability, while the school was stuck with a failing power plant it had paid a fortune for. Evidently, no one on the school board understood the concept of sunk costs.
When the maintenance issues became so severe that it threatened the school’s before and after-school basketball practices—of paramount importance in a basketball-mad town—some well-heeled donors financed an overhaul that put the school onto the grid.
The ignorance of sunk costs is a common affliction these days, and one that is implicit in many arguments that deride the current heated discussion about how continued efficiency gains in solar, combined with new technological gains in energy storage, could transform the provision of energy in the United States. Even if these gains come to fruition, however, the grid will likely be with us for the indefinite future, so it makes sense to think about what the grid, and our nation’s energy portfolio writ large, will look like a decade hence.
The high energy prices of a decade ago precipitated a tremendous amount of research (both public and private) in the energy sector, some of which remains stillborn (e.g. clean coal technology in the U.S.). But in other energy sources it has paid off. Most important from the U.S. perspective, hydraulic fracturing (better known as fracking) finally became cost-effective and practical after decades of research and experimentation, and the gains in oil and natural gas production it has engendered have completely changed the global energy market. The collapse of global oil prices has made life inconvenient for OPEC countries and potentially disastrous for the kleptocracies in Venezuela, while transforming the economies of Texas, North Dakota, and other states. In non-oil-producing areas it has also given the economies a boost because of lower energy prices, which is just what the doctor ordered after a decade of subpar growth.
With domestic oil production at historically high levels and threatening to overtake Saudi production, it’s natural to question whether we need to bother further incentivizing the development of other energy sources, especially given that some of these incentives expire in the near future.
Supporters of solar energy note that the efficiency of solar panels has steadily improved over the last decade and nearly equals the current cost efficiency of fossil fuels. Some have wagered that further gains in solar efficiency and battery storage may soon take us to a world where some homes and businesses may find it practical to move off the grid completely.
Grant Wishard, writing in these pages recently, took an axe to this notion in an analysis that combined a realistic view of future energy gains with an argument about sunk costs. He reasoned that the immense investments we’ve already made in the grid will squash the incipient notion of entities leaving it in any form, and that we will stick to the centralized energy production model currently in place.
I’ve got no idea what will happen to energy prices in the future, nor whether the gains in solar energy efficiency will indeed continue. However, there’s no guarantee that the cost of fossil fuel will remain low indefinitely: All it will take is one massive fracking accident or a president Hillary Clinton anxious to make her mark on the world to trigger a regulatory change that dramatically boosts the cost of producing energy via fossil fuels. Throw into this the standard geopolitical risks that come with anything that comes from the Middle East and any reasonable person should be wary of predicating energy policy on low and stable oil prices for the indefinite future.
In such an environment we’re going to need to rely on our current diversity of sources, and a conservative’s reflexive antipathy towards solar (admittedly easy to arrive at given the fetishization it’s received in many quarters on the left) won’t do us much good.
If solar does reach escape velocity and become a truly cost-effective energy source, what will that mean for the grid? The odds are that there won’t be too much cord cutting, even if battery technology also improves apace: There are still too many cloudy days and seasonal cycles for this to make sense for the masses, although we shouldn’t reflexively oppose such a thing happening if the technologies do advance that far. What would make more sense would be that we provide incentives to modernize the grid to accommodate more decentralized energy production.
While we’re doing that we could also do more to discourage energy consumption spikes that require utilities to maintain power plants that operate for just an hour or two a day, when demand spikes around 5 pm. The widespread adoption of peak load pricing, combined with an embrace of smart meters of the sort that the technology firm Nest offers, would go a long way toward smoothing consumption. Better energy storage, if it does arrive in the near future, would help the cause.
California’s beginning to implement some of these ideas, spurred on by state-imposed CO2 emissions caps coming down in the near future, but these investments make sense even setting aside one’s opinion on climate change. A wider diversity of energy sources and fewer aging billion-dollar utilities to maintain could potentially result in less expensive and more dependable energy for the rest of the country as well, if pursued in a sensible way.
We currently have an investment tax credit for solar that costs the Treasury roughly $1.5 billion a year, and which is set to expire in 2016. As energy incentives go this is one of the better ones in place, in part because as currently structured its incentives ramp down as solar’s efficiency improves. It’s a marked contrast to the plethora of benefits we give to corn ethanol, which includes mandates, production subsidies, tax breaks and tariffs on ethanol produced elsewhere, none of which have resulted in an ethanol industry that can be defended by anyone bound by the truth. It’s also smaller than the energy incentives for oil and natural gas production.
Advocating a continued emphasis on energy diversification, grid modernization that accommodates greater gains in noncentralized production, and an embrace of technology and pricing regimes that smooth out demand over the day amounts to a policy prescription that can’t be boiled down to a bumper sticker, but it’s the right one. And it’s much more palatable than merely decrying the follies of liberal environmentalists.
Ike Brannon is a Senior Fellow at the George W. Bush Institute and President of Capital Policy Analytics, a consulting firm in Washington, D.C.
