April 15, 2007

How direct access would improve electricity supply

By Steven F. Greenwald and Jeffrey P. Gray

The debate over retail choice has resurfaced, triggering in the minds of many consumer advocates California's failed deregulation attempt and its fallout—rolling blackouts, bankrupt utilities, and government bailouts with crippling long-term consequences. Before allowing a chorus of "oh no, not again" to cloud the debate, state policy makers should realize that allowing generators to sell directly to end users (direct access) would serve to make electricity supply more abundant, affordable, and reliable.

 

New plants for old

Delays and uncertainties associated with new power plant licensing and construction threaten system reliability, hinder the growth of renewable energy, and limit wholesale competition that puts downward pressure on retail prices. Much of the generating capacity of many utilities in the Midwest and South comes from coal-fired plants built in the 1950s and 1960s that should have been retired long ago. Yet state regulators have allowed the continued operation of these older, relatively inefficient, and inherently more-polluting plants, and essentially condoned the effective refusal by utilities to execute power-purchase agreements (PPAs) with builders of cleaner renewable-energy projects and other environmentally more benign resources.

The regulatory, institutional, and "economic" rationales for extending the life of old plants frustrate the development and construction of new ones. Non-utility generation projects require a signed PPA to be financed. Without the opportunity to market the output of a proposed plant directly to end users, a developer is left hoping that its project will win a utility resource solicitation; then it can negotiate a PPA and obtain financing and regulatory approvals for the project. In recent years, this has become an increasingly extended, expensive, and uncertain process. By comparison, giving project developers direct access to potential retail customers would produce more PPAs, and more new capacity would be timely constructed.
 

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