Incentives and the Electricity Industry in Michigan

Gary Wolfram's recommendations for a better power market

Gary Wolfram, an economics professor at Hillsdale College and member of the Mackinac Center’s Board of Scholars, has just released a new report on Michigan’s electricity industry. The study was published by the Michigan Conservative Energy Forum and provides an overview of the history and current organization of this important industry.

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Wolfram highlights a few troubling facts about Michigan’s electricity market. First, Michigan has the highest retail rates in the Midwest — a fact we’ve highlighted in the past. They are 25 percent higher than Illinois, the surrounding state with the lowest rates. Second, Michigan electricity was the least reliable among the Midwest states in 2013. The average outage per customer was 779 minutes per year, more than double the next highest figure in Minnesota.

The report also makes several recommendations for how to improve Michigan’s electricity market:

  1. Expand retail competition to put pressure on the public utilities (Consumers Energy and DTE) “to improve their production and reduce rates or face the loss of their customer base.”
  2. Structurally separate who owns the means of generation with who owns the means of distribution, creating “incentives for new and existing generators to innovate, in particular those in the renewable energy fields.”
  3. Let customers specifically purchase power produced through renewable energy sources.
  4. Require utilities to purchase power produced through renewable, co-generation and waste-to-energy sources at the “market price.”
  5. Use peak-load and other differential pricing mechanisms to encourage customers to use energy more efficiently.

There is sure to be much debate over the future of Michigan’s electricity market in the coming months. This new report is a solid overview of the main issues and provides recommendations that should be considered by policymakers. Although the industry is heavily regulated, individuals operating within it still respond to incentives, and Dr. Wolfram has given careful thought to how to improve those incentives to benefit Michigan rate payers.

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