In the Beltway, No Inefficient Policy Deed Goes Unrewarded

In the Beltway, No Inefficient Policy Deed Goes Unrewarded
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In the Beltway, no inefficient policy deed goes unrewarded. That is an eternal truth illustrated well by the expansion of federal powers---at the expense of state and local authority---attendant upon efforts to ameliorate the adverse effects of prior policies to favor one set of energy technologies over others.

The latest example of this dynamic is a recent order from the Federal Energy Regulatory Commission (FERC) to the PJM Interconnection, a regional transmission organization that coordinates through auctions the purchase and movement of bulk power in 13 states and the District of Columbia. The FERC expansion of the “minimum offer price rule” (MOPR) will set a base price for all power sources in PJM’s capacity market, where generators bid to supply future market electricity demands, so as to offset the artificial competitive advantages created by state subsidies for wind, solar, and nuclear facilities.

States are subsidizing wind and solar power because of political pressures to increase the market share of “clean” electricity, notwithstanding the reality that there is nothingclean” about those power technologies. Some states have implemented subsidies for nuclear generation as well in part because federal and state favoritism toward wind power in particular allows wind facilities to underbid (sometimes to negative levels) nuclear operators, which essentially must continue to produce electricity regardless of market prices on a given day.  

In short, traditional power generation sources like coal and gas plants often find themselves competing on a playing field decidedly not flat. This has led FERC to conclude that the state subsidies have distorted cost competition in the PJM Interconnection.

Because renewable power is unreliable, FERC appropriately has elected to address that adverse condition in a multistate power market. Note that the FERC order excludes from the minimum price calculation the effects of federal subsidies for renewables, which represents a substantial preference. Those subsidies are very large on a per-megawatt hour basis, and are the major source of the reduced reliability and higher costs characterizing the U.S. electricity sector.

There also are the guaranteed market shares (“renewable portfolio standards (RPS)”) for renewables mandated by a number of states. The federal subsidies---in particular, the wind production tax credit and the solar investment tax credit---allow states implementing those guaranteed market shares to shift part of the higher costs resulting from their RPS policies onto taxpayers in other states. That is an important erosion of federalism, which the FERC order does not ameliorate because of the exclusion of federal subsidies from the MOPR calculations. That cost-shifting attendant upon the federal subsidies increases the incentives of states to mandate ever-higher market shares for renewables, and thus exacerbates the problems of unfair competition, higher costs, and reduced reliability.

So: FERC finds itself in a market environment in which federal and state policies (1) bestow large artificial advantages upon renewable power, thus (2) reducing the competitiveness of state and regional power markets, (3) increasing costs and reducing reliability, and (4) leading states to subsidize the disadvantaged parts of their power sectors.

The FERC focus on competitiveness and reliability issues in an interstate power market, however justified narrowly, is a good example of the “stovepiping” problem universal among federal administrative agencies. They have a particular mandate, they are required to pursue it, and they do so. Larger issues are too fraught politically to address, or simply are far outside their area of focus. Why not allow states to bear the consequences of their policy choices? Federal policies may make renewable power artificially cheap in the short run, but states are not required to buy it, and the longer run considerations of costs, competitiveness, and reliability are hardly irrelevant.

FERC could simply allow states to make their choices and live with them. The efforts of states to offset the distortions created by federal and state favoritism toward renewables with more distorting subsidies are not entirely unreasonable given the adverse cost and reliability effects of that favoritism. Accordingly, FERC’s goal of leveling the playing field also is understandable. But achievement of that objective will prove impossible as long as the MOPR order excludes federal subsidies from the relevant calculations. In the larger context, FERC’s order by definition will do nothing to preserve federalism: policy experimentation, and ability of citizens in a constitutional republic to choose among different policy environments.

FERC has a narrow mandate to “ensure the competitiveness” of the power markets under its jurisdiction; accordingly, FERC is pursuing a strengthening of competitive conditions. It would be better to eliminate all favoritism, whether from federal or state policies, but that may be a bridge too far. At a minimum, the FERC order should be amended to include the large federal subsidies as inputs in the calculation of the minimum prices.

Benjamin Zycher is a resident scholar at the American Enterprise Institute. 

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