Let Markets Choose, Part 2

Mark Green
Posted September 29, 2017

Earlier this week we wrote about the market perils of government efforts to favor some energy sources over others (“On Energy, Let Markets Choose”). We may as well have been talking about Friday’s U.S. Energy Department request that the Federal Energy Regulatory Commission (FERC) develop a new electricity pricing program that lets some power plants recover the costs of providing that power.

Whatever you call these preferential measures – subsidies, mechanisms, credits – they tend to foil the way markets, if left to themselves, reward innovation, promote efficiency, lower prices and work to benefit consumers.

DOE’s proposal falls in this category. It asserts that some energy sources need preferences to remain viable so that they can help ensure the reliability and resiliency of the U.S. electricity grid. It cites a recent study that uses flawed examples to question the reliability of natural gas, which in 2016 was the nation’s top fuel for generating electricity.

Marty Durbin, API executive vice president and chief strategy officer:

“[A]s we review the proposal we are concerned the agency has mischaracterized the lessons learned from past weather-related events and appears to suggest that additional regulation is the answer where markets have already proven the ability to greatly benefit consumers and give our electric system the flexibility needed to meet constantly, and often rapidly, changing electricity demands.”

As we said in the earlier post, in a larger sense the U.S. is strongest and its citizens are best served when all of the country’s energy sources play their part. Yet, the power grid’s reliability is linked to diversity of attributes, not fuel diversity. That’s one of the points in a recent study on the diversity of reliability attributes associated with the modern grid. Proposals that would shift the playing field in favor of some fuel sources, to ensure their market viability, are wrong for power generation, for markets and consumers. Durbin:

“Markets play an important role in determining energy sources, because markets reward innovation, spur efficiency, lower prices and work to benefit consumers. Over the last decade, competitive forces in natural gas markets have resulted in the shale gas boom currently providing numerous benefits to the nation, driving down prices for American consumers and further increasing the reliability and resiliency of supply. … American consumers, including families and businesses, rely on this affordable and clean-burning fuel to heat their homes, cook food, produce domestic products, and provide electricity. We need to be careful that government doesn’t put its thumb on the scale. It’s better to let markets choose, which is what the United States is seeing with the growth of natural gas as the United States’ leading energy source for electricity in 2016.”

Dena Wiggins, president and CEO of the Natural Gas Supply Association, also weighed in on DOE’s proposal:

“We agree that our electric grid must rely on a diverse fuel mix that includes all fuels, however introducing market distortions and fuel preferences into the energy mix is a disservice to consumers and contrary to the non-discriminatory principles of the Federal Power Act. Instead, competitive fuel-neutral energy markets produce the best outcomes for consumers, including a diverse fuel mix. In fact, our energy mix has never been as diverse as it is today.”

Markets should be allowed to determine an energy source’s viability based on its affordability, efficiency and other factors. Again, the diversity of attributes study found that natural gas is uniquely positioned to supply them – dispatchability, ramp rates, frequency response and others. These are among the considerations markets should be allowed to weigh to ensure the future reliability of the power grid – free of the artificial skewing that comes with preferential measures such as those proposed by DOE.