The U.S. is a complicated place in terms of regulations, and it is no different when talking about energy markets and options. The energy-related industries are for the most part private sector entities that are covered by a wide assortment of regulations and requirements. The oil and gas sector that provides fuels for transportation, industry, power generation, and personal use is one of these sectors. We also have power generation public utilities which are entities that maintain infrastructure on behalf of the public. These can be government entities, or private companies which are heavily regulated and under some form of public control. For this lesson, we will focus on the power-generating utilities, including the transmission and distribution of the energy.
Upon completion of this lesson, you will be able to:
Read | Lesson 9 content |
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Discuss | Relationship between deregulation and renewable energy |
Write | 325 word (+/- 10%) essay |
If you have questions, please feel free to post them to the Questions about EGEE 401 Discussion forum in Canvas. While you are there, feel free to post your own responses if you, too, are able to help a classmate.
To get a good understanding on how the energy markets work in the USA, it is first important to understand the differences between the types of markets. For example, we have fuel supplier markets, like oil and gas companies and coal producers, who are private sector companies that compete for customers to whom they sell their products. If you use propane or fuel oil to heat your house, or are looking for a gas station to refuel your car, you get to choose from a number of suppliers who are all competing for your business.
We also have electricity providers who generate power and manage the grid. Parts of this grid include power producers who use fuels to run turbines and generate electricity and who are also private sector companies. This power then gets put into the transmission and distribution system to get the electricity to users. It is an understatement to say that this system and the relationships between players is quite complex, and there have been major changes in how this works over time.
One of the fundamental concepts to begin to understand these complex relationships is that of regulated vs. deregulated markets. To an extent, the entire energy sector is regulated in one way or another. So before discussing regulated vs deregulated, we should first define the key segments of the energy sector. For now, we will focus on the power generating sector, and the aspect of getting electricity generated and distributed. For this lesson, we will not be looking at regulation of the fuel sources themselves such as oil, gas, coal, nuclear, and hydroelectric. Each of these fuel types has its own, unique, myriad regulations. Also, we are not going to get into the intricacies of the legal and business elements. The goal is to understand how these regulated and deregulated markets relate to energy security, accessibility, reliability, and sustainability.
Energy generation is what power plants do. Whether they are coal, oil, gas, nuclear, hydroelectric, or a combination of these sources- these plants generate electricity by consuming a fuel and putting that electricity into the transmission and distribution grid (the power lines and power poles that crisscross the country). With the advent of renewable energy, power is also generated at wind and solar farms, biomass-to-energy plants, waste-to-energy plants, and others. All of these power generating options wish to add their power into the national grid.
The Federal Energy Regulatory Commission (FERC) regulates the transmission of electricity across the national grid. This includes setting standards for reliability and security and putting some controls on pricing. Price control was intended to address the risk of unfair charges that would prove detrimental to the public at large. Referring to our four attributes, FERC is most concerned with accessibility, reliability, and security. Whereas FERC does not actively focus on energy sustainability, they do indirectly support it by allowing renewable energy to be put into the grid, as well as allowing provisions for demand response. As we discussed before, demand response is allowing the generation sector to work with consumers to optimize efficiency of energy use.
Interestingly, when one speaks about regulated and deregulated markets, they are usually not referring to many of the complexities described above. In reality, when their state is unregulated, they usually mean the concept of consumers being allowed to choose their own power producer. You can imagine that having thousands of independent grids with their own generation units, transmission lines, distribution points, and wires right to your home would create an unreliable, tenuous mess. Blackouts would be common and the ability to meet demand when and where needed would be almost more by luck than by planning.
Hence, the power sector had to be regulated to ensure consistency and reliability across the country. The ability for these systems to interconnect and work together was the only way to ensure reliable power. But we know that there are hundreds of power generation and transmission entities in the U.S. With the advent of renewable energy generation, there are thousands of additional sources of electricity trying to get connected to the grid. There was a need for government-driven oversight of the system.
Over time a situation evolved that proved to be unfair to consumers. Historically, the electric utility was a single entity that owned and controlled the system from the power plant to the end user. These utilities had their service areas, and they were the “only game in town.” As a user in that market you had no choice.
Even though there was a growing number of power producers, including a growing amount of renewable energy available, there was only one set of wires available in a given area. In order to allow consumers to shop more competitively for electricity but recognizing that it would need to come to their home or business through the transmission system available, several states opted to decouple energy production from transmission. This decoupling is what is commonly referred to as a “deregulated market”. In reality, only the power production is deregulated. The transmission and distribution are still regulated.
In a deregulated market, you can shop around for a good electricity price, or you may be willing to pay more than average to ensure your energy comes from a renewable source. By keeping the transmission and distribution regulated, regardless of from whom you buy your power, you are assured that it will be delivered to you without undue cost markups, at high levels of reliability. Those who move the energy to your home are required to cooperate with the generation players to ensure enough power is in the system and reliably delivered to you at a fair price.
In essence, the entire issue of deregulation was an attempt to break up power utility monopolies and allow for more choices and therefore better and more competitive prices, but still keep enough regulation to not compromise accessibility and reliability. We shall see below in the Kim et al assigned reading paper how the element of deregulation affects renewable energy choices. But it is important to note that integration or promotion of renewable energy was not a driver or reason for deregulation. Before we discuss what the relationship actually is between deregulation and renewable energy, we need to understand what we mean by renewable energy policy.
