Death spirals

One of the challenges of renewable integration that often goes undiscussed are the “death spirals” that are associated with adoption. We’ve been thinking a lot about these issues at Caltech over the past few years…

Two motivating stories

To highlight what we mean by a “death spiral”, let us first consider an example of  consumers in Southern California who use a lot of power from the power grid.  They clearly have an incentive to install rooftop solar since the price you pay for each incremental kilowatt-hour you consume increases with the total amount that you consume. That means that if you consume less you fall into a lower tier in which the price of the next kilowatt hour you consume is low; whereas if you consume a lot, the corresponding price you pay is high. This convex price structure is an incentive for high consumers to reduce consumption; it is also, however, an incentive for installing rooftop solar so that the consumer’s net consumption falls into a low tier.

But what are the consequences of the fact that incentives for adoption are much stronger for high consumers?

With “net-zero” pricing schedules, the total price you pay for power consumed from the grid is (approximately) based on the net consumption: the amount you consume from the grid minus the amount your rooftop solar supplies to the grid. An argument for net-zero pricing is that the power supplied from your rooftop solar feeds your neighbors and thus reduces the power generated from nuclear, gas-fired or coal-fired plants far away.

But, the quality of power — low variations from specified voltages and frequencies — is a public good. Consider the power quality received by you, your next door neighbor, and your neighbor two houses down. The utility cannot (easily) give you and your neighbor two houses down excellent power quality while giving your in-between neighbor poor power quality; all three of you use the same distribution circuits. The amount you pay the utility has no bearing on the quality of power that you get from the utility. The utility has to ensure that you get 110 volts and 60 Hertz when you turn on your microwave regardless of the number of houses in your neighborhood with solar or whether fast-moving clouds passing over your neighborhood block the sun intermittently. High prices are an incentive to decrease payment for public goods, but regulated companies need income to maintain the quality of public goods (see a New York Times article on this issue), and the problem is that the net zero price you pay to the power utility is no longer a good proxy for the costs incurred by serving you; technology has changed that correlation.

The same story can be told in the context of gas taxes and road maintenance.  The tax on gasoline is used to pay for roads. The quality of roads is a public good since you can travel on most roads without paying for the privilege. However, the tax on gasoline is also an incentive to consume less gas. When more people who drive long distances switch to electric cars, hybrids, and more efficient cars generally, the state’s intake of gasoline tax decreases.

The tax you pay on gasoline is a proxy for the amount that you drive. The more you drive, the more you “use up” the roads, and so the more you should pay to maintain them. The quantity of gas you consume is no longer a good proxy for the number of miles that you drive; technology has changed that strong correlation.

What are the consequences

The two stories above highlight a mismatch, but what are the consequences of it? Well, high prices or rapidly increasing marginal costs of consumption could lead to a “death spiral.”

Home owners in high-priced power-consumption tiers install rooftop solar, fall into lower tiers, and pay less to the power utility. Utilities are regulated: they are required to maintain the public good. Regulators allow utilities to raise rates so that the public good can be maintained. The increase in rates, particularly if the rates for top tiers increase more rapidly than for lower tiers, attracts more high-consuming homeowners to install rooftop solar. And this results in the utilities raising rates to maintain the public good, which attracts even more homeowners to install solar. The positive feedback drives rates up and makes it increasingly attractive for more homeowners to install solar. Eventually, everybody who can install rooftop solar will do so.

Likewise, in theory, everybody who drives many miles each month will buy electric cars or high-mileage cars eventually. Gasoline taxes will go up to pay for road maintenance. And more people who drive a lot will switch to high-mileage cars; and then gasoline taxes will go up further.

Is the death spiral a possibility? Is it happening? How quickly do customers adopt technologies that result in less payment for public goods, and how is the adoption rate influenced by the feedback cycle?

Anish Agarwal and Desmond Cai, students in RSRG, working with Dr. Julian Bunn of the Center for Advanced Computing Research and me, have developed a Cloud-based service to simulate technology adoption as it is influenced by costs of maintaining public goods. The Cloud-based service is currently being tested by engineers and business analysts at a utility… so, I’ll leave there for now and wait until my next blog post to say more about modeling and conclusions from our work.

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