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Opinion: How to design markets for effective energy transition in Colorado

Colorado, like most parts of the world, is undergoing a significant transition in its energy system. 

Thanks to significant research and development efforts across the public and private sectors, the costs of using energy from wind, solar and natural gas are at record lows.

Coal, which had long reined as an energy king prior to the 2000’s, is in the middle of a dramatic and rapid decline across the United States. 

Steven Dahlke

Coal power plants across Colorado have been closing and will continue to do so for the foreseeable future. These changes have had positive environmental effects. Colorado’s carbon dioxide emissions are declining after hitting a peak around 2010. 

However, the global risks and negative impacts from climate change require further transition. Effective policy and market design are critical for positioning Colorado as an energy leader long into the future.

Against this backdrop, state lawmakers passed a suite of bills late last year designed to accelerate the state’s energy transition, all in support of new goals for aggressive greenhouse gas emissions reductions.

Now that clear direction and goals have been established, the important conversations shift toward policy details and implementation. In other words, how can we set regulations and market design to most efficiently enable investments to meet the state’s energy goals?

One of the first, crucial steps is to bolster and expand Colorado’s electricity markets. 

READ: Colorado Sun opinion columnists.

Our state is relatively unique in that it does not formally participate in a regional market. This makes it more costly and technically challenging for Colorado electric operators to manage growing wind and solar production.

A regional market will enable us to lean on our neighbors for help through trade on days when there is too much or too little renewable energy production. 

Regional market design should support and reflect the state’s greenhouse gas goals, which should be treated like other air pollutants and be limited by through pollution standards, caps or prices. 

Under this framework, there may be neighboring states we’d like to trade with who don’t share Colorado’s environmental goals. This can be addressed in a regional market framework by implementing border adjustments that reflect the environmental quality of energy imports.

Competitive markets can further support the state’s energy transition via more efficient pricing. Most Colorado electricity is currently sold at relatively flat, volume-based rates.

This pricing structure is simple for everyone involved, but incentivizes more investment in conventional energy sources, not wind or solar. 

A more dynamic, market-based system that adjusts prices throughout the day and across seasons to reflect the true cost of energy will incent more efficient energy use and support the profitability of clean energy technologies.

Importantly, this will also create new business opportunities for enabling technologies like energy storage that are flexible and can respond quickly to changes on a dynamic clean energy system.

Once the appropriate market design is in place, state and local policy should focus on transition support for communities that are currently dependent on coal-based energy production and mining, and for those on the cutting edge of developing clean energy economies.

Residents in coal-based communities are understandably worried as the state’s new energy goals cast uncertainty on their economic futures. Public support for these communities on the tail edge of the energy transition is just as important as support for those at the front. 

Pueblo provides a useful case study for a community that is successfully diversifying from a historic steel and coal-based economy.

Colorado is in an enviable position, with one of the highest growth rates in the country and a world-class energy research hub.

Given the clear goals and direction set by last year’s energy legislation, effective policy and market design will position us as a 21st century energy leader.

Steven Dahlke is a research fellow supported by the U.S. Department of Energy, working under a collaborative appointment with the National Renewable Energy Laboratory and First Solar. These are the author’s views and do not reflect positions of any of his affiliated organizations.


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