Five Truths About Grid Reliability and Deregulation
Before electricity had been restored last month, false claims proliferated as swiftly as the outages themselves. Misguided criticisms included excessive blame levied at wind power, while others have fallen into the trap of blaming “deregulation” of the power industry. That’s dead wrong for two reasons: power markets aren’t “deregulated” for reliability purposes and the data show that competitive markets have a superior reliability record to the monopoly utility model.
Now is the time to focus on the root causes of February’s outages and let the full body of evidence speak to the relationship between regulation and grid reliability. To that end, there’s five truths to go by:
1. February’s generator outages and rotating “blackouts” affected market and monopoly states. Three grid operators implemented rotating outages across much of the Midwest and South, of which two are comprised predominately of generators owned by monopoly utilities. The other, Texas, deserves more focus because of the greater number and duration of customer outages. Paradoxically, a key lesson in Texas is that it’s not enough of a market. That is, consumers’ reliability preferences are suppressed by administrative rules, whereas reforms to integrate consumers into the market would produce more voluntary demand reduction and more selective involuntary customer outages. This would have avoided much of the economic and public health consequences witnessed in February.
2. Competitive generators are regulated, especially for reliability purposes. National generator reliability standards are developed by the North American Electric Reliability Corporation (NERC) and approved by the Federal Energy Regulatory Commission (FERC) for all generators, irrespective of their competitive or monopoly status. Preliminary data indicate that the causes of most generator outages in February are linked to insufficient weatherization and natural gas fuel supply. Addressing this through market rules to incent voluntary behavior versus mandatory reliability standards is where the fair debate on the merits of regulation reside. The FERC is already exploring making winter weatherization standards mandatory.
3. Competitive markets produce superior reliability behavior. Upon the introduction of mass competitive power ownership in the 1990s, competitive generators immediately began to reduce power plant outages and invest in reliability-enhancing innovation relative to monopolies. In recent years, this compelled Texas generators to have industry-leading reliability performance, especially for extreme weather like heat waves. These results are predictable, as some competitive power companies base executive bonuses off the ability to produce power during price spikes. Simply put, aligning the profit motive with generation output is a potent and effective reliability policy.
4. Organized electricity markets have a superior reliability track record. This applies even in areas where monopoly utilities own the generation. Monopoly states, like Louisiana, have seen improved reliability when they joined an organized market, where the grid operator dispatches power plants based on dynamic regional transmission conditions, unlike the previous operation of those plants that poorly reflected grid conditions. The southern states who remain holdouts from organized markets would be wise to inquire about the growing reliability advantage of markets, especially when it comes to extreme weather events.
5. The monopoly model is increasingly disadvantageous for grid reliability. The monopoly model has always stifled innovation and elevated costs unnecessarily, but it was serviceable on the reliability front. That’s because past power plant decisions were easy, such as choosing to build a coal or gas-fired plant and then operating them simply, often at a steady state. However, as the generation mix relies more on diverse and unconventional resources, like renewables and storage, keeping the lights on requires dynamic, complex decisions. With this in mind, consumer groups, independent monitors and grid operators in the great plains and midcontinent areas are increasingly concerned by the inflexible operations and misaligned investments of monopoly utility power plants from grid-operating conditions. In fact, they are engaging states to encourage regulators to address reliability concerns as the generation mix evolves.
Some have suggested that the regulatory tools of the past are best positioned to meet future reliability challenges. Independent grid monitors say otherwise, noting evidence of a growing market advantage where reforms should enhance competition and choice. The only question is whether political responses fall victim to the false security of state-sanctioned monopolies, or if policymakers are brave enough to empower competitive American enterprises to unleash the grid of the future.
Devin Hartman is the director of energy and environmental policy at the R Street Institute.
Beth Garza is a resident senior fellow of energy and environmental policy at the R Street Institute.