Exports, Unreliables, or Central Planning?

Wednesday, July 12, 2017

Francis Menton, aka the Manhattan Contrarian, takes a look at a Wall Street Journal article about a recent blackout in Adelaide, Australia. Part of Menton's criticism focuses on the print headline: "The Energy Shortage No One Saw Coming," but the internet headline ("How Energy-Rich Australia Exported Its Way Into an Energy Crisis") bears mention, too, and for similar reasons. As a reading of Menton's post will show, the real cause of the shortage was central planning guided by an emphasis on the kind of "renewable" energy sources fossil fuel advocate Alex Epstein has more accurately described as "unreliables":

... Has environmental religion penetrated even the Wall Street Journal's news pages to such an extent that they can't give an honest account of what is going on? Sure the gas plant's unavailability that day was the immediate precipitating cause of the particular problem. But what goes unmentioned is that the South Australians have painted themselves into a corner where one after another of such situations is inevitable, and if they didn't see it coming they are really blinded by their environmental faith. First they increased renewable capacity, particularly wind, to the point of getting over 50% of their power from wind when it blows. Then they forced closure of all coal capacity. Then they prioritized the power from wind in the dispatch scheme, leaving the few remaining natural gas plants sitting idle much of the time and having no clue when they might be required to crank up at a moment's notice -- a regime under which the gas plant operators can't make money. And finally, they claim to be "surprised" when the wind suddenly stops blowing and the gas plant operators can't or won't come on at a few minutes' notice. Why should the gas plant operators contract to buy gas that they may never need at prices that they can't recoup? [emphasis in original, minor format edits]
In other words, this shortage was quite predictable, and exporting natural gas was hardly to blame. Menton quite ably nails that point to the wall. But there is another theme that bears mention, even if it lies outside the scope of Menton's analysis, and it is this: The religion of central planning has so penetrated Western culture for so long that its role in this mess may entirely escape notice. I don't blame Menton for missing this (if he did), because relatively early in the evolution of electric utilities, central planning snuffed out once-vigorous free market competition.

In his book, The Innovator Versus the Collective , Brian Phillips notes the following from a study in 1938:
Six electric light companies were organized in the one year of 1887 in New York City. Forty-five electric light enterprises had the legal right to operate in Chicago in 1907. Prior to 1895, Duluth, Minnesota, was served by five electric lighting companies, and Scranton, Pennsylvania, had four in 1906. ... During the latter part of the 19th century, competition was the usual situation in the gas industry in this country. Before 1884, six competing companies were operating in New York City ... competition was common and especially persistent in the telephone industry ... Baltimore, Chicago, Cleveland, Columbus, Detroit, Kansas City, Minneapolis, Philadelphia, Pittsburgh, and St. Louis, among the larger cities, had at least two telephone services in 1905. (p.54)
Phillips, who notes that, "Clearly, entrepreneurs and businessmen across the country thought that they could make a profit in utilities," then notes the effects of an alliance between "businessmen" who wanted government protection from competition and power-hungry "progressives":
In America's Electric Utilities: Past, Present, and Future, economist Leonard S. Hyman notes that standard texts assume that utilities became regulated because they were monopolies. But he questions this assumption, citing a study that concluded that "the concept of state regulation was both compatible with the ideas and political needs of progressives [who were calling for more government regulation of businesses] and expedient for safeguarding the material interests of the utilities. From 1907 to 1913, philosophical compatibility and commercial expediency combined to produce a political necessity."[48] The political goals of progressives -- government control -- served the financial interests of the electric utility companies -- guaranteed profits through a prohibition on competition. (p. 55)
Consider for a moment what might have happened in an Adelaide powered in a free market. Among the possibilities would have been several companies competing on merit at once or a small number that rose to the top on merit. I have a hard time imagining a company that has to compete for customers, in part by maintaining a reputation for reliability, making the kind of mistake we saw here. (And if it did, customers could and would jump ship, an option they don't have here.) In any event, nothing would stop a company from investing in wind power, if it could be made sufficiently profitable, and nothing could force an entire city to "rely" on it, either.

Adelaide's blackout wasn't at all a result of Australia's exporting of natural gas, nor was it simply because it has incompetent central planners who imagine "unreliables" can be trusted to power a modern grid: It would have been nearly impossible in a free market.

-- CAV

P.S. Economist George Reisman has some choice words for anyone who imagines that central planners can even be competent.

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