Outdated energy rules impede innovation

How economists surfaced an alarming pattern, shrouded by 8 million points of data

A sweeping new analysis from Environmental Defense Fund shows that outmoded rules governing wholesale energy markets cost New England families and businesses an estimated $3.6 billion in artificially-inflated energy bills over just a three-year study period.

By analyzing patterns hidden in over 8 million data points from dozens of gas delivery nodes on the Algonquin Pipeline (which serves the majority of gas power plants in New England) EDF revealed that a few gas utility companies were routinely scheduling large gas deliveries, then canceling their orders at the last minute, too late for the space to be resold.

In effect, they were reserving a table at the hottest restaurant in town, then not showing up (and they did this at least 1,500 times). The artificially limited supply sent gas and electricity prices skyrocketing.

Why the rules need to change

Natural gas is rapidly becoming the dominant fuel for producing electricity in the U.S. – it supplies fuel to generators that in turn provide electricity to millions of American homes and businesses.

And natural gas-fired power plants have become the largest user of the pipeline system.

Yet there is an alarming disconnect between the two markets. The natural gas market rules are not keeping up with operational needs of electric power plants (and of the economy that they power).

What's more, at a time when markets of all kinds are becoming more and more data driven and transparent, the natural gas market design is falling behind.

The ever-fluctuating volumes of gas that power plants need to adjust to daily demand are largely unpriced, meaning that the value of flexible gas delivery is utterly opaque, preventing anyone from regulators to potential competitors from seeing the full supply-and-demand equation that pricing data provides.

Lack of transparency impedes innovation, prevents fair competition and keeps prices higher.

A growing national challenge

The New England problem is emblematic of a challenge that exists nationwide, as the reliance on natural gas to make electricity grows.

The disconnect between gas and electricity markets is giving some large, entrenched players unfair leverage and protection, and inviting economically dubious behavior.

Decades-long contracts used to finance expensive new pipelines can end up locking in fossil fuels longer than necessary.

Out-of-date, inefficient trading rules are not only costly in themselves. They also risk saddling ratepayers with the cost for more new pipelines than they actually need, and stifling competition.

That's because the decades-long contracts used to finance expensive new pipelines can end up locking in fossil fuels longer than necessary, and locking out cheaper, cleaner, more efficient energy solutions that are rapidly emerging.

Until wholesale energy markets are transparent and functioning efficiently, it will be almost impossible to determine what energy solutions are sensible and the appropriate level of investment. Updated and well-designed markets are key to resolving these challenges.

Moving forward, gas markets must work better for everyone involved, with more flexibility for buyers, better price signals reflecting true market need for investment, and better alignment of costs and benefits for ratepayers.