Smitherman: Capacity Markets Not Producing Intended Results

May 13, 2011
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Capacity markets do not appear to produce the results they are designed to produce, while engendering significant litigation and conflict between consumers and generators, PUCT Chairman Barry Smitherman said during yesterday's open meeting.

Smitherman, discussing resource adequacy after hearing from ERCOT regarding its report on potential retirements due to federal environmental regulations, said that Texas would be "better served" by maintaining its current energy-only market design, and ensuring that it produces proper incentives for quick start generation.

Based on observations of the capacity markets in the Northeast and discussions with state regulators in those regions, "it appears to me to not produce the kind of results that it's designed to produce," Smitherman said of a capacity market.

Commissioner Kenneth Anderson said that he is also, "very skeptical of forward capacity markets" for the reasons cited by Smitherman. Commissioner Donna Nelson said that she is not sure that capacity markets solve any problems, while they create a lot of problems.

Smitherman said that Texas would be better served by exploring any modifications needed to incent quick start peaking generation under the energy-only design. Such measures could be a longer Security Constrained Economic Dispatch (SCED) or "true" scarcity pricing where the price remains at scarcity levels even if ERCOT is forced to procure Reliability Unit Commitment (RUC), so that resource owners can start their units and not be afraid that the scarcity prices will collapse due to RUC procurement.

Smitherman directed Staff to convene a workshop of such measures after the legislative session (existing Project 37897, see 3/4).

Smitherman noted that the experience to date in the energy only market has been that, as reserve margins have been projected below the reliability target, waves of new build in ERCOT have consistently raised the levels back above the target.

Indeed, ERCOT's energy only market is the only RTO to see significant generation development on a merchant basis. What little capacity additions have occurred in the organized FERC markets with unbundled capacity obligations (whether auction or bilateral) have been undertaken pursuant to state-mandated long-term contracts, or PPAs with various state authorities (in the Northeast), or utilities' obligation to build or procure (California).

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