On Energy, Let Markets Choose

Mark Green
Posted September 26, 2017

We support all-of-the-above energy – the concept that America is strongest and its citizens are best served when all of our country’s energy sources play their part. We’re also for the important role markets play in determining energy sources, because markets reward innovation, spur efficiency, lower prices and work to benefit consumers.

That said, a new study that basically says market-distorting subsidies given to some energies should be followed by market-distorting subsidies for others makes little sense.

The study by IHS Markit argues that resilient and efficient power generation is too vital to American life to let some energy sources, including nuclear, wane while federal and state subsidies are in place for other generating energy technologies. The study argues this creates an uneven playing field and ultimately does consumers a disservice.

Unfortunately, the study’s solution to counter the effects of market-distorting subsidies for some energy sources is to create market-distorting subsidies for others. From the study:

Subsidies for specific generating technologies do not reduce, but rather shift, some of the cost of specific electric generation technologies. Federal subsidies shift some costs from consumer power bills to current or future consumer tax bills. In addition, some state subsidies shift costs from consumers with distributed generation resources to those without. Since subsidies shift costs, the result is the development of more subsidized resources than are cost-effective with a level playing field. As a result, an economic rationale exists for market interventions to offset the unintended consequences of the uneven playing field.

In other words, let’s make the playing field even more uneven!

That’s the wrong approach – for power generation, for markets and for consumers.

To be clear, this is an argument against proposals for – what’s the study’s term, “market interventions”? We’re not opposed to any energy source. We mention nuclear above because subsidies for nuclear have been proposed recently in a handful of states. Rather, we’re opposed to the idea that subsidies should be deployed to ensure certain energies' market viability.

Indeed, we’ve talked about letting markets work in connection with recent pushes for subsidies for nuclear plants in New Jersey, Ohio and Connecticut. Polling shows voters in those states and Pennsylvania oppose consumers footing the bill for nuclear plant bailouts.

Our point across all these states: Markets are best-suited to determine an energy source’s viability – based on affordability, efficiency and other factors. When it comes to energy viability, government shouldn’t put its thumb on the scale. And in the context of a call for additional energy subsidies, putting more thumbs on the scale isn’t the answer.

For one, markets seldom behave the way people hope they’ll behave when market-distorting measures such as subsidies are employed. Again, it’s better to let markets choose, which is what we’re seeing with the growth of natural gas as a power generator – the United States’ leading energy source for electricity in 2016. One other bone we’d pick with the IHS study is that it questions the reliability of natural gas in a few examples without detailing any evidence that customers who wanted natural gas in those instances didn’t get it.

According to a recent study on the diversity of reliability attributes associated with the modern electricity grid, natural gas generation is uniquely positioned among energy sources to supply attributes – dispatchability, ramp rates, frequency response and others – that ensure the future reliability of the U.S. power grid. Here’s a chart from that study showing how the various energy sources compare:

We cite the attributes/reliabilty study not as an argument against other forms of energy. Rather, it shows that because of its unique attributes, natural gas-fueled generation has a unique ability to help ensure the reliability of the electricity grid – and it does so without the benefit of market-distorting subsidies. This, we'd argue, the market and consumers recognize.