Keeping America’s lights on

For more than 100 years, the U.S. electric industry has met the power needs of its customers under all but the most extreme conditions. Whether the electricity sector can continue to ensure adequate supplies of electric power has emerged as the greatest challenge the industry faces and an issue of growing concern on Capitol Hill.

Grid reliability increasingly depends on where you live. An Electric Markets Research Foundation study found that keeping the lights on is more likely in traditionally regulated markets in the South, Southwest and Northwest than in restructured markets in California, Texas, the Midwest and on the East Coast.

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In regulated markets, utilities own the power plants as well as the transmission and distribution lines.  State regulators set prices. Restructured markets administered by regional transmission operators (RTOs) use competitive bidding to set prices for wholesale electricity that utilities or unregulated retailer suppliers sell to consumers.

Reliability is not much of problem in regulated markets, the EMRF study found, but restructured markets are still trying to prove their model works. Our study shows restructured markets are neither attracting the mix of new generating resources nor sending the right price signals needed to ensure supply meets demands in all circumstances.

The most striking difference between the two markets is the reserve margins of electricity needed to ensure reliability during peak demand for power. Regulated regions forecast significantly higher reserve margins than do RTOs in 2014, 2018 and 2023. Some RTOs may soon be operating with historically low planning reserves because of power plant retirements. RTOs in the Midwest and Texas may fall below the minimum safety level in 2018. None of the regulated regions are likely to do so.  

Abnormal weather is not the only cause for concern in restructured markets. Natural gas-fired generation has at least doubled in every RTO region over the last decade, overtaxing gas pipelines and driving huge price spikes when supplies are tight. Low wholesale prices and environmental regulations have induced massive retirements of coal-fired generation. In some cases nuclear plants can’t compete either and a few have retired. The increasing reliance on intermittent supplies of solar and wind and the increasing lack of fuel diversity threaten grid security.

The 2014 polar vortex exposed the vulnerability of the electric grid in restructured markets, as utilities in the Northeast and Midwest scrambled to avoid blackouts. “This country did not just dodge a bullet – we dodged a cannon ball,” American Electric Power Chairman Nicholas K. Akin told the Senate Energy and Natural Committee at a hearing on grid reliability in April. Almost 90 percent of the generation AEP will retire in 2015 was needed to cope with electricity demand last winter, Akin added.

Reliability challenges translated into higher prices for consumers. PPL Corp., a central Pennsylvania utility, saw its wholesale prices soar last winter from $40 per megawatt hour on a normal day to $2,000 per megawatt hour last winter. During one of the coldest days last winter, ISO New England reported, natural gas prices normally at $3 to $5 per million British Thermal Units were trading on the regional energy market for $79 per million BTU.

The reliability of the electric grid depends on making the restructured model work. Yet RTOs are struggling to fit a square peg into a round hole. RTOs seek a market solution when none exists. RTO efforts—price caps, renewable energy mandates, short-term pricing schemes, a refusal to ration – undermine their own free-market principles and fail to provide the incentives needed to encourage investment in new electricity.

Comprehensive reforms are needed. Regulated markets have avoided the reliability concerns plaguing RTOs by relying on long-term planning and injecting competition only where it makes sense. The RTOs could follow their lead and emulate regulated markets in other ways as well. 

Congress understands the need to keep the lights on. “We are setting ourselves up for a major reliability crisis,” Sen. Joe Manchin (D-W.Va.) warned at recent Energy and Natural Resources Committee hearing.  

But Congress should act. As a nation, we are paying insufficient attention to grid reliability. The timing is propitious because the polar vortex has demonstrated the clear and present danger facing the nation’s grid. Congress should direct FERC to accelerate review of the ways RTOs are procuring the capacity needed to ensure grid reliability and make recommendations to RTOs and the states for solving the problem. Failure to act now could have serious impact on the nation’s economy. 

Edelston is president of the Electric Markets Research Foundation.