Latest / The Fiscal Policy Podcast with Fexingo: Government Budgets, Stimulus, and Public Spending / How the US Government Overpays for Electricity
Transcript
- Lucas: So the federal government spends about six billion dollars a year on electricity. That's roughly what it costs to run the entire Department of Homeland Security for a year. And yet, according to the Energy Information Administration's own data, the government pays on average about twenty percent more per kilowatt-hour than a typical commercial office building. Luna: Twenty percent more? That's like walking into a grocery store and paying a dollar twenty for a dollar item. How does that even happen? Lucas: There's no single culprit. It's a mix of how the government buys power, how it bills itself, and some incentives that are actually misaligned with saving money. Let's start with the basics. When a federal agency needs electricity, it doesn't usually go out and negotiate with the local utility. A lot of that purchasing is handled by the General Services Administration, the GSA, which runs the federal real estate portfolio. Lucas: Now, the GSA negotiates contracts on behalf of agencies, and in theory, that should get them volume discounts. But in practice, many of those contracts are locked in for years, sometimes a decade or more, at rates that don't reflect what the market is doing. So when natural gas prices drop and wholesale electricity dips, the government is still paying yesterday's rate. Luna: So it's not that they're bad at negotiating, it's that they're not renegotiating. Kind of like being stuck on an old cell phone plan because you forgot to switch. Lucas: Exactly. And there's a second layer. Many federal buildings are metered in a very coarse way. Instead of tracking usage hour by hour, they might get one flat bill for an entire campus. That means they have no idea which buildings are energy hogs, and no financial incentive to fix them. If you can't see the waste, you can't cut it. Luna: And I imagine the people who work in those buildings aren't the ones paying the bill, so they don't really care. Lucas: Right. The person who makes the decision about whether to replace an old air conditioner or install LED lighting is often not the person who sees the utility bill. That's a classic principal-agent problem. The Department of Energy actually estimated that the federal government could cut its energy consumption by twenty percent just through cost-effective measures, but the upfront capital is hard to find. Lucas: Because the budget process rewards spending money on programs, not saving money on electricity. If an agency saves a million dollars on energy, that money goes back to the Treasury, it doesn't stay in the agency's budget. So there's no real reward for being efficient. Luna: That's nuts. So you're telling me the person who could save money has no reason to save money. Lucas: Precisely. And the perverse incentives don't stop there. There's also the renewable energy credit market. The government has this goal of powering federal facilities with a certain percentage of renewable energy. So agencies buy renewable energy credits, or RECs, to claim that green power. But those credits can be bought separately from the physical power, sometimes for pennies on the dollar. Lucas: So a building might be, say, a federal office in Washington, D.C. It pays a premium for RECs to say it's offsetting its carbon footprint, but the actual electricity it consumes is still coming from the local grid, which might be mostly coal or natural gas. The agency gets its green trophy, the ratepayer gets a higher bill, and the planet doesn't see a meaningful difference. Luna: So it's kind of a feel-good purchase that doesn't actually change where the power comes from. Lucas: Exactly. And some of these REC contracts are priced way above what they're worth on the open market. I've seen examples where the federal government paid two or three times the market rate for RECs, just to hit a compliance target. That's taxpayer money going to subsidize something that is, at best, a paper transaction. Luna: It sounds like the problem isn't just waste, it's that the system is designed to reward the wrong things. Lucas: That's the real story. And it's not just about electricity, it's about how the government thinks about any operating expenditure. But let's stay on energy for a second. There are a few things that could actually change this. The GSA has been talking about moving to aggregated purchasing, where you bundle electricity buying across multiple agencies in a region to get better rates. Lucas: They've also started to push for smarter metering, so that buildings can actually see their real-time usage. And there's this idea of performance contracting, where a private company fronts the money for energy efficiency upgrades and gets paid back from the savings. That gets around the upfront capital problem. Luna: So there are fixes. But do they actually work in practice? Lucas: There have been some pilots. The Navy, for example, has saved tens of millions on a few bases by doing exactly this. But the scale is tiny compared to the total federal footprint. And here's the thing, the savings are real, but they're not huge in the grand scheme of the federal budget. We're talking maybe a few hundred million dollars a year out of a six trillion dollar budget. Lucas: It's not going to balance the budget. But it's the principle. If the government can't manage its own energy bills, how can it credibly set energy policy for the rest of the country? Luna: That's a good point. And I think that's why this matters beyond just the dollars. It's about whether the government can run itself efficiently. Lucas: Absolutely. And it ties into a broader issue we've talked about on the show before, which is that the federal government is really bad at paying attention to its own operating costs. It's like a giant household that never looks at the utility bill because the money just comes out of a shared account. Lucas: And you know, it's funny, we talk about these things on the show, and a couple of listeners have written in saying, hey, this kind of stuff is why I support the show. It's not the flashy stuff, it's the small, concrete examples of how the system actually works. Luna: Yeah, I think people appreciate the nitty-gritty. It makes the abstract feel real. Lucas: Totally. And if you've gotten something out of these episodes, honestly, a couple of dollars a month is genuinely what keeps these going. You can do that at buy me a coffee dot com slash fexingo. It's a small thing that makes a real difference for us. Luna: Yeah, we appreciate that more than you know. And every little bit helps us keep the lights on, no pun intended. Lucas: Ha, right. Anyway, back to the energy story. So one of the most interesting recent developments is that the GSA has been testing a new approach where they actually buy electricity on the spot market in a few regions, rather than signing long-term contracts. Lucas: The idea is that with real-time pricing, agencies would naturally shift their usage to when power is cheaper, like overnight or on windy days. But it's a tough sell because it introduces a little more financial risk, and the federal bureaucracy is not known for embracing volatility. Luna: Right, because no one wants to be the one who explains why the energy bill went up one month, even if it averages out cheaper over the year. Lucas: Exactly. And that's the crux of the problem. The incentives are all backward. The people who make the decisions are penalized for taking risks, even when those risks would save money over the long run. So they stick with the comfortable, expensive path. Luna: So what's the one thing you'd tell a friend about this topic? Like, what's the takeaway? Lucas: I'd say this: the federal government spends billions on electricity, and it overpays by about twenty percent because it doesn't shop around, doesn't meter properly, and has no incentive to save. A few small changes could save hundreds of millions a year, but the bureaucracy just doesn't move that way. Lucas: And if you think about it, that's kind of a metaphor for a lot of government spending. It's not that people are corrupt or lazy, it's that the system was built for a different era, and no one has the power or the motivation to change it. Luna: So, next time you see a government building with the lights on at two in the morning, you know why. Lucas: Partly, yeah. But also, some of those lights are on for security reasons, and that's a whole other conversation. But the energy waste is real, and it's measurable. Lucas: I think the bigger question is, when will we start treating the government's own operations with the same scrutiny we apply to private companies? Because at the end of the day, the taxpayer is the shareholder, and they're getting a pretty poor return on this particular investment.