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Decarbonizing the Rockies: A Policy Memo on Colorado's Electricity Market

Climate attitudes in Colorado, courtesy the Yale Program on Climate Change Communication

In Brief

Consumers see limited choice and progress in Colorado, a state with increasingly energy-progressive voters and companies. 

The state's major utility works under a regulated system, which many analysts say inhibits competition and innovation. 

In this memo, a professional sets out how deregulating the system can unclog paths to new competitors and more carbon-smart processes. 

This article arose as an assigned policy memo in the Financing and Deploying Clean Energy certificate program. We've lightly edited it for flow and clarity.

May 28, 2021
RE: Policy Memo Advocating for the Deregulation of the Electricity Market in Colorado

This memo sets out how Colorado will benefit from changing policy to deregulate the energy market, with suggestions for approach and implementation. Deregulating Colorado’s electricity market will enable a necessary market evolution, fostering a diverse and distributed energy supply and wider variety of services that energy customers need. Liberalization of the energy market provides:

1)    Increased customer choice, and improved satisfaction 
2)    Greater market participation and industry job growth
3)    Accelerated integration of renewable energy resources onto the grid

Customer Choice and Satisfaction: The lack of competition disincentivizes a regulated monopoly such as Xcel to prioritize customer satisfaction and product innovation. Colorado energy customers may well ask: Why aren’t Coloradans allowed to choose where their power comes from? Why can’t customers change providers if they are dissatisfied?  Xcel Energy has a 1.4-star approval rating (Consumer Affairs), and yet customers who live in Xcel’s territory have no other supply option. Current market regulations inhibit consumers’ influence over the nature of energy supply or energy services. A deregulated market is a 21st century strategy that removes regulation and enables choice, empowering customers to exercise their market power, making customer service, competitive pricing, and diverse generation supply a priority for utilities (Danwitz, 2006). 
Market Participation and Job Growth: The emergence of the new industry participants would be far more significant in a liberalized competitive market. 42 states and the District of Columbia employed more clean energy workers than fossil fuel workers in 2019. Of the top ten states providing clean energy employment 80% of them were deregulated markets. The disproportionate amount of clean energy jobs in deregulated states describes a robust labor market and a robust energy market (America, 2020). 
Accelerated Integration of Renewables: When consumers hold market power, companies must compete, and when companies compete new products, generation, and participants emerge. Researchers at Yale and George Mason University found that 47% of 2,000 people surveyed said they would pay more for clean energy with the average increase at $16.25 more per month for clean energy (Gustafson, 2019). The failure to account for customer demand and willingness to pay has inhibited new renewable supply. Demand for renewables continues to climb and providing open market access will drive supply even further. 

How Energy Market Deregulation is Achieved  
Beginning in 1992 with the passage of the Energy Policy Act, states can restructure their energy markets to allow for greater participation of power producers. Successes and failures of implementation provide a road map of best practices for making fair and equitable the market transition. The primary components include: 
1)    Privatization and sale of generation assets of vertically integrated electricity monopolies
2)    Integration of transmission facilities creating a single Independent System Operator (ISO) 
3)    Separation of likely competitive segments and creation of ancillary markets 
4)    Creation of a voluntary wholesale energy market and retail rate restructuring  
5)    Transition mechanisms and stakeholder cooperation 
Privatization of Generation Assets: This action achieves the goals of decoupling the transmission of energy from the supply of energy, resulting in the creation of a competitive market for energy production. Generation assets of vertically integrated utilities are sold off to create a new market for energy production, and transmission responsibility is managed by the local system operator.  
Creation of an Independent System Operator (ISO): An Independent System Operator (ISO) bears the responsibility of the transmission of power to one singular entity which manages the interconnection and transmission of power across the grid, enabling competitive markets for energy generation and ancillary services.
Separation of Competitive Segments and Creation of Ancillary Markets: “Ancillary services refer to functions that help grid operators maintain a reliable electricity system. Ancillary services maintain the proper flow and direction of electricity, address imbalances between supply and demand.” (E. Ela, 2014 ) Ancillary markets are where new smart grid technology can easily be adopted on a market basis. New smart grid innovations that help levelized load and curtail demand are what now make energy liberalization a competitive reality (Oren, 2019). 
Wholesale Energy Markets and Retail Rate Restructuring: The creation of wholesale energy markets enables market forces to determine retail rates and eliminates retail rate regulation by a public utilities commission. Wholesale markets allow ancillary service providers to buy and sell power on a market basis, resulting in rates driven by true market forces. 
Transition Mechanisms and Stakeholder Collaboration: Achieving Market deregulation will require a comprehensive plan with dedicated milestones that will span multiple years. It will require cooperation and participation from multiple stakeholders and should begin with a comprehensive study and report. A recent study of deregulation in the southeast found that the creation of a “Southeastern RTO creates cumulative economic savings of approximately $384 billion by 2040…and in 2040, this amounts to average savings of approximately 2.5¢ per kilowatt-hour (kWh), or 29 percent in retail costs (Gimon, Mike, McNair, & Clack, 2020).”

Conclusion: Colorado should be leading on progressive energy policy. It enables consumer choice, encourages market participation, and fosters renewable energy development. Deregulating the electrical sector will be a technical, institutional, and political change, but is a mechanism that will ensure increased industry growth. Policymakers in Colorado should make data-driven decisions and push back on the pressures from monopolistic utilities to maintain their antiquated and inefficient business models. Market deregulation will create a platform to enable innovation through competition and allow the energy market to evolve to support customer choice, industry growth, and renewable energy.
Aurora Sepp-Peterson | Associate Developer

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