How utilities could offset the coming winter's record-high energy prices

How utilities could offset the coming winter's record-high energy prices
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More than 40 percent of U.S. electricity generation comes from natural gas, a fuel that is also commonly used for heating, cooking and other needs. Winter can bring a crunch on natural gas supply, and this winter is likely to create a problem. Natural gas prices have been rising steadily since March. Today, prices are more than 2.4 times as high as seven months ago, and prices continue to rise. In the face of rising prices and a potential natural gas supply crunch, it is time to reassess state regulations on utilities that limit market benefits on pricing, reliability and pro-environment sourcing. 

In the United States, some utility companies can respond to market trends by contracting with the best power producers at that time. They can optimize to lower prices for the consumer, and they can prioritize limiting greenhouse gas emissions. However, other utility firms still operate with monopoly power markets, where utilities consist of the whole power generation, transmission and distribution supply chain. This results in monopoly pricing, less reliable electricity supply and the inability to adjust for greenhouse gas emissions.

It is time for all states and all utility companies to open up to greater competition and to have the flexibility to procure power in the most cost-effective, reliable and green ways. We have much to do to improve our supply of electricity, from modernizing the grid to increasing the diversity of power sources, but these improvements will come by utilizing market forces. 

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Competitive markets for power generation started appearing in the 1990s. Now there are seven regional transmission organizations (RTOs) and independent system operators (ISOs) that cover about two-thirds of the population.They run the wholesale markets for power generators (the producers of electricity) to sell to the utilities, and they cover most of the country except for the Southeast, Southwest and Northwest.

A new report by Wayne Winegarden from the Pacific Research Institute highlights how shifting to competitive markets for power generation has benefited consumers. Between 2015 and 2020, prices fell 44.3 percent in the New England ISO, 44.8 percent in the New York City zone of the New York ISO, and 41.7 percent in the PJM Interconnection (across the Mid-Atlantic and parts of the Midwest). Monopoly utilities, on the other hand, increase pricing for consumers because of their system of cost-plus pricing, which essentially passes on costs to customers even for failed projects. For example, the report notes that “customers of South Carolina Electric & Gas were forced to cover billions of dollars in costs for the construction of nuclear reactors that were never completed and generated no electricity,” the report notes.

Monopoly systems, coupled with the inherent cost-plus pricing, ensure that utility managers never will be responsible for overruns and bad decisions. But when power production is subject to competitive markets, utility managers are incentivized to pursue lower costs.

Competitive power generation markets also incentivize utilities to pursue reliability and avoid power outages and brownouts. According to the study, areas operating with an RTO or ISO “have less frequent and shorter [power] interruptions” than areas operating with monopolies. When it comes to an impending natural gas shortage — for which much of Europe is preparing now — the competitive framework allows utilities to shift to different, cost-effective and reliable sources of power when they are needed.  

This is particularly relevant to the northern U.S. states that suffer from the coldest temperatures. When temperatures dip, more natural gas is needed to heat homes and businesses, but if natural gas is in short supply, the utility has the flexibility to purchase and use other sources of power in a mix that prioritizes keeping costs lower. But in the Northwest, Idaho and parts of Montana, utilities don’t have this option.

In this period of persistent inflation and supply chain disruptions, consumers don’t need record-high utility bills. Yet, that is what some are bound to get this winter — especially if their utilities are stuck with monopoly pricing on wholesale power. Some forecasters predict that natural gas prices this winter will be the highest in 13 years. Utilities that can pivot in competitive markets to other power sources will be able to help their customers. Utilities in monopoly systems will just pass the cost on to consumers. 

If we care about minimizing greenhouse gas emissions, we must support market-oriented power generation across the board. According to data from the Energy Information Administration (EIA), carbon dioxide emissions in states with monopoly power systems dropped only 7.3 percent between 2008 and 2018. However, emissions dropped 12.1 percent in states with competitive power markets during the same period.

A report from last year by Jennifer Chen, at the Nicholas Institute for Environmental Policy Solutions at Duke University, found that the use of RTOs and ISOs in a free-market system improve the reach of the utilities to utilize more “far-flung but cheap renewables.” In addition, she found that regionalization improves the diversity of power sources, which is vital to reducing greenhouse emissions, increasing cost effectiveness and improving reliability.

Right now, a third of the country lives and operates at a power disadvantage. The data on competitive power market systems are clear —they have the advantage, compared with the monopoly model for delivering affordable and reliable electricity while reducing carbon emissions. It is time for the rest of the country to move to RTOs or ISOs and deliver more reliable, cost-effective and cleaner power to their customers.

Ellen R. Wald, PhD, is a senior fellow at the Atlantic Council’s Global Energy Center and the president of Transversal Consulting, a global energy and geopolitics consultancy. She is the author of “Saudi, Inc.,” a history of Aramco and how the Saudi royal family controls this multitrillion-dollar enterprise. Follow her on Twitter @EnergzdEconomy.