Ten Congressional Electricity Reforms to Improve the Economy and Environment
Although the wounds from sparring over Build Back Better (BBB) have yet to heal, their pain serves as a reminder that this country needs to pivot its climate and clean energy strategy. It’s time to embrace policies that remove clean energy blockages, inform emissions-slashing capital and grow the economy. Starting with the power industry, Congress should prioritize competition and emissions transparency.
The outlook for this Congress to pass legislation is admittedly meager, but it can still pursue an influential two-pronged strategy: push the Federal Energy Regulatory Commission (FERC) toward cultivating healthier markets and establish bipartisan agreement to align the next Congress with shared outcomes sought by the Biden administration.
FERC leadership has adjusted its agenda for decades based on congressional and presidential priorities, even though it is an independent agency. Headlining FERC’s agenda is an Advance Notice of Proposed Rulemaking (ANOPR) to overhaul transmission and generator interconnection policy. This would strike at the core of uneconomic regulation and the clean energy blockade. Additional reform avenues are also warranted.
Five Areas Where Congress Could Provide a FERC Push Without Altering Statutes
-
Redefine “good utility practice” to incorporate grid-enhancing technologies (GETs). Technologies like power flow control, topology optimization and dynamic line ratings can save billions and avoid millions of tons of carbon annually just by enhancing the use of the existing transmission system. But unlike a competitive marketplace, cost-of-service regulation motivates utilities to use the system less efficiently. Encouragingly, FERC voted unanimously across party lines last December to implement one type of GETs: temperature-adjusted line ratings. This was easy as a uniform best practice, but FERC needs more surgical tools for other GETs. Through the ANOPR and separate procedural vehicles, Congress could ask FERC to employ cost-benefit tests of GETs in areas of the grid with chronic congestion to set a higher bar for “good utility practice.”
-
Reduce artificial barriers to entry in generator interconnection. The process for generation developers to apply for grid interconnection is “causing a massive backlog and delay” in new construction. The amount of capacity backlogged equals 70 percent of 2030 clean energy targets. In the ANOPR and beyond, Congress should press FERC to prioritize reducing information and procedural barriers in interconnection, while ensuring network upgrade costs adhere to the beneficiary pays principle consistent with the dispersed nature of the evolving resource mix.
-
Bolster regional transmission planning, cost allocation, oversight and competition. A handful of planning and cost allocation improvements alone could net trillions in private investment, save consumers billions and pave the way for eliminating most industry emissions. Planning processes are notoriously short-sighted and uneconomic, requiring an overhaul to plan for long-term conditions and use of higher quality cost-benefit analyses. This is important within organized electricity markets but even more so outside of them, where transmission opacity reigns supreme. Instituting independent planning and oversight would improve planning parameters and ensure incumbents cannot stymie use of GETs and competitive solicitations, with the latter providing a 20-30 percent discount for transmission expansion. Most of this falls under the scope of the ANOPR, and it is no secret that FERC leadership seeks congressional cover to weather resistance from incumbent transmission owners.
-
Overhaul interregional transmission planning. FERC’s ANOPR is heavy on regional transmission reform and overlooks most aspects of interregional planning, which is largely non-existent in practice. Congress could add major value. On the technical side, requiring economics-based interregional transfer requirements could bolster grid resilience and build superhighways for clean energy while ensuring consumer benefits easily outweigh costs. Congress should also press FERC to overhaul the institutional design of interregional planning, such as incorporating third party expertise and community siting considerations in an efficient planning process. For example, Congress could require FERC and the Department of Energy (DOE) to sign a memorandum of understanding for DOE to convene stakeholders to help plan, provide technical input and file before FERC pursuant to Section 403 of the Department of Energy Organization Act.
