The Pennsylvania Electricity Generation Customer Choice and Competition Act was passed in 1996, restructuring the state's wholesale and retail electricity markets. This report examines the impacts of the restructuring law twenty years later—using a variety of metrics and available data, we assess the law's performance and impact on wholesale and retail electricity markets in Pennsylvania, and identify policy issues ahead.
Prices. In real terms, PJM Interconnection’s (PJM) average annual wholesale energy price of $36.26 per megawatt hour (MWh) in 2015 was lower than the 2000 price of $42.28/MWh (nominal price in 2000 was $30.72/MWh). Regional natural gas hub prices are well correlated with PJM power prices, and the primary driver of the downward trend in power prices. Regulated generation is compensated on an average cost basis, while marginal costs in the market drive compensation for competitive generation. With gas generation as the primary marginal power resource, competitive wholesale markets have enabled sustained, low natural gas commodity prices to be passed through to electricity markets, benefitting power consumers and financially harming some generators.
Capacity Resources. PJM’s capacity market helps to ensure sufficient resources are available for reliability. From 1995 through 2015, there was a 17 percent net increase in installed capacity within PJM. Over this time period, 54.1 gigawatts (GWs) of capacity has entered the market and 24.7 GWs of capacity exited the market. Some of these resources entered the market as new delivery zones were integrated into PJM’s system. In addition to installed capacity within the PJM footprint, PJM has other capacity tools available, including for example, imports/export, demand response, and energy efficiency.
For PJM delivery years (June 1 through May 31) beginning 2007/2008 through 2014/2015, the majority (65.4 percent) of new capacity was market funded, and the remainder (34.6 percent) was funded by non-market (i.e. cost of service regulated) investment. Market funding is expected to increase to 85 percent for the period spanning delivery years 2015/2016 through 2018/2019, with the remaining 15 percent projected to be non-market funded.
Pennsylvania-based installed capacity increased 18 percent from 1996 to 2014, representing a 7.1 GWs of installed capacity. This includes 15.1 GWs of new capacity entry and 8 GWs of capacity exit. In addition, Pennsylvania installed capacity grew by more than 1.8 GWs in 2015 and there are over 5.5 GWs of capacity currently under construction.
PJM’s resource adequacy planning activities develop parameters (e.g. target installed reserve margin) for the capacity market, to help ensure reliability. PJM has consistently procured a reserve margin greater than its target installed reserve margin, a trend widely observed across reliability organizations.
Operational Efficiency. Numerous academic studies have identified improved generator operational efficiencies (e.g. increased thermal efficiency, reduced reactor outages) and reduced labor and non-fuel costs as benefits of wholesale restructuring. PJM data indicates the pool-wide rate of generator outages has generally decreased since restructuring. In 1996, the pool-wide equivalent demand forced outage rate (EFORd)—a metric for the probability that a generator will not be available when needed—for PJM was 11 percent, in 2015 the EFORd was 6.9 percent.
Fuel Mix and Output Growth. Compared to 2005 levels in PJM, coal-fired generation in 2015 had decreased by more than 16 percent, while natural gas-fired generation increased by 20 percent. In 2005, coal (55 percent) was the dominant fuel source for generated power in PJM, followed by nuclear (34 percent) and natural gas (5.3 percent). By 2015, nuclear (35.7) was the dominate fuel source in PJM, followed by coal (35.2 percent) and natural gas (22.9 percent). From 2005 to 2015, annual MWhs generated in PJM increased by 10.8 percent, representing a compound annual growth rate (CAGR) of 0.94 percent over this 11 year period.
Compared to 1996 levels, coal-fired output from Pennsylvania generators in 2014 dropped by 16.8 percent, while natural gas fired generation increased by 26 percent. In 2005, coal (55.5 percent) was the dominant fuel for power generated in Pennsylvania, followed by nuclear (35 percent) and natural gas (5 percent). By 2014, coal (35.7 percent) and nuclear (35.6 percent) were close to equally sharing the dominant generator fuel position in Pennsylvania, followed by natural gas (24 percent). From 1990 to 2014 in Pennsylvania, annual generation increased by 26 percent, representing a CAGR of 0.92 percent over this 15 year period.
