Discussion Paper

The Environmental Impactsof Electricity Restructuring:Looking Back and Looking Forward

Abstract

In the mid-1990s, when the Federal Energy Regulatory Commission was preparing torelease Order 888 requiring open access to the transmission grid, the commission, environmentalgroups, and the Environmental Protection Agency, among others, raised the question of howopen access and greater competition in wholesale electricity markets might affect theenvironment. If open access worked as expected, underutilized older coal-fired generators in theMidwest and elsewhere might find new markets for their power, leading to associated increasesin air pollution emissions. Restructuring also might lead to retirements of inefficient nuclearfacilities, whose generation would be replaced by fossil generation, further increasing emissions.On the other hand, some suggested that in the long run, the anticipated increase in investment innew gas-fired generators might accelerate a switch from coal to gas that would decreaseemissions. Lastly, if restructuring produced the desired result of lower electricity prices, manyobservers suggested that an increase in electricity demand would lead to more generation andhigher emissions. The counterargument was that restructuring would lead to productdifferentiation and customer choice, including the opportunity for customers to willingly select“green electricity.”<br><br>In this paper we review the prospective literature on the possible or anticipated effects ofrestructuring on the environment and the evidence from changes in the intervening years toutilization of coal facilities, performance of existing nuclear plants, investment in natural gasgeneration, and electricity prices. We assess how actual experience compares with priorexpectations. We discuss other changes in upstream fuel markets, energy policy, andenvironmental regulations and the role that each of these factors plays in the efforts to evaluatethe environmental effects of restructuring. Today the movement toward restructuring has stalled,leaving the country divided into competitive and regulated regions. We discuss the implicationsof this division for the future of environmental policy and the complicated relationships betweenpolicy agendas concerning mitigation of climate change and further restructuring of theelectricity industry.