Public policies favoring renewables are threatening upheaval in power markets

You can’t have a competitive environment when utilities have to purchase any renewable power that’s produced and when state and federal subsidies and tax credits artificially lower their actual costs by making consumers pay for them in their role as taxpayers.

The problem is, these phony state supports aren’t just getting renewables a foot in the door. They’re threatening to shove zero-emissions, highly dispatchable nuclear and even low-emissions, highly dispatchable natural gas providers out the door, along with coal.

Which would be a disastrous outcome.

Here are some quotes from Utility Dive today. Note that the term “political economy” is not “market economy,” but instead refers to economic interventions made for political reasons:

“You can’t be half pregnant but that’s what we’ve tried to be,” said Larson. “We kind of like markets but if we don’t like the outcome we’re going to reverse it or start playing with prices. You can point to a number of policy imperatives — some of them defensible and others not — but ultimately this is an area where the political economy pressures … overwhelm the ability to run a market.”

“The fundamental reality,” said Gifford, “seems to be you’re not able to cover your fixed costs in a market that is essentially dispatching with some equilibrium between intermittent renewables, driving down prices during large parts of the day, and simple-cycle gas, which has less fixed costs to cover [than large baseload plants].”

This is worrisome:

Public policies, while they may be necessary to increase or protect favored resources, are having undeniable impacts on the markets, Gifford and Larson said. In states like Texas, cheap renewables are often dispatched first in the generation stack. Due to declining costs and the federal production tax credit, wind resources in particular can bid in at low or negative prices, lowering the market clearing rate for all plants in the stack.

Until recently, the dynamic put large baseload plants at most risk due to their high fixed costs. But as renewables continue to proliferate and decline in price, even natural gas generators are starting to feel pressure in markets rich with wind and solar, like Texas and California.

Jon Sanders / Director of Regulatory Studies

Jon Sanders studies regulatory policy, a veritable kudzu of invasive government and unintended consequences. As director of regulatory studies at the John Locke Foundation, Jo...

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