-
Remove barriers to electric commodity market innovation and liquidity. Irrespective of transmission reforms, improving the tools to manage grid congestion are crucial as the resource mix evolves. Liquid, granular markets for congestion management reduce artificial costs for clean energy development and integration while improving risk management. Regulatory rules for market pricing and congestion products vary by region and result in some areas having no granular market, while others face limitations on granularity or forward periods. Some markets still suffer from subpar credit policies. Ambiguous FERC enforcement practices leave commodity markets with no clarity on what constitutes market manipulation, which chills commodity innovation and decreases liquidity. Congress should direct FERC to reform market rules and enforcement practices that inhibit nodal congestion products, while ensuring tools to detect legitimate market manipulation like physical withholding during tight natural gas markets.
Five Reforms That Require Altering the Federal Power Act (FPA)
-
Make competitive generation the law of the land. Historically, the regulated monopoly generation model has stifled innovation, hurt consumers and undermined environmental progress. The economic and environmental advantage of competitive generation grows as capital and risk decisions become more complicated with the rise of unconventional resources. Large consumers argued for competitive power generation half a century ago, culminating in national “diet” competition policy in the form of the Public Utility Regulatory Policies Act (PURPA) of 1978. Consumers stepped that up in recent years, calling for an end to the “natural monopoly” model. Truly competitive policy would render PURPA obsolete, consistent with states’ objectives. Congress could require removal of wholesale barriers to consumer self-supply and establish a minimum threshold for competitive central plant procurement without right-of-first refusal by an incumbent utility, applicable in interstate bulk power systems.
-
Strengthen competitive rules for affiliate transactions. FERC uses competitive solicitations criteria to mitigate affiliate abuse concerns. But this has not prevented some egregious anti-competitive conduct, such as those witnessed in Ohio and Illinois in 2020, where a parent company used a monopoly utility to cross-subsidize uneconomic legacy power plants owned by its competitive generation affiliate. FERC’s criteria are sound, albeit limited in practice: transparency, definition, evaluation and oversight. However, utility solicitations ostensibly satisfy these criteria but remain uncompetitive. FPA amendments could address this by requiring that solicitation criteria do not narrowly define one technology to the exclusion of others and by having equitable evaluation criteria across all bids and bidders.
-
Enable nationwide retail choice. Recent studies suggest properly designed and implemented retail competition programs send more accurate price signals, lower costs and enable product differentiation. This includes expanding clean energy access, lowering the “green premium” and ensuring any clean premium is fairly allocated based on individuals’ voluntary preferences. The CLEAN Future Act boldly had a “right to clean” provision, and ideally Congress would push a “right to anything” for consumers.
-
Require granular emissions transparency. Emissions data from the U.S. Environmental Protection Agency is severely lagged and lacks the granularity necessary to inform power consumers about their indirect emissions. The result is that the wave of voluntary corporate and retail clean energy investment—which now overwhelmingly outweighs that driven by standards—is increasingly divorced from the objective of reducing emissions. Fixing this requires granular information: the emissions of the marginal power generator in a given area based on dynamic transmission congestion. Congress could require public utilities and/or balancing authorities to disclose average hourly emissions publicly for each pricing node within a specified timeline.
-
Eliminate price controls on state policy. FERC responded to proliferating state subsidies by imposing price controls to “fix” their price suppressive effects. The primary culprit is the “minimum offer price rule” (MOPR), which remains in litigation. A constant in economics is that when one government imposes price controls to counteract the effects of another government’s subsidies, it exacerbates harm to social welfare (i.e., two wrongs don’t make a right). MOPR is bad economic policy and even worse politics. Congress should eliminate this instrument of overreach and clarify the jurisdictional bright line, such as preempting facility-specific subsidies, not portfolio attribute subsidies that preserve a role for competitive forces.
This agenda is by no means holistic. Even an area like transmission requires urgent additional reforms outside of the FPA, such as permitting reform. But this agenda demonstrates the potential of good economic policy to yield massive environmental benefits. Hopefully, this sentiment provides the basis of sound bipartisanship. Lowering costs, increasing innovation and slashing emissions simultaneously are criteria that just might forge a national consensus on climate and clean energy policy.
Image credit: vencav
