The Fiat Standard and the American Electric Grid
A Feedback Loop of Fragility
Fragility in RTO/ISO Grids
In Shorting the Grid: The Hidden Fragility of Our Electric Grid, author Meredith Angwin argues that the Regional Transmission Organization (RTO) and Independent System Operator (ISO) market regimes in the U.S. electric utility sector have several fundamental flaws that make the grid fragile and expensive.
For simplicity, RTOs and ISOs are collectively referred to as RTOs for the remainder of the text.
RTOs were created to break up vertically integrated utilities (VIUs), which operated as monopolies in their service territories and were able to amortize the cost of their assets over time by passing it down to the customers who were price sensitive and would complain if costs increase too much. If these utilities failed to provide stable and reliable service at a reasonable cost. Therefore VIUs had to be far more conservative with their business decisions. VIUs owned almost all parts of the electrical system—from the power plants to the substations and the transmission and distribution lines. So for example, if you were served by Alpha Power, that entity owned all these assets.
As Angwin explains in Shorting the Grid policymakers thought that more competition in electricity generation via auctions would lower costs and make the system more efficient. So, they pushed for “deregulation” to break up the monopoly power of VIUs and create a what was supposed to be a more open market. After the Enron debacle, the desire to create RTOS inspired by earlier deregulation of telephone and airline industries went into overdrive. In the case of Alpha in an RTO regime, they might still own generation but you the Alpha Power customer might not necessarily receive electrons from an Alpha generating station. Alpha’s generation side of the business has to operate separately from the rest of their business and sell those electrons on a market with competing generators, perhaps from Beta Power or Gamma Power.
But the modern RTO is packed full of insiders who make decisions that benefit them, their investors, and their wallets instead of decisions which benefit the actual electricity end users. Angwin compares the situation to the Big Short and the speculation that was behind the US housing market that led to the 2008 Great Recession.
In many areas of the country, but especially in RTO areas, power installations that can operate only intermittently, such as solar and wind installations, are the sure bet for becoming wealthy. In the mortgage situation, the intrinsic value of the mortgage didn’t matter. In the RTO area, the value of the power produced doesn’t matter. As a matter of fact, less-valuable power is more profitable. Trouble is sure to come, and it is on its way.
In the years leading up to the 2008 Great Recession, the actual value of homes and mortgages was ignored in favor of speculative trading. Banks and investors focused on financial products that promised quick returns without considering the stability or real value of the underlying mortgages. Mortgage-backed securities were based on risky loans, supported by loose monetary policies (set by the Federal Reserve) and government (and bipartisian) push to expand homeownership.
There are unique unique challenges of running an electric grid, which actually needs constant balance between supply and demand. This restructuring to the RTO regime meant that legacy investor-owned utilities (IOUs) had to sell power from their generating stations on an open market via auctions instead of selling directly to customers. It might sound like a free-market solution on paper, but it’s been far from that and it’s brought about a lot of unintended consequences. The RTO insiders managed to capture state and federal regulatory bodies with the same predictable outcome: benefits for them and their buddies at the cost of the end users who often aren’t able to understand or navigate such a the complex web without either spending significant time learning how it works or by picking up a book such as Shorting The Grid.
Angwin contrasts the difference between old and new in the first few pages of Shorting The Grid:
In the old days, regulatory bodies wanted to see a grid with reliable power plants and, hopefully, plants that used several different types of fuels. A varied grid meant that, if one fuel had shortages or rose in price, the grid would still be stable, and cost would remain relatively stable. In current grid governance, none of these things matter. In many areas, power plants that make steady, reliable power can’t make a profit. Several large utilities are trying to sell or shut down their nuclear, gas, and coal plants in these areas. These utilities plan to operate plants only in other parts of the country.
Angwin also notes that RTOs weren’t built with reliability as the main focus.
IN THE RTO AREAS, no group or agency has the responsibility for grid reliability. This agency can do a little of this, and that agency can do a little of that, but no agency is charged with ensuring reliable power. No agency is in charge of ensuring that there are enough power plants and power lines to keep the grid operating.
In other words, nobody at the end of the day is legally responsible for gaps in reliability or price increase.
This shift in focus, from making sure the grid is reliable to making it more “market-driven” (in name only) has led to a lot of issues for grid stability. The RTO model created financial incentives that often prioritize short-term gains over long-term reliability.
