R Street study: Why risk and reliability matter more than fuel diversity

WASHINGTON. (May 10, 2017) – Having a diverse fuel supply is not, in and of itself, a valid policy objective and at best only serves as a poor proxy for other goals, according to a new policy brief published today by the R Street Institute.

Declines in the market share of coal and nuclear generation have led some observers—particularly organized political interests—to bemoan that the rise of natural gas and renewables will leave the U.S. energy mix exposed to insufficient fuel diversity. In fact, the nationwide trend has been toward greater fuel diversity, notes author Devin Hartman, R Street’s electricity policy manager.

Hartman makes the case that there is little empirical evidence to support claims associating a diverse fuel supply with improved performance of the electricity market performance. Rather, Hartman notes, policy interventions to promote greater diversity usually undermine market performance.

“It is time to end the presumption that diversity in electricity supply is inherently beneficial, even a necessity,” Hartman said. “This presumption manifests in industry catchphrases, campaign slogans, government policy objectives and beyond—often with disastrous consequences.”

Policymakers and regulators can improve the performance of electricity systems by focusing on incentives for efficient risk management and reliability-enhancing behavior, which may be associated with fuel diversity but aren’t directly caused by it. Market mechanisms are ideal tools to signal behavioral improvements. That begins by ensuring regulatory and market structures assign risk to those who make investment decisions, rather than socialize it across captive ratepayers.

“Fuel diversity was not a major concern when coal provided most of the country’s electricity. Now, market forces are pushing natural gas into the dominant position,” said Hartman. “Let’s push policymakers to ensure markets have appropriate signals for managing risk and reliability—not fuel diversity—so that markets, not political favoritism, continue to drive investments consistent with fundamentals.”

 R Street is a nonprofit, nonpartisan public policy research organization whose mission is to promote free markets and limited, effective government. It has headquarters in Washington, D.C. and five regional offices across the country. Its website is www.rstreet.org.


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