The Surprising Ground Zero for Electricity Market Fights

Look to the East and you’ll see a major initiative to transform New York’s electric grid into a cleaner, more efficient system. Look to the West and you’ll find ambitious clean energy legislation in California.

Yet utility executives and federal regulators recently gathered in the Midwest to highlight how this region is ground zero for key electricity-market debates. Anyone concerned with fair, affordable electricity should be paying close attention.

Federal Regulator Warns of an Unsustainable Future

To start, there was the Mid-America Regulatory Conference in June, during which Tony Clark, then of the Federal Energy Regulatory Commission (FERC), said disputes playing out in Illinois and Ohio represent the major challenge facing the electricity industry at a critical juncture in its evolution. These states are part of FERC-regulated wholesale markets that rely upon market signals to determine when power generator companies invest in new units or close an old one. Yet the low costs of natural gas, efficiency, and renewables are pushing some utilities to seek subsidies for their aging, unprofitable coal and nuclear plants.

Clark worries such “out-of-market constructs” would distort price signals and lead to “a really, really unsustainable future.” Environmental and consumer advocates tend to agree, viewing such requests as unnecessary subsidies that would increase electricity bills. Moreover, by propping up uneconomic generators, these subsidies would distort markets in ways that discourage investment and innovation.

Utilities with unprofitable power plants, as might be expected, see the issue differently. In Illinois, Exelon is currently arguing that subsidies for its Clinton and Quad Cities nuclear reactors are needed to preserve jobs and taxes in local communities. In Ohio, FirstEnergy and American Electric Power (AEP) used similar arguments to seek a $6 billion bailout for their uneconomic coal and nuclear facilities, yet FERC effectively blocked those efforts.

Nervous Utilities Try to Undo Competitive Electricity Markets

Around the same time, in Chicago, there was the annual convention of the Edison Electric Institute, the trade association of investor-owned electric utilities. The Clean Power Plan—the nation’s first-ever proposed limits on carbon dioxide emissions from power plants—dominated last year’s gathering, but earlier this year the Supreme Court put the plan on pause while a lower court reviews it. That move, combined with Congress’s extension of renewable energy tax breaks, have shifted the CEOs’ focus to what they describe as “reforming the nation’s organized markets.”

Those markets, created in the late 1990s and early 2000s, allow independent power producers to compete against each other in about two-thirds of the nation. PJM Interconnection, which covers multiple states in the Midwest, including northern Illinois and Ohio, is the largest of those markets and admits such competition has led to reliable power and lower electricity prices. Reduced costs are obviously good for customers, but generation company leaders worry those reductions contribute to their own “slow roll bankruptcy.” They argue the low prices of natural gas, efficiency, and renewable energy are pushing higher-cost coal and nuclear plants to shut down, eventually leading, in their opinion, to higher electricity prices and reduced reliability. Their proposed reform is to seek, in Commissioner Clark’s words, “out-of-market constructs” that provide new revenue streams for generators that can no longer compete in power markets on their own.

Obtaining these reforms or subsidies (depending upon your perspective) promises to be the concerted effort of the electric utility industry. AEP CEO Nick Akins declared, “You have baseload assets, whether coal or nuclear, that are retiring or are being forced to retire because of a market structure that does not pay for the sustainability of these long-term assets.” In other words, Akins believes some power plants should be exempt from the market to keep them from disappearing.

Grid operators, however, tend to view such concerns as overblown. Vince Duane, senior vice president for law, compliance, and external relations at PJM, calls the power generators’ worries “not just far-fetched but virtually impossible.”

Yet utility CEOs argue reforms (or subsidies) are needed—and quickly. If they don’t get relief, the politically powerful utilities promise to lobby for legislation that overturns state deregulation policies and the competitive markets those policies promote. Such re-monopolization would enable a utility’s generation subsidiary to return to being regulated and obtaining guaranteed profits.

Debate Will Affect the Future of Energy

The debate is critical for environmentalists. Environmental Defense Fund and others have long argued in Ohio that bailing out FirstEnergy’s uneconomic facilities will enable aging coal-fired power plants to continue operating well beyond when market forces would have forced their closure. Re-monopolization, moreover, would make it harder for innovative competitors—including providers of solar, wind, and grid-modernization projects—to participate in markets, thereby curtailing their investments in the electricity industry.

Environmentalists will therefore be joined by clean energy companies that fear empowered monopolies will block competition, efficiency, and renewable energy. They should also find allies in conservatives who favor competition over monopolies, and markets over subsidies. Furthermore, consumer advocates will recognize how competition leads to lower prices for customers.

Critical debates about the future of this essential industry are playing out, not on the coasts where clean-energy advocates tend to focus, but in the nation’s heartland. The outcomes here will determine how utilities across the country address electricity markets and the introduction of new players into those markets.■

Dick Munson (dmunson@edf.org) is the Environmental Defense Fund’s director, Midwest Clean Energy.

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