Electricity Markets as Policy Arenas: ‘Stranded’ Assets & Financial Dealmaking

• In Event: The Political Economy of Energy

Abstract

The clean energy transition hinges on what happens to the fossil fuel infrastructure, including coal and gas power plants, pipelines, refineries, transportation networks and the like. Cheaper renewable energy has the potential to render them uneconomic – reducing their value, shortening their expected lifespan, and turning them into “stranded assets” from the perspective of their politically powerful owners (Colgan et al. 2021). While successful transition implies the rapid retirement of stranded fossil fuel assets, both their owners and other affected populations (from power plant employees to proprietors in adjacent communities) have an economic incentive to defend the fossil fuel economy, obstruct efforts to replace it and thereby generate contentious climate politics along the way. A central challenge of our time is to develop pragmatic and just policies that address these kinds of incentives and prevent their unwanted consequences. This paper seeks to contribute to stranded asset policy in the United States by drawing lessons from the electricity power plant sector of the last two decades. In the absence of a top-down national program (akin, for instance, to Germany’s vis-à-vis coal generators), how does the U.S. make stranded asset policy? I argue the answer lies largely in the seven wholesale electricity markets. They have become a principal source of “policy” by shaping the value of power-generating assets, putting in place the incentives for investment decisions (such as whether to retire coal-fired generators, extend the life of nuclear plants or take risks in new gas or renewable generation) and financializing the electricity sector (that is, transforming power plants into assets that can be easily bought and sold and encouraging investment from private equity funds and other financial firms). It is conventional to think of markets as politically neutral and decentralized price-determination mechanisms in contrast to systems in which regulators set prices. Yet to understand developments in the US electricity sector, it is useful to draw from the long tradition in the social sciences that treats markets as dense tangles of rules, with different market rules yielding different market outcomes including winners and losers. In the US, the seven wholesale electricity markets are political battle grounds for contentious fights over some of the most important climate-related issues. Members of Congress, the Supreme Court, presidents, state legislatures, federal and state agencies and regulators, the independent system operators (FERC-delegated quasi regulators), industry and environmental groups and an array of other stakeholders have all weighed into the processes of creating the market rules. Most important for the purposes of this study, the distinct histories, the complex rulemaking processes, and the idiosyncrasies of the system operators have resulted in remarkably different bundles of market rules for each of the seven. Thus, if the argument – that these wholesale electricity markets have been a main source of US stranded asset policy – is correct, there should be wide variance across them in outcomes of concern and a tight correspondence between particular market rules and predicted patterns of investment in (or retirement of) types of power generators. The paper will evaluate these propositions using an original index of power plant financial dealmaking that combines data from S&P Global, Pitchbook and the wholesale market operators (ISO/RTOs). If substantiated, the argument will have policy implications – by pointing to the urgent need for wholesale market reforms to ensure that the incentives for private investment align with the clean energy imperative.

Author

• Elliot Posner, Case Western Reserve University