Thursday, December 01, 2005

The Free Lunch

Milton Friedman famously claimed that there’s no such thing as a free lunch. If you ever got what you thought was a free lunch, it meant that somebody else was paying the tab. And very likely, that person was going to end up charging it back to you in ways that you couldn’t forsee and might not want.

That seems the best description of our energy situation. Everybody wants to use energy, but no one wants to do the things that allow it to be produced. There are multitudes of examples of this, but Californians who can recall back to 2001 remember the numerous rolling blackouts of that year.

Over at least two decades, the political and regulatory thicket surrounding power plants in California essentially stopped them from being built, and in some cases reduced the capacity of the existing energy base by capping the amount of nitrogen oxides they were able to emit into the atmosphere. When the Internet Age hit and electricity demand increased, California could not provide enough energy for itself, it had to buy it from other states and speculators such as Enron and Dynegy. The way ball bounced at that particular time, weather factors were unfavorable, the other Western states had very little if any power to sell, and the speculators charged what the market would bear, plus a had a few unsavory tricks up their sleeve as well. With this little omelette cooking, the real price of electricity increased dramatically, of course.

At the end of 2001, price spikes had bankrupted several of California’s rate-controlled utilities, plus cost the California taxpayers several billion dollars besides. Now it is asserted, with a fair amount of plausibility, that the blame for the California energy crisis cannot be entirely blamed on NIMBYism and environmental activism. If some regulators or market participants had done this or that differently, the effects might not have been nearly as severe. But none of that would have been an issue if California were able to generate enough energy to meet its own needs. And that comes from the fact that Californians, like many others, wanted the benefits of a stable energy supply, but none of the costs. But there’s no such thing as a free lunch.

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