Energy Markets and Clean Air

As most utility officials know, there is a good battle going on in Congress these days over the Clean Air Act. The battle lines are drawn between those legislators who want the federal government to do something about carbon dioxide (a so-called "greenhouse gas") emitted by electric power plants, and those who do not. The Clean Air Act, which was originally passed by Congress in 1970, is in the middle of this fight because it is the only tool presently available to federal environmental regulators to impose new requirements on power plants to reduce greenhouse gas emissions.

Many electric utility officials, including many in the public power community, as well as our national association, the American Public Power Association, feel strongly that the Clean Air Act is the wrong tool to attack greenhouse gas emissions and that new federal legislation is required to deal with this important issue. They make a strong case that greenhouse gases are fundamentally different from the types of pollutants that the law was designed to reduce and that proven technology to reduce greenhouse gas emissions from power plants is simply not available at this time. The result of such regulations, they argue, will simply be the shutdown of numerous coal plants around the country that will not be able to incur the costs of retrofitting their plants. Some studies, in fact, estimate that EPA regulations could reduce coal plant capacity in the United States by up to 20% over the next several years.

While this prognosis is bad enough, it has even more serious implications for regions of the country that have regional transmission organization (RTO)-operated power markets, such as New England. In these regions, the costs to consumers would be magnified by a considerable amount. This is due to the manner in which electricity is bought and sold in these markets.

All electricity that is sold through the wholesale market in New England receives the same price every hour, which is known as the single-clearing price. Under this model, the plant which makes the highest offer to sell power to meet the demand each hour sets the price for all sellers in that hour (the same single-clearing price is used in the capacity markets). So, as coal plants (with lower cost energy) are gradually phased out in response to expensive retrofit costs, less efficient plants with higher operating costs will set the clearing price in energy markets. Another beneficiary of coal plant closures in the northeast will be owners of nuclear power plants, who will realize significant increases in their profits as clearing prices continue to increase. These profits, it should be noted, are in return for doing absolutely nothing, just selling their power (with the lowest operating costs) into markets that pay them as if they had the highest operating costs.

Many Americans understand that the problem of climate change and global warming may require fundamental changes in the way that energy is produced and consumed in the United States and around the world. These changes in all likelihood will include higher-cost electricity. What is more difficult to understand and defend are markets in some areas of the country that reward some producers for no reason and generate windfall profits that are simply indefensible. If consumers have to pay more for their electricity due to greenhouse gas regulation, there needs to be a direct connection between the sacrifice and the solution to the problem. RTO markets don’t contribute to the solution.