October 16, 2009

Green Power and Deregulation

Speaking of responsible conservatives, E.D. Kain of David Frum's New Majority website makes several good points about electricity deregulation and clean energy:
Obviously the government will have its role to pay in the green revolution, but we should limit that role to laying pipes and power lines, and ensuring that when laws are broken, the perpetrators are punished. The government needs to establish fair-play rules and create a grid, but beyond that they need to let markets work, and allow competition to flourish. A lasting green revolution needs to benefit not only the earth, but the people who live on it as well. Too often the economic costs of environmentalism are overlooked, and too often it is the poorest among us who bear the brunt of those costs. Real cost-saving competition can help change that.
Stated that way, the case for deregulated energy markets seems quite strong. The problem with deregulation, however, has less to do with the desirability of moving away from closed markets (Brad Plumer's article on the roadblocks to distributed generation provides a wealth of examples in that vein), but with how we get to open ones -- and the record in the US has been pretty poor on that mark. California's troubles with deregulation have become legendary, with massive price spikes and Enron-driven market manipulation. In my own state of Maryland, deregulation wasn't quite so dramatic a process, but the problems were similar in many respects: Price caps largely prevented competition from emerging, and ultimately didn't prevent massive price spikes for Baltimore Gas & Electric customers from happening once the caps were removed -- though Gov. Martin O'Malley and the General Assembly did manage to delay, then dampen, the effect of the rate hike. There were also some shady dealings between Constellation Energy, which owns BGE, and the then-Republican-controlled Public Service Commission; but even so, deregulation in Maryland, like in many other states, was not well designed.1

What's baffling about all this is that even the more successful examples of a deregulated electricity market have been running into problems. For example, the UK, which deregulated in the early 1990s, is now finding that generators may not be able to keep up with demand -- possibly even leading to blackouts. Moreover, pace Kain's hope of open markets and green power going hand in hand, these generators have been skimping on renewable energy development. Back in 2000, Severin Borenstein co-authored a paper (ungated version here) on deregulation which essentially argued that, until we get up and running a smarter grid, including real-time pricing for consumers, the electricity market will remain vulnerable to volatility and manipulation. In other words, to get free markets in electricity, there'll need to be a great deal more government-directed investment. Carbon pricing will likely also be essential to giving renewable energy a leg up among generators.

1 Ironically, competition for generators is finally starting to emerge -- particularly in renewable energy -- yet Gov. O'Malley is now said to be considering re-regulating the industry.

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