Lisa Margonelli’s got a great piece in The Nation on the potential for “Gray Power.” The article makes the case for the Midwest to invest in waste heat recovery and other areas near and dear to my self-interested heart. She also puts out a pretty clever idea for a “Clean Power Authority.” She describes it thus:

… a federal agency tasked with recycling energy in the South and Midwest–would work like a utility, buying power generated from recycled waste energy and using it to meet federal, state and local government needs.

I like it.

Power markets are broken. We’ve spent 30 years being blessed with falling prices for power by virtue of the fact that we haven’t built any new generation. We’ve paid generators for their fuel, but not their physical plant. That’s fun while it lasts, but can’t last forever. Eventually, you get to the point we are today where prices aren’t high enough to build anything new (clean or otherwise). Therein lies an opportunity.

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If we were more socialist, we’d fix this by raising the price for power, economic pain to electricity users be damned. But we aren’t, and so we sit around slowly waiting for the price to rise to a level necessary to justify new investment. Our plight is best understood by a driver who avoids a traffic jam by hopping the divider and speeding down the deserted (but wrong way) pavement on the other side. It’s great as long as there aren’t any trucks coming, but only an idiot (or an economist) would argue that our speed represents the optimal outcome of an infallible process.

So what do we do about it? Current average retail power prices in the US are about $100/MWh, but closer to $50/MWh for the biggest customers who drive so much of our demand. Wholesale markets are trading at $50 – 60/MWh depending on where you are in the country, but post-Lehman Brothers, no one is willing to sign the kind of long-term contracts you’d need to justify a big capital investment.

Meanwhile, no one’s building any new assets of any significant size for less than ~$110+/MWh, and even those often come with big tax subsidies that disguise the full price of power (see: wind). It’s short-term political suicide for anyone to argue for increases in retail rates to justify investment, but long-term reliability suicide to keep driving in the wrong lane.

This is where the CPA could come in. The federal government is the largest electricity purchaser in the country. There is no reason why it could not enter into long-term contracts with clean-electricity generators to stimulate their construction, at rates higher than retail but lower than the costs of new coal.

Keeping the system economically and environmentally honest would require only that CPA purchases come only from new sources of power, and that those sources meet some standard of cleanliness. In short, something like a Clean Energy Standard Offer, but instead of forcing utilities to buy clean power at those prices, the government leads by example.

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Most intriguingly, it bypasses many of the hardest issues associated with electricity reform. Whenever the federal government tries to dictate how (state-regulated) local monopolies buy or generate power, states-rights claims inevitably arise. These are conveniently avoided in a CPA, since this is stipulating only how the federal government buys power. When we pass tax-incentives for clean energy, they are perpetually bedeviled by technology-specific incentives, sunsetting tax provisions, and their annoying habit of not being useful to anyone who doesn’t pay taxes. This would bypass all those issues by simply giving long-term contracts to clean energy sources, without all the goofy inefficient innate to tax policy.

What say you?