Three Ways Advocacy Has Enabled Market Forces to Clean up the Power Grid

, Senior Energy Analyst | December 17, 2019, 3:51 pm EST
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Economics and market forces are powerful but often get all the credit for the gains in decarbonizing the power grid. Certainly, they deserve a lot of credit: without favorable economics, decarbonization is a lot less likely to happen. However, advocacy by independent groups has played a critical role in making sure economics and market forces can do their job.

For many years I’ve been obsessed with detecting and surfacing the many forms of market failures that exist in the power sector. So, when I hear other economists, journalists, or other leaders in the energy space suggesting that these types of market failures don’t exist, it touches a nerve. The fact is economics are necessary but not sufficient to produce real-life results.

UCS and other advocates participate in complex, technical, and often arcane energy decision-making structures because economics are simply not enough to bring forth the low cost, climate-resilient, decarbonized power sector the US needs. We intervene on utility dockets that decide how the grid is shaped and used; we raise awareness of the costs and opportunities of power generation sources among decisionmakers and the public; and we connect the dots between government regulators, policymakers, and corporations (utilities) through analysis and advocacy. All of these efforts have successfully advanced power sector decarbonization.

Here are three examples where advocacy has played an essential role in ensuring the power sector makes the right economic choice.

“Externalities”

Advocates have made an undeniable contribution to markets through their work to pass and ensure enforcement of environmental regulations that internalize externalities such as safety, health, and reliability.

Approximately two-thirds of US coal plants are in “rate base,” which means that so long as the power plant operates, the owners get to recover the costs to operate the plant—and a profit—via electricity bills. This creates a powerful incentive for the owners to keep power plants open even if they are not economic. Unless they need to make a major investment in the power plant, there is little reason from a profit standpoint for a utility to retire a power plant.

This economic incentive naturally counters whatever market forces would encourage a decarbonized power sector. Even if our economic assessments today say it would be more economical for an asset to retire, many “uneconomic” coal plants would have kept chugging along had it not been for environmental policies that forced the owners to make “retrofit or retire” decisions.

And where did those environmental policies originate? Advocates.

There are countless examples of state and federal policies that were only passed because of advocates pushing for science-based standards that would protect human health.

Advocates often must sue states and federal agencies to get information on energy data, or for them to properly enforce science-based protections. These regulations were an attempt to rectify one of the most pervasive market failures: externalities.

“Perfect information”

Many good analyses that draw the specious conclusion that it is economics alone that retired coal plants point to gas prices.

It is true that gas prices are impactful, particularly when regulators and utilities choose how existing energy resources are operated, but only up to a point. Owners of rate-regulated coal plants will often ignore those market price signals and elect to operate their coal plants, seemingly at a loss, because they are able to get bailed out by their unwitting customers. A lack of transparency, information asymmetry, and institutional inertia are the main market failures here.

This market failure instance happens to also be a good example of how advocates are helping ensure that the utility industry is feeling the full force of the markets, and are not continuing with “business as usual.”

In another example, just two years after I wrote the first report documenting the issue, the market monitor released its own analysis of the problem. A little over a year ago, there was little interest from regulators, and now they are seeking more information on the phenomenon of self-committing and how they can address it.

The market monitors and insider experts all knew about the problem for years, but it wasn’t until advocates shined a light on the problem that anyone even thought to start thinking about addressing it.

These issues of information asymmetry and lack of transparency can also directly affect the market itself. When New England governance of ISO-NE (NEPOOL) sought to ban stakeholders from meetings, UCS was an advocate for openness and was very quick to file comments in support of more rights for members of the press to be in attendance as power grid decisions are cast.

“Competition”

Utility power plants that are in rate-base (like DTE in Michigan and Xcel Energy in Minnesota) tend to be owned by “monopoly” utility companies but also include electric co-ops and municipal utilities. For this segment of the market, there is little to no built-in competitive force that would drive market economics (let alone drive decarbonization). In fact, that is why there are regulars and litigated proceedings with intervenors, as a substitute for market forces and competition.

Low gas prices did make it profitable to build gas plants, but most gas price projections used by regulated utilities 10 years ago, even 5 years ago, weren’t projecting sustained low gas prices. It was experts hired by intervenors (typically consumer advocates and environmental advocates) that had to come in and argue with the utilities about the reasonableness of not retiring those coal plants. For most coal plants, the original game plan by the owners included keeping them open for decades to come, but it was advocates that helped make sure the realities of economics were coming to fruition in the wonky annuls of utility regulatory proceedings.

Today, many monopoly utilities are rushing to build gas plants to the point of overreliance even though clean energy is the more affordable option. That is why UCS deploys its experts to testify in utility proceedings to help ensure that the market realities come to fruition and why we are working to ensure that grid operators update their planning processes and market rules to give clean energy technologies a fair shake.

Advocacy on its own would not have had as much success in course-correcting market failures had there not been economics shifting in favor of clean energy. Unlike the utility-hired experts, the intervenor work UCS provides is always held to an incredibly high technical standard and has to go up high priced consultants that the utilities hire. Thankfully, advocacy groups like UCS are able to go toe-to-toe with these multi-billion-dollar corporations, countering flawed utility analysis with robust objective analysis.

Denying the role of advocacy could be dangerous

The truth is, “There is No Free Market for Electricity.” The electric sector, as it is today and was in the past, is full of market failures, with jargon terms like monopoly power, sunk cost fallacies, perfect foresight, barriers to exit/entry, information asymmetry, and more.

In order to facilitate more efficient markets, UCS is continuing to work on analyses about other barriers that are preventing a “market-driven” transition to clean energy. Barriers include self-committing coal, affiliate transactions, and imprudent investments.

And, as a practicing economist, I understand the desire to have a simple economic explanation to how we’ve gotten to where we are. If we can explain the past, it will help improve our ability to shape the future. But if we misunderstand the past, we will fail at any endeavor to shape the future.

Economics and market forces will play an unquestionably important role in the energy transition. However, it is undeniable the role of advocacy organizations in identifying barriers to the clean energy transition and helping the market-driven change that will ensure the power sector is decarbonized.

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  • lazer1950

    Utilities will keep running uneconomic plants, so long as they expect to recover more of their sunk costs from ratepayers by running rather than retiring those plants. Customers pay the excess cost (Joe’s “bail out”), regulators rarely look at whether existing resources are economic, and some utilities argue that their regulators cannot make them shut uneconomic plants (which may be true, but the regulators can certainly remove the costs of those plants from rates).

    btw, the “monopoly” utilities to which you refer are vertically-integrated investor-owned utilities, which own most of the generation outside the effectively restructured states (New England, NY, NJ, PA, MD, DC, DE, OH, IL, TX and CA). The owners of merchant plants in the restructured states have clearer incentives to retire uneconomic plants than do the vertically-integrated utilities (IOU, muni or coop).