Navigating Regulation of U.S. Electricity Grids
This month, we welcomed Ari Peskoe for a week-long visit at the Kleinman Center. A highlight of Ari’s visit was his public lecture titled “Power Over the U.S. Electric Grid”.
Ari is the Senior Fellow in Electricity Law at the Harvard Law School Environmental Law Program Policy Initiative. He has a background in electricity regulation, on issues ranging from electric vehicles to constitutional challenges to states’ energy laws.
This blog post provides an overview of Ari’s talk.
Ari began by providing some history on electricity regulation. Today, electricity regulation is no simple topic. But as Ari explained, it used to be much less complicated. In the early 20th century, power plants were built to meet local demand. There was a growing population, growing demand, and increases in efficiencies made power cheaper to produce.
Then in the 1970’s, factors such as the oil embargo, inflation, and an increase in natural gas prices led to higher power generation costs. Growth also slowed, leading to a rise in consumer bills and the public became increasingly concerned. Around the same time the environmental impact of energy generation was garnering more public scrutiny. All of the sudden eyes were on state public utility commissions (PUCs).
States reacted with more active regulation. Utilities, instead of simply building new plants, were compelled to explore other options, like storing energy or purchasing other types of power to create a more diverse portfolio.
FERC opened the doors to restructuring and competition with Orders 888 and 889, by requiring open access to transmission systems and introducing the concept of independent systems operators. FERC later issued Order 2000, promoting the concept of regional transmission organizations (RTOs) that would facilitate cross-state management of electricity supply and demand. These regional markets provided a platform for competition and allowed power generation companies to bid into the market how much power they are willing to sell and at what price. The RTO then weighs offers against demand to pick lowest cost power to consumers. FERC maintains exclusive authority over wholesale competitive markets.
In the 1990’s, electricity restructuring in some states removed vertical integration, for example, no longer allowing a distribution company to uncompetitively supply power from its own generation assets.
This change in industry economics and federal and state regulation has many benefits, but also makes things complicated. Historically, some states ceded control to the market over what types of electric generation was built and, as a response, states introduced energy credit programs to incentivize different energy types. The Renewable Portfolio Standards (RPS) policy requires that when the state-regulated utility purchases power, it purchase credits that ensure a certain percentage of energy is supplied from renewable sources. The state, through the creation of credits, created a change of the resource mix on the grid.
Looking at the electricity grid today, there are some big issues currently up in the air. Last year, New York and Illinois enacted a new policy of Zero Emissions Credits (ZECs) which are available for nuclear generators. This helps nuclear generators that weren’t operating economically it in the market. In response, competing “merchant” generators that do not get credits are suing. If left up to the market, many of these nuclear plants would retire, which would be beneficial for merchant generators. Merchant generators claim the states are changing the power price and intruding on the authority of the federal government’s exclusive authority over wholesale power rates. This is still in the courts but could have a big impact on the electricity grid and state credit programs when it is decided.
Another issue up for debate is the Department of Energy recent “resiliency pricing” proposal. This proposal would reward coal and nuclear plants in competitive markets that store fuel on site, with the rationale being that these fuel sources are more fuel secure. It is widely criticized as a bailout to struggling coal and nuclear. This proposal is currently in process and while coal companies are predictively supportive, nuclear companies are largely not supportive. Many companies with nuclear plants have diverse portfolios and recognize that this proposal could hurt their other assets. Along with the ZEC issue, we are still waiting to see how this will play out.
Ari’s talk provided a great overview of how the electric grid is regulated. It is an intricate system and the pending questions with the Zero Emissions Credits and DOE’s “Grid Resiliency Pricing Rule” may throw more wrenches in the system.
Did you miss Ari Peskoe’s talk? Watch the recording of the lecture. And don’t miss out on other upcoming Kleinman Center events.
