Is Revamping The Power Grid Necessary?

Reason asks:

What's So Smart About Investing in the Smart Grid?

Smart grid technology is all the rage. General Electric just paid $2.4 million for a Superbowl ad featuring an animated scarecrow singing "If I Only Had a Brain" to promote its smart grid initiatives. IBM, meanwhile, is running full page "Smarter power for a smarter planet" ads in major newspapers like the New York Times. These corporations are in perfect sync with the new administration in Washington.

Earlier this month, President Barack Obama promised to retrofit America by "updating the way we get our electricity, by starting to build a new smart grid that will save us money, protect our power sources from blackout or attack, and deliver clean, alternative forms of energy to every corner of our nation." To that end, the House version of the American Recovery and Reinvestment Act authorizes the Department of Energy to spend $4.5 billion dollars to stimulate the deployment of smart grid technologies.

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Ultimately, the article concludes:

In 2004, the Electric Power Research Institute calculated that it would cost $165 billion over the next 20 years—about $8 billion per year—to build out the smart grid. And one of the first challenges is mobilizing sufficient investment. But that problem won't be solved by throwing $4.5 billion at the electric grid as a sop to the environmental lobby—even if it does stimulate the bottom lines of favored corporations.

I agree completely. But due to my deep concern about climate change issues, which comes largely from reading the always informative Climate Progress and RealClimate blogs, I reach the opposite conclusion. We should drop enough non-green infrastructure from the bill to allow the $8 billion per year funding required to update our power grid.

The Reason article makes clear that there are plenty of collective action problems, perverse incentives, etc. at work here that prevent the market from facilitating developments that could help the United States cut back on its CO2 emissions. And the externalities associated with climate change are yet another massive market failure. I'm all for allowing the market to solve any problem it can, but this is an extremely clear case of it not being able to solve a problem. Thus, the government has to intervene. That's a major part of what the government is for.