I have long been an advocate of true, effective deregulation of the electricity industry. Of course, when typically uttered in the context of the power sector, the word “deregulation” conjures up images of the California experience of the 1998-2002 era — which was an abomination involving government intervention against market forces at many levels, and thus should not be termed “deregulation” by any thoughtful observer.

Instead, there are several examples of much more workable approaches to electricity deregulation — such as Texas and PJM — that should be examined when weighing the possibility of competition in the power sector. The consulting firm CERA has just recently issued a report assessing the U.S. deregulation experience, and generally concludes that the pros outweigh the cons.

CERA Press Release on Deregulation Study

As CERA’s Lawrence Makovich pointed out in announcing the report: “The expectation embodied in the conventional wisdom — that for deregulatino to be considered a success, power prices in nominal terms should have decreased continuously over the period under consideration — is inappropriate. Power prices needed to fluctuate in order to convey the appropriate signal for economic efficiency.”

Not only do I wholeheartedly agree with this statement, I contend that when considered more broadly, it has significant implications for those of us with environmental interests. Power prices need to fluctuate by time in order to provide clear price signals that enable consumers to capture the true economic value offered by on-peak renewables (most notably, solar) and demand-altering measures. When true economics are masked by regulation or badly-botched deregulation, many environmentally-beneficial energy technologies are hobbled.

Of course, competitive forces in electricity would also work better if subsidies on conventional energy were eliminated (as argued in a previous posting), and if externality costs imposed by energy production/use (most notably, CO2 emissions) were fully and appropriately captured into energy prices. But, one step at a time. Let’s get energy market structures and rules right first, and we can tackle those issues subsequently.