Economists' Folk Theorems and Problems with the US Energy Transition

10 August 2023
Dr. Jeff D. Makholm

In the September issue of Wiley journal Climate and Energy, NERA Senior Managing Director Dr. Jeff D. Makholm examines the challenges the US is facing regarding its renewable energy transition. Broad agreement among engineers, geographers, and climate scientists is that an important path to the broader entry of renewable electricity generation depends on developing a high-voltage (HVDC) interstate transmission grid—spanning the geography between renewable resource-rich states/regions and relative renewable resource deserts. Yet there is no evident progress on such a transmission system either at the Federal Energy Regulatory Commission or amongst FERC’s regional transmission organizations (RTOs). Why not?

A large part of the reason for this dearth is that FERC and its RTOs are stuck pursuing regional electricity markets that, because of their own local perspective, impede progress toward an interstate HVDC system. Worse, FERC has been doubling down on its reliance on its RTOs to deal with all transmission-related problems. This is despite increasing evidence that its RTOs, as they continue to pursue what economists call “folk theorems” regarding their regional power markets, cannot adapt to the geographic exigencies of the US energy transition.

Dr. Makholm notes that the US has a geopolitical endowment—a continent-sized country bounded by two allies and two oceans—seemingly tailor-made for making the best competitive use of its renewable electricity resources to aid the energy transition. Dr. Makholm explains that the US is stuck with renewable electricity bottled up in resource-rich regions, FERC has been convinced to re-raise competitive transmission entry barriers by rent-seeking incumbents (in the form of right of first refusal (ROFR) for RTO region utility members), and the queue for renewable projects continues to grow.

Dr. Makholm concludes by emphasizing that by continuing to hew to its RTOs to manage all transmission questions in their regional territories, FERC is part of the problem, not the solution, regarding progress toward the US energy transition.

Makholm, Jeff D. (September, 2023). “Economists’ Folk Theorems and Problems with the US Energy Transition,” Climate and Energy, 40/2, ©2023 Wiley Periodicals, Inc., a Wiley Company.