High voltage tower. Credit: iStock/Bohbeh
Since implemented in the 1990s, competitive wholesale electricity markets have pushed down wholesale power prices, improved reliability, reduced emissions, and fostered innovation that has spurred a clean energy revolution. But you wouldn’t necessarily know that from reading some of the recent news coverage about them.
Instead, you might come away thinking that competitive or “deregulated” markets that most large states rely on for electricity are worse for consumers than regulated monopoly utilities. In fact, it’s quite the opposite since utilities face no competition and have legendarily cozy relationships with regulators.
But the facts tell a different story.
- Competitive power markets are highly regulated, with companies – not customers – bearing the risk of generation investment.
First, “deregulation” is a misleading term when referring to these restructured markets. Prices received by power generators are subject to federal review to ensure that competitive rates are just and reasonable, and each market is subject to extensive oversight by an independent market monitor, which oversees market activity and evaluates performance. Compared to “regulated” utilities, power generators in competitive markets put private dollars into their investments and either recover or lose those costs based on their performance in the market. Utilities, however, are guaranteed to recover the costs of building and operating infrastructure by charging ratepayers, as approved and overseen by state regulators. This different approach can lead to vastly disparate outcomes.
Example: The V.C. Sumner nuclear expansion project ran years behind schedule with costs projected to balloon from $10.5 to over $25 billion until it was eventually abandoned in 2017. Ratepayers in South Carolina must still pay for the costs of construction even though they will never receive a megawatt of power from the project. In contrast, competitive power suppliers bear the risk of investment – failed project costs are absorbed by the company and shareholders, never ratepayers. This approach encourages developers to make prudent investment decisions and stay on schedule and within budget in order to have those assets earn a rate of return.
- Many factors determine energy costs.
Some have attributed today’s higher energy costs in certain states to “deregulation,” or competitive electricity markets. But myriad factors contributed to the global rise in household energy costs in 2022, and U.S. power customers were not spared. From geopolitical upheaval to short-sighted state policies to extreme weather, all have created a serious situation that demands attention.
States are highly diverse when it comes to geographic characteristics, weather, historic infrastructure development, and policies that all contribute to energy costs. Massachusetts, New York, and Illinois are some of the largest participants in competitive electricity markets by population. These are states with high power prices compared to the U.S. average, but they are also the states with the most ambitious (and costly) greenhouse gas targets in the nation. They are also states that have historically had high costs for many things including real estate, state and local taxes, cost of labor, and many others. Higher baseline costs are not limited to electricity.
Competitive electricity markets span the Mid-Atlantic, New England, the Midwest, Texas, and California. With only a handful of exceptions, including Texas, these states have mandated and subsidized huge levels of out-of-market subsidies to drive investment into renewable resources to address emissions and climate change, while enacting policies that actively discourage cheaper resources like natural gas. State policymakers and advocates have also pressured market operators to change and distort market rules to favor preferred resources – tampering with the price signals that were originally designed to procure the least cost resources needed to meet demand and help ensure reliability.
That is their prerogative as state governments, but it is deeply misleading to say that state-mandated, out of market investments are a “natural” feature of competitive power markets.
There are a few factors that make it imprecise to say that restructuring caused higher costs in the regions examined. The states that had the costliest power prior to the introduction of competitive markets were generally the ones that adopted competitive market structures, according to data from the U.S. Energy Information Administration. Many other factors also drive prices including state policies, geography, population density, resource availability, and land costs.
Fuel costs have also played an outsize role this year in high power prices, but that is true in monopoly regions as well since utilities normally pass on added fuel costs directly to ratepayers in the form of fuel cost riders meaning those costs are also paid by consumers and are similar in impact to restructured regions of the country.
What we do know is that wholesale power prices in restructured markets have consistently trended down, at times reaching record lows, since the creation of those markets and consumer costs for electricity have seen a corresponding decrease in cost.
- Competition advances clean energy and innovation.
There is ample evidence that competitive markets spark innovation and curb emissions significantly faster than vertically integrated utility paradigms.
Competition has helped deliver a 60 percent reduction in carbon dioxide emissions from power plants in New England and a 39 percent reduction in the Mid-Atlantic PJM region since restructuring took place in those regions. New England continues to suffer from high power prices, but regulators have been clear that the issue is a lack of gas infrastructure needed to meet current demand, not market structures.
- Does competition increase transmission spending?
Some critics have also noted that utilities in competitive markets do spend more on average for transmission than their peers in regulated and monopoly areas. Setting aside for a moment the tidal wave of articles talking about how investing in transmission is critical for mitigating climate change, protecting against wildfires, and integrating renewables, this is a complex area that can’t be oversimplified.
Extreme weather is a significant driver of transmission spending, and some of the largest competitive markets like California are epicenters of massive transmission investments to prevent wildfires and integrate more renewables.
This is also a part of the industry that is routinely misunderstood by critics. In competitive markets, generation assets compete to see who can produce electricity most efficiently, but transmission and distribution are generally granted as a monopoly to local utilities. That portion of the system functions essentially the same in competitive markets as it does in regulated markets, the only difference is that in the monopoly setting those utilities also own the generation. In short, fully regulated transmission and distribution are NOT directly impacted by restructuring of generation resources. In fact, compliance with state mandates around generation resources would mean the same T&D build out regardless of the owner of generation resources further undermining the claim that “deregulated markets raise transmission rates.”
Transmission costs are rising in some states for a variety of reasons, but transmission remains a regulated monopoly in nearly every state. These costs are a feature of state-regulated transmission monopolies, not the competitive markets that govern power generation. State and federal regulators are in the best position to impact the costs and scope of transmission planning, expenditures, and rates of return paid to transmission and distribution asset owners.
- Competitive markets do not “make all resources cost the same.”
The claim that competitive markets somehow “make all resources cost the same,” as reported in recent coverage, is wildly misguided. The entire competitive market structure is built around the notion that power generators should compete on price. Markets allow resources like wind, solar, nuclear, and gas to all compete over which can provide the best price that balances supply and demand. That is coupled with incentives in many markets for other valuable attributes, like providing additional “stand-by” capacity to help preserve reliability during high demand or generating power with zero emission resources. The effect of this competition is to reward lower cost generators who run more and are paid to do so, rather than guarantee a decades long payment for generating resources that may (or may not) be needed to provide power at a rate approved by state regulators and paid by captive customers.
The Bottom Line: Electric Competition Is Critical to Solving Our Energy Challenges
Because of the existence of competition, competitive markets have led to an explosion of innovation and reduced emissions – this has been key to reaching U.S. climate commitments while still preserving reliability. There are reasons to be concerned, however, when policies are implemented that are disconnected from the reality of grid operations and try to impose “solutions” that don’t work or are not yet ready for widespread, cost-effective deployment on the electricity grid. When put simply, it just makes sense – more choice allows the best solutions to rise to the top. The U.S. electric grid faces immense challenges as it navigates the energy transition, but competitive markets have been – and will continue to be – a critical tool in meeting those challenges.
Learn more about some of the myths around competitive markets and get the facts.
