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Texas REP: Capacity Market Would Allow Capacity-Owning REPs to Put Me Out of Business
The Dallas Business Journal has published a great interview with John Werner, President of Source Power & Gas, in which Werner warns that granting compulsory capacity payments to capacity owners in ERCOT would allow those capacity owners who also own REPs to, "use that money to undercut me and Source Power and Gas and others to the point where we go out of business."
Link to Dallas Business Journal article
The real potential for the capacity market to undermine non-capacity-owning retail electric providers, through the compulsory transfer of wealth from non-capacity-owning REPs to REPs which own capacity, and to put such independent REPs out of business was first detailed by EnergyChoiceMatters.com last year (click here).
Podcast (Sept. 2012): Capacity Market Will Lead to Extinction of Independent Retail Electric Providers in Texas (mp3)
As more fully explained in our podcast, the capacity market will socialize the cost of NRG, TXU, Direct Energy, Exelon/StarTex, and other capacity-owning REPs using energy from such capacity to manage their peak load and balancing needs.
Currently, if capacity-owning REPs want to rely on owned-generation to serve super-peak and balancing load, for various benefits such as reduced collateral exposure and lower costs versus scarcity pricing, they are free to do so, but they must pay for, and take on the risks of, maintaining the availability of such generation. This means these REPs must reflect the full costs of such generation, including the fixed costs of maintaining these units' availability, in their retail rates, or alternatively, accept lower margin if such costs are not reflected in retail rates. Either way, the capacity-owning companies appropriately bear the full burden of the costs for these plants, which they operate solely for their own benefit.
However, when a capacity market is introduced, now those fixed costs of the capacity owned by a REP (or its parent/affiliate) are socialized across the entire market, including through payments extracted from competing REPs. The capacity-owning REP, however, can continue to operate their capacity in a manner that benefits solely their own retail book, by using the plants to hedge super-peak risk and avoid balancing market purchases -- cost-reducing strategies not afforded to the other REPs who now bear the costs of this capacity. The capacity-owning REPs, if their capacity clears the capacity market, can now "free ride" on the capacity payments of other REPs, and no longer take on the cost and risk of marinating their plants' availability to serve or hedge super-peak loads.
This undeniably provides such capacity-owning REPs an unfair competitive advantage over REPs which do not receive capacity payments. Freed from having to bear the costs of managing their super-peak and balancing load through owned-generation, capacity-owning REPs can lower their retail pricing to win more market share and drive independent REPs out of business, who must reflect the non-subsidized risks of serving super-peak and balancing load in their rates.
Or, the capacity-owning REPs can maintain higher retail rates but earn more margin due to their subsidized cost advantage, and use this margin to buy up competing retail providers, or invest more heavily in customer acquisition strategies, again, winning more market share and putting competitors out of business.
In either case, the government compulsion for independent retail electric providers to pay the fixed costs of their competitors' power plants forces these independent REPs to subsidize the business strategies and decisions of their competitors -- which is not the Texas way.
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October 23, 2013
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Copyright 2010-13 EnergyChoiceMatters.com
Reporting by Paul Ring • ring@energychoicematters.com
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