This winter’s extreme weather, including the dramatically named “bomb cyclone,” brought a renewed public focus onto the electric grid.
Usually, consumers are content as long as the lights turn on and their monthly bill is affordable. Now, grid resiliency, reliability, and infrastructure are being seriously discussed by government officials, consumer groups, and electricity providers.
{mosads}That the grid is tested from time to time by extreme weather events has been used as an excuse to intervene in electricity markets. I’ve argued in the past that not all subsidies are created equal — a subsidy can be justified if it promotes the public good by correcting a market failure. However, recent proposals for new coal and nuclear subsidies only serve the financial bottom line of a few energy companies struggling to compete in the free markets. Policy should support competition, not specific competitors.
Late last year, the U.S. Department of Energy proposed to intervene in competitive wholesale electricity markets — markets operating on free market principles — in order to give financial support to struggling coal and nuclear plants and ultimately benefit a few companies while raising costs across the Midwest and Northeast. The proposal was voted down by a regulatory commission in January, and afterwards, Energy Secretary Rick Perry stated that he put forward the proposal in order to jumpstart a conversation about reliability and resiliency. We should take the secretary at his word, but we should also ground our public debate in a firm understanding of the facts.
The “bomb cyclone” is a real-life datapoint showing how market forces help keep the lights on even amidst extreme weather. Advocates for new subsidies argue that the price spikes after the “bomb cyclone” justify the need for government intervention. To the contrary, the price movements demonstrate an efficient market at work. Short-term price increases in a competitive electricity market help electricity providers respond quickly to increased demand. Most consumers barely notice these short-term price fluctuations. In most cases, they are short-lived, sometimes only for a few minutes. When we understand how electricity markets operate, they’re a lot less scary.
The electricity market operates a bit like Lyft and Uber. In periods of increased demand, the price of a Lyft ride increases. The price increase sends a signal (“price signal”) to other drivers to get on the road (“the marketplace”). Ultimately, this price signal results in more cars on the road, meeting consumer needs, and ultimately those extra cars drive prices back down. For most of the time, Lyft prices are at their normal, affordable levels. When prices increase due to increased demand, the structure of Lyft and Uber are designed so that those increases are short-lived while consumer demand is met.
This is how wholesale electricity markets work — prices rise and fall based on demand and this mechanism brings more power online, ensuring adequate supply and affordability. Those markets depend on a diversity of fuel sources and a level playing field between them. Just like your Lyft or Uber might be a Toyota, Ford, or Nissan, the electricity market delivers you energy regardless of the source so long as it can compete on reliability and price. Consumers already use a number of fuel sources each day, though they may not know it.
Furthermore, grid operators have a number of tools already at their fingertips to deal with extreme weather situations, such as power supply agreements, demand response tools, and fuel-switching. Often, they sign long-term contracts with electricity generators, shielding consumers from price fluctuations. Market forces, combined with smart contracting, have demonstrated that competitive wholesale markets have the ability to maintain reliability while not leaving consumers out in the (literal) cold.
Of all the hours in which power systems were disrupted over the past five years, only 0.00007 percent of that downtime was due to fuel supply issues, according to an analysis by the Rhodium Group. In fact, most of the disturbances were caused by downed power lines or other transmission issues in extreme weather.
Long-term considerations for the grid in wholesale markets should focus on fuel-neutral investments and policies that keep electricity reliable, resilient, and affordable. This includes investments in transmission infrastructure, pipelines, and more storage — recommendations echoed by the organizations currently monitoring and operating our regional grids.
This is an important, even critical, debate to have, but major changes to our electricity markets should not be rushed into or made in haste. It may not make great headlines, but deliberate and careful evaluation of changes to the grid is the best path forward.
Ben Ho, Ph.D., is a professor of economics and former lead energy economist at the White House Council of Economic Advisers under President George W. Bush.