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Greening the Grid

Can markets co-exist with renewable mandates?

Fortnightly Magazine - April 2007

Part way through the recent conference on electric competition, held Feb. 27 at the Federal Energy Regulatory Commission (FERC) headquarters, in Washington, D.C., it was so quiet you could hear a hockey puck slide across the ice. No, hell had not frozen over. Rather, it was Commissioner Marc Spitzer, who had found a clever story to ease the tension and allay fears that FERC somehow might want to undo the sins of the past, and give up its dream of workable markets for wholesale power:

“My son in his hockey game gave up a couple of goals—a couple of goals early—and instead of playing harder he asked for a do-over. That’s the way with kids. They want do-overs sometimes.”

That was as close as the commission came all day to ordering a do-over in electric competition. When Chairman Joseph Kelliher had asked the opening panel about killing competition—putting the toothpaste back into the tube—M.I.T. economics professor Paul Joskow had ready his convincing reply:

“You can’t put the genie back in the bottle … unless you’re going to expropriate the generators’ property.”

In fact, Commissioner Spitzer echoed that theme a week later, as the guest luncheon speaker at an industry conference in Arlington, Va. (The Thirteenth Annual FERC Briefing, March 7, 2007, sponsored by EXNET.)

As Spitzer explained over dessert and coffee at the Ritz Carlton in Pentagon City, “not even Stalin was able to rewrite history.”

All the same, threats still remain that could undermine the market regimes now in place at the regional transmission organizations (RTOs). One threat, in particular, comes from global climate change and from mandatory renewable portfolio standards.

Can competitive power markets co-exist with government mandates for more renewable energy, or planning that dictates investments in specific resources deemed to offer public benefits?

Consider: What is the point of locational marginal pricing (LMP), which offers market price signals at thousands of points on the grid, if regulators will simply mandate a fixed market share for renewable energy, without regard to price? How do LMPs help reveal where to build new plants for maximum profit, if the next new unit is a wind turbine? Or perhaps an oceanfront hydro facility built to capture wave or tidal energy? Each must locate where the energy resides; none can simply choose a site at the highest-priced node.

Roy Thilly, president and CEO of Wisconsin Public Power Inc., who testifies frequently on behalf of transmission-dependent utilities, often urging infrastructure ahead of market structure, explained in a nutshell why competitive markets seem to many not to offer the right solutions to today’s problems:

“Power plants are not being built by LMP signals. Wind has to be built where there’s wind. LMP tells you to build it at the load. Coal has to be built where you can site it, where there’s an opportunity for carbon sequestration, where there is water, where it is permittable. Nuclear is not going to be built at the load centers.

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