Environmental Emissions. Between 2005 and 2015 in PJM, on a pounds of emission per MWh basis, carbon dioxide emissions decreased by 21 percent, nitrogen oxides decreased by 70 percent, and sulphur dioxides decreased by 81 percent. These reductions were attributed to reduced use of coal-fired generation. Between 2005 and 2014 in Pennsylvania, on a total metric tons of emissions basis, overall carbon dioxide emissions fell by 21 percent, nitrogen oxide emissions fell by 31 percent, and sulphur dioxide emissions fell by 74 percent.
National Pricing Overview. Prior to restructuring, Pennsylvania’s retail electricity prices were 15 percent higher than the national average. As of 2015, the statewide annual average retail price of electricity was 0.1 percent below the national average. On a statewide annual average basis, over the time period reviewed (2001 through 2015), retail electricity prices to Pennsylvania’s residential and industrial customers tended to be above national averages, while prices to the commercial sector tended to be below the national average.
Pennsylvania Commercial and Industrial Retail Prices. During full implementation of restructuring (from 2011 to 2014), statewide average annual retail electricity rates (on a cents per kilowatt hour basis) to commercial and industrial shopping customers were generally lower than utility default service rates, providing these customers with the potential for cost savings from retail shopping. From 2000 to 2014, statewide average annual distribution rates to the commercial and industrial sectors have generally decreased (on a nominal basis), and have not kept pace with inflation. This has provided additional cost savings to these sectors.
Pennsylvania Residential Retail Prices. During full implementation of restructuring (from 2011 to 2014), statewide average annual retail electricity rates to residential shopping customers were higher than utility default service rates. From 2000 to 2014, average annual distribution charges to the residential sector increased at rates exceeded the rate of inflation.
Data limitations impact this conclusion. Competitive retail suppliers argue many retail offerings provide additional attributes (e.g. renewable energy, discounts and incentives) that command higher prices, making comparison with standard utility service inappropriate. Supporters of utility default service argue higher retail supplier costs and greater market volatility drive cost premiums. More research is needed to determine the magnitude to which these factors contribute to the observed residential price differential.
Further analysis helps to understand restructuring outcomes for the residential sector.
Cost Impacts of Retail Restructuring for Smaller Customers. Residential and small commercial generation and transmission prices and total bundled bills from 1996 (prior to restructuring) were adjusted for inflation and compared to January 31, 2016 default utility prices. The results indicate that retail restructuring has benefitted most small commercial and residential customers, through utility-offered default service products. Residential generation and transmission default utility prices were 2 to 41 percent lower than 1996 inflation adjusted generation and transmission prices for Duquesne, MetEd, PECO, Penelec, Penn Power, and PPL. For West Penn Power, the 2016 default utility generation and transmission price was 7 percent higher than the 1996 inflation adjusted generation and transmission price. For the small commercial sector, 2016 default generation and transmission prices were 5 to 56 percent lower than 1996 inflation adjusted generation and transmission prices for Duquesne, MetEd, PECO, PECO summer, Penelec, PPL, and West Penn Power, whereas the 2016 default price was 9 percent higher than the 1996 adjusted price in Penn Power.
These benefits were primarily achieved by requiring utilities to purchase energy, capacity, and related services in competitive wholesale markets, rather than through cost-of-service regulated generation. Residential customers taking restructured default generation and transmission service from their local utility have the potential to save over $818 million in 2016, compared to inflation-adjusted 1996 regulated generation and transmission costs.
The total bundled bill analysis—which examined default generation and transmission prices as well as distribution prices—yielded interesting results. Total bundled bills for residential customers in 2016 were 16 to 21 percent lower than 1996 inflation adjusted total bills for Duquesne, PECO, and Penn Power. However, 2016 total bundled bills were 4 to 12 percent higher than 1996 adjusted total bundled bills for MetEd, Penelec, PPL, and West Penn Power. These data indicated that for total bundled bills, increases in distribution prices were outstripping savings realized from restructuring’s lower generation and transmission prices in some areas. Recall, on a statewide annual average basis, distribution prices to the commercial and industrial sector have trended down over time, while residential distribution prices have trended up. Further analysis was required to better understand residential distribution price trends, even though the restructuring law did not change the way these rates are regulated.