The RTO regime rewards financial tactics that seek quick profits rather than stable energy generation. For instance, subsidized renewable energy sources such as wind and solar can bid into the market at zero or even negative prices because of government subsidies, which pushes out reliable baseload power from hydrocarbon and nuclear plants with the former trying to be regulated out of existence and the latter in a virtual freeze in expansion thanks in part to high regulations and a societal misunderstanding of the safety of nuclear energy. State and federal renewable energy mandates along with a dominant political ideology demanding humans reduce carbon dioxide output to “net zero” under the belief this will prevent or reverse what they see as catastrophic climate change are the primary sources for the “demand” of these unreliable and ultimately expensive sources of energy.
Berkshire Hathaway owns and operates several utilities across the country and its CEO Warren Buffet even admitted to the game.
As a result, Berkshire Hathaway’s federal tax burden over several years was in the negative due to their losses, all subsidized by taxpayers and the money printer.
Dispatchable/baseload energy sources (those that can be turned on when needed) aren’t compensated enough for their reliability under an RTO regime, which makes the grid increasingly dependent on unreliable, intermittent sources such as the ones Buffet’s businesses have been installing all over Berkshire Hathaway’s subsidiaries.
In the same way, RTO regimes ignore the real value of electricity generated in favor of complex financial instruments focused on short-term profits. Just as subprime mortgages were bundled and sold, renewables are propped up by subsidies and policies that hide their real worth to the grid. This financialization distorts the market, making it harder for reliable power sources like hydrocarbons and nuclear to compete, which ultimately weakens the stability of the system. The result? A fragile energy market that puts reliability in the backseat to make room for financial maneuvering—just like what happened with the housing crisis.
But where did all this nonsense ultimately originate?
That’s not a question answered directly in Shorting The Grid which is already over 400 pages long. It’s by no means any shortcoming of the book either as Angwin is likely the only person whose single-handedly explained the complex tentacles of the RTO regime and she did an excellent job at it.
Fortunately, there are others out there who’ve figured it out.
The fragility and backroom shenanigans of RTO-managed grids draws parallels to the fragility and backroom shenanigans of the fiat money system and that’s because they’re one in the same.
Fiat Money and Time Preference
Fiat-money! Let the State 'create' money, and make the poor rich, and free them from the bonds of the capitalists! How foolish to forego the opportunity of making everybody rich, and consequently happy, that the State's right to create money gives it! How wrong to forego it simply because this would run counter to the interests of the rich! How wicked of the economists to assert that it is not within the power of the State to create wealth by means of the printing press! - You statesmen want to build railways, and complain of the low state of the exchequer? Well, then, do not beg loans from the capitalists and anxiously calculate whether your railways will bring in enough to enable you to pay interest and amortization on your debt. Create money, and help yourselves.
— Ludwig von Mises, The Theory of Money and Credit
Most people probably think of the dollar as just that - a dollar. “Backed by the Full Faith and Credit of the United States,” some will, while others will say “as good as gold.”
But the dollar is far from that.
Fiat money such as the US Dollar isn’t backed by anything at the end of the day; it gets its value just from government decree. The U.S. officially moved to a full fiat standard in 1971 when President Nixon “temporarily” took the dollar off the gold standard to avoid default with US trading partners under the Bretton-Woods agreement.
Before that, the dollar was tied to gold and any dollar minted or printed could be redeemed in gold which was set at a steady $35.00 per ounce for decades in the shadow of the Bretton-Woods Agreement. This convertibility of US dollars and reserves to gold at almost any time (except for US citizens, which thanks to FDR could not possess gold bullion) acted as a check on how much money the US could print. But with the gold link gone, it became easy to just print money and spend without directly taxing people.
This switch allowed the government to fund popular (yet unsustainable) social programs, wars, and deficit spending without worrying about the long-term consequences all while hiding the costs under rampant inflation and depreciation of the dollar. The result was a system where resources are often misallocated because price signals get distorted—just like what happened in the housing market before the Great Recession. In energy markets under RTOs, subsidies and mandates distort prices, making renewables seem cheaper than they actually are, while undervaluing steady, reliable baseload energy. This leads to a shaky grid that can’t keep up with real energy demand.
Centralized control under the guise of “experts,” another hallmark of fiat systems, brings inefficiencies, and we see the same thing with RTOs and renewable energy mandates. These mandates enforce rigid rules that prevent market-driven solutions, even as electricity demand keeps rising, especially with pushes to electrify more parts of our lives such as transportation, cooking, and the heating and cooling of buildings. Those who are pushing for full electrification also want to see heavy industry switch their energy intensive processes to use only electricity. Instead of focusing on energy reliability, the system leans into political agendas.
