Last week, I had the pleasure of being part of the Second Annual Searle Center Conference on Federalism and Energy in the United States.  (I had the good fortune to be part of the first one, too.)  The conference covered a wide range of energy issues from electricity transmission siting to hydraulic fracturing to natural gas markets.  One paper/presentation struck me as particularly interesting for markets generally (I am told an update version will be available soon at the same site: “The Evolution of the Market for Wholesale Power” by Daniel F. Spulber, Kellogg School of Management, Elinor Hobbs Distinguished Professor of International Business and Professor of Management Strategy & R. Andrew Butters, Kellogg School of Management, Northwestern University.

Here is the conclusion: 

A national market for wholesale electric power in the US has emerged following industry restructuring in 2000. Tests for correlation and Granger Causality between trading hubs support the presence of a national market. Going beyond pairwise analysis, we introduce an array of multivariate techniques capable of addressing the national market hypothesis, including the common trend test. Although there is strong evidence of integration between the series, the analysis suggests a division between the eastern and western parts of the market. We also find border connects of 300 miles between the three interconnects.

The absence of transmission between the interconnects and significant border effects suggests that the national market is not yet fully integrated, even within the one-month horizon. Construction of transmission facilities between the interconnects would complete the development of the US wholesale market for electric power. Our analysis suggests that transmission facilities connecting the three regions would result in substantial gains from trade.

This conclusion – that “[a] national market for wholesale electric power in the US has emerged following industry restructuring in 2000 – could have a profound effect for how we view (and FERC views) wholesale electricity markets.  The study notably does not control for or otherwise address the price of renewable energy credits (RECs), which are required for compliance with renewable portfolio standards in a majority of states. This may not change the conclusion, but it would be interesting to see how if the RECs have any influence on the market operations.

In addition, it’s possible that more than just the 2000 market restructuring is at play here.  Since that time, electricity generation from natural gas has grown dramatically, and there is every reason to believe that will continue.  According to the Energy Information Administration, “Nearly 237 GW of natural gas-fired generation capacity was added between 2000 and 2010, representing 81% of total generation capacity additions over that period.”  If natural gas really is a major driver in facilitating this market, it would mean that that recent shale gas boom is even broader reaching than some may have expected. 

There’s more work to be done here to be certain a national market for electricity really is emerging and if more can be done to facilitate that market. If true, such a market could bode well for the consumers, especially those in higher cost regions.  It could also be an indicator that the regulatory structure of the market, even if not ideal, it working efficiently.  If so (as I am inclined to believe), it suggests that the Congress and FERC should leave the market-related regulations alone, and focus efforts on things that will further develop the market, such as the study’s finding “that transmission facilities connecting the three regions would result in substantial gains from trade.”