The Case for Energy Competition

Opponents of electricity choice make two common arguments against injecting more competition in the energy industry: it will lead to higher prices and it will decrease investment in new energy generation. Fortunately, data are available to assess each of these claims, and a recent report by the Compete Coalition, a group of hundreds of electricity stakeholders, does just that.

The study divides the U.S. into two groups: the 14 jurisdictions in the contiguous U.S. (13 states plus D.C.) where electricity customers have been free to choose their supplier (“competitive states”) and the 35 contiguous states where customers must purchase electricity from monopoly providers (“monopoly states”). Comparing the price and generation trends of these two groups is one of the best ways to analyze the effects of competition-inducing electricity policies.

The analysis shows that competitive states do a better job of holding down prices compared to monopoly states. From 1997 to 2014, prices in competitive states increased by 41 percent, but in monopoly states the increase was larger at 60 percent. Adjusted for inflation, electricity prices in competitive states actually declined over this period by 5 percent, but grew by 8 percent in monopoly states.

When it comes to investments in new energy generation, the research shows that monopoly states did invest more from 1997 to 2013, adding 206,800 MW of power, a 41 percent increase. But competitive states made significant investments too, adding 73,900 MW, a 28 percent increase.

While monopoly states invested more overall, there is another aspect of energy generation that should be considered, what this new study calls “potency.” Potency is a measure of how growth in generation compares to growth in consumption. It’s a valuable statistic because it can identify when a state is underinvesting even while it expands its generation capacity.

In terms of potency, competitive states clearly outperformed monopoly states. Generation production in competitive states outpaced consumption growth from 1997 to 2013, whereas consumption growth in monopoly states rose faster than those states added generation. This suggests that competitive states did a better job of meeting future capacity needs than monopoly states over this period.

Policymakers in Lansing have been discussing eliminating the little bit of electricity competition that exists in this state: 10 percent of the market is open to competition, 90 percent is guaranteed to the state’s public utilities. But based on the data in this new report, it appears that a low-cost way of making Michigan electricity prices more competitive nationally (an important factor in attracting new business investment) is to embrace more electricity competition, not less.