The debate over energy markets and their effectiveness has sparked a divide across the United States. While some regions, like the West, are embracing the idea of independent regional energy markets, others in the East are considering an exit from established markets like PJM. But why are there such contrasting views on market-based solutions for energy management?
The key lies in understanding that each market is unique, and often, the simpler the market design, the better it performs. The voluntary markets in the West, such as the Energy Imbalance Market, are less controversial and function more like traditional markets, allowing buyers and sellers to determine fair prices. In contrast, the command-and-control markets in the East, like PJM and ISO-New England, have faced criticism for overcomplicating matters and failing to deliver on their promises.
The issue arises when we lump all market designs together and assume a one-size-fits-all approach. This oversimplification can lead to flawed policies that are difficult to undo. When discussing energy markets, we often hear catchy phrases that may not hold up to scrutiny. For instance, the notion that "without competition, utilities have no incentive to keep costs low" ignores the existence of consumer-owned utilities. Similarly, the claim that "markets lower costs" is not always supported by studies, as efficiencies may not always benefit consumers.
One of the most controversial statements is that "RTOs are responsible for keeping the lights on." This idea, in my opinion, is a misattribution of responsibility. RTOs were never intended to be the sole guardians of reliability.
To understand the current situation, we must look back at history. In 1992, Congress passed the Energy Policy Act, aiming to lower energy prices by opening transmission lines to competition. The Federal Energy Regulatory Commission (FERC) implemented this law by recommending the creation of regional constructs to facilitate competition. States allowed their utilities to join these markets, but soon realized they were losing control over energy policy. Independent power producers, now reliant on the market, complained about insufficient returns to invest in new plants. As a result, some RTOs created "capacity markets" to ensure future resource adequacy.
As an advocate for not-for-profit electric utilities, my perspective is influenced by the municipal light plants that existed long before organized markets. From their viewpoint, the administrative structures that emerged have done more harm than good, raising consumer prices and limiting their ability to invest in new generation assets. Particularly in New England, where the ISO has consistently violated its own rules, markets have been a burden for public power, especially the capacity market.
The fundamental tool markets have to ensure future reliability is the "price signal." However, the current "price signal" system is flawed. It assumes an equal split of the bill, regardless of individual consumption. This analogy breaks down when considering the significant growth in data center load, which is far beyond what organic consumer use would dictate. Household energy bills should not bear the brunt of tech companies' investments in AI.
States like Pennsylvania and Virginia are considering leaving PJM due to concerns over rising costs and the impact on consumers. While everyone agrees that new infrastructure is needed, relying solely on annual price signals to trigger investment seems illogical. There are alternative financing methods, such as bilateral contracts, which could be utilized to power AI data centers.
The Western approach highlights the benefits of relinquishing control. If states successfully leave PJM, they could establish a new regional compact resembling the Western markets and the early days of PJM. This would allow utilities to trade megawatts while maintaining state authority over resource adequacy, without the need for RTOs to "keep the lights on," and without burdening consumers with the costs of AI's power plants.
Elizabeth K. Whitney, a managing principal at Meguire Whitney, specializes in government relations for not-for-profit energy clients in Washington, D.C. With over twenty years of federal energy policy experience, she writes the "This Week in Hyperscaling" newsletter, focusing on energy markets, environmental regulation, climate change, and nuclear power. The opinions expressed in this article are solely those of the author and do not reflect the views of Latitude Media or its staff.
