Make America burn whale oil again?
An “all-of-the-above” policy would allow all technologies and fuels to compete on their merits, with markets determining the best role for different fuels based on their evolving competitive relationships. That’s fair, pro-growth and puts America first.
Far from an emergency, one fuel source replacing another – or “fuel substitution” – is a natural progression in energy markets. The role of different fuels evolved through different eras, from the swift rise of biomass during the agricultural revolution to the dominance of fossil fuels during the industrial revolution. Consider that, for illumination alone, whale oil dominated in the 1700s and early 1800s. Kerosene then steadily replaced whale oil, followed by various forms of manufactured gas and piped natural gas. Eventually, electricity eclipsed natural gas for lighting. The transition from biomass and whale oil to today’s complex electricity system spurred massive economic growth. This was all made possible by letting markets run their course.
Today, fuel substitution is fast underway for power generation, primarily powered by the exceptional pressure of inexpensive natural gas that is driving many coal and nuclear plants out of the market. Secondarily, falling costs and subsidies have spurred growth in wind and solar.
Should we be concerned with the growth in some fuels and the decline of others? Not if they’re the result of a healthy marketplace.
According to the independent monitors tasked with evaluating the health of electricity markets in each region of the country, markets – despite imperfections – are performing well. These monitors also insist that no grid emergency exists and that shifts in the fuel mix mostly reflect changes in economic fundamentals. In fact, monitors’ greatest concern is not about market performance, but rather the uptick in political interventions that disrupt these natural transitions.
Anyone with in-depth knowledge of wholesale electricity markets knows that the institutions overseeing them have an incredibly strong commitment to grid reliability. The two most seasoned FERC commissioners, Democrat Cheryl LaFleur and Republican Robert Powelson, demonstrated before Congress a firm understanding of both how markets function as well as how the institutions that oversee them work. In short, they recognize markets’ long track-record of robust reliability, the procedures safeguarding reliability and the imperative of having fuel-neutral rules.
Unfortunately, flawed research has led to counterproductive recommendations that government should change the rules of the game to promote certain fuels. These “studies” run hypotheticals of what would happen if generators operating on certain fuels retired. This method does not reflect the incentives in markets that determine actual outcomes, making these hypothetical exercises devoid of meaning and often misleading to policymakers.
Quality studies would critique how well rules permit markets to signal the substitution of one fuel type for another. After all, the entire rationale for market rules is to align incentives for market participants with the efficient and reliable operation of the electricity system.
FERC should thus examine the rules that affect investment incentives, especially in context of the evolving fuel mix. Improving rules for how market prices reflect generators’ costs and the value of electricity during grid scarcity conditions is a valid pursuit. But FERC should never make changes to rules to achieve a predetermined outcome of what its commissioners think the fuel mix ought to be.
By all credible indications, the current fuel transition benefits our economy immensely and presents no grid emergency. It’d be one thing if the alarmist tone over fuel migration came from the market monitors or the institutions responsible for grid reliability. But this is not the case – which is why the Energy Department is struggling to find a legally defensible approach to bail out unprofitable plants. Bailout pleas are instead coming from rent-seeking companies that backed fuels having a tough go in the market, as well as those that are sympathetic to certain fuels.
Meanwhile, expert and customer groups overwhelmingly oppose bailouts. They just want the government to let markets work. The market monitor for the region facing the Energy Department bailout noted that some of the region’s plants are economically obsolete while many coal and nuclear plants remain profitable. At the same time, frustrated manufacturers in the region say bailing out unprofitable plants would mean that the Energy Department will have decided manufacturing jobs are not as important as those at economically-obsolete power plants.
Economic transitions make for difficult politics. But history will reflect favorably on those who stood for allowing markets to run their course. Subsidizing the recent past is just slightly less absurd than suggesting America burn whale oil again. If we can Free Willy and keep the lights on, surely we can free markets and do the same.
Image credit: Tory Kallman
