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Why the Electricity Market Needs Reprogramming

The Energy Department’s study of the power grid is 187 pages long but it can be summarized in five words: the energy markets are failing us.

"Society places value on attributes of electricity provision beyond those compensated by the current design of the wholesale market," the study found.

Economists like to say that markets "optimize" production and consumption; that is, they set prices in a way that induces suppliers to bring forth the right amount of whatever is being traded, and lets consumers make wise decisions about how much to use, all in a way that improves everybody’s welfare. That’s true, as far as it goes.


But markets are a little like computer programs; they only do what they’re told to. The best they can do is to optimize the factor they’ve been told to use, in this case, price. The market is a tyrant with a hyper-focused goal. The electricity markets are set up almost entirely to optimize price.
But if the economy needs anything else, some policy intervention is required.

And there is a lot of intervention in the energy marketplace already. There are production tax credits for wind, investment tax credits for solar, and state quotas for both of them. There are big hydroelectric projects built by state governments or Washington. There are programs to reduce demand by collecting money from all customers, and spending it to improve the energy efficiency of others.

We need intervention now to preserve other benefits that nuclear reactors provide: resilience, diversity and reliability in the electric system; economic stimulus in the places where the plants are located; domestic industrial capability and self-sufficiency in technologies related to national defense; and clean air everywhere.

Reactors are an insurance policy against supply interruptions in gas, which are a virtual certainly in some regions in cold weather, and against coal piles that have frozen solid, and hydroelectric dams crippled by drought. Each of these reactors provides many hundreds of jobs directly, and their payrolls are the heart of the small-town economies where they operate. Their property taxes are essential to municipal budgets.

These benefits used to come without asking.

When the price of natural gas was high, and before extensive government help for renewables at the state and federal levels, the market imperfections didn’t matter to our country’s long-term goals. Now they do, and the Energy Department report recognizes that.

"Ultimately, the continued closure of traditional baseload power plants calls for a comprehensive strategy for long-term reliability and resilience," the study said. "States and regions are accepting increased risks that could affect the future reliability and resilience of electricity delivery for consumers in their regions."

It said, "a continual comprehensive regional and national review is needed to determine how a portfolio of domestic energy resources can be developed to ensure grid reliability and resilience."

We have heard some discussion lately about how policy interventions in the electricity field will threaten the “sanctity” of the markets. Markets are useful but they are not sacred. And policy can be smarter.

The above is a guest post from Matt Wald, senior communications advisor at NEI. Follow Matt on Twitter at @MattLWald.

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