Electricity Primer - The Basics of Power and Competitive Markets
Competition in Electricity Markets
Competition in electricity markets - as with competitive market structures for other commodities - creates incentives for efficiency and innovation while providing the most affordable prices consistent with long-term investments. From 1995-2004, significant gains in efficiency, attributable to competitive markets, were seen in coal and nuclear plants in the eastern United States.4 Competition also led to the innovation and increased deployment of new gas-fired generation technologies providing significant new efficiencies and environmental controls. These efficiency gains translate to reduced fuel use, lower costs, lower emissions and fewer power plants needed to meet demand.
Competitive markets also transfer much of the risk of a costly and long-term power plant investment from the captive rate-payers of a vertically-integrated utility to competitive suppliers. In states with ISO/RTOs and in regions that hold independently overseen competitive bidding for generation resources, the days when a rate-based plant was built 200 or 300 percent or more over the initial cost projections, with the excess costs footed by captive ratepayers, are over so long as robust competitive electricity markets discipline plant development costs.
The decision to move to increased competition in electricity markets was not made by Congress and the states in a vacuum. It was no accident that competitive electricity markets were developed after electricity rates skyrocketed in the 1970s and 1980s due to a number of factors, including large cost over-runs in building traditional utility-owned capital intensive baseload power plants. As the nation faces a situation again where the need for new baseload plants is looming, it is important to remember the past to avoid repeating costly mistakes.
Today, rates are rising everywhere because of significant input cost increases such as for fuel, labor, and construction materials, as well as regulatory uncertainty. It is important to note, however, that these costs are rising in all regions of the country regardless of market structure. In fact, states that have chosen to further pursue competitive markets have seen a comparative decrease in their power costs when compared to other states.5
The path to competitive power markets has been one affirmed numerous times by both state and federal governments. As stated by the Federal Energy Regulatory Commission in a June 5, 2006 press release, "The Energy Policy Act of 2005 represents the third major federal law enacted in the past 30 years to promote wholesale competition... These laws promoted competition by lowering barriers to entry and increasing transmission access." While refinements are necessary as these markets evolve and mature, competition is bringing real benefits to consumers across the country.
4 Global Energy Decisions, Inc., "Putting Competitive Power Markets to the Test," 2005
5 Howard J. Axelrod, David W. DeRamus and Collin Cain, "The Fallacy of High Prices," Public Utilities Fortnightly, November 2006