Besides, nothing says “reliable power supply” like endless red tape and political meddling.
The above commentary on fiat money is barely even striking the tip of the iceberg. The downstream effects of the fiat standard, which doesn’t just exist in the United States is vast. Perhaps the most popular, most successful, and in the opinion of this author, there’s one person whose efforts to explain these effects of the fiat standard just as well as Meredeth Angwin explained the RTO regime in Shorting the Grid is Saifedean Ammous.
Saifedean Ammous, initially famous for his best selling book The Bitcoin Standard: The Decentralized Alternative to Central Banking wrote a second book called The Fiat Standard: The Debt Slavery Alternative to Human Civilization where he talks about the fiat money system often prioritizes short-term political wins over long-term stability. Ammous argues the fiat standard of money and its negative side effects infiltrate almost everything in society from agriculture, diet, architecture, the family and to science and academia. Jimmy Song takes this even further with his book Fiat Ruins Everything: How Our Financial System is Rigged and How Bitcoin Fixes It.
The two may sound nuts for trying to blame almost everything under the sun on what to most people is a dorky economics topic but both base their arguments in solid economics - the Austrian school - not the silly yet popular Keynesnian “animal spirits” school which is the dominant school of economics today.
One of the key concepts Ammous discusses in all three of his books is time preference - a prominent topic in Austrian economics. In a fiat system, high time preference behavior is encouraged—meaning people are more focused on short-term gains rather than long-term stability and sustainability. With easy access to unlimited printed money, there’s no real incentive to think about the future because it’s always easier to borrow more or print more to satisfy current needs. The same thinking seeps into energy policy especially under RTO regimes. Politicians and energy planners are incentivized to focus on quick wins—for example building lots of wind turbines or subsidizing solar panels to meet renewable mandates—without considering the long-term impacts on grid reliability. It’s all about looking good today, even if tomorrow’s energy grid is held together with duct tape and prayers.
Ammous makes it clear that a low time preference society—that is, one that values future stability—requires sound (non-fiat) money and sound economic policies. This is the opposite of what happens in a fiat system, where short-termism runs rampant. The RTO market, propped up by subsidies and mandates, is a perfect example of high time preference in action. Instead of investing in stable, reliable baseload power that would benefit future generations, the system incentivizes flashy, politically popular projects that generate good PR or “save the world” but do little for long-term stability. Renewable energy mandates and RTO regimes fit this description perfectly—they’re driven more by political narratives than by market realities, which leads to poor use of resources. The “fiatization” of energy policy has given us a fragile grid that’s prone to disruptions and more expensive for consumers. It’s like building a house on sand and hoping no one notices when the tide comes in. Or kicking the can down the road in hope that someone else sometime later will address the pressing issues.
Energy, Power Scarcity, and Marginal Analysis
Ammous wasn’t done with book writing though.
Last year he published Principles of Economics, a nod to Karl Menger’s 1871 book of the same title.
There he has an entire chapter dedicated to energy.
He writes:
Understanding the role of energy production and utilization is essential to all economic decision-making in the modern world. One cannot understand the economics of the division of labor and capital accumulation without reference to the increased consumption of energy that inevitably accompanies each and without which they would not be possible.
In the same chapter, he highlights that energy, much like trade, capital accumulation, and money (all topics in previous chapter of the book), plays a key role in increasing the quality and quantity of our time which is ultimately the most scarce asset. The increased consumption of energy has accompanied the division of labor and capital accumulation, making these advancements possible.
The Austrian School focuses on Menger’s marginal analysis. Marginal analysis is how individuals make decisions based on the additional benefits and costs of consuming or producing one more unit of a good or service. Austrians also emphasize that value is subjective and determined at the margin—meaning the value of any good is based on the importance of the next unit to satisfy a specific need. The diamond-water paradox, introduced by classical economist Adam Smith and later explained by the Austrian school using marginal analysis, is an excellent example of how value is determined at the margin. The paradox asks why diamonds, which are non-essential for human survival, are valued far more than water, which is essential for survival. Marginal analysis solves this riddle by emphasizing that value depends on the importance of the next unit consumed. For a person with abundant access to water, the marginal utility of an additional unit of water is low, while diamonds, being scarce, have a higher marginal utility. Therefore, even though water is vital for survival, its abundance makes its marginal value lower, whereas diamonds are highly valued because each additional unit has significant subjective worth to individuals. Marginal analysis and subjective value can also provide a powerful explanatory framework for understanding energy markets and their role in the broader economy.
