Competitive electricity markets help clean up the U.S. energy sector
¶¶ŇőÂĂĐĐÉä Boulder economics researcher Daniel Kaffine finds that whole electricity markets might help reduce carbon emissions
Even though we use it every day, most of us don’t give much thought to the electricity powering our homes, schools and offices. As long as the lights come on when we flip the switch, we don’t stop to consider where our power comes from, who produces it and how.
Yet, in recent decades, electricity markets—the way power gets bought and sold—have changed dramatically in many parts of the United States. These shifts have largely been good for consumers, promoting competition that often leads to lower electricity bills. But Daniel Kaffine, a University of Colorado Boulder economics professor, wanted to investigate another, less-obvious ripple effect: How are these shifts affecting the environment?
It’s a commonly held belief that competitive markets tend to be bad for the environment. But Kaffine finds the opposite to be true. His latest research, published in °Őłó±đĚý, suggests that competitive whole electricity markets might help clean up the U.S. energy sector by reducing carbon emissions.
Daniel Kaffine, a ¶¶ŇőÂĂĐĐÉä Boulder professor of economics, finds in recently published research that competitive whole electricity markets might help clean up the U.S. energy sector by reducing carbon emissions.
“The conventional wisdom on a lot of these topics is not always correct, and environmental economics is a very useful structure and framework for developing more nuanced thinking about the relationship between the economy and the environment,” he says.
Understanding U.S. electricity markets
Before the 1990s, electricity in the United States primarily came from vertically integrated utilities—that is, one company that owned and operated the entire electricity supply chain. These one-stop-shop firms handled every phase of the process, from generating electricity at power plants to transmitting it to substations to distributing it to customers. Overseen by public utility commissions, these companies usually had the exclusive rights to serve a particular region.
However, in 1996, the Federal Energy Regulatory Commission issued two orders that transformed the nation’s electricity utility industry. The commission sought to break up public utilities and get more players into the mix, in hopes of lowering prices for consumers.
As a result, many states began moving away from the traditional utility model and toward competitive . In regions that have made this shift, there are multiple sellers (companies that produce power) and multiple buyers (local utilities that provide electricity to customers).
For the new paper, Kaffine and co-author , a former ¶¶ŇőÂĂĐĐÉä Boulder graduate student who is now an assistant professor of agricultural economics at Texas A&M University, turned their attention to one such market.
They looked at the , an independent system operator and regional transmission organization that manages the grid for some or all parts of 14 states. These are Arkansas, Iowa, Kansas, Louisiana, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Oklahoma, South Dakota, Texas and Wyoming.
The Southwest Power Pool is a bit like an air traffic controller. It doesn’t own any of the region’s electricity infrastructure—things like power lines and poles—but it does operate them. It coordinates the flow of electricity, monitors congestion and prevents outages and emergencies.
Another big role the Southwest Power Pool plays is that of auctioneer, Kaffine says. Each day, it is in charge of sourcing enough power to meet the region’s anticipated demand for the following day. This is what’s known as the “day-ahead energy market,” and it functions like an auction.
“You have buyers and sellers of power,” Kaffine says. “The people who sell power offer up a certain amount of electricity at a certain price. And, basically, the cheapest bids win. Those are the power plants that end up producing power the next day.”
Ěý
¶¶ŇőÂĂĐĐÉä Boulder researcher Daniel Kaffine and colleague Doyoung Park studied carbon emissions from power plants within the Southwest Power Pool before and after the introduction of day-ahead markets. They compared the emissions intensity, or the amount of carbon dioxide emitted per unit of power generated.
(The Southwest Power Pool also runs real-time markets every five minutes. But, for their study, Kaffine and Park focused only on the day-ahead markets, which were created in 2014.)
Consumers are not involved in this process, which runs seamlessly in the background to produce a continuous stream of on-demand electricity. But, because of the competition between sellers, they do end up paying lower electricity bills every month. And, according to Kaffine’s research, society as a whole gets the benefit of reduced carbon emissions.
Carbon emissions decline in free markets
For the study, Kaffine and Park looked at carbon emissions from power plants within the Southwest Power Pool before and after the introduction of day-ahead markets. They compared the emissions intensity, or the amount of carbon dioxide emitted per unit of power generated.
To isolate the effects of the day-ahead markets and rule out other variables, they also compared the data to a similar power pool in Pennsylvania, New Jersey and Maryland, called PJM Interconnection.
When they crunched the numbers, the researchers found that the day-ahead markets caused a 4 percent drop in average carbon emissions intensity in the Southwest Power Pool. That equates to a reduction of roughly 7.66 million tons of carbon dioxide emissions and about $383.4 million in avoided damages per year.
“Shaving off 4 percent from every unit of power that gets generated really adds up,” Kaffine says.
When they drilled down into the data, Kaffine and Park were able to uncover the mechanisms responsible for the decrease in carbon emissions. Some individual power plants got slightly cleaner after the day-ahead markets were introduced. But the primary factor was the retirement of older, dirtier, costlier power plants in the region.
These plants simply couldn’t compete in the new environment, says Kaffine. When they shut down, what remained was a fleet of newer, cleaner and cheaper-to-run facilities—and that resulted in lower carbon emissions overall.
“It’s just like if you have an old air conditioner—it takes more power to run the thing, and that’s expensive,” he says. “In a power plant, if you have an old boiler, it takes more fuel input to produce power and that’s more expensive and dirtier.”
Looking ahead
“You have buyers and sellers of power. The people who sell power offer up a certain amount of electricity at a certain price. And, basically, the cheapest bids win. Those are the power plants that end up producing power the next day.”
Zooming out, the results challenge the long-held assumption that competitive markets are always detrimental to the environment. The findings might be different in other regions but, at least in the case of the Southwest Power Pool, the “market incentives lined up nicely with the environmental incentives,” Kaffine says.
In addition, the findings suggest that other states may want to consider creating or joining competitive electricity markets—for the economic advantages, but also for the potential environmental benefits. Many states in the Southeast and the West (with the exception of California) do not have competitive electricity markets.
Colorado, for example, still operates under the traditional, vertically integrated utility model. But a requires all non-municipal electric utilities that own transmission lines to join a wholesale electric market by 2030.
A conducted by the Colorado Public Utilities Commission estimates this change could result in savings of up to $230 million each year. And Kaffine’s research suggests it may also lead to a reduction in carbon emissions, too.
“Rather than running an old, dirty plant here in Colorado, having a wholesale market might mean buying cheap wind [power] or cheap natural gas [power] from New Mexico,” says Kaffine. “They do some of that trading already, but having a market in place to facilitate that trade makes it easier to find lower-cost producers. And if the lower-cost producers happen to be cleaner, that’s a win for the environment as well as consumers.”
Did you enjoy this article?ĚýĚýPassionate about economics?ĚýShow your support.
Ěý