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Opening the Electricity Market to Competition a Win for Renewables, and Ratepayers

The price of electricity has been regulated for so long that price regulation is widely considered proper and necessary. The reality is that rate regulation was needed only to enable utilities to raise investment capital for building large central power plants and transmission lines. But this financial arrangement has had far-reaching unintended consequences. It has made infrastructure investment a major business concern of utilities, to the detriment of cost reduction and technology advancement. It also has had the consequence of giving utilities monopoly control over the generating capacity they employ. For example, anyone who wants to build a wind farm must negotiate an agreement with an electric utility (or with the balancing authority that represents an interconnected group of utilities).

Now that the credit-worthiness of utilities is well established, the original purpose of rate regulation has lost its importance. An alternative to rate regulation is available which would have the great virtue of opening the electricity market to competition. Simply by regulating retail mark-up, rather than selling price, utilities could be regulated as electricity retailers. As retailers, utilities would still be able to raise capital for infrastructure investment; but they would get their electricity from competitive suppliers.

Financial markets are adjusting to the reality that conversion to 100% renewable electricity is inevitable. Large pension funds are beginning to divest from fossil energy, and are looking for investment opportunities in renewable energy. Opening the electricity market to competition would enable investors to initiate renewable energy projects without negotiating with an electric utility or balancing authority.

Wind and solar are the only renewable energy sources with the potential to replace all fossil energy now used to generate electricity. However, to operate without fossil energy, both wind and solar need energy storage to adapt their daily output to the cycle of grid demand. To reach the goal of 100 percent renewable electricity, it will be necessary to employ enough energy storage to fully adapt all wind and solar to the daily demand cycle. Since wind and solar together will supply around 90 percent of electricity, the ultimate market for energy storage is on the order of one-quarter of total daily electrical energy consumption — easily enough to attract the capital investment for the necessary production capacity.

The energy storage presently in use is far short of that needed to adapt existing wind and solar power to the daily demand cycle. Although present cost may not justify fully balancing with energy storage, merely using the cost-effective amount could significantly reduce the cost of generating electricity. Utilizing a stand-by gas-fired power plant just to balance peak demand is an example of a function that could be performed more economically with energy storage.

An effective way to bring the use of energy storage into concurrence with wind and solar would be to open the electricity market to competition. In the competitive market, fossil energy would have to compete directly with renewable energy. To increase profitability, fossil power producers would be motivated to reduce the down-time of operating plants by time-shifting with energy storage. Wind and solar electricity producers also would be motivated to improve profitability by time-shifting. Thus, a competitive market would motivate all energy producers to use a cost-effective amount of energy storage. This increase in demand for energy storage would start bringing down its cost. Lower cost would, in turn, increase usage, in a positive feedback that would increase the use of energy storage until it fully balanced the daily demand cycle.

When the demand cycle has been fully balanced, there will no longer be large daily variation in price. Price, instead, will depend largely upon weather. The competitive market is inherently stable. Increasing demand would cause price to increase, motivating investment in additional capacity. If the proportion of wind power were low, price would be higher during winter, motivating investment in wind. If the proportion of solar power were low, price would be higher in summer, motivating investment in solar.

The competitive market also would motivate investment to reduce cost. This would have the effect of bringing additional wind and solar capacity into the market. Additional capacity would be beneficial because it would dilute the impact of weather upon the price of electricity. (It is unlikely that the additional capacity would go idle. Over the next 20-30 years, as fossil energy is phasing out, demand for hydrogen and synthetic methane will be developing. Producing these fuels is very likely to become a profitable alternative use for wind and solar electricity. This second market could substantially increase total wind and solar capacity, further diluting the impact of weather upon price.)

Recognizing that energy storage is essential to wind and solar electricity, California regulating authorities are subsidizing its use. Energy storage will ultimately be fully utilized, whether the price of electricity is set by the market or by regulation. The difference is that, when the price of electricity is set by regulation, adapting to change in weather, demand, and technology — which the competitive market performs automatically — requires action by regulators, balancing authorities, and, occasionally, even by state legislators. Human management requires deliberation and consensus, causing it to operate much more slowly than the competitive market.

The annual destructive cost of climate change is high and growing. The ultimate cost will depend upon the total consumption of fossil fuel. Opening electricity production to competition would leave more fossil fuel in the ground by accelerating the conversion to renewable electricity in two important ways. By eliminating the delay inherent in human management, competition would rapidly bring technology advances into the market; and by eliminating utility approval of investment in renewable electricity, market pricing would accelerate investment in renewable capacity. Opening the production of electricity to competition would be win-win. Competitive pricing of electricity would reduce the ultimate cost of climate change, and would lead to more rapid reduction in the cost of electricity.

Lead image credit: CC0 Creative Commons | Pixabay