Competitive power markets offer a pathway to deliver reliable power from a mix of all resources that meets customers’ needs while incentivizing cost-savings and innovation through competition. Policymakers can learn from other countries’ energy transition experiences and improve upon that experience to meet customers’ top priorities: reliable, affordable, and cleaner power.
Couple discussing bills. Achieving and maintaining energy affordability is one of the key priorities for competitive energy markets through the energy transition. Credit: iStock/whyframestudio
For over a decade, the cost of renewable generation, including solar and wind, has plummeted around the globe. The significant cost reduction of renewables can be attributed to several factors associated with improved efficiencies and achieving economies of scale. With the drop in prices for renewable generation, why aren’t customers seeing their energy bills go down too?
A partial answer to that question is how the “levelized cost” of energy resources is analyzed. It’s true that these analyses do find renewables are frequently the cheapest source of electricity megawatt for megawatt. However, what these analyses fail to account for is the fact that renewables do not generate power on demand 24/7/365. Comparing renewables to dispatchable resources like natural gas, nuclear, and hydro is not apples to apples because another resource always needs to be available when renewables are not able to produce—something that policymakers are increasingly choosing to ignore.
The other part of our answer on cost can be found by examining the entire energy system, not just generation. While it may seem counterintuitive to see high electricity prices as cheap renewables continue to increase their market penetration, the cost of electricity generation is only one part of this story. In the U.S., generating electricity accounts for about 44 percent of the total cost consumers end up paying. So what accounts for the other 56 percent?
First, independent power generators, whether using conventional power plants or renewables, are part of an interconnected system that aggregates and delivers power to customers on a regional scale. While renewables may displace conventional generation during certain periods of the day, their inherent intermittency requires grid operators to ramp up dispatchable resources to maintain capacity and meet consumer demand. Maintaining that flexibility to meet power demand comes with a cost.
Second, building a new grid-scale solar or wind installation requires land (or sea) in remote areas that are not close to population centers driving demand (also known as load). To get this cheap renewable power from where it is generated to its point of use, new transmission infrastructure needs to be built. From 2012 to 2021, transmission costs more than doubled, largely due to the increase in renewables deployment and utility choices on transmission construction. Further, the transmission investment and buildout of the past decade will pale in comparison to the requirements for renewable deployment fueled by the Inflation Reduction Act of 2022. Those new, additional costs are still yet to come and will also impact consumer bills.
Third, policy and regulation are key factors in the final electricity costs consumers end up paying. A prime example of this is Denmark, which produces 74 percent of its electricity from renewables. Despite the high penetration of cheap renewable generation, Denmark has the highest residential electricity prices in the world at $0.48 per kWh. This is because the country’s tax policy makes up a significant portion of residential end-user electricity prices. In the U.S., policies that prioritize specific technologies or emissions targets, like the IRA, can result in higher costs for consumers.
Competitive power markets offer a promising model to deliver reliable and affordable power, while also deploying cleaner technologies to reduce emissions. For example, the PJM Interconnection delivered a cost savings between $3.2 billion to $4 billion annually for its 65 million customers. Meanwhile, PJM has reduced CO2 emissions by 39 percent across its footprint since 2005, which was largely achieved through a combination of deploying more efficient dispatchable resources, like switching from coal to natural gas, and a modest amount of renewables.
Competitive power markets offer a pathway to deliver reliable power from a mix of all resources that meets customers’ needs while incentivizing cost-savings and innovation through competition. Policymakers can learn from other countries’ energy transition experiences and improve upon that experience to meet customers’ top priorities: reliable, affordable, and cleaner power.
