Growing renewables by deregulating utilities

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The question of whether or not to open up wholesale electricity markets to nonutilities is an important one for the renewable energy market.  Currently, there are three components to our electricity markets; power is generated, transmitted, and distributed.

In the past, all three of these processes were managed by large, vertically-integrated utilities.  For most of the first half of the twentieth century, direct competition in electricity markets did not exist.  Similar to the telecommunications and aviation industries at the time, monopolies were allowed to become established; regulations were put in place to set prices so that utilities could recover the costs associated with building the power plants, erecting transmission lines, and managing distribution through electrical substations.  These same regulations also prevented competitors from entering established electricity market places.

Regulated prices resulted in an electrical transmission system that was concerned more with expansion than it was with efficiency; made sense at the time.  Resources were still relatively abundant, and there was no reason to change the status quo.  Times have changed though.

Starting in the 1970s, conditions of all four major feedstocks for electricty generation (oil, natural gas, coal, and nuclear) began to change.  The beginning of a shortening of supply in energy generating capability caused utilities to either raise the regulated price of electricity or lower demand somehow. 

More power was needed in some areas, while other areas of the country had excess capacity.  So, an upgraded transmission system was needed in order to move electricity thousands of miles across the country.  This was the birth of the concept of dismantling the vertically-integrated utilities into the three separate functions they performed (generation, transmission, distribution).  Utilities began to toy with the idea that they could purchase electricity more cheaply than they could generate it on their own; they were turning into power brokers.

The conservation policies advocated by President Carter during his administration were a reaction to this new reality that fossil fuels were not only becomming more limited in supply, but they were also becomming more expensive due to their environmentally damaging effects.

By the 1990s, regulations governing transmission rights were expanded to allow transmission lines to carry power from nonutility sources.  In most cases, customers were still regulated to draw their power from local utilities, but in some States however, customers were allowed a choice for their electricity consumption.

The most famous of these deregulation measures where customers were allowed a choice of power supplier is in the case of California Public Utility Commission.  In the 1990s, California sought to broaden the number of electricity suppliers in their State by creating an exchange where power was sold.  The exchange was not limited to utilities; anyone could sell power on the market.  Retail rates for customers were frozen so as to allow utilities to make up the costs associated with building the already established generating facilities, transmission lines, and distribution centers (stranded costs).  If costs of generating power went down, utilities could reap profits by charging customers the fixed rate.  Well, for California at the time, supply shortened and demand spiked.  Since utilities were purchasing their power from the exchange, they were forced to pay more for power than they were allowed to charge their customers for it, and their brownouts, blackouts, and bankruptcies are part of history.

So does deregulation work?  It worked in the airline industry; it worked in telecommunications.  America bases its entire economy on a free market system, but then overregulates its power market and stifles competition through the allowance of the establishment of utility monoplies.

Whereas for most of the twentieth century, vertically-integrated utility companies generated, transmitted, and distributed power, the twenty-first century is already seeing that trend change.  In States like New Jersey, New York, and Massachusetts customers can now choose from dozens of power suppliers; understandably, scared off by its initial experiment, California is reverting back to a monopolistic utility model.

In order to inject intelligence into the grid, it will be necessary to open up the power generation market to more competitors.  Contructing a national transmission system which can send power from solar fields in the Southwest, wind farms in the northern Plains, geothermal facilities in the Northwest, and biofuel generators in the Southeast to any place in the country will aid in opening up the power market.  As for distribution, smart meters and demand response systems as well as battery storage will allow loads to be balanced more efficiently.

It is time to separate the generation, transmission, and distribution of energy into three separate utility sectors that can be molded to allow for more competition and efficiency while also lowering overall costs for consumers and improving reliability.  Large utilities may still be able to vertically integrate, but separating the power sector into its three components will allow us to tackle the issue of diminishing energy supply coupled with a growing population.

Read more articles by 72JAG, John Guerrerio, HERE.