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Keep the Lights On: Fixing U.S. Power Issues Through Policy Reform

Keep the Lights On: Fixing U.S. Power Issues Through Policy Reform

An improved system of power generation and transmission in the U.S. would prevent some outages, and also reduce the price of electricity to American families, businesses, and institutions through increased production and competition. This would make life for American families more affordable and more pleasant.

The Lights Go Out Too Often

The need for improvement in U.S. energy markets has become increasingly clear recently. In the last year, Americans across the country, including in the three large states of New York, California, and Texas, have suffered from major power crises. While occasional, isolated power outages are a fact of life, especially in areas with above-ground power lines and storms, it is far different and worse for a large metropolitan area to simply fall short of the electricity demanded. These larger power crises have been unfortunately frequent.

Of course, few systems can be designed for a perfect record of 100 percent uptime; power has variable demand, and sometimes plants have issues and need to go offline. Building in a ton of redundant capacity to handle every possible crisis would be costly, requiring resources to construct and maintain plants that are rarely or never used.

However, outages are also tremendously costly. Power enables all sorts of other productive, valuable, or enjoyable activities, making it valuable to people, often far in excess of typical prices. This is what economists call “consumer surplus:” while people like having cheap power, they would actually still want it even if it cost a lot. Preventing outages, then, is a worthwhile goal—and judging by the U.S. record over the past year, not enough has been done to prevent them.

Preventing Power Disasters Can Also Lower Costs Generally

Furthermore, the same kind of power systems that prevent outages under times of strain are also likely to have lower prices under more ordinary circumstances. Much of the time, at times when demand is low and weather is not causing problems, wholesale electricity is extremely cheap. However, when demand is high or weather has caused a disruption, the price of wholesale electricity rises to a large multiple of its off-peak price, as high demand keeps raising prices in order to incentivize more marginal sources of power to come online. In extreme cases, those factors can be huge: even a hundred times the normal price.

Prices to consumers are different from wholesale prices; most customers have little variable pricing, if any, in their electricity costs. Instead, their provider tends to take a huge loss on extreme days, paying the high wholesale price while charging a lower price to consumers. In compensation, the provider earns a small profit on ordinary days. This profit can be thought of as an insurance premium against disasters. If there were fewer disasters, the premium could be reduced without driving power providers out of business. This would make power cheaper for all.

More generally, most improvements that make the supply of power more readily available have a chance to reduce power prices through competitive pressure.

Some improvements are specific to certain kinds of weather in certain kinds of geographies; for example, Florida and Arizona have different kinds of extreme weather events, and will need different engineering solutions to insure their grids against those extreme events.

However, there are two major things all areas can improve on: power generation, and power transmission. Both of these are unnecessarily held back by overregulation and a system that rewards a minority of litigious complainers over ordinary people who want to keep the lights on. Both of these deserve reform.

Power Generation Is Subject to Unnecessary Delays and Legal Abuse

Adequate power generation should be a consistently attainable goal for American cities. Power plants have existed in some form since the 19th century, when Edison Illuminating Company first brought light to New York through a coal-fired power plant on Pearl Street. Since then, Edison’s successors have invented a variety of superior designs using several different energy sources. When it comes to keeping the lights on, engineers and construction workers are more than capable of getting the job done, and that has been true for a very long time.

Some of the most salient failures in U.S. power generation instead lie primarily with the political or legal systems. New York, for example, suffered from a heat wave at the end of June of 2021 and Con Edison—the successor to the original enterprise that established the Pearl Street station—was forced to ask consumers to shut off appliances in order to conserve energy.

A contributing factor in this energy shortage was the shutdown of the final Indian Point reactor in April of 2021, as part of an agreement between its operator and New York State in 2017. While this shutdown was based in part on market factors—natural gas bringing down the price of wholesale electricity—it was also based on legal factors. The firm cited “continuing costs for license renewal beyond the more than $200 million and 10 years we have already invested.” The primary source of those legal costs was New York State, which pressured the Nuclear Regulatory Commission not to renew the plant’s license.  The license renewal was originally requested in 2007, but was opposed by New York for the next ten years, until an agreement was struck to abandon legal challenges and shut down the power plant in 2021. Just months later, New York suffered a power shortage. While New York had added some natural gas plants that were in principle able to replace Indian Point, the overall power generation in New York was nonetheless insufficient at the end of June.

