In New York, electricity is bought and sold in a wholesale market. Like other markets, it has rules to prevent participants from gaming the system to their own advantage, thus harming their competitors and consumers. But renewable-power producers in the state want to be exempt from those pesky rules — because, after all, they’re green.
So, they asked the Federal Energy Regulatory Commission, which is tasked with ensuring the New York electricity market is fair and competitive, for the electric equivalent of a papal indulgence.
FERC responded with the legal equivalent of a Bronx cheer, ruling that, yes, renewable-power producers have to follow the same rules as everyone else.
FERC’s ruling incensed Sen. Chuck Schumer, who accused FERC of putting its “thumb on the scale in favor of the most polluting sources of energy” and undermining the state’s efforts to combat the “climate crisis.” The senator’s outrage far outstrips his understanding of basic economics — at least, basic economics beyond that of hoovering up campaign contributions.
In fact, contra the senator, FERC’s ruling will help protect New York’s already beleaguered electric consumers, who pay some of the highest rates in the nation. Nor is FERC putting its thumb on the scale to protect those icky, dirty generators. Oil-fired plants and the one remaining coal plant in the state provide less than 2 percent of electricity, mostly when electricity demand is highest.
Back in 1990, coal and oil-fired plants supplied more than one-third of the state’s electricity. It’s been replaced by natural gas, which will be even more needed when the emissions- and carbon-free Indian Point Nuclear facility shuts down next year, courtesy of Gov. Andrew Cuomo.
The underlying issue is called market power. Market power can take many forms, but one of the most common is a company that has enough clout to raise prices by withholding supplies. That’s what OPEC did back in the 1970s when it imposed embargoes on crude oil destined for America.
But there’s another type of market power, just as insidious and harmful, called “buy-side” market power, in which buyers artificially reduce market prices.
You might think that lower prices — however achieved — are great. Well, for consumers, in the short-term, they are.
Except short-term subsidies do long-term damage. And that’s the real problem with buy-side market power. It drives suppliers who can’t survive artificially lower prices from the market. Once you’ve driven your competitors out of the market, the price you can charge goes up. It’s really just simple supply and demand.
What this means is that, unchecked, renewable generators could use their state and federal subsidies to drive their unsubsidized competitors out of the market, thus increasing electricity prices for consumers and businesses.
Those subsidies, such as federal investment and production tax credits, have already given renewables an artificial competitive advantage. It helps, too, that New York is forcing electric utilities to supply more and more electricity from renewables, no matter the cost. What business wouldn’t want everyone to be forced to buy what it sold, regardless of price?
Renewable generators demanded that they be made exempt from these buy-side market power rules, arguing that those rules interfere with green policy goals. They also claimed that the rules were unfair and would prevent them from entering the electricity market. In other words, exempt us — because we are saving the planet.
New York’s other generation owners — the ones who actually keep New York’s lights on — called BS on this argument.
FERC agreed. Not because climate goals aren’t important — although nothing New York does will have any effect on world climate — but because ensuring a well-functioning and competitive wholesale electricity market that can meet the state’s electricity needs is more important. Score a rare and much needed win for the state’s electricity consumers.
Jonathan A. Lesser, PhD, is the president of Continental Economics, an economic consulting firm, and an adjunct fellow with the Manhattan Institute. His most recent report, “Is There a Future for Nuclear Power in the United States?” was published in July 2019.
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