Constructive Restructuring: Weatherizers Get into the Act

This is an excerpt from "Constructive Restructuring: Weatherizers Get into the Act," an article by Joel Eisenberg in the November/December 1996 issue of  Home Energy Magazine.  Joel Eisenberg is senior analyst for public policy at Oak Ridge National Laboratory.

What Is Electricity Restructuring?

Electricity restructuring is similar to the reshaping of the telecommunications, airlines, and trucking industries over the past two decades. Complete retail deregulation, known as retail wheeling, is not inevitable, but a generally more competitive, less regulated electricity business is certainly on its way. Recent rulings by the Federal Energy Regulatory Commission (FERC) have already set out the road map to a more competitive wholesale power generation market. More than 30 state regulatory commissions and legislatures are now exploring the potential for and limits of competitive markets.

Technological, economic, public policy, and market forces are driving these profound changes in the electricity business.

Technological and Economic Change

The era of ever larger, ever more cost-effective power plants that shaped the electric generating business for four decades is over. Where once power stations of 1,000 megawatts (MW) and more were considered the desirable way to meet growing power requirements, now combustion turbines that generate from 25 to 250 MW are often the units of choice. These natural-gas-fired plants can be installed at one-third to one-half the capital cost per kW of conventional steam generators, and they provide electricity at lower energy cost than the U.S. retail average. Somewhat larger combined cycle gas units are also considerably less expensive per kilowatt-hour (kWh) of electricity generated than larger coal-fired power plants, and they are faster to install. Bigger is no longer more cost-effective.

Because economies of scale no longer apply to the same degree, it is possible to create a cost-effective mix of generation from a wide variety of smaller power resources rather than from a single massive plant. This eliminates the need for a single generating monopoly capable of mobilizing huge amounts of capital for individual projects. As the mainframe computer has given way to individual PCs, electric generation is increasingly becoming cost-effective in smaller units of service.

Public Policy

Federal policy has been moving in the direction of less regulation and more competition in many industries. The 1992 Energy Policy Act (EPAct) embraced competition in wholesale power markets as the cornerstone of federal electric policy. FERC has been promoting open access to transmission lines that will allow wholesale buyers of electricity to buy their power not just from their monopoly supplier, but from any supplier with access to the transmission grid.

Market Forces

The price of electricity that consumers in many parts of the United States now pay is more than the cost to generate and distribute electricity from a newly constructed power plant. There are also substantial differences in power costs among various regions, states, and even individual utilities within states. For example, the average cost of electricity to consumers in New England in May of 1995 was 10.l¢/kWh, and in the Middle Atlantic states it was 9.2¢/kWh, whereas the national average was 6.89/kWh.

These cost differences have created incentives for some industrial consumers to try to get independent access to the transmission lines and bypass the high-cost power of their monopoly supplier. This would create not only competitive wholesale electric markets, but competitive retail markets as well. While there is general agreement that competition is coming and is desirable at the generation and wholesale level, there is no such consensus regarding retail competition.

Will all consumers have access to competitive power supplies, or only large consumers? What will happen to renewable energy and demandside management programs? If retail competition comes to pass will current consumer protections, including low-income programs, stay in place, or will they be left to the marketplace? Will the electric industry go the way of the telephone business, with confusing ads and intense competition? These are the questions that will be answered by the debate over electric industry restructuring.

Page Last Updated: December 7, 2005