Market Design Will Determine Whether Electrifying the Economy Serves Consumer Interests

The Biden administration’s ambitious goal of running America’s economy on 100 percent carbon-free electricity by 2035 is accelerating the shift to renewable energy and sparking a debate among policymakers over how best to encourage the clean energy transition without having costs fall entirely on consumers.

While the war of words between the fossil fuel and renewables camps has garnered the lion’s share of the attention, less has been paid to the importance of modernizing transmission infrastructure and the role of competition in incentivizing investment in a cleaner, more efficient and affordable power system.

Incentives matter when it comes to creating effective public policy, and a market model that encourages power generators and service providers to compete for customers is a far more efficient way to deliver the low-cost, clean energy and advanced technologies that consumers demand.

The surest way to decarbonize the electricity sector without sacrificing affordability or reliability is to increase grid flexibility by adding more storage and transmission infrastructure to accommodate the growth in intermittent generation from renewable resources. Competitive markets can deliver on these goals sooner and more efficiently than the old monopoly utility model.

That is why we at the Energy Choice Coalition, along with several other free-market advocates, are urging federal regulators to support the expansion of organized wholesale power markets and regional transmission organizations nationwide by demonstrating the consumer benefits of RTOs.

Federal regulators created RTOs at the end of the 1990s to promote competition and transparency in electricity markets that were – and still are – dominated by the traditional vertically integrated monopoly utilities of the last century.

A well-designed wholesale market with an RTO that ensures unfettered access to transmission lines offers multiple benefits over the monopoly model where a single utility has exclusivity over all aspects of the grid – from generation to delivery – and a set of captive customers within a geographic region.

RTOs provide a necessary check on anti-competitive behavior within the market and help ensure a level playing field for start-ups and innovators. They also serve a valuable role in managing reliability and the expense of accessing the transmission system – costs ultimately paid by the end-user regardless of whether a market has organized competition or a monopoly structure.

A 2019 report by economists at the Brattle Group found that expanding RTOs in the West could save ratepayers nearly $2 billion a year in energy costs by 2030.

RTOs are essential to balancing intermittent renewable energy supplies with fluctuations in demand and the data shows that suppliers in competitive markets typically have lower outage rates and better reliability performance records than utilities in traditional monopoly markets.

Again, incentives matter.

Organized competitive wholesale markets already transmit more than two-thirds of all electricity produced in the United States. RTOs remain voluntary, though, and despite the potential benefits, customers in much of the West and Southeast remain trapped in the regulatory monopoly designed for the last century.

The rules governing RTOs have a significant influence on investment decisions at the state and regional levels. Electricity markets are undergoing rapid change, and RTOs can and should change with it. An independent study could reaffirm the value of RTOs in wholesale markets and inform the evolution of RTOs to ensure they remain responsive to the new realities of climate change, growing customer expectations and evolving technologies.

Unfortunately, RTOs have not been able to change fast enough because they are not independent. Governance changes that strengthen their independence are needed, and policymakers need a clear picture of these forces when making decisions that will affect the price and quality of electricity for consumers, both big and small.

Resistance to RTO expansion comes from the same monopoly utilities that have long used their market power and political clout to undercut competition and protect outdated fossil fuel investments. Despite public promises to invest in clean energy, the record increasingly shows that vertically integrated utilities are failing to live up to their pledges.

A 2020 Deloitte report found “significant gaps” in the net-zero pledges of utilities and their actual decarbonization efforts. Independent analysis by the Energy and Policy Institute recently showed how the big utilities use accounting tricks to hide emissions.

There’s no need to argue over the merits of competition compared to top-down central planning of monopoly markets, though. An independent study of the costs and benefits of organized markets can end the debate once and for all. Such a review should measure the impacts of RTOs on production and transmission costs in wholesale markets and whether cost-savings are reaching consumers.

Consumers big and small want reliable, affordable and clean electricity and are increasingly demanding their right to energy choice. Regulators need to recognize where technology and consumer preferences are headed and ensure that a market structure is in place that’s responsive to those preferences.

While the current public debate is focused on improving wholesale electricity markets, we believe a well-designed competitive wholesale market moves retail consumers closer to obtaining the right to choose their energy provider, too.

We believe the evidence is clear that increasing competition and transparency is the most effective and affordable way to achieve our national decarbonization goals. But you shouldn’t have to take our word for it.

What is certain is that the most expensive and slowest path to decarbonization is to allow monopoly utilities to continue to pass the costs onto captive consumers who cannot vote with their feet.


Robert Dillon is executive director of the Energy Choice Coalition and a senior fellow at the Rainey Center for Public Policy.

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