Sunday, February 11, 2007

Making Future-Proof Policy

Greetings, fellow nerds.

Today I'm going to address an emerging problem for policy-makers: how to exploit all the latest tech without getting bogged down in implementation details. I'm going to make the case that governments should adopt an adjudicating rather than a micro-managing role in some kinds of service provision.

Today's Tech is a Moving Target

Ours is an age of innovation. The rate of innovation has never been so fast. There's a yawning gap between the cutting edge of (especially) information technology and typical technology usage. As tech speeds up, I see this problem getting worse, not better. Do we want to perpetually wait around for bright ideas to crawl their way through the legislature? Or, do we want an adaptive system where better solutions to public problems can be implemented and rewarded instantaneously? How would such an unregulated system work?

Examples: Road Construction and Power Distribution

I've already given an outline on how we could get the private sector to automatically implement any useful tech in terms of road durability and safety in the form of bonds which annually pay the holder an amount proportional to the good that was done to the community. See my 21st century capitalism post at the bottom for more details.

I'm going to argue that we should trade in our monopsony/monopoly electrical power distribution system for a free market system with fluctuating prices for the same reason. As soon as a new gizmo which does things better gets invented, you should be able to just plug the sucker in and start making cash.

Case in Point: Cold Dutch Ideas

Recently, a Dutch research agency suggested that refrigeration warehouses should turn off their refrigerators during the day (nature article and ZDNet summary) in an idea called "night wind". Excess wind power is generated at night and might get wasted if nobody used it. Since it's OK for some refrigerated goods to vary in temperature a couple of degrees, you would let your warehouse warm up a bit during the day, but get cooled right off at night using green power through a grid that didn't happen to be at peak.

Let's review some of the steps you'd need to go through to put this idea into practice given the current power system.
  1. Some researcher thinks it up.
  2. Political will is mustered to look into the study.
  3. The specifics of which warehouses could use no diurnal refrigeration (possibly season-dependent) are compiled by a central authority.
  4. New regulations have to be developed and approved.
  5. Businesses are notified of discounts (or worse yet - income tax incentives) available for night-only refrigeration.
  6. Enforcers patrol the warehouses which signed up to make sure they don't use their refrigerators at night.
Keep It Simple!

I think letting the price of power float is a much better idea, so long as any approved entity can buy or sell energy to the grid. We already have "time of use" power meters which record the time of day each kWh of energy was used. Usually, energy at peak hours costs a high fixed rate while energy at off-peak hours is much less expensive - often less than half as costly.

Suppose we took the time-of-day concept one step farther and let electrical power be traded like any other commodity. Then, the steps needed to get warehouses to take advantage of extra power would be:
  1. Somebody notices power is more expensive in the day, so she turns off the refrigerators during the day.
  2. Profit!!!
Once people realize that power's cheaper at night, all sorts of things might get switched over to night-only, such as domestic air conditioning (possibly with a heat reserve), industrial processes, electric car charging, winter heating, etc. I can imagine thermostats which take in two variables: the current temperature and the current cost of electricity, to decide whether to turn on. It would be easy to transmit a few bits of information relaying the current price of electricity along power lines at some frequency other than 60 Hz (probably higher, so the signal would die out over a short range, and so local prices could vary somewhat). Then every appliance from fridge to light bulb could (in principal) decide for itself whether to turn on.

Free Market Benefits

There are six benefits to this system:
  1. Consumers would have financial incentives to cut back electricity usage when it's most scarce.
  2. The market would be able to decide exactly when price-dependent operation is worthwhile. Personally, I would say "no" to lightbulbs which dim when power is expensive, but "yes" to a fridge which works most when power is cheap, and "definitely" to a plug-in hybrid car which guzzled late-night 2¢-per-kWh hydro power. No extra laws needed!
  3. Power generation systems would be rewarded for producing electricity when it's most needed (potentially making solar power more financially-feasible in hot and sunny areas - solar needs all the financial help it can get).
  4. If somebody developed a large battery for leveling out peak usage, they would be able to make a quick buck right away. No need for proving the thing first: just buy low and sell high. No public investment risk would be involved, and peak prices would go down as peak supply increased, as if by magic.
  5. The financial incentives for long-distance power cables (such as HVDC) would be immediately apparent, and if they were economical, would be built quickly by profit-seeking companies.
  6. There would finally be some elasticity in demand for power. Trying to match generation with consumption is one of the biggest causes of damage to power equipment causing blackouts. If systems become over-stressed, prices would go up and everyone who had a smart air conditioner would instantaneously decrease the load on the critically-stressed system.
As I see it, the biggest disadvantage of changing to a market-based system is that it would be a change. New hardware would be needed - that's about it.


A market-based power-distribution system has the advantage of instantaneously adding incentives exactly where they would be with an ideal policy system. There would be no lumbering lag between technological innovation and implementation: if it will make money, do it.

Ensuring that financial incentives are aligned with the good of humanity is what 21st century capitalism is all about. Policies where every party has the same goals makes us work together to the benefit of all, harnessing our uniquely human gift of capitalism to do good.

No comments: