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Friends Like These: Competitive Generator Says Competitive Retail Market, With Transient Customers, Can't Support "Investment," Innovation Investment, and by implication, innovation, cannot occur in competitive retail energy markets characterized by "transient customers," a competitive generator shockingly told the Public Utility Commission of Texas, in comments urging the PUCT to not rely on demand response for long-term resource adequacy (41061).
"In a deregulated market, retail electric providers cannot make investments in transient customers," NextEra Energy Resources, LLC proclaimed.
To provide context, NextEra Energy Resources was highlighting that demand response has seen the greatest penetration at the mass market level at a regulated utility:
"To this point, according to the Department of Energy, at 20% of all customers, Florida Power & Light has the highest DR penetration in the country, yet it only represents 8.0% of summer peak and has taken over 25 years to achieve. This accomplishment has only been achieved through diligent regulated efforts and with rate recovery. DR has a cost, and in a regulated market the cost is recoverable. In a deregulated market, retail electric providers cannot make investments in transient customers. Only industrial class customers can significantly engage in DR -- while this is an effective and necessary tool, broadening and increasing dependency on it effectively creates a monopoly class of energy providers, disadvantages residential consumers and creates a perverse market incentive."
NextEra Energy Resources, in comments barely over a page long, does not elaborate on its assertion that retail electric providers cannot make investments in transient customers.
This leaves several unanswered questions concerning the assertion (How long must a REP expect to retain a customer for the customer not to be considered "transient?" Even though Texas customers have choice, what evidence suggests that REPs' customer bases are "transient" enough to prevent investment, etc). However, even ignoring these issues and interpreting the comment in the light most favorable to NextEra Energy Resources -- that simply investment cannot occur if the REP is not certain that a customer base will be there in the future -- it remains a naked assertion which flies in the face of free markets, both for energy supply, and other goods and services.
Indeed, if a transient customer base prevented investment, the retail energy industry would not see hundreds of new, start-up entrants investing millions despite having zero customers at start-up, and no guarantee of winning any customers. Moreover, there would be no reason to have retail electric choice, and Texas, and all other retail access states, should simply return to vertical integration (including the end of competitive generation, since competitive generators don't -- or shouldn't -- have captive customers, although, as noted below, warped policies have resulted in just that in certain RTOs with capacity markets, with regulated customer obligations but unregulated profits)
Moreover, consider NextEra Energy Resources' assertions in other industries without captive customers and therefore transient customers. Under NextEra Energy Resources' logic, Apple could not have made the millions of dollars investment in the iPhone, because mobile phone users are transient. Obviously, not only did Apple undertake the investment despite the lack of a captive or regulated customer base, the investment proved a success, because in free markets, building a better mousetrap, or being better at selling it, means you don't need captive customers to make money; you win customers by responding to their needs, tastes, and preferences.
Indeed, in "deregulated" markets, standing still and not undertaking investments to innovate is riskier than investing even though the customer base is transient, because the company will not keep pace with changing consumer preferences without investment -- see the myriad of once-dominant competitors (Sears, Pan Am, AOL, etc.) replaced by more innovative start-ups which invested in nothing more than what they believed was a superior business model, with no promise of static customers through which to make a return on that investment.
Even Luminant, a supporter of a capacity market, conceded that the higher wholesale price caps will incent investment by competitive retail electric providers in demand response:
"[A] certain level of incentives for DR programs will naturally be created by the increasing SWOCs. Specifically, as the SWOCs increase to $5,000 this summer, $7,000 next summer, and $9,000 in the summer of 2015, REPs, end-use customers, and generators will have an increasing incentive to reduce their exposure to real-time prices. With respect to REPs, such exposure results from unexpected changes in the amount of load that a REP is required to serve (i.e., their 'swing' load). If an unexpected increase in the REP's load occurs when real-time prices are approaching the SWOC, REPs have an incentive to reduce the amount of load they have to serve and thereby reduce their exposure to real-time prices."
Citigroup Energy Inc. noted that because retail customers have choice, and are transient, REPs will be forced to invest in peak management capabilities such as demand response to offer lower pricing and attract/retain more customers:
"Retailers will be strongly encouraged, through the natural forces of retail competition, to creatively mitigate rising retail prices as reserves tighten and forward market prices reflect a number of hours with shortage pricing are expected. For example, as retailers begin to enter into agreements with residential and small commercial customers for pricing in 2014 or 2015 [years used for illustrative purposes only, does not reflect Citigroup's view on actual pricing conidtions], and [as] those retail prices are higher than what retail customers are used to paying, the aggressive competition for relatively lower prices will drive innovation in hedging high prices, including with demand response. As tighter conditions enter into the retail sells cycle (often one year contracts are common), this innovation becomes more probable, and demand response providers or other service providers with sufficient agility or expertise will be encouraged to provide expertise to these retailers."
Ironically, NextEra Energy Resources' comment has backed into several problems with the capacity markets sought by "competitive" generators in ERCOT -- regulators, and the command and control structure of the artificially created capacity obligations, pick winners and losers when it comes to investment, rather than customers through voting with their feet.
Indeed, the capacity market essentially returns the market to the old notion of "captive" customers, since customers cannot avoid the capacity obligation. Now, if generators really believe that new capacity cannot be built without captive customers, that may be a valid argument, but if customers are to be held captive, the regulatory compact demands that returns and profits be strictly regulated in exchange for obligating customers to be captive to the government-selected providers (whether a "competitive" auction or regulator-established franchise selects the providers is immaterial, so long as the customer is captive to the selected provider).
Moreover, contrary to NextEra Energy Resources' assertions, less investment actually occurs when customers are held captive, because customers cannot express dissatisfaction by choosing an alternative provider as they would in a free market. There is no need for companies enjoying a captive customer base to invest in innovation.
This is why PJM, with its incumbent-favoring forward capacity market, has seen less investment in new generating capacity than ERCOT, because regardless of what customers would prefer, the PJM capacity market is designed to clear the plants with the lowest going-forward fixed costs regardless of how expensive these plants will actually be to customers when it comes to producing energy.
In contrast, ERCOT's energy-only market has forced the oldest, most inefficient plants into mothballed status because, through the non-captive energy market, customers can express a preference for the units with the lowest production costs. In a forward capacity market, customers are robbed of this ability, and are made captive to old, inefficient, and largely depreciated plants with lower going forward costs, which appear cheaper when measuring an artificial product such as forward capacity, but which do not produce the lowest-cost power on an all-in basis. But because minimum offer price rules designed to inflate capacity prices don't allow customers to reduce their capacity obligation if they were to independently contract for new, more efficient generation that is cheaper on an all-in basis (but with higher going-forward costs versus depreciated plants and which therefore don't clear the capacity market), customers remain captive to the old, high-cost power plants, despite their preference for the plants which produce the lowest-cost all-in power, including energy, capacity, and ancillaries.
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February 20, 2013
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Copyright 2010-13 EnergyChoiceMatters.com
Reporting by Paul Ring • ring@energychoicematters.com
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