Market prices send investors clear signals to invest in the most efficient means for producing electricity.
Thomas L. Welch is the former vice president of external affairs for PJM Interconnection. Prior to joining PJM, he served for 12 years as the chairman of the Maine Public Utilities Commission. Contact him at TLW1949@yahoo.com.
Higher electricity prices have drawn sharp attention to the design of organized wholesale electricity markets—particularly to areas where residential customers’ rates will increase because multi-year rate freezes are ending.
Rising costs for the fuel used to generate electricity have driven wholesale electricity prices higher. The price of natural gas has increased dramatically, although oil and coal prices also are higher than they were two years ago. These underlying fuel-cost increases would have pushed up electricity prices no matter how prices were set.
Nevertheless, because of higher electricity prices, some suggest changing the way that markets set wholesale electricity prices, or doing away with competitive markets entirely and returning to government regulation of prices. They say that the design of the markets exaggerates the effects of natural-gas price increases and unfairly rewards generators that use lower-cost fuels.
Organized Markets Promote Efficiency
A market-based system provides the best investment and performance incentives. Market prices send investors clear price signals to invest in the most efficient means for producing electricity. Plant operators have the financial incentive to operate and maintain power plants effectively and at the lowest cost possible. Investment and operating decisions are made at the investors’ own risk and potential for reward.