Energy Secretary Rick Perry is being asked to consider using his emergency powers to force customers in the mid-Atlantic to buy their electricity from (more expensive) bankrupt coal and nuclear power plants. “We don’t have a free market in that [electricity] industry,” he said about this possibility of his intervention, “and I’m not sure you want one.”
Secretary Perry is half-right, but half-wrong. Electricity isn’t in a free market, but there is a market, and it ought to be free.
Up until the 1990s, virtually all electricity was sold under a “cost-of-service model.” A regulated monopoly would build the infrastructure, and the consumer would pay the cost of service delivery. This model sidelined a lot of challenges with electricity: It avoided duplicative infrastructure and simplified delivery. Unfortunately, it also gave electricity providers zero incentive to keep costs low. Their customers were captive, and the costs of electricity crept up each year.
To solve the problem of rising prices, the creation of regional wholesale markets introduced competition into electricity delivery in the 1990s and early 2000s. Power producers bid into the market, and the lowest bid wins the market share. In states that participate in these markets (such as in the mid-Atlantic), Americans are ensured access to the lowest-cost electricity.
Not everybody won under the new reforms, however. Competition creates losers as well as winners, and the huge growth in natural gas production is quickly making losers of utilities that have relied too heavily on coal and nuclear power. This shift has alarmed policymakers such as Secretary Perry, as they fear that the lost generating capacity from the demise of those plants will make the U.S. less able to maintain a reliable stream of electricity in extreme events.
Ignore for the moment that the vast majority of electricity outages are due to transmission failures and not a lack of generating capacity. Is there any other industry in which customers fear scarcity because of an increase in low-cost production? Of course not. Markets have churn, and so the lost capacity from failing coal plants does not mean a permanent loss of overall power-generating capacity.
Further, it appears that Secretary Perry and others believe that markets do not reward reliability and resilience. But they do, a lot. During the “bomb cyclone” events last winter, locational day-ahead electricity prices were nearly tenfold the typical norm. Electricity demand was high, fuel was scarce, and prices rose accordingly. The plants which stayed open — the reliable ones — were compensated well beyond the norm, and the market’s price, which reflected scarcity, created an incentive for those plants to stay open now and in the future.
Perry and other intervention advocates point out that the markets are already rife with government control that is biased against coal and nuclear plants. State and federal subsidies, renewable portfolio standards, regulations, and more have skewed markets in a way that could hardly be described as “free.” And they are right. But my own research has shown that market competition — not government interventions — is a more significant reason for the declining profitability of coal plants. And even if that were not the case, the best policy response would not be another intrusion into the market.
Perry is courting a significant risk by considering this intervention. If the Department of Energy were to use its emergency powers to bail out failing companies, and if such interventions were upheld by the courts, it would signal to every potential electricity producer that their relationship with the government is more important than their ability to deliver low-cost electricity to consumers reliably. It would also set an awful precedent for future energy secretaries to exploit. The result would be long-term strategic uncertainty for energy companies — which, since power plants last at least 20 years, would impede these companies’ planning and investment.
Electricity markets are fundamentally working, and overly expensive plants are closing. The answer to reliability concerns is policies that expand market competition and reduce the power of policymakers to intervene. Markets, by their nature, reward the services that people want.
We may not have a free market for electricity at the moment, but we should want one.
Philip Rosetti is the Director of Energy Policy at the American Action Forum.
