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Making Electricity Markets Competitive Again

March 5, 2018

There are no free markets in electricity generation, and subsidies are contagious.

The Federal Energy Regulation Commission (FERC) has officially rejected the "Notice of Proposed Rulemaking" (NOPR) issued by Department of Energy Secretary Rick Perry. The measure would have provided cost-of-service compensation to power generation sources capable of storing a 90-day supply of fuel on-site, namely coal and nuclear power sources.

Despite FERC's decision, Mr. Perry may be able to instruct the agency to implement a suite of reforms that would help make electricity markets competitive again.

Critics of the plan said NOPR would unravel competitive power markets. However, these criticisms ignore the fact that federal subsidies for wind and solar power and state renewable energy mandates have already distorted so-called "competitive power markets" and eliminated many of the free-market characteristics these markets originally had.

The wind and solar industries received $5.9 billion and $5.3 billion, respectively, in federal subsidies in 2013. These substantial sums are far greater than the estimated cost of NOPR (between $1 billion and $4 billion per year) and allow renewable energy producers to profit while selling their electricity far below market rates, which they do to seize market share. This practice is similar to product dumping, when foreign companies sell their products below the cost of producing them to gain a greater share of a global market.

Wind power producers receive a federal subsidy of $24 per megawatt hour (MWh) of power produced, regardless of whether this power is needed to satisfy the current demand for electricity. As a result, wind producers are incentivized to sell their power to the grid even when prices are negative (up to -$23 per MWh).

In these circumstances, coal-fired generators must choose between paying customers to take the additional power generated or scaling back generation. Either way, subsidized renewable generators profit at the expense of coal and nuclear plants, which have high fixed costs but can generate low-cost electricity when they produce a steady, constant output of electricity.

Because FERC is responsible for setting prices in wholesale competitive markets, the commission can help unsubsidized merchant generators by eliminating negative pricing. FERC should also consider requiring independent systems operators to include subsidies in the bids submitted by renewable generators. Without doing so, subsidies for renewables will continue to erode the economics for the power plants needed to maintain the reliability of the nation's power grid, as is the case in California.

California has aggressively incorporated ever-increasing amounts of intermittent wind and solar power into its electric grid to satisfy its renewable energy mandate, which requires the state to generate 50% of its electricity from renewables by 2030.

However, one important problem is electricity demand has been essentially flat in recent years, which means the addition of more renewables in the market depresses wholesale power prices even further. As a result, California's independent systems operator, CAISO, has been forced to issue payments to numerous natural-gas-fired power plants to ensure reliability as the state attempts keep the lights on while using more renewables. Either way, ratepayers will subsidize generating sources needed for system reliability.

In short, there are no free markets in electricity generation, and subsidies are contagious. If Mr. Perry wants to ensure the reliability and affordability of the grid, to which coal and nuclear plants are vital, he should instruct FERC to implement reforms that will mitigate the unjust and unreasonable benefits enjoyed by renewable power generators and restore competitive elements to the nation's power grids.

[Originally Published at Investor's Business Daily]

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Isaac Orr is a research fellow for energy and environment policy at The Heartland Institute. Orr is a speaker, researcher, and writer specializing in hydraulic fracturing, frac sand mining, agricultural, and environmental policy issues.