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Mucking Up America’s Competitive Electricity Markets

With or without Bernie Sanders, America’s market-based approach to electricity generation and distribution is taking a beating. Today, we are in danger of losing the system that has made electricity quite reliable and affordable.

Sanders wants to bludgeon the market-based approach by launching the Green New Deal and spending $16.3 trillion. One objective is to put the federal government front and center in electricity generation, until private operators are crowded out. Other activists prefer making a thousand cuts on the market-based system and have been doing so for years.

An upheaval in the electricity markets would be especially troublesome for energy intensive industries like manufacturing — and tens of millions of consumers literally struggling to keep the lights on.

To be sure, electricity generation and distribution require regulation and has never been a pure “free market.” Government programs, for example, were essential to bringing electricity to rural America.

Electricity is also a pre-requisite to modern living. Without it, there are significant threats to human health and safety. There are also major efficiencies that come from scale. All this augurs for a system of regulation to ensure competitive prices and that the power nearly always stays on. The system has worked well for decades.

Today, though, there is growing chasm between what electricity should cost and what it does. Natural gas, the benchmark fuel for determining electricity costs, has fallen by more than 50 percent in the last two years.

Yet, the U.S. Energy Information Administration reports that consumers’ electricity bills have risen by an average of 1.5 percent from December 2017 to December 2019.

State energy policies are a major culprit, particularly because a growing number of elected officials want to determine the power sources for generation. Techniques for boosting renewable energy projects, and burying the costs, include:

¯ Transmission grid improvements that will principally benefit renewal projects without explicitly saying so.

¯ Power purchase agreements with state entities that will provide above-market prices for solar and wind power, often for years.

¯ Opaque fees on electric bills that will direct money to renewable energy programs.

One of the functions of a regulated electricity sector is to ensure that there will be enough electricity when demand is highest and system emergencies arise. A system known as capacity markets solves this challenge.

With capacity markets, generators provide bids for electricity that they will deliver at a given date in the future. It is imperative that the power be provided and provided consistently.

Wind and solar power are intermittent sources. As such, they do not lend themselves well to being in the capacity markets as they cannot generate power 24/7. Yet, numerous states have sought exemptions to have these power sources included in capacity markets, which are regulated by the Federal Energy Regulatory Commission.

Capacity markets are also essential to grid reliability because they signal where and when capital investments should be made. If these markets are corrupted, the very reliability of the electric grid itself is at stake.

FERC, which has statutory authority for ensuring electric grid reliability, has recently issued orders that will require New York and the 13 states in the PJM Interconnection transmission network to better take into account the subsidies renewable power sources receive, as well as the intermittent nature of wind and solar.

On February 20, FERC struck down attempts by New York to get exemptions for renewable power sources, so it could be significantly involved in the capacity markets.

All this augurs for greater clarity in the electricity markets.

Wind and solar advocates have been clamoring that the price for this power has fallen dramatically, largely because of recent engineering innovation. It is time for these power sources to enter the market, without subsidies, which have been widespread for the past 10 years.

If they still cannot compete without subsidies, there is still a path forward for renewable power. State governments, if they dare, could impose a carbon tax. This would be a work around to FERC’s rulings. It would also provide much greater clarity to people and businesses about electricity costs.

While carbon taxes have been extremely unpopular politically, the steps taken to incubate renewable energy have been expensive and degraded competitive markets.

It is time for state activists to come clean on their audacious goals, and live with the consequences, up or down. After all, Bernie Sanders is doing that.

Paul Steidler is a Senior Fellow with the Lexington Institute, a public policy think tank based in Arlington, Virginia.

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