As electricity demand rises for the first time in decades, utility companies such as Exelon, PPL, and FirstEnergy are making what seems like a simple request to state policymakers: Let us build generation in the Mid-Atlantic region again.
What they don’t disclose is that utilities can already build generation in competitive markets. What they’re actually asking for is to impose the risks of their investments on families already struggling with electric bills.
In PJM Interconnection, the largest competitive power market in the United States, which serves 13 states and the District of Columbia, power producers compete to provide the lowest-cost power generation to meet demand. Customers reap the benefits of this competition, with annual savings of $5 billion within PJM.
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Utilities can actually provide power generation in regions with competitive markets as long as they do so with a competitive affiliate.
A clear example is New York, where investor-owned National Grid operates as a traditional utility, collecting guaranteed returns on transmission and distribution infrastructure while also building and operating generation through its competitive subsidiary, National Grid Ventures.
The snag? Unlike the vertically integrated utility model you see in areas such as the Southeast, utilities that build in competitive markets do not have the safety net of a guaranteed return on equity for generation investments.
If utilities can already build generation and provide power through affiliates that compete in the market, what exactly are they asking policymakers to change?
It’s not about building generation or providing power. Utilities want to remonopolize the electricity system by building generation with guaranteed returns, which increases risk for ratepayers. Under a monopoly utility model, utilities can collect guaranteed returns on equity for their investments, even if projects run significantly over budget or are never completed. In a competitive market, independent power producers run the risk of their bid not being chosen if it’s not competitively priced — no compensation is automatically guaranteed, and no risk is passed onto consumers if the IPP fails.
Unsurprisingly, consumer advocates across the region, who protect ratepayers from high bills and unfair practices, plainly state that allowing utilities to build generation with guaranteed returns is a bad idea.
Maryland People’s Counsel David Lapp is staunchly opposed to the utilities’ proposal: “For many reasons, it’s a bad idea to have utilities build and operate power plants and have the costs treated like distribution costs.”
Similarly, Brian Lipman, director of New Jersey’s Division of Rate Counsel, said that “competition is good for ratepayers. Moreover, utility-owned generation will likely shift the risk of producing generation away from generation developers and onto ratepayers.”
If power demand falls short of projections, ratepayers could be left paying for stranded, unnecessary assets. For example, when Ohio approved stricter forecasts for data center demand, AEP Ohio’s demand forecast dropped from 30 gigawatts to 5.7 gigawatts almost overnight. This example and others like it show that the projections being used to justify huge investments and dramatic policy reversals are often not connected to reality.
If utilities believed their own demand projections, they have every incentive and opportunity to be first movers and build the generation claimed to be needed. They are not doing so, and that suggests their load forecasts are inflated, and they don’t believe them either, which is why they are only willing to build generation with guaranteed returns.
Even setting aside the real risks ratepayers would face if the utilities’ proposal were allowed, there’s no reason to believe utilities would build generation faster or more efficiently than independent power producers. Utilities would face the same challenges — lengthy permitting delays, supply chain complications, and workforce limitations — without the experience independent power producers have in bringing new generation online.
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Independent power producers and PJM are already working to bring new generation online. Since 2020, PJM has approved 103 GW of interconnection agreements for new generation, and market signals have brought power plants out of retirement, encouraged upgrades to existing plants, and spurred investment in new generation.
Given the uncertainty about how much generation will be needed to meet the rising demand, why should we trust utilities to build it with ratepayer money instead of competing to build in the market today?
Todd Snitchler is president and CEO of the Electric Power Supply Association.