William Hogan on Electricity Policy

Interviewed by Doug Gavel on September 30, 2013

The U.S. electricity market is considered one of the most reliable and cost efficient in the world, having transitioned from a monopoly to a more competitive model over the past twenty years. The Harvard Electricity Policy Group (HEPG) was established in 1993 to help ease the transition following the passage of the Energy Policy Act of 1992. William Hogan, Raymond Plank Professor of Global Energy Policy, is considered one of the leading academics in the area of electricity policy, and serves as HEPG’s research director.

Q. What were the most significant challenges facing the industry when the Energy Policy Act was passed in 1992?

Hogan: We experienced a dramatic change in the organization of many markets in the 1980s –deregulation of trucking, railroads, airlines, and, importantly, natural gas pipeline systems. It was clear that the next target was going to be the electricity sector. When the Energy Policy Act passed in 1992, it included an element which allowed for competition at the wholesale level. In particular, the law required open access to the monopoly transmission grid and nondiscrimination in treatment of market participants.

When people read this law, including many of us here at the Kennedy School, we understood that this was a radical and dramatic change – a change which the authors of the law didn’t fully appreciate – and the industry had no idea how it was going to address or comply with these new requirements. This led to the formation of the Harvard Electricity Policy Group in order to provide a vehicle for participants in the electricity system – people who were in the companies providing power, the regulators who were overseeing them, and the academics who were studying the industry – to meet in an environment where we could explore new ideas and alternative models for how to organize what would become a market in the electricity sector.

Q. What role did the Harvard Electricity Policy Group play in assisting the industry’s restructuring?

Hogan: The group was motivated by the legislation, but it was an unusual group because of what we decided to do. First, it was clear that we were going to have to think well outside-the-box, as they say, and adopt new approaches that would go so far as redefining the basic concepts, and even the words that were used to describe the industry. Second, we were going to have to have that conversation in an environment where the adversarial aspects of any reform and, in particular, the tensions between the winners and the losers would be minimized as much as possible, and we’d still have the opportunity to discuss dramatically different ways of organizing the industry. And Harvard is a place where this was possible. We thought we could make a real contribution, so we organized the participants in this group to meet on a regular basis under two broad rules that would govern everything we did.

The first rule was that everything discussed in the room was not for attribution. Of course, obviously, it wasn’t a secret, but you couldn’t cite anybody outside the room as having said or espoused any particular position. Secondly, we did not consider that we were constrained to seek consensus. Consensus is a good idea if you can achieve it, but we didn’t want to give up anything by way of having to go the “least common denominator” route. We wanted to talk about dramatic changes that might seem not very appealing at first blush, that might seem so far different from what we had done traditionally as not to be politically possible. And, so, we tried to remove those constraints as much as possible, and, in fact, were quite successful in stimulating very vigorous debate within the group about what could and should be done.

Q. What are the toughest challenges facing the industry today?

Hogan: We’ve accomplished a great deal. When I talk about the debates that we had early on, one of them surrounded the organization of wholesale electricity markets, and we, in fact, put together a proposal for discussion as part of the research supporting the Harvard Electricity Policy Group. When this proposal was first offered, it was rejected as being pie-in-the-sky, too academic, not realistic, and politically impossible.

If we fast forward to today, we find that all of the organized electricity markets in the United States, which now account for two-thirds of the electricity generation in the country, all of those regions have adopted the proposal that we advanced back in the early 1990s. It took a long time to get here, and there was experimentation with many different models that didn’t work, but we now recognize that wholesale market design, built around economic dispatch, is the only way to support a true competitive wholesale market. That system is good, but it is certainly not perfect. There are some problems that remain in dealing with that design, particularly in providing sufficient incentives for long-term investment in infrastructure. So, expanding the transmission grid or developing new long-term generation options still remain topics where we are doing research and having discussions.

