THE TRANSFORMATION OF ELECTRICITY SECTOR ECONOMICS Presentation of Dr. Mark Cooper Senior Fellow for Economic Analysis, Institute for Energy and The Environment, Vermont Law School Joint Forum of North Carolina Warn and the John Locke Society on Monopoly, Competition and the NC Electricity Market Raleigh, North Carolina, February 26, 2014

Base load is not a myth, it is an antiquated concept that has outlived its economic usefulness, but it has a large institutional and physical infrastructure with massive entrenched incumbents wedded to it, who have the economic interest and political power to extend its life at great cost to consumers and the economy. The 20 th century electricity industry focused on base load facilities that had to run constantly to meeting off-peak demand and chose to meet higher levels of demand (shoulder and peak), not by storing electricity itself, but by storing potential electricity in the form of raw fossil fuel (natural gas and diesel) since it was cheap and easy to convert to electricity. The scarcity rents necessary to pay the high capital cost of base load facilities were created by allowing peak prices to skyrocket. Over the past decade It is has become much more costly to meet peak demand in this way, as the social cost of fossil fuels has been recognized. The search for low carbon alternatives to replace coal has unleashed a wave of innovation that is not only dramatically lowering the cost of alternatives but also leads to resources that are likely to be dispatched on peak. Innovation is driving down the costs of utility scale storage. As these resources come on line, they shift the supply-curve, putting downward pressure on the market clearing price and the rents available for capital recovery. This is what nuclear utilities are complaining about.

With the economics moving strongly in favor of the alternatives, the largest remaining obstacle to the transformation of the sector is the incumbents utilities who use the existing regulatory institutions to slow or prevent the growth of alternatives, demand full compensation for obsolete infrastructure, and resist the deployment of the infrastructure that will support the 21 st century approach. Whether your goal is more choice and competition, or more alternative resources, the key is to overcome the incumbent utilities and accelerate the transformation of the institutional and physical infrastructure. The greatest obstacle to accomplishing those goals would be allow a nuclear reactor to be built, which would reinforce the incumbent structure and create a huge strategic overhang on the market. My slides describe the economics underlying the transformation.