The Biden Administration’s goal to decarbonize the electric grid by 2035 requires building large-scale transmission lines that carry renewable energy across the country. Not only will these lines be a cost-effective way to reduce greenhouse gas emissions and slow climate change, but they will also improve the reliability of the grid. A new paper finds the United States builds plenty of transmission – but is building the wrong kind of lines.
Current energy regulations allowing rate-regulated companies, those only allowed to charge buyers authorized rates, to own subsidiaries that operate fossil fuel plants in competitive markets. This gives fossil lines an unearned advantage to continue operating, whether or not they are cheaper than renewables, due to their ability to generate significant monetary value in a non-rate regulated market. At the same time, energy buyers are exposed to the financial risks incurred by participating in competitive markets.
“For years, scholars and policymakers have known that we should quarantine companies that are rate-regulated’’ says Joshua C. Macey, an author of the study and Assistant Professor of Law at the University of Chicago Law School. “From an economic perspective, transferring monetary value from rate-regulated to non-rate regulated markets is problematic because it passes risk onto energy buyers and gives fossil fuels an advantage.”
Macey—along with his co-author Aneil Kovvali, Associate Professor of Law at the Indiana University Maurer School of Law—examine the different ways energy regulators struggle to ‘quarantine’ rate-regulated companies. The paper finds that the investment decisions companies make in rate-regulated markets are in favor of their non-rate regulated businesses, such as charging above-market prices for coal and gas supply. Companies with fossil fuel facilities then become reluctant to build transmission lines that carry renewable energy at the risk of undercutting their fossil line business, and pass off the costs to the energy buyers. For example, the paper details how Entergy blocked a ~$100 million line by building a ~$900 million gas unit.
“If coal is more expensive than other sources of energy, we shouldn’t be buying it anymore,” says Macey. “If a company owns both gas and electric utilities, for instance, they may be reluctant to electrify their business as it would reduce profits of its gas company and possibly strand its assets. These techniques allow them to keep fossils going even if they should retire. Energy regulators, including FERC, should consider further market liberalization and require companies to divest themselves.”