Illinois needs interstate competition, not in-state monopoly, to lower electricity costs

State experimentation is a feature of our federal system. It helps us identify good and bad policies. Competition in energy supply policy is no different. Unfortunately, recent efforts in Illinois fall on the side of helping us learn what not to do.

This fall, Gov. J.B. Pritzker signed a law with lofty but unachievable climate-enhancing goals. Worse, the legislation ignores the lessons of economics by constraining the market for mandated renewable energy supply to in-state sources. These constraints come at the expense of the benefits consumers would get from a more robust embrace of electricity suppliers, by looking to interstate and regional energy markets to achieve consumer efficiencies.

First, Illinois’ ambitious new energy plan anticipates massive spending to address climate change. Yet, recent Illinois history tells us it will hardly make a dent on that goal.

The new legislation sets targets to move away from fossil fuels, declaring that 40% of the state’s electricity should come from renewable sources by 2030, with even higher percentages each decade thereafter. It also calls for shutting down coal-fired and gas-fired power plants on a graduated but aggressive schedule.

The problem is that Illinois has tried this before, with little success on proponents’ own environmental metrics. Recent past efforts were made at the expense of alternative means for reaching energy efficiency that would better reduce pollution and lower electricity costs.

In the 2016 Future Energy Jobs Act (FEJA) and earlier clean energy plans, similar targets were set and the state made little progress. Goals set in 2007 never resulted in any action to achieve them. Because of politics and bureaucracy, and even after dumping tons of taxpayer money into renewable energy development under those earlier plans to the point of running out of funding for FEJA, less than 8% of Illinois’ electricity is supplied by renewable sources.

It is difficult to see how the Pritzker plan hopes to accomplish quadrupling that percentage in now less than 10 years.

What’s worse, the Pritzker plan also eschews the benefits of interstate competition for energy generation by creating artificial constraints. Setting mandates for the new renewable energy supply to come from in-state sources is hugely problematic. Why should Illinois presume that Illinois companies are the best at producing renewable energy? Our current sophisticated electricity markets and power generation make it easy to purchase energy remotely.

Interstate innovation

Indeed, in recent years robust interstate markets and regional electricity operations have been the innovative drivers of cheaper, more reliable, ever cleaner, more efficient, and therefore lower-pollution power generation. Two reports published this year analyzed Energy Information Administration and EPA data substantiating this case. Pacific Research Institute economist Dr. Wayne Winegarden found that wholesale electricity prices in the PJM region — which includes parts of Illinois — are 41.7% lower today than in 2020. University of Texas-Austin engineer Dr. Josh Rhodes assessed that the PJM reduced carbon emissions by 41% since 2005. Competitive regional markets can take credit for these benefits.

Illinois’ insular requirement that renewable power come from in-state was a bug in the 2016 legislation that is biting again in 2021. And this flaw in the 2016 plan undoubtedly contributed to the ineffectiveness of those reform efforts, both in hardly increasing the renewable percentage in Illinois and also in not reducing consumer electricity costs.

The mandate in the new legislation, like the old, requires utilities to increase the amount of in-state renewable energy they purchase. It makes no sense to geographically restrict where utilities purchase energy from.

This rule is a clear case of in-state, so-called clean energy lobbying interests capturing the Legislature to concentrate benefits for themselves in the form of newly available subsidies, and dispersing the costs onto Illinois consumers — the cost of the subsidies and the cost of foregoing lower utility bills.

Interstate competition for the supply of traditional and renewable energy and the development of regional markets would be sure to lower electricity prices.

Illinois and other states should make it their policy to foster utilization of these markets. They should encourage in-state electricity stakeholders to engage in these markets to find the lowest-cost energy sources. And Illinois should loosen the grip of the Illinois Power Agency and break down the monopoly of Illinois utilities. Other states should take the same approach.

That is the blueprint for letting market forces pave the way for successful state energy policies, while benefiting consumers and the environment.

Donald Kochan is a law professor and deputy executive director of the Law & Economics Center at George Mason University.

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