This was a missed opportunity; given the high importance of power, state-level policymakers should, in general, be relatively welcoming to a competitive energy sector with many participants and ample capacity. It is better, in general, to try to expand capacity, not replace it. When it comes to a valuable service like power, it is better to build in some redundancy than to fall short.

However, state governments are not solely to blame for power problems. Even an eager state can find, despite its wishes, that it is difficult to bring new power generation online because of a bloated and easily-abused federal approval process. The Vineyard Wind project in Massachusetts is a particularly extraordinary example; it was not merely approved of by the Massachusetts state government, but even, commissioned by the Massachusetts state government, and nonetheless, it has faced difficulties in breaking ground. The Massachusetts passed bipartisan energy legislation in 2016, and the government, through a competitive bidding process, selected the Vineyard Wind project as part of an energy production effort.

The problems for Vineyard Wind instead came at the federal level: because the project was on the ocean, it was subject to a federal permitting decision by the Bureau of Ocean Energy Management (BOEM). This, in turn, made it subject to an easily-abused federal law known as the National Environmental Policy Act (NEPA). NEPA requires assessments of the environmental impacts of not just federal projects, but any project that would need a federal permit.

It is important that NEPA is not binding when it comes to the decisions themselves. It does not compel a particular outcome. Instead, it compels a process, one in which the agency writes a sort of cost-benefit analysis known as an Environmental Assessment (EA) or Environmental Impact Statement (EIS) before making a decision. Cost-benefit analysis, in some form, is a good idea; it is a good method for evaluating decisions, and transparency into that evaluation process is welcome.

However, NEPA has two general flaws. The first is that these analyses are subject to legal challenges by just about anyone on the basis that the analysis was insufficient, and the second is that it is relatively easy for those challenges to halt permitting entirely until the ostensible insufficiency is corrected.

Taken together, this is ripe for abuse. While NEPA was not intended to create outcomes—just to provide analysis—the process can be manipulated to create the outcome opponents desire. If building cannot start until the review is complete, then as long as the review continues, opponents of the project actually achieve their preferred outcome. It is therefore in their interest to make the review as onerous as possible through legal challenges.

This further creates the incentive to write an EIS as defensively and exhaustively as possible, making sure that it covers every possible objection under the sun; while this is individually rational to avoid lawsuits, it also creates the expectation that other EIS will reach that same level of detail. The average EIS for a BOEM project is 480 pages.

Vineyard Wind is a particularly egregious example. Its EIS contains four separate volumes, the shortest of which is 352 pages and the longest of which is 794 pages. The production of statements in that level of detail is impossible on any sort of reasonable project timeline. In the case of Vineyard Wind, for example, it took until 2021 for BOEM to approve Vineyard Wind, even though the state of Massachusetts was on board in 2018.

Even after final approval, though, lawsuits can still be filed to derail projects. For example, the Department of the Interior (of which BOEM is a component) has been sued by a rival energy producer, with a litany of claims about how the four-volume EIS still falls short of completeness.

There are problems with this process worth considering. The excesses of NEPA legal abuse themselves fail a sort of cost-benefit analysis. Delay is a cost, and often, the larger the decision, the more costly delay is. Furthermore, cost-benefit analysis has costs in itself. The production of these reports takes the time and energy of well-educated and well-paid people. Additional months and additional pages are not free. Delays and reports are desirable only to the extent that they help decisions by more than they cost in terms of time and effort.

Time and effort can add to the quality of analysis, but this is subject to diminishing marginal returns. As the staff of the BOEM or other federal agency write their EIS, they are likely to analyze the most important considerations in a decision-making process early on, even in a fairly brief statement.

It is relatively unlikely that a crucial or persuasive argument would go uncovered in a thousand-page document, but would instead only clear the bar and warrant a mention if the document were given an additional hundred pages. It is also unlikely that an agency would change its entire permitting decision based on information it thought insignificant enough to omit from a thousand-page tome.

Rather than a good-faith effort to improve the quality of government analysis, it is far more likely that many NEPA lawsuits are a deliberate effort to increase costs.

Another problem is in accountability. The project, like any project, has upsides and downsides. One benefit of a republic, in theory, is that arguments are weighed and decisions are made by representatives who are accountable. Voters can also weigh the decision, and, if it is important to them, consider it when they decide which lawmakers to vote for.