In addition to regulated vs deregulated aspects of states, there are also a wide variety of ways states encourage, or require, renewable energy as part of the state’s energy supply. The way RPS are implemented varies, and there are specific types of approaches. In other words, there are many ways to generate renewable energy, and then there are various policy options to getting this energy into the state’s energy mix. Generating solar energy for your home or a building is fine, but it does not help to build commercial scale solar, like a solar farm, if there is no way to get that power into the grid. And to get that power into the grid not only requires the right technology and spatial logistics, but it has to be allowed by the regulations. How that is allowed, and actually encouraged is through a state’s renewable energy policy.
There are a number of vehicles, or programs, that allow for renewables. A recommended resource to explore these programs is the Database of State Incentives for Renewables & Efficiency®. You can access this database directly at https://www.dsireusa.org/ [4] or via the EIA website [5].
One example is the Renewable Portfolio Standards program, or RPS, which require utilities to include a certain percentage of renewable energy in their power mix. How these are reflected across the states varies quite dramatically, and not all states have RPS. As of mid-2019, 29 states and the District of Columbia had some type of RPS, and another 8 states had voluntary goals or objectives. Pennsylvania is one of the 29.
The deregulation of the power sector and introduction of renewable energy policies has proven to be positive from all four attributes’ perspectives- accessibility (includes affordability), reliability, security, and sustainability. The end consumer, whether your home or place of work, now can choose where they buy their electricity, but are still assured reliable delivery. It is, in essence, the “best of both worlds”.
Currently, 29 of the 50 states have some degree of deregulation in their markets. Note that because natural gas is so integral to energy consumption in the home and in industry, it is also regulated with deregulated parts. In other words, in some states, you also have a choice in who sources your natural gas, even if it is not the same as the distribution. Unlike with electricity markets where you may decide to choose a supplier based on how they generate the electricity, with natural gas, it is more about price competition.
Let us use an example not too distant from the PSU campus in southeastern Pennsylvania near Lancaster. The electric utility is PPL. This is the only utility that services the area, so they own and are responsible for the transmission and distribution of electricity, whether residents buy it from them (PPL also generates power via a sister generation company), or from another producer of their choice. Pennsylvania has several utilities that cover various parts of the state so someone living in Pittsburgh does not use PPL infrastructure; they have their own utility. Until the state deregulated in 1996, that meant buting electricity from PPL. But today, residents in this part of the state have no less than 20 options for buying electricity. In Pennsylvania there were advantages and disadvantages of deregulation. One positive change was that the utilities were required to allocate part of their income towards energy efficiency and renewable energy awareness and programs. Another major advantage was the ability to shop around for good rates. But that also introduced some disadvantages. First of all, the price caps that were in place in the regulated market (to avoid a single monopoly provider from high prices) were eliminated and many saw big changes in their pricing. Another disadvantage was that now the consumer was faced with a large number of choices and complex payment plans. It was suddenly possible to accidentally put yourself in a situation where you actually paid more than you used to, even in the more competitive market.
Fortunately, in Pennsylvania, a new state authority, PA Power Switch, was established to provide a wealth of information and guidance to residents and businesses in navigating the deregulated market. Feel free to visit the Power Switch website [7].
Now that we understand more about deregulated markets and renewable energy policy, let us revisit the question of how they relate, if at all. For this, we will read parts of an interesting study done by Columbia University and published in 2016.
Access the following paper through the following link:
Read pages 22; top half of 29 (up to Research Design); pages 30-32; and, the conclusion section on page 47.
What is the likely relationship between deregulation and renewable energy policy, i.e., the concept of issue linkage?
In this lesson, we explored the concepts of regulated and deregulated energy markets and the factors that impact each. We also discussed renewable energy policies as it related to regulated and de-regulated markets. We also discussed the current state of the energy marketplace and how it pertains to your geographic location. To pull these concepts together, we’re going to engage in a creative activity.
To successfully complete this assignment, you will write an essay which reflects the ideas and concepts presented in this lesson, specifically answering the questions provided below.
You will need to research your own options regarding the electricity market. You present the information in the form of an essay (325 words plus or minus 10%). Even though some of you live in Pennsylvania, not all replies will be the same because we learned that market choices are not the same statewide in many U.S. states.
In your submission, please answer the following questions:
Links
[1] https://www.pexels.com/@pixabay?utm_content=attributionCopyText&utm_medium=referral&utm_source=pexels
[2] https://www.pexels.com/
[3] https://creativecommons.org/share-your-work/public-domain/cc0/
[4] https://www.dsireusa.org/
[5] https://www.eia.gov/energyexplained/renewable-sources/portfolio-standards.php#:~:text=Renewable%20portfolio%20standards%20(RPS)%2C,energy%20sources%20for%20electricity%20generation.&text=However%2C%20most%20states%20have%20enacted%20their%20own%20RPS%20programs
[6] https://www.pexels.com/@kaip?utm_content=attributionCopyText&utm_medium=referral&utm_source=pexels
[7] http://www.papowerswitch.com
[8] https://onlinelibrary.wiley.com/doi/epdf/10.1111/ropr.12157