Fixing the Power Grid through Open Markets and New Technologies

The electric power system makes our modern, mobile, information-age economy possible. But it is organized in much the same way it was in 1884, when Thomas Edison created the first system of power plants to light up homes and businesses in lower Manhattan. By way of comparison, the iPhone, which is the spiritual descendent of the telegraph, packs more computing power in a user’s pocket than mainframes that once filled entire rooms. Meanwhile, the electric system is still built around central generating plants delivering power to customers via a monopoly provider—the local utility company.

In most segments of the U.S. economy, market competition drives prices lower, delivers innovation faster, and gives consumers more choice. But in the electricity system upon which all our modern devices depend, competition has come slowly and fitfully. We could do better with more of it.

On that point, our two organizations—one, a national business association of advanced energy companies, and the other, a pragmatic, free-market think tank—can agree. We hope that President Donald Trump and the individuals he is due to appoint to the Federal Energy Regulatory Commission (FERC) will agree, as well, and that they will take action.

The United States began down the path toward free and competitive electricity markets in the 1990s. A number of states “deregulated”—more accurately, restructured—their electric power systems by requiring monopoly utilities to sell off their power plants and letting them maintain their exclusive franchise only for the delivery of electricity (i.e., managing the poles and wires that connect to homes and businesses). Thereafter, owners of existing power plants and developers of new ones would compete in open markets to deliver electricity at the lowest price.

The federal government, through FERC, organized these wholesale electricity markets at the regional level, establishing nonprofit entities called regional transmission organizations, or RTOs, to manage a power grid fed by competing power plants. The idea was that private investors would build and operate power plants, and competition between these independent power producers would drive down costs, increase efficiency, and spur innovation. Competition also would free ratepayers from the risk that power plants built by their regulated utility would become outmoded and inefficient, shifting that risk to private investors.

The Enron-driven electricity crisis in California largely stopped the restructuring trend, despite remedies that can prevent such problems from reoccurring. Still, RTOs continued to expand, as some monopoly utilities joined to share grid-management responsibilities. Today, two-thirds of the electricity generated in the United States is sold in the seven operational RTO markets.

What’s more, competition has worked. The RTO serving the Midwest—the Midcontinent Independent System Operator—estimates the region has realized $12.2 billion to $16.8 billion in cumulative savings from 2007 to 2015. A new study from the University of Chicago found organized power markets save about $3 billion annually in generation costs. These markets have helped spur innovation by sending price signals to invest in new, competitive resources. But even these markets are not as competitive as they could be, and, as a result, consumers are losing out.

Organized more than two decades ago, and based on the energy sources of the day, the rules governing RTO markets have not kept up with rapidly changing technologies. Today, market rules designed for a system based on large, central power plants present barriers to competition for alternatives like demand response (that is, paying customers to reduce their electricity use during times of peak demand); distributed solar; fuel cells; and energy storage—all technologies and services we call “advanced energy.”

Getting competition right is even more important today. The electricity infrastructure upon which we all rely has grown old and fragile. We need to modernize the power grid to meet new demands for reliability and resiliency, as well as the new services that technology makes possible. The American Society for Civil Engineers recently gave our energy infrastructure a D+ rating.

That speaks to the need for improvement. But what kind of improvement? If advanced technologies are shut out because they don’t look and act like old-fashioned power plants, we merely will rebuild the electricity system of the past, instead of creating an electric power system for the future.

FERC is duty-bound by statute to ensure that prices set by RTOs are “just and reasonable and not unduly discriminatory or preferential.” The commission has begun to recognize the situation, proposing a new rule to eliminate technology biases in RTO market rules for two sets of advanced-energy technologies: energy storage and aggregated distributed energy resources.

That’s a strong start. But consumers will not reap the full benefits of competition in electricity—including lower costs and innovation to make the grid more reliable, resilient and efficient—until these markets are completely open to competition between all available technologies. Let’s make it happen.

Eli Lehrer is president of R Street Institute, a free-market think tank. Graham Richard is CEO of Advanced Energy Economy, a national business organization.

This post originally appeared on Weekly Standard


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