The second challenge I put under the heading of the “green agenda.” We are all interested in having cleaner sources of power generation dealing with the climate problems – carbon dioxide and other greenhouse gas – but, also, the more conventional pollutants, small particulates that have local health impacts. And that “green agenda” presents an enormous challenge for the country and for the energy sector. A large part of tackling that problem is going to take place through the power sector. This focus on the power sector is important for two reasons. One is that much of the pollution that is created in our energy system is actually used in producing electricity, and so it has an immediate direct effect. Secondly, the way to address the challenges in some of the other sectors, such as the transportation sector, is through electrification of the transportation sector, which will make the electricity system all that more important, as we go forward. If we are to meet the challenges that have been laid out by, for example, the IPCC, the UN group which just produced its latest update on the climate challenges, we’re going to have to change virtually everything about the energy system and the electricity sector. This is going to require enormous innovation. This innovation is going to require a flexible and adaptable system that provides incentives for people to participate and try out new technologies, and, in this regard, the questions of electricity market design and electricity reform become central to the debate that is going forward.

Q. How does the US electricity market compare with others across the world? Do we have some lessons to learn from other countries?

Hogan: We can all learn from each other. We’ve tried many things that didn’t work. Unfortunately, we’ve tried some of things that didn’t work more than once, demonstrating that you can’t learn from the mistakes of others, you have to make them yourself. I’d like to see that change in the future, where we can profit from the experience of what’s being done in other countries.

The first country that received a lot of attention for organizing its electricity market was the United Kingdom. That had a big influence on electricity market design in the United States. Actually, Chile organized its electricity market before the UK, and we’ve learned from the Chilean experience, as well. Now reform efforts are under way around the world, from Australia and New Zealand, across the United States, and South America, and Europe, everywhere we are wrestling with these same problems, and we all need to learn from each other.

Frankly, in terms of electricity market design and wholesale markets, the United States is in the lead, if you accept as part of your constraint that you have to have a system which provides open access for everyone to participate and is non-discriminatory in its application. These are very important principles in our system. Europeans are struggling with this problem. They have the special complications of dealing with national systems that are incompatible, and they have many challenges to face. By contrast, the Europeans are ahead of us in regard to developing some of the new renewable technologies, and we have a lot to learn from their experience. So, the challenges are enormous and we can all learn from each other.

Q. There has been a lot of discussion about who is leading in the development of new energy technologies and who the early adopters are. How much does this sort of discussion of competition – say with China or what’s being developed in Europe – impact policy discussions domestically?

Hogan: The question about who’s leading in the adoption of new technologies and, particularly, green and renewable technologies, often confuses two challenges: One challenge is to develop new technologies which are going to be cost-effective and are going to be applied around the world and, particularly, in the developing world where most of the growth is coming from.

The other challenge is to simply penetrate and produce a lot of new green technology, no matter what the cost. In the latter regard, the Europeans are way ahead of us. They have managed to adopt a lot of very expensive renewable technologies. What they have not been able to do is to identify something that’s cheaper than coal. And that is a research and innovation challenge that is in front of us.

The competition arguments, I think, are often misplaced. If you take the case of China, for example, China has greatly expanded its output of panels for solar facilities that you could put on your rooftop, and they’ve caused the prices to crater around the world and bankrupt the industry in many different countries. If the Chinese had accomplished this because of superior innovation and developing a better technology that was inherently cheaper, that would be one thing, and we would all be benefitting from it, including the Chinese, and they would be more competitive than anyone else. If the Chinese have accomplished this through government programs providing subsidized credit to state-owned enterprises, so that the Chinese companies are competing with each other and driving the prices to their variable costs, that’s very bad for China and it doesn’t help the rest of the world very much because it doesn’t solve the fundamental problem of getting technologies which are truly cheaper.

Unfortunately, I think the experience in China is more consistent with the latter story than it is with the technological innovation story. There’s no trick in producing subsidized, expensive technologies and exporting them so that you can take over the world market. That’s easy, but not desirable. The challenge is in developing technologies that will be competitive without the subsidies.

Q. What are the challenges for the Harvard Electricity Policy Group as it goes forward?

Hogan: When we organized the group in 1993, we thought it would last for a short while, a few years, the problems would be solved, and they would go away. We recently had our 20th anniversary and there was a very strong sentiment amongst the participants that the problems are far from solved and we need to maintain the vitality and vibrance of this organization and its contribution going forward. This is not an easy thing to do over such a long period of time, and the challenge with any such organization is how to refresh itself and keep itself on the cutting edge of what’s happening, and we’re thinking about how to do that right now.