Renewable energy advocates free and competitive markets are to blame for coal-fired power plants being replaced by natural gas and wind generation. The problem is, there is no such thing as “free-market electricity generation,” because electricity markets are warped by a series of state and federal government policies.
These market-distorting policies include a host of regulations that require states to purchase a portion of their electricity from renewable sources (state renewable energy mandates) and federal policies that subsidize renewable energy sources and impose onerous regulations on coal-fired power plants, such as the Clean Power Plan.
The confluence of these policies has created carrots and sticks that have been used to manipulate wholesale electricity prices, to the detriment of coal and nuclear electricity generators.
Renewable energy mandates have decreed that more electricity generation capacity must be built, even though demand for electricity has been stagnant. Federal subsidies bankrolled much of the cost. As a result, the supply of electricity has outpaced demand for that electricity, causing wholesale prices to fall.
This is similar to the tactic called “product dumping,” which occurs when foreign companies sell their products in other countries for less than the cost of producing them to gain an unfair market share.
In the United States, product dumping in the electricity sector is enabled by a federal tax subsidy called the Renewable Electricity Production Tax Credit, which grants $23 per megawatt hour of energy produced to wind electricity generators. The payment is issued regardless of whether there is consumer demand for the electricity created.
This government policy is important, because it enables wind producers to sell their power for a profit no matter what the market demand is, a phenomenon that occurs most frequently in areas where renewables have been aggressively pursued and are dictated by state mandates.
It is this government-induced oversupply of electricity, coupled with low natural gas prices, that provides the real explanation for why wholesale electricity prices are currently suppressed. However, it is important not to be fooled into believing artificially low wholesale electricity prices are a windfall for consumers. As additional coal and nuclear plants retire, the oversupply of electricity will decline and push prices upward.
This has already started to happen in California, which has experienced higher retail electricity prices, despite higher incidences of negative wholesale prices, thanks to state policies that mandate renewables and the shuttering of coal-fired facilities. Residential customers in California now pay 39 percent more for their electricity than the national average.
Coal and nuclear plants are not retiring because they are inefficient and need subsidies to remain competitive; they are retiring because state and federal policies have placed a thumb on the scale, unfairly favoring renewables over traditional forms of energy.
Isaac Orr is a research fellow for energy and environmental policy at The Heartland Institute.