Climate Goals and Renewable Deployment Need Competitive Electricity Markets

As the U.S. joins the rest of the world in fighting climate change, it will be critically important that power generators continue integrating renewable energy into their portfolios. The challenge is to balance the variability that solar and wind power introduce while minimizing carbon-intensive generation. Monopoly utility models are not built to do that. Competitive electricity markets are the best way to integrate renewables— including distributed generation—and deliver affordability and reliability to American customers. Fortunately, the Biden White House’s July 9 executive order recognized the broader principle to prioritize competition, and directed agencies across government to implement policies that ensure competition. The order stated, “for consumers, [competition] means more choices, better service, and lower prices.”

The rationale should be obvious. Monopolies aren’t incentivized to develop new technologies and cost-effective generation infrastructure. Instead, monopoly utilities are driven primarily by their guaranteed rate of return on existing investment. In the past, that model may have been good for Wall Street. Rarely did it create the best outcomes for customers or our climate change objectives.

Recently, nine former Federal Energy Regulatory Commission (FERC) regulators sent a letter to the FERC arguing that competitive grid operators, known as regional transmission organizations (RTOs) and independent system operators (ISOs), are the best platforms to develop renewable energy sources and ensure optimal consumer benefits. Large-scale, organized wholesale markets allow the economies of scale to send the right signals to provide the least-cost, customer-centric approach to a low carbon or zero-carbon electrical grid.

Fighting climate change requires competitive markets operating at scale. That is where RTOs and ISOs come in. Typically RTOs and ISOs dispatch energy across several states, enabling them to integrate renewable resources with variable output, including solar and wind while lowering emissions. In fact, the former FERC Commissioners cited that “more than 80 percent of renewable generation has been deployed in the organized market regions, and emissions are falling faster in such regions.” The competitive market model creates incentives to adapt to technological trends and customer preferences, including more renewables.

The outcome? Competitive markets reward innovation and deployment of new products. Consider that one of the nation’s largest grid operators, PJM, saw carbon emissions drop 39 percent between 2005 and 2020 because of more efficient technologies. New York’s competitive market experienced a 52 percent reduction in carbon emissions over the past two decades as price signals encouraged efficiency. Some advocates for utility monopolies have attempted to dispute this argument with cherry-picked data alleging the opposite. However, unbiased data from PJM and NYISO provide an accurate picture.

Wind power plants are pictured
Wind power plants are pictured.

Monopoly models offer a different story, mainly because they are based on maximizing capital expenditures. As Pacific Research Institute economist Wayne Winegarden recently explained in Forbes, “Businesses operating on a cost-plus business have no incentive to implement innovations that will reduce customers’ costs or improve service – in fact, the easiest way to earn revenues is to operate with bloated costs and then apply a percentage margin to this unnecessarily large cost structure.”

Examples of this point abound. In Mississippi, Southern Company undertook a multibillion-dollar “clean coal” technology project in Kemper County, only to see significant delays and costs that ballooned from $2.4 billion to $7.5 billion. Reportedly, top executives knew of construction problems and design flaws years before the project collapsed and instead presented a rosy picture of Kemper’s prospects to the public. They even used political influence to ensure a $1 billion rate hike for construction costs. Without decisive action from state regulators, customers, rather than Southern Company stockholders, could have been on the hook for more than $3 billion.

Further east, a project to bring nuclear energy to South Carolina shared a similar fate. The project, a joint venture between Southern Company and SCANA, was supposed to cost about $14 billion. However, delays from accounting errors to poor management led SCANA to bankruptcy in 2017, even though SCANA’s misleading of the public allowed it to sell more than $1 billion in bonds and boost its stock price. In the end, consumers were left to pay $9 billion for an unfinished project. It was customers, not their monopoly providers, who suffered, as the risk was shifted away from investors to a public with no choice.

This is not to say that competitive markets ensure mistake-free power generation, distribution and a cleaner environment. They enable the application of data technology at scale to improve the efficiency of electricity production while facilitating consumer demand for more renewables. In this regard, we can learn from Europe through increased cooperation with the European Network of System Operators for Electricity (ENTSO-E). European operators have had extensive experience with incorporating renewables into their grid—and we should learn from that.

We will need to grow renewables to win on climate change, and we need competitive electricity models to get there. It is time to transition from obstructive monopoly models and adopt competitive electricity marketplaces that meet the future head-on with innovation and customer-centered solutions.

Richard D. Kauzlarich is a former U.S. ambassador and the co-director of the Center for Energy Science and Policy and distinguished visiting professor at George Mason University’s Schar School of Policy and Government.

The views expressed in this article are the writer’s own.

Read More: Climate Goals and Renewable Deployment Need Competitive Electricity Markets

2021-07-22 12:00:01

Notify of
Inline Feedbacks
View all comments