Competitive Markets and Environmental Goals—Yes, They Can Coexist

While the nation is rightfully consumed with responding to the COVID-19 crisis, other battles are being fought that also will have decades-long consequences. One of those involves states seeking to override the competitive wholesale power markets in order to pursue their low-carbon and other environmental objectives. Their fight is against the Federal Energy Regulatory Commission (FERC), which wants to defend the competitive power markets and the consumer benefits it believes those markets offer.

But policymakers and consumers don’t have to choose between low-carbon energy sources and competitive power markets. It’s possible to have both. Consumers should insist they get both.

The stakes are high. Americans spend more than $400 billion annually on residential, commercial, and industrial electricity—or about $1,200 per person. Especially given the current economic situation, it is critical that businesses and residential customers pay a reasonable price for their power. At the same time, and as my Columbia University colleagues have noted, nothing including a pandemic should distract from the importance of addressing climate change.

The current tension between federally regulated competitive power markets and state-mandated carbon reduction objectives is often painted as a battle between a FERC controlled by Trump administration appointees and states controlled by Democratic governors and legislators. But it really is possible for environmental objectives and competitive markets to coexist. Environmental objectives can and should be pursued through the competitive power markets, not around them.

Competitive Markets Keep Costs Down

Large parts of the country participate in competitive wholesale power markets regulated by FERC. Those markets originate from a unanimous bipartisan FERC order issued in 1996 that required “open access” for the nation’s electric transmission system. FERC opened up this system to “remove impediments to competition in the wholesale bulk power marketplace and to bring more efficient, lower cost power to the nation’s electricity consumers.”

FERC’s pro-competition order responded to years of increasing consumer dissatisfaction with the cost of decisions by regulators and utilities to invest billions of dollars in large coal and nuclear power plants. Those plants had seemed like a good idea at the time, but times change. Cost overruns and excess generation resulted in massive costs being imposed on consumers, and policymakers from both parties saw competitive markets as an effective way of addressing these problems.

This solution is now at risk. Some states have moved to address climate change and other objectives by enacting mandates and subsidy programs for renewables, nuclear facilities, and other types of generation. Some of these programs seek to override or replace the wholesale competitive power markets.

FERC views many of those efforts as intruding on areas of exclusive federal jurisdiction and interfering with price-setting mechanisms intended to benefit consumers. As a result, FERC has issued orders—including one involving the 13-state PJM Interconnection power market—that impose “minimum offer price rules” to preserve the wholesale competitive markets.

This federal-state tension is causing a lot of regulatory uncertainty, litigation, and unnecessary costs. It also means neither environmental objectives nor competitive market objectives are being met in the best possible way.

Competitive Markets Can Also Support Environmental Goals

Consumers should insist on something better. The mechanism policymakers settled on in the 1990s to ensure consumers receive lower-cost power—that is, competitive markets—still works today. In PJM alone, competitive markets save Americans between $3.2 billion and $4 billion annually. Neither climate change nor COVID-19 has repealed the laws of supply and demand or the principles of how markets work.

Of course, the urgency of addressing climate change is as great or greater than ever, and competitive markets should better incorporate and take account of state environmental objectives. Markets really can be successfully adapted to meet both environmental and competitive market objectives.

There are a variety of ways in which important electric power attributes—performance, reliability, emissions, etc.—can be priced and purchased in a competitive wholesale electric power market. And there doesn’t need to be a one-size-fits-all solution for all parts of the country or how environmental objectives are accomplished through these markets. For example, forward clean energy markets, embedding a price of carbon, and clean energy standards are all ways in which environmental objectives can be pursued through competitive markets.

Competitive wholesale power markets are the best means for eliminating backroom deals and delivering power to consumers at the lowest reasonable price, with optimum reliability and environmental performance. If the markets aren’t doing that, the solution is to fix the markets, not to try to override them.

Policymakers seeking to lower the emissions of their power sector should keep in mind the lessons of the past. A market-based solution, not one based on command and control, will best create the power system and the change we need. ■

David R. Hill is an attorney and senior research scholar at Columbia University’s Center on Global Energy Policy. He previously served as executive vice president and general counsel of NRG Energy Inc., and general counsel of the U.S. Department of Energy during the George W. Bush administration.

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