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New England, With Capacity Market, Seeing More Retail Energy Suppliers Default than "Volatile" Texas Energy-Only Market
Another mythical benefit of centralized capacity markets has been discredited by recent events in ISO New England, which has now seen three retail energy suppliers default at the ISO in the past 11 months.
Specifically, we're told that capacity markets produce less "volatility," and that's one of their main benefits, especially from a retail market perspective. The claim is that retail competition is less tenable in an energy-only market with a $9,000 price cap due to excessive volatility and risk, but that having a capacity market makes business less risky for retail suppliers and thus supports competition.
The reality does not support this claim.
As noted in our related story today (click here), ISO New England has now seen three defaults by retail energy suppliers since February 2013 -- PNE Energy Supply in February, and now recently People's Power & Gas and Easy Energy of Massachusetts.
Due to potential supply shortages (despite the billions paid to meet the mandated reserve margin), New England wholesale energy market prices have reached the $1,000/MWh cap in several instances in the weeks prior to the recent retail supplier defaults, and were routinely exceeding $250.
In contrast, the "volatile" ERCOT energy-only market has not seen a default by a retail electric provider since July 2012.
We also stress that the ISO New England defaults occurred in a market with a mandated reserve margin enforced by a centralized capacity market, with an energy market price cap of only $1,000/MWh.
In contrast, were Texas to adopt a capacity market, we have heard no serious support among capacity market supporters for a reduction in the ERCOT energy market price caps, and certainly not to the level of $1,000/MWh. Indeed, numerous Texas capacity market supporters have said that the capacity market doesn't replace the need for an "efficient" energy market, and have stressed the need for scarcity pricing (while at the same time claiming customers won't have to worry about volatility anymore with a mandated reserve margin assuring adequate supply).
Our point is this. The New England experience has proven that adoption of a capacity market does not meaningfully reduce volatility, and does not reduce retail supplier defaults or incubate retail choice. Instead, it has layered additional costs on retail suppliers while still leaving them vulnerable to volatile scarcity pricing.
Since much of the scarcity pricing in ERCOT arises from operational scarcity, not a lack of installed capacity (and therefore such scarcity pricing will not be reduced by meeting a mandated reserve margin), instituting a capacity market in Texas isn't going to reduce volatility for retail energy suppliers, or reduce the energy market risks they are facing. Instead, it will only make retail suppliers who do not own capacity subsidize the costs of retail suppliers whose affiliates do own capacity and who use such capacity to serve their affiliate loads.
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December 27, 2013
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Copyright 2010-13 EnergyChoiceMatters.com
Reporting by Paul Ring • ring@energychoicematters.com
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