That connection to accountability is almost entirely severed in many NEPA cases, including Vineyard Wind. The government of Massachusetts commissioned the project. The federal government also approved: not just by granting the permit in a procedural way, but also by issuing a statement touting the project. The delays in the project come entirely from private lawyers, an unelected judiciary, and a system that voters have little access to. Congress mistakenly granted too much power to the legal system to do what should be the job of elected lawmakers: making policy decisions under pressure.

Power Transmission Needs Faster Permitting

Power transmission, including long-range power transmission, is also subject to a too-onerous legal environment in need of reform.

Transmission is important for several reasons. The first is that many of our power sources often require specific natural features to work well, and these natural features are often not located near the end users. Solar, wind, geothermal, and hydroelectric power make use of naturally-occurring energy sources. Nuclear power does not derive its power directly from a natural source, but it does require large amounts of water—ideally, relatively cold water—to convey heat from the reactor core to its turbines, or to cool excess heat generated. It is often efficient to locate power plants in an ideal physical environment for them, and then transmit the power from that ideal location to consumers.

Transmission also facilitates competition between different power sources. The more interconnected the power grid is, the more the discipline of competitive pressure can be used to reduce energy prices and make life more affordable for families. This is especially important at peak times, when wholesale energy prices are especially high. In those times, it becomes relatively more economical to transmit power in from neighboring areas, which can help relieve the worst of the pressure.

The Northern Pass project—a power line that would run through New Hampshire—is one example of a project in power transmission that suffered from legal difficulties. The value proposition is simple: Quebec is a region with ample power, while lower New England is a large population center with ample power demand. It is worthwhile to connect them efficiently through New Hampshire.

However, the Northern Pass project—which was ultimately cancelled—was subject to many of the same issues as power generation is. For example, it was subject to NEPA review, and ultimately resulted in an EIS so large that the Department of Energy divided it up into 21 separate files.

At the state level, there was far less incentive to approve, since many of the greatest beneficiaries of the project laid outside of New Hampshire’s borders. The proposal was opposed by hundreds of local groups who worried that the overhead power lines would create visual blight in scenic parts of the state’s White Mountains. To address this concern, builders put forward a new proposal was put forward where the cables would be buried in the most scenic area of the project’s route. However, local groups wanted the entire route to be buried, which would have substantially increased the cost. The project was approved by the Department of Energy but denied by New Hampshire’s Site Evaluation Committee, and eventually abandoned, at a loss of $200 million to the builder.

Power transmission suffers from a relatively simple problem: because it goes through several jurisdictions, it may require the approval of many different regulators, and even a single failure at any point can scuttle an entire project. As a result, the U.S. is falling behind other large countries like China in its ability to transmit power over long distances.

Policy Recommendations

Energy policy is a difficult topic: markets are not always competitive, and many important pieces of energy infrastructure are subject to approval of multiple agencies or jurisdictions. No single reform will solve every problem.

However, there are some clear lessons from the case studies above. The first is that state governments should generally create a policy environment that is welcoming, not hostile, to power generation. Electricity creates deep consumer surplus, and is a prerequisite to many other economic or social activities. It is worthwhile to keep the lights on, and ideally with relatively cheap and competitive markets.

The second is that NEPA is overdue for reform. One proposed suite of reforms to NEPA is the UNSHACKLE Act, a bill jointly sponsored by Senators Mike Lee, Ted Cruz, and Kevin Cramer. UNSHACKLE would limit the costs of NEPA by requiring agencies to finish their statements faster, allowing them to reuse paperwork, and limiting duplicative work at state and federal levels. Furthermore, it would protect agencies from lawsuits by narrowing the judicial standing requirements, setting a 150-day statute of limitations, and requiring high evidentiary standards for injunctive relief. In short, permitting decisions would be expedited and protected from severe legal abuse.

The third is that long-range power transmission regulation may need streamlining. Congress should consider reforms that would reduce the total number of regulators with effective veto power over a project.

These policy recommendations are only a start, but they could make the U.S. power grid more robust against days of high demand, reduce the frequency of damaging outages, and mitigate energy costs to American families and institutions.

Alan Cole

Devin Thompson

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