Distribution Price Analysis. An analysis of delivery prices to the residential sector was performed, comparing 1996 inflation adjusted delivery prices to 2016 delivery prices for PA distribution utilities. The analysis found that for West Penn Power, escalating generation, transmission, and delivery prices are driving total bill increases beyond 1996 inflation adjusted levels. For MetEd, Penelec, and PPL, increases in delivery prices are likely overwhelming savings realized from default generation and transmission price savings, resulting in 2016 total bills being higher than 1996 inflation adjusted total bills. Duquesne Light and PECO residential customers are experiencing total bundled bill savings in 2016, compared to 1996 adjusted total bills, due to default generation and transmission price savings that have overcome delivery price increases. Penn Power residential customers have experienced total bundled bill savings in 2016 compared to 1996 adjusted total bills, due to 2016 default generation, transmission and delivery prices savings compared to 1996 adjusted prices.
Retail Shopping Statistics. Shopping statistics were examined and found to be consistent with many contemporary observations. Shopping penetration is highest in the industrial sector with most electric distribution company (EDC) territories seeing over 80 percent of customers shopping. Commercial sector shopping ranged from 30 to 50 percent of EDC customers. Residential sector shopping ranged from 22 to 46 percent among EDC territories.
Residential Retail Product Offerings. Retail offerings to the residential sector were examined to understand non-monetary benefits that may be available to the residential sector from shopping, which were not available prior to restructuring. Restructuring has provided residential customers in each Pennsylvania distribution company territory examined with new options about rates and rate plans, including between 57 and 138 competitive offerings per area. Most of these new plans were fixed or variable rate plans. In addition, restructuring has opened the possibility for innovative rate and product offerings to be made available to the residential sector. By far, renewable energy plans have been the most widely offered innovative product available to residential customers. There have been far fewer innovative rate and product offerings available related to unlimited usage flat bill, discounts and incentives, and net metering plans. Many innovations that were expected (e.g. time of use, energy efficiency and conservation) are either not available or not listed on the PA PUC’s www.PaPowerSwitch.com shopping website.
Universal Service. The restructuring law’s implementation orders required significant increases to Customer Assistance Program (CAP) and Low Income Usage Reduction Program (LIURP) funding. These increases (required from 1999 through 2002) are documented for each EDC, along with post-restructuring program funding trends. Comparing 2014 LIURP funding levels with 2002 inflation adjusted levels, we find LIURP Met-Ed, Penelec, PennPower, PPL, and West Penn program funding has increase at or above the rate of inflation, while Duquesne Light and PECO program funding levels have not kept pace with inflation. For 2014 CAP program funding, we found all EDC program spending has kept pace with inflation.
Policy Choices Ahead
The report outlines just seven key issues impacting Pennsylvania’s retail and wholesale markets, where policy choices will likely be needed in the short to medium term. It is necessarily an incomplete discussion. Good policymaking will ensure that generation markets are competitive, electricity becomes cleaner, and power remains affordable and reliable.
In examining future solutions, there are opportunities to develop policy solutions that synergistically address multiple challenges, but these solutions will take creativity, cooperation, and coordination across traditional jurisdictional boundaries and will likely depart from existing paradigms.
Key policy choices impacting retail markets include creating a sustainable utility business model for the future, developing a modern, resilient, and secure grid that can accommodate the next generation of electricity service, leveraging new market opportunities such as transportation electrification, and making choices about utility default service.
Key policy choices impacting wholesale markets include maintaining market efficacy in the face of state policy interventions, making decisions about the ever-evolving capacity market in light of an increasingly complex set of resources and stakeholder needs, and integrating and optimizing the value of distributed energy resources for wholesale power markets.