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ERCOT Generators Seeking to Replace Free Market with Command and Control Regulation
September 4, 2012
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Copyright 2010-
Several ERCOT generators have asked the Public Utility Commission of Texas to abandon the state's free market in exchange for a command and control approach to electricity under which the ultimate price of electricity would be driven, in large part, by the outcome of computer models and forecasts developed by unelected, quasi-government bureaucrats, rather than the interaction of buyers and sellers.
Specifically, Calpine Corporation, Exelon Generation Company, LLC, and Next Era Energy Resources, LLC [sic], filing joint comments, urged the Commission to, "adopt a mandatory ERCOT annual planning reserve margin requirement" [emphasis added]. Though the three generators offered what they called a "competitive market solution" to meet this centrally planned mandate, their proposal, a forward capacity market, is anything but a market.
As stated by the generators, in this capacity market, "Demand bids will be developed administratively by ERCOT based on net Cost of New Entry (Net CONE) for a Combustion Turbine" [emphasis added].
Ironically, the generators oppose other alternatives proposed by the Brattle Group which rely to a greater extent on the existing energy-only market, such as an energy-only market with adders or an energy-only market with backstop procurement, because the generators claim that these solutions amount to "administrative intervention" which "contradict[] the rest of ERCOT's competitive market structure" -- but somehow forcing load to purchase, at the quantity and price determined by administrative formulas, a product which does not currently exist in the market is not "administrative intervention."
"It is a step back that effectively grafts old-style integrated resource planning on top of ERCOT's competitive market," the generators absurdly say of back-stop procurements, while calling a mandated capacity purchase a competitive market solution.
Luminant and NRG Energy, Inc. also offered support, in separately filed comments, for varying forms of a centralized forward capacity market.
In comments, Texas Industrial Energy Consumers soundly demolished any pretense that a capacity market is a competitive market solution.
"This would be a substantial step backward toward regulation," TIEC said of a capacity market.
"A capacity market is not a real 'market.' Instead, capacity markets create a fictional product for which there is no natural demand, and then create a 'market' around the mandate to purchase this product, relying on taxes and penalties to enforce a government-created obligation" [emphasis added].
"Where a true competitive energy market relies on natural market signals and dynamics to induce appropriate behavior, capacity markets must attempt to recreate these incentives through cumbersome government regulations, which are costly, inefficient, administratively complex and historically ineffective," TIEC said.
"Since PJM's current capacity market was initiated in 2007, it has cost customers approximately $50 billion (through the end of 2011). This is approximately $900 per person in PJM's 13-state area. New Jersey and Maryland are now attempting to finance and build state-owned generation resources to satisfy their mandated capacity obligations because it is significantly cheaper than paying the annual PJM capacity payments. This is strong evidence that a capacity market does not lead to rational or efficient results," TIEC said.
"TIEC estimates that imposing a capacity market on ERCOT would be extremely costly, with little to no benefit. Some have argued that capacity payments and energy revenues are two interchangeable means of incentivizing the same level of reserves and, all things being equal, the same total costs should result regardless of which revenues come from which revenue stream. This assertion ignores the extreme difficulty and complexity of recreating the natural incentives of a competitive market through administrative requirements," TIEC said.
Furthermore, it should be noted that forward capacity market proponents are not satisfied with the massive wealth transfer to generators contemplated under the capacity "market" starting three years in the future, and have proposed various "transitional" capacity obligation mechanisms to be imposed on load immediately. Such transitional capacity auctions are inconsistent with the purported purpose of capacity markets; namely, that sufficiently forward signals for new generation are required to support new entry, and calls for transitional auctions expose calls for a capacity market as what they are -- an attempt to implement a government-forced transfer of money from customers to generators.
TIEC also said that, "the lack of efficient price signals in a capacity market can result in a sub-optimal resource mix, which would increase overall costs relative to an energy-only market. As a point of reference, regulation was intended to recreate the effects of competition in industries that were natural monopolies, including previously integrated utilities providing generation service. The inability of regulation to provide the same level of efficiency as a competitive market in practice was the reason the wholesale market in ERCOT was deregulated." [emphasis in original]
"In practice, a well-functioning energy market naturally produces the incentives that the legislature envisioned when it passed S.B. 7. A capacity market does not, and instead shifts risks that should be borne by investors in a competitive market back to consumers," TIEC said.
"In addition, capacity markets have been shown to be ineffective in stimulating the construction of new generation. Studies show that the overwhelming majority of capacity payments in forward capacity markets go to existing generators. A recent study analyzing the practical operation of capacity markets concluded that the PJM capacity market has resulted in approximately than 90% of the capacity payments since the market's inception flowing to existing generators," TIEC said.
"As another 2010 study on PJM's Reliability Pricing Model (RPM) concisely put it, '[a]fter seven auctions, and billions of dollars of costs ... significant fundamental questions remain unanswered about RPM: How can a market that funnels 94% or more of the revenue to existing generation be the best means to foster continued growth of demand-side resources and attract other new resources?' In a PJM-style capacity market, plants receive capacity payments for simply existing, regardless of their performance. This means that a 50-year old, high heat-rate plant with a high incidence of startup failure will be valued the same as a new, reliable, efficient plant. This design does not align profits with performance, forestalls replacement of older, less-efficient units, and promotes neither reliability nor high-quality generation service," TIEC said.
Copyright 2010-
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