What the Exotic Snack Factory taught me about clean energy markets
Price secrecy is bad for doting grandparents and the global energy transition
I was recently visiting family up in my hometown of Rochester, New York and learned an unexpected lesson about electricity contracting from (where else?) a suburban shopping mall.
My first job when I turned sixteen was at Spencer’s Gifts in the Eastview Mall, where I earned $3.35/hour stocking shelves with tacky gag gifts, NSFW t-shirts, and lava lamps. I also got an early lesson in petty tyranny enforcing the age limit on ear piercing.
While reminiscing about the old days, my mom shared that my 12-year-old nephew loves Eastview Mall today, but she complained that a new store, the Exotic Snack Factory, is a big problem. The store is a carnival of bright colors with a mind-boggling variety of unusual goodies like Wagyu steak-flavored potato chips (from China), Red Velvet Oreo cookies (Korea), and garlic shrimp Doritos (Taiwan). My nephew loves it. But here’s Grandma’s issue: no price tags.
Weird, I thought. A store without prices is exploitative in at least two ways.
Charging overly-high prices. Any seller deliberately hiding prices does not want customers to be able to make informed decisions or easy comparisons, which inevitably must mean prices are higher than in an open competitive market with full information. Grandma is pretty sure that the Exotic Snack Factory is price-gouging, and she’s almost certainly correct.
Stoking price-insensitive demand. The only way to find out what an item actually costs is to check out. The store is likely counting on children picking a snack and then the purchasing parent/grandparent not wanting to disappoint – or spark a tantrum – by just paying whatever it costs. My nephew isn’t paying, he just wants the Skittles Giant Crazy Sour Big Pouch (United Kingdom). And Grandma doesn’t want to make him put it back. She’s annoyed that the store is exploiting powerful maternal guilt by hiding prices, and she’s right.
All of this snack talk brought my energy nerd brain immediately to electricity. I’m still bemused that power purchase agreements (PPAs) – the core contracts behind all private power plants built to provide an essential public service – are kept secret in many emerging markets. I think the same exploitative dynamics of the Exotic Snack Factory’s concealed prices are also at play with power markets.
Secret power contracts guarantee higher prices. Whether it’s electrons or Masala Tadka Pringles (India), price disclosure encourages competition. When a PPA is signed, it usually means a utility will pay the generating company a publicly-guaranteed price over twenty or more years. When the pricing formula is hidden, we may not know who exactly is benefitting from opacity, but we can be confident it’s not consumers or taxpayers. Extreme real-time price transparency in Texas wind markets, for example, has been a massive driver of lower prices. (Yes, yes, Texas has other power market problems, but lack of price competition is not one of them.) A similar wind farm built in Kenya or Indonesia would be negotiated behind closed doors and the prices kept secret, which inevitably means less competitive pressures – and thus higher prices.
Scarcity of supply creates price-insensitive demand. If a country has a massive shortage of power – dumsor in Ghana or Stage 8 load shedding in South Africa – officials are likely to be less concerned about prices and more worried about just getting the juice flowing. But emergency power always, always, always costs more. And a population that’s angry about power outages cares less about what the government agrees to pay. They just want the damn lights back on. Like Grandma at the snack shop, politicians don’t want to disappoint voters or spark protests, so they overpay.
Secret pricing ultimately hurts consumers and taxpayers in countries like South Africa, Ghana, and other countries by driving up prices and removing information that could help decision makers be more discerning. Closed markets also likely deter some investors, especially those that only want to operate in an open environment with clear rules and known prices. Higher prices and a narrow investor pool are obviously bad for countries who want more and cheaper power to drive economic development and job creation.
And there’s a larger cost to the world of secret electricity contracts: slower clean energy deployment. The International Energy Agency says the world needs to build 1,000 GW of new clean power capacity every year, much of it in fast-growing emerging markets. There’s literally zero chance this can be done if every contract is written from scratch, negotiated in secret, and the prices are shielded from the public.
It doesn’t have to be this way. The private firm LevelTen Energy, working with Google, has built a platform using standardized contracts with open competition to drive down both prices and negotiation times to just eight weeks (!) for corporate PPAs in North America. I hope that officials in Pretoria, Accra, and Jakarta might learn from these market-altering advances and see how transparency can help their power markets grow faster and more affordably.
The lack of price tags makes Grandma want to avoid that part of the mall because she’s averse to being exploited by the Exotic Snack Shop. It would be tragic for the world if similar price secrecy kept billions of people from enjoying the benefits of modern cheap electricity.
Transparency would fix this. And transparency doesn’t need a price tag because it’s free.