The debate for Capacity Markets in the Texas electricity space is fixing to heat up. I stumbled across this excellent article about the fallacies driving the debate for introducing a capacity market in the state of Texas. It’s rare that I just cut and paste an entire article in this blog space, but I thought that this was worth the exception. The article was originally published in the Austin American Statesman on September 16th, 2013:
Texans use more than 360 billion kilowatt hours of electricity each year — more than any other state. We use it to keep our homes air-conditioned and to operate the businesses we work and shop in. We can’t do without.
But it comes at a cost. Last year, Texans spent more than $31 billion on electricity.
While that is a lot of money, competition in Texas’ world-class electricity market has kept prices down, making electricity less expensive for consumers.
Competition and lower prices, however, may soon become a thing of the past.
Regulators and special interests in Austin are working to replace competition with subsidies that will make electricity more expensive. The Texas Public Utility Commission could reach a decision on the issue as early as October.
The push for higher prices is part of an effort to undermine the world’s most competitive electricity market, in which most Texans can buy electricity for as low as 7 or 8 cents per kilowatt-hour, compared to the pre-competition, inflation-adjusted price of 13 cents in 2001.
Competition in the market, with consumers able to choose from more than 30 different providers, has driven prices down. While consumers in cities like Austin served by municipal utilities don’t have retail choice, the reliability of the market and costs of electricity within the Electric Reliability Council of Texas still have an impact here.
Of course, competition can also be hard on corporate profits. In fact, the push to abandon competition has been going on since lower natural gas prices and a more efficient market started eating into generator profits a couple of years ago. Also sparking the debate was the record heat and drought of 2011 that strained our electricity supplies to the limit.
Behind the push are policymakers nervous about running out of electricity, regulators who don’t believe an electricity market can operate without their help, and generators seeking the security of a regulated market.
Though we survived 2011 without any interruptions in service, the thin reserve margins that summer opened the door for generators to begin the push for subsidies in the form of a capacity market, where generators get paid for generating capacity — regardless of whether consumers need it.
There is no evidence, however, that capacity markets can actually improve reliability. But there is plenty of evidence that they make electricity more expensive.
While foreign to Texas, capacity markets operate across most of the United States. For example, PJM, a regional transmission organization, operates a capacity market that provides electricity to many Mid-Atlantic and Midwestern states. The average cost of electricity in those states in 12.3 cents per kilowatt-hour, significantly higher than competitive rates in Texas.
Estimates have placed the cost of direct corporate subsides through a capacity market in the neighborhood of $3 billion to $4 billion per year. Texans would have to pay these subsidies in addition to what they pay for electricity.
With the recent appointment of a third commissioner, the utility commission appears ready to take up this debate in earnest. It has set Oct. 8 as the date for a workshop where many of the decisions determining the future of the market may be made.
The problem with this debate is that concerns over reliability and profitability are overstated. Concerns of future shortages are based on faulty projections and ignore the responsiveness of the market. While some companies struggle to turn a profit, others have announced hundreds of millions of dollars in new investments in generation.
To the extent Texas is having problems, it is because of growing intervention in the market by policymakers and regulators — who now seem bent on creating more problems.
Texans do need to act to improve the market, but we should be moving away from, not toward, more regulation. We should eliminate overregulation of wholesale prices, eliminate renewable energy subsidies, promote market-driven demand response, and generally reduce the ability of the PUC to interfere with the market.
Less government — not more — is the key to providing Texans with a reliable, affordable supply of electricity.