Deregulation, Not Renewable Energy Mandates, Will Best Protect Both Economy and Environment

Although cap-and-trade may not make it out of the lame-duck session of Congress after the upcoming elections, several other extremely damaging policies responding to excessive fears about human-caused CO2 emissions are moving forward, especially on the state level. Prominent among these policies is the push for renewable electricity mandates. Several states are moving to force utilities to increase their production of renewable energy, primarily solar and wind power, and a bill introduced in the Senate on September 21 by Senators Jeff Bingaman (D-NM) and Sam Brownback (R-KS) would require utilities to generate at least 15 percent of their electricity from renewable sources by 2021

Even with the generous subsidies lavished on them by all levels of government, however, renewable energy sources are not cost-competitive with power derived from coal, oil, or natural gas, and the measure would thus raise electricity prices for consumers and businesses. "The states with renewable portfolio standards are also the states with much higher than average electricity rates," notes Tom Tanton, president of T2 & Associates, a California-based energy and technology consulting firm, in a recent article in Environment & Climate News.

Those who say we must not utilize our least expensive fuel sources are putting small and hypothetical risks ahead of better-understood costs and benefits. We know that coal, natural gas, and nuclear power can be used to generate electricity safely and cleanly. If we fail to utilize them, we risk supply interruptions and rising costs, which in turn will reduce economic growth and job creation.

Instead of further interfering in the search for the most cost-effective and environmentally safe means of generating electricity, the national and state governments could do much good by removing unnecessary existing regulations from the utility industry. This is urgently needed during the current economic crisis because plentiful, reliable, and inexpensive electricity is closely correlated with strong economic growth and rising standards of living. It's also good for the environment: The increasing electrification of American homes and industries is one reason air pollution emissions have been falling even though population and the production of goods continue to expand.

States have already hamstrung the utility industry through policies such as price caps, restrictions on vertical integration in the industry, and blocking construction of new power plants due to illusory environmental worries and NIMBY (Not in My Backyard) concerns. Such interventions are the very opposite of consumer-friendly because they reduce the supply of electricity both directly and by discouraging competition in the industry.

In addition, because demand for electricity tends to be inelastic in the short run, limited supplies can cause price spikes and shortages. That leads to calls for even greater regulation to solve the problems the government created in the first place. The real solution is market competition, and that requires deregulation, not more restrictions and mandates. Electric utilities compete with each other and other industries for capital, and price controls and lengthy permitting battles scare off investors. According to one recent report, demand for electricity is increasing approximately three times as fast as investment in new electricity supplies.

With utilities often being hit with rising fuel costs and state legislatures threatening to renege on promises to lift price caps, and with the many legal challenges to the licensing of new electric power plants, governments are artificially suppressing the supply of electricity. That means prices must eventually rise and are already higher than they would be in a freer market. Government mandating the purchase of expensive power from wind and solar energy producers would only exacerbate the problem.

Policymakers and citizens concerned about the cost of electricity should pursue real deregulation to encourage new investment in and market-based pricing of electricity. Recommended policies include:

  • Honor commitments to end temporary price caps or rollbacks that were part of state electric deregulation in the 1990s.
  • Support the licensing of new generation capacity and oppose mandates to purchase expensive solar and wind power.
  • Do not mandate vertical de-integration of the electric industry, and review laws passed in the 1990s that required it.
  • Explore and promote innovative patterns of ownership, such as joint ventures and regional system organizations, instead of top-down efforts to redesign the electric industry.

Unhindered and unsubsidized competition among energy technologies is the best means to discovering tomorrow's new energy sources. Elected officials should not try to pick winners, even though doing so may score points with one group or another in the short term.

In the long term, the individual choices of people and businesses, not governments, will lead to a more diversified fuel supply, reliable energy technology, and environmental protection that is effective as well as efficient. Market-driven energy policies will generate the wealth necessary to maintain a healthy environment and provide our homes and businesses with affordable and reliable electricity.

Joseph L. Bast is President of The Heartland Institute. Portions of this article are adapted from The Patriot's Toolbox (The Heartland Institute: 2010).