Deregulation of U.S. Energy Creates Efficiency

July 17, 2013

In most states, regulators allow power plants, owned by the same firms who own transmission networks, to charge their customers a price that reflects the sum of a given rate of return on capital investments and the cost of the fuel inputs they use. But in the mid- to late-1990s, some states abolished that system in favor of one that separates ownership of network and electricity generating facilities. Power plants were now supposed to compete directly with one another: they provide prices at which they are willing to supply electricity and the transmission network delivers from the cheapest available sources, says Stan Veuger, a resident scholar with the American Enterprise Institute.

In a new research paper, University of Chicago assistant professor Steve Cicala explores the consequences of this move to what would seem to be a more sensible regulatory framework. His findings suggest that the move to a more market-focused approach did, indeed, lead to significant efficiency gains.

  • Coal plants that were forced to compete on price managed to purchase cheaper coal.
  • Not just that: remember that power plants used to be reimbursed for their capital investments.
  • No longer, so they started using cleaner low-sulfur coal, which made it unnecessary for them to invest heavily in capital-intensive abatement technology.

The incentives facing coal plants in states that deregulated the electricity sector thus changed drastically, and the benefits they could reap from cost reductions drove them to realize massive efficiency gains.

  • Cicala estimates that even though only a quarter of all coal-fired plants have been deregulated, the reduction in fuel cost alone amounts to about $1 billion a year.
  • By that logic, deregulating coal plants in all states could bring savings of about $40 billion per decade, a significant sum.

It is quite unfortunate that a deregulatory process that has brought massive savings to parts of the country came to a stop, and there is no reason not to resume implementation now. Due to the sheer size and importance of the energy sector, even seemingly small improvements in its functioning can bear enormous fruits, while big improvements, like the shale gas revolution, can be game-changers for the U.S. economy.

Source: Stan Veuger, "The Crazy Costs of Excessive Coal Regulation," U.S. News & World Report, July 11, 2013.

 

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