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Competitive Electricity Markets Deliver Economic, Environmental Benefits

American families continue to feel the economic pain of inflation as levels jumped at the highest pace in over a year, driven in large part by higher prices at the pump. When energy costs go up, consumers are hit multiple times over as energy is a central driver in food production, transportation, and electricity generation. There are practical steps that lawmakers can take to reduce energy costs. A recently released report from Michael Giberson and Devin Hartman of the R Street Institute titled, “Electric Paradigms: Competitive Structures Benefit Consumers,” outlines how increasing competition in electricity markets can help consumers by lowering prices and increasing reliability. 

>>>READ: Were Competitive Electricity Markets and Renewables to Blame in the Texas Blackouts?

Electricity markets are regulated at a state-wide or regional level. Prior to the 1990s, all electric power consumers were served by vertically integrated monopoly utilities, which meant that utilities owned the generators and power lines in their respective states. In protest to increasingly higher electricity prices, state legislatures started passing legislation to break up these monopolies and introduce a more competitive electricity market model. 

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Roughly one-third of U.S. states, many of whom are in the southeast, still use the traditional vertically integrated model. In these states monopolies must have their electricity rates approved by the state’s public utilities commission in order to keep costs fair for consumers. However, tradeoffs exist in this structure. For instance, utilities must receive state approval for power plant investments which can allow politics to slow down the pace of innovation. In these states ratepayers are also on the hook for the cost of new investments as utilities can make up a loss in profit by charging higher rates. 

In states that embraced restructuring, Regional Transmission Operators (RTOs) replaced monopolies to allow for more consumer choice. Under this structure, RTOs purchase electricity at wholesale market prices—which are usually determined on a day-to-day basis—and sell electricity to generators who sell it to consumers.

Eighteen states still use the traditional model of monopoly utilities, nineteen use a hybrid model where regulated monopolies serve most or all consumers and own power plants that participate in wholesale markets, and thirteen states and Washington D.C. allow for full competition among retail services and power plant owners.

According to R Street’s report, increasing competition in electricity markets has bolstered reliability, lowered costs, and reduced emissions. 

While quantifying competition’s effect on reliability can be hard, the R Street study finds that market restructuring has helped improve reliability: 

RTOs have superior situational awareness, scale and tools to operate systems reliably. RTO operations use an integrated, region-wide look at generator and transmission availability in real time, coupled with contingency plans to help ensure that the system will remain in service in the case of an unexpected loss of a generating unit or a power line. The organized markets operated by RTOs further enhance operational reliability and provide incentive for reliable behavior among market participants…Given changes in technology, evidence supports the increasing reliability and economic advantage of competitive markets over traditional practices like IRP.

Cost saving for consumers and businesses is also one of the largest advantages that competitive electricity markets offer. According to R Street: 

The evidence on wholesale power markets shows that competition has promoted efficiencies in generator operations and in investment and retirement decisions. Restructuring has allowed investors to make investments with lower costs and rates of return than monopoly utilities while transferring the risk from ratepayers to investors…Investors had to make wiser decisions based on fuel prices, demand, environmental regulations and technological advances. By contrast, monopoly utilities kept investing in some uneconomic facilities—three of them alone have cost consumers tens of billions of extra dollars.

Still, as R Street’s and other studies have shown, smart policy and implementation are needed for the economic advantages of electricity market restructuring to be realized. In New England, for example, the price of electricity has risen after restructuring while costs in Pennsylvania and Texas have decreased to more accurately reflect the price of natural gas. One reason for this is that localities and states in New England have placed restrictions on pipelines and other natural gas infrastructure, making it harder and more expensive to deliver power to consumers. 

In other restructured states where prices have increased, the costs have been associated more with environmental compliance, labor costs, and transmission services rather than generation and retail services, according to the report. 

>>>READ: Texas Grid Proposal Should Bolster Reliability, Protect Consumers

Electricity market competition also delivers environmental benefits. One study has found that between 2005 and 2019, RTOs were able to reduce their carbon emissions by 35% whereas non-RTOs were able to decline emissions by 27%. Free, competitive markets are able to adapt and accommodate newer, cleaner technologies. Monopoly utilities on the other hand are less likely to take risks and incorporate emerging energy sources into their portfolio. 

R Street’s report provides several recommendations to improve the implementation of electricity market restructuring. Included among these are improving retail market oversight, adopting market-compatible environmental policies, and increasing the availability of consumer usage data. 

As the U.S. looks to meet future electricity demand while keeping costs low for consumers, state legislatures should consider ways to incorporate more competition into respective energy markets. 

Read the full report here.

The views and opinions expressed are those of the author’s and do not necessarily reflect the official policy or position of C3.

Copyright © 2020 Conservative Coalition for Climate Solutions

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