Competitive markets can help deliver climate solutions in 2022

As 2022 gets underway, climate change policy remains a top priority in Washington. Perhaps to many observers’ surprise, Sen. Joe Manchin (D-W.Va.) recently voiced support for the climate package in the latest version of the Build Back Better Act. He stated, “I think that the climate thing is one that we probably can come to agreement much easier than anything else.”

This comment came despite his recent opposition to the $1.7 trillion reconciliation bill. In addition, in early December, President Biden signed “Executive Order Catalyzing America’s Clean Energy Economy Through Federal Sustainability” to help make good on his commitment to transition the U.S. to clean energy. The order directs the federal government to be carbon free by 2030 but is also part of a larger plan for America’s decarbonization.

These major moves are sure to make a difference. The electricity sector, which is responsible for 25 percent of U.S. greenhouse gas emissions, should be a key building block to any plan. While we are discussing the energy sources that feed into our electricity sector, it is important to consider whether market structure could be part of the solution.

U.S. electricity markets generally come in two types. The first is the traditional monopoly model where an integrated public utility generates, transmits and distributes electricity to all the customers in a government designated region. These monopolies work under a cost-plus pricing system.

Under the second model, firms price compete on the generation side to meet customer demand. Consumer benefits, mainly on electricity bills, diverge under both systems. As shown in a recent study by University of Chicago’s Steve Cicala, markets reduce production costs by $3 billion per year by allocating output to more economical plants. These cost reductions are also reflected in consumer prices.  

In fact, a recent study by Pacific Research Institute’s Dr. Wayne Winegarden compares competitive energy markets to non-competitive regions and explains, “States with competitive retail electricity markets have seen smaller price growth compared to monopoly states.”

In addition to price benefits, there is another factor to consider how quickly market competition leads to diverse energy resources, namely wind and solar, to penetrate the generation market. As these markets favor low-cost resources, their uptake under competitive markets results more quickly in significant reductions in carbon emissions. According to a study by Dr. Josh Rhodes of the University of Texas at Austin,  “Regions in the U.S. that are associated with independent system operators (ISOs) reduced their total carbon emissions (from 2005 to 2019) by about 35%, whereas other regions only reduced their carbon emissions by about 27% over the same period.” 

In fact, competitive markets have deployed the lion’s share of renewable energy resources, about 80 percent of the U.S. total, even though they account for only about 67 percent of total overall capacity. More are on the way. For example, Equinor ASA was awarded a bid to build up to 1,260 megawatts (MW) for its Boardwalk Offshore Wind and 1,230 MW in the Beacon Offshore Wind Project in New York State.

Meanwhile, Hecate Energy is constructing a 500 MW solar farm in western New York, a $500 million-plus private infrastructure investment that will create over 500 construction jobs and enough electricity to power over 120,000 households. Even energy-rich Pennsylvania is seeing renewable demand grow, with Adams Solar LLC constructing a 70MW solar farm that will supply electricity for Philadelphia buildings.

The price and environmental advantages of competitive electricity markets, however, have been overshadowed recently by questions surrounding the reliability of the grid. The Great Texas Blackout in 2021 is a great example of this: The events pitted various energy sources against each other, and also raised questions about Texas’s market structure.

The reasons behind Texas’s debacle are still up for debate. These are great discussions to have as climate change increases the frequency of such unexpected weather events. No doubt resilience of any infrastructure will be a key component of future climate change battles. But shifting the blame to market structure or a single energy source would be shortsighted. Neighboring Louisiana, which had a vertically integrated monopoly, also suffered blackouts during the same winter storm. 

Like any market, electricity markets are continuously evolving and changing. Competitive markets are increasing their share as consumers become more price sensitive. But this does not mean that reliability needs to be sacrificed for the sake of lower prices.

Federal and state regulators have a responsibility to efficiently oversee these markets. Competitive markets have been doing this under their guidance over the last 25 years, and hopefully will continue to do so. 

Pinar Cebi Wilber is executive vice president and chief economist for the American Council for Capital Formation.