As the United States grapples with how best to address climate change and conservation—whether by taxing carbon, cap and trade, or setting higher renewable portfolio standards—an effective approach exists at the state level to reduce electricity producers’ carbon emissions: restructuring.

How can opening competitive electricity markets help Americans reach their conservation and carbon reduction goals? The answer rests with Great Britain and those U.S. states that followed its lead.

According to the United Nations Framework Convention on Climate Change, Britain made nearly a 20% change in its greenhouse gas emissions between 1990 and 2007. After restructuring, high carbon–emitting coal plants were no longer protected as monopoly-owned stranded assets. Consumers and businesses were then free to choose their power from cleaner, more efficient power sources while competition-motivated plant operators improved efficiency and lowered costs.

So why are there so many critics of restructuring? First and foremost, California restructuring— based on a model that was abandoned by Britain—forced all generators and consumers into an hourly pricing pool, leading to market instability and gaming by generators. Britain learned through its early testing of the "pool-co" approach that it was essential to allow for bilateral contracts between generators and users; California failed to address these concerns.

Although restructuring may have failed in California, it is working in New England, Pennsylvania, Maryland, Texas, and Illinois. Recognizing the flaws in California’s approach, these states implemented a bilateral restructuring model whereby the bulk of electricity is traded in direct contracts between generators and large distribution companies or customers. Hourly pricing markets in these regions provide a means for setting competitive market prices. These new markets also provide ancillary service payments to consumers for providing demand response, day-ahead, and other market services. In these new pricing markets, entrepreneurs and consumers are working together to lower demand when prices rise.

In restructured markets, consumers no longer foot the bill for new generation plant construction overruns. Most of us have not forgotten the billions in dollars consumers had to pay in the 1980s for huge nuclear plant construction cost overruns. In a restructured market, power plant overruns are borne by investors. When generators overbuild, investors foot the bill, not consumers.

Restructuring led to unintended benefits for consumers, saving two quadrillion British thermal units of energy annually—more than half of the total natural gas consumed by the U.S. commercial sector. New England and Texas generate a large portion of electricity from natural gas‚Äìfired generators. Many of the new gas turbines, built because of restructuring, utilize about half the natural gas of the older, utility-built, simple-cycle gas-fired generators they displaced. Consumers in these restructured states also saved billions of dollars in fuel costs when natural gas prices increased dramatically (see the table).

Estimates of selected restructuring benefits.

Benefit Delta Annual carbon reduction Annual savings
New CCCT capacity displacing simple-cycle natural gas* 149 GW of new CCCT capacity ~125 million tons ~2 quadrillion Btu ~$8 billion @$4/mmBtu
Increased nuclear production due to competition** 230 million MWh of increased nuclear output ~230 million tons ~$12 billion
Lower nuclear O&M due to competition, 800 million MWh $15/MWh reduced O&M cost ~$12 billion
Lower coal O&M due to competition, 1.9 billion MWh $5/MWh reduced O&M cost ~$10 billion
Price/demand response Later Later Later
Totals ~355 million tons ~$42 billion
Impact 15% reduction in total electricity-related carbon emissions Total reduction in costs for consumers of ~$10/MWh

* Assumed 50% capacity factor for all combined-cycle combustion turbine (CCCT) plants and carbon savings of 500 lb/MWh for displaced simple-cycle gas generation. Also note that annual savings were much higher from 2001 to 2008 during the run-up in natural gas prices.
** Assumed carbon savings of 1 ton/MWh for displaced coal-fired generation. Please note that nuclear total capacity remained constant from 1990 at about 100 GW while output increased by 40% due to the threat of competition. The nuclear generation cost is about $15/MWh less than the coal generation displaced.

1. Electric Utility Restructuring: A Guide to the Competitive Era, Peter Fox-Penner (1998).
2. Electricity Prices in a Competitive Market,
3. The Changing Structure of the Electric Power Industry, (June 11, 1999).
4. Economic Analysis of Electricity Restructuring in Michigan, Standard & Poor’s DRI (November 13, 1998).
5. Environmental Protection Agency EGrid database, eGRID2006 Version 2.1 Generator File Year 2004.
6. Department of Energy, Annual Energy Outlook 2009, Tables A9, A10 and A18. "The Change in Greenhouse-gas Emissions in Industrialized Countries," The Economist (October 30, 2009).

Another future benefit of restructuring is the displacement of coal generation and associated environmental impacts. In restructured states, as coal-fired generation costs increase due to carbon costs, cleaner, more efficient generation (e.g., wind and natural gas) pushes the higher-cost coal generation out of the market. Unfortunately, older, inefficient coal and gas plants in structured markets are deemed stranded assets. As carbon costs rise, vertically integrated utilities can pass carbon costs on to consumers as the "least cost option."

There have been missteps in restructured markets outside California, however; some generators gained market power in isolated markets, and residential retail markets have experienced problems. Independent system operators continue to adjust market rules and standards to address issues and improve competitive markets.

Restructuring is a new form of market regulation that treats consumers as partners, not prisoners. It is a market approach that provides state leaders and regulators a momentous opportunity to provide more reliable, affordable, efficient, and cleaner electricity to consumers and effectively curb climate change by reducing U.S. electricity’s large carbon footprint.

—John Kelly is the deputy director of the Galvin Electricity Initiative. This commentary first appeared in The Energy Daily.