In Principles of Economics, Ammous notes that while energy in its raw form is abundant and not inherently scarce, its value lies in its transformation into a usable form otherwise known as power. Only when energy is directed towards satisfying human needs, thereby becoming scarce, does it qualify as an economic good. He argues that we value power at the margin just as we do with any other economic good, meaning we value each additional unit of power for its contribution to satisfying our needs. Thus, the economics of energy is deeply tied to the concept of subjective valuation at the margin.
Ammous continues:
Energy’s scarcity lies not in its absolute availability, but in its availability in sufficient quantities when and where it is needed, in the form in which it is needed. Energy in its raw form is not an economic good because it is highly abundant, and because it has very little utility in its naturally occurring levels without being channeled into productive uses, at the margin, as power. In order to operate a car, airplane, computer, phone, loudspeaker, ventilator, or any of the many critical and ubiquitous technological devices of the modern world, a specific amount of energy needs to be directed at the device per second of operation. The economic value that accrues from operating these devices is dependent on this continuous stream of energy entering the machine at the required rate—i.e., the power supply. To the extent that energy provides utility to humans, it does so at the margin, in the form of power.
As humans value goods at the margin, humans value energy in the form of power, the quantity of energy provided per second.
While energy in the form of sunlight, wind, hydrocarbons or nuclear may be plentiful, the challenge lies in accessing and delivering that energy in a useful form and at the right time. This need for timely, directed energy makes power, rather than energy in the abstract, the true economic good. Consumers are not concerned with the absolute amount of energy available globally but rather with how much power they can command to meet their needs at a specific point in time.
Additionally, Ammous draws parallels between the roles of energy, capital, the role and need for private property, and technology in economic productivity. Capital accumulation is often accompanied by an increase in the amount of energy utilized for productive purposes. The technological shift from manual labor to machinery, such as the transition from transporting goods by foot to using cars, exemplifies the importance of power in improving productivity. Increases in energy availability have consistently allowed for higher levels of output, which has fueled economic growth and improved standards of living. Societies with private property rights succeed over societies where private property is deprioritized or does not exist.
Ammous is famous for appropriately pissing on the parade of renewable energy advocates directly challenging their fiat-minded endorsement of these inferior forms of energy. This criticism is ultimately based on their poor ability to be converted to power and their inability to satisfy human needs in their power form. He’s understandably a huge fan of hydrocarbons and to an extent nuclear energy following the intellectual path of energy giants such as Julian Simon and Vaclav Smil.
It is common for promoters of wind and solar energy to argue they are cheaper than hydrocarbons because their fuel is free, since there is no charge for sunshine and wind. But this is a good example of faulty economic reasoning, because it does not analyze decisions at the margins. Marginal analysis can help us understand the irreparable problem with wind and solar energy as alternatives to hydrocarbons. Energy is not purchased in the aggregate or abstract; it is purchased at the margin, in specific quantities at particular intensities over time. Energy is not the economic good; power is.
The Austrian approach emphasizes that energy should be subject to real market price signals to make sure it’s used efficiently. This contrasts sharply with the current RTO system, where subsidies and mandates distort these price signals, ultimately leading to inefficiencies and making the grid more vulnerable. But with RTOs, subsidies for favored “technologies” mess with the price mechanisms too, resulting in too much reliance on renewables and not enough investment in reliable baseload power. This stops the market from doing what it’s supposed to—ensuring a stable and affordable energy supply to meet the demands of modern society.
All these policies—subsidies, mandates for inferior energy, and fiat-style intervention - end up creating a more fragile grid with higher costs and inefficiencies. As Angwin points out, the misalignment in the RTO regime puts grid stability at risk and undermines the broader economy that depends on reliable energy. RTOs, renewable mandates, and fiat money all share a common flaw: they emphasize short-term political gains over long-term economic and technical realities, creating a cycle of intervention, inefficiency, and rising costs that ultimately hurt the reliability of the electric grid.
Instead of fostering a low time preference society that invests in long-term, stable energy infrastructure, the RTO regime encourages high time preference behaviors that lead to a fragile and inefficient energy system. The misguided pursuit of politically driven energy policies has created a grid that is prone to disruption, expensive for consumers, and ill-equipped to meet the demands of modern society. To build a truly reliable energy system, it is crucial to refocus on principles that prioritize stability, efficiency, and long-term value—principles that are directly undermined by the current RTO and renewable energy frameworks.
I propose an analog of Gresham’s Law: “Bad energy drives out the good” and that we call if “Angwin’s Law”
Excellent!