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An earlier version of this article was published in the This Week in Hyperscaling newsletter
In the last month, regions on opposite sides of the U.S. are having entirely different takes on the benefits of organized energy markets. Folks in the West are cheering California’s move toward an independent regional energy market; meanwhile, two Eastern states are threatening to leave their established market, PJM, over lack of control over rising prices from data center load growth. So, why are some clamoring for a market solution while others seem to be saying it doesn’t work?
The first thing to understand is that each market is different. And, counterintuitively, the ones that perform better tend to do less. The newer, voluntary markets, like the Energy Imbalance Market in the West, are far less controversial than the command-and-control versions like PJM and ISO-New England in the East. That’s largely because they actually function like markets — that is to say, they serve as clearinghouses for buyers and sellers to arrive at fair prices, rather than trying to do quite a bit more than that, and failing.
Problems arise when people start talking about market solutions to every energy problem, lumping all kinds of market designs into one concept. And an incorrect premise, confidently stated and persistently repeated, can become so wired into policy discourse that it’s nearly impossible to dislodge.
When discussing energy markets, these aphorisms abound:
“Without competition, utilities have no incentive to keep costs low” — that is, unless they’re consumer-owned, for starters.
“Markets lower costs” — though studies show efficiencies don’t always trickle down to consumers.
“We need to mitigate buyer-side market power” — now you’re just making up words so no one realizes you’re literally advocating for prices to be HIGHER.
The worst of all, in my unpopular opinion, is “RTOs are responsible for keeping the lights on.” Virtually no one asked RTOs to pick up the mantle of reliability.
By way of (greatly abbreviated) history: Congress, in the Energy Policy Act of 1992, said “lower energy prices by opening transmission lines to competition.” The Federal Energy Regulatory Commission, in implementing that law, recommended the creation of regional constructs to facilitate the entry of competitors. States allowed their utilities to join the markets, but later found they struggled to set energy policy. Independent power producers, now wholly dependent on the market to survive, complained that they weren’t getting paid enough to invest in more plants. So some RTOs created a “capacity market” as their way of ensuring future resource adequacy.
As a professional advocate for not-for-profit electric utilities, my view here is no doubt shaped by the municipal light plants that predate the organized markets by nearly 100 years. From their perspective, the administrative constructs that grew up around them have done little but raise consumer prices and cut off their ability to cost-effectively invest in new generation assets. Particularly in New England, where the ISO was created through a settlement agreement but almost immediately violated its terms and has never run an auction under the same set of rules twice, markets have been an albatross for public power — particularly the capacity market.
(For an extremely well-researched and eloquently-stated position on capacity markets, I commend you to Jay Morrison’s legendary Energy Law Journal article, “Capacity Markets: A Path Back to Resource Adequacy.”)
Look, markets have one tool to ensure future reliability: the “price signal.”
The problem we have now is that the “price signal” assumes we’re all ok with splitting the check evenly after a big group dinner. But I didn’t have any alcohol, Karen, and you ordered six appetizers “for the table.”
Here are two premises I dare you to argue with: Data center load growth is an order of magnitude greater than what we would expect from organic consumer use, and household energy bills are not an okay place for tech companies to share the cost of their investment in AI. That’s a big reason why states like Pennsylvania and Virginia are ready to dine and dash from PJM’s forecasted smorgasbord.
Everyone knows we need to build. But waiting for an annual price signal that somehow gets high enough to provide incumbent providers with the cash they’d need to do it seems like madness. There are other ways to finance the assets needed to power AI data centers, like good old fashioned bilateral contracts.
The Western approach demonstrates the importance of relinquishing control. If states successfully leave PJM (and that’s a big if), they could start over with a regional compact that looks more like the Western markets — and more like PJM did at its inception. This would allow utilities to trade megawatts without states having to relinquish all authority over resource adequacy, without pretending they need an RTO to “keep the lights on,” and without extracting the price of AI’s power plants from consumers.
Elizabeth K. Whitney is a managing principal at Meguire Whitney, a government relations firm representing not-for-profit energy clients in Washington, D.C. She has twenty years of federal energy policy experience and writes the This Week in Hyperscaling newsletter. Her government relations practice centers on energy markets, environmental regulation, climate change, and nuclear power. The opinions represented in this contributed article are solely those of the author, and do not reflect the views of Latitude Media or any of its staff.