The study, from the Center for the Advancement of Energy Markets and the Distributed Energy Financial Group, said a market-based approach to ensuring resources are sufficient would produce a $19 billion benefit to retail customers. Many states or regions of the country have reserve margins, but the study said such a prescriptive regulatory approach undermines the goals of a competitive market, treats all consumers the same regardless of their preference for more or less reliability and results in considerable costs being passed onto consumers.

Relying on the competitive market and more efficient pricing for capacity would reduce the average cost of electricity by more than 1 cent/kWh in certain parts of the country, the study said. "This price reduction would produce a $19 billion annual benefit to ultimate U.S. customers. The benefit would result from avoiding unnecessary capacity reserves, and encouraging price-demand response."

Reserve margins are maintained all year long and they are usually set above a peak generating level or peak demand day, meaning for most of the year "there is an enormous amount of unused capacity" that is being paid for by all ratepayers, said Ronald Sutherland, one of the authors of the study. "The value of improved reliability due to reserve generating capacity is much less than the cost of providing this capacity," Sutherland said.

The study recommended that demand-response initiatives, distributed generation or other mechanisms such as load shifting and curtailment should be pursued more aggressively, rather than trying to ensure generation levels are adequate for reliability purposes. "We’re saying there’s a cheaper way of doing business," and rather than prescribing means to achieve reliability the best way is to "let the market figure it out ... The same level of reliability could be obtained at a much lower cost," Sutherland said in an interview.

Focusing resource adequacy on generation is inappropriate because most electrical outages result from transmission and distribution system failures, not insufficient capacity, the groups said. Today’s industry relies on "an increasingly brittle and aging T&D system" that could use more investment, not more generation, said Jamie Wimberly, president of CAEM and CEO of DEFG.

Projections by the North American Electric Reliability Council and the Energy Information Administration document that future generating capacity is likely to be more than adequate, yet regulators in Texas are considering adopting a reserve margin for that state, said Nat Treadway, the other principal author of the report and managing partner at DEFG. Texas has plenty of generation and is seeing relatively new plants mothballed, yet staffers at the Texas Public Utility Commission have said they intend to have a rule establishing a reserve margin approved by the end of the year to avoid a crisis a few years down the road, said Treadway, a former staffer with the PUC. "They need to take a more market-oriented approach" to avoid excess costs and market inefficiencies seen in other parts of the country, he said.

The current regulatory model focusing on generation adequacy also hinders any real benefit from retail restructuring because competitive retail markets are designed based on an inefficient wholesale market model, according to the report. "Restructuring efforts in the U.S. include the use of auction markets and retail access to power suppliers, but some such efforts are superimposed on the old regulatory model of flat-rate pricing and large reserve margins. The inefficiencies inherent in the regulatory model preclude restructuring efforts from providing the potential benefits to customers," the report said, suggesting that the transition to a truly competitive electricity market may take a decade or longer.