Separate Reports Find Capacity Market Would Increase Texas Electric Rates

Two reports from think tanks on opposite ends of the political spectrum have both reached the inescapable conclusion that a capacity market in ERCOT would raise customer rates, without addressing any specific causes of the current resource adequacy concerns.

"A capacity market is an institution in which people have no choice but to trade a contrived good that has little or no economic value," the Texas Public Policy Foundation said in an analysis. TPPF's mission, "is to promote and defend liberty, personal responsibility, and free enterprise in Texas."

TPPF said its critique revealed that, "the economic theory behind capacity markets [is] deeply flawed."

"We conclude that investment in generation in ERCOT is likely to continue and, as it has in the past, provide sufficient reserves to maintain reliability. Shifting to a capacity market is unnecessary, and would in reality be a source of inefficiency and a barrier to competition that would likely increase the cost of electricity for consumers," TPPF said.

"A capacity market is an attempt to impose a complex global solution on a relatively simple local problem. However relevant the missing money model may be in reality, it points directly back to localization. There is no reason -- either in theory or in history -- to assume that the missing money will be important for every type of generator at some points in its life," TPPF said.

"There appears to be general agreement that if generation investment in Texas is in fact inadequate, that problem is with a small set of peaking generators and it exists for no more than 100 to 200 hours per year," TPPF stressed. "If these are the problem units, any capacity policy should be directed toward them rather than instituting a vastly more complex policy that affects all generators along with demand response," TPPF said.

However, TPPF's analysis cast doubt on, "the common assertion that investment in peaking generators in ERCOT is intrinsically unprofitable."

"Claims by critics that investment is persistently unprofitable in ERCOT's energy-only markets rest on a regulator-determined formula (Peaker Net Margin) whose definition deals solely with Balancing Market revenues and costs. Adding in potential revenues from the sale of ancillary services leads to a conclusion that peaking units are often economically viable investments. On the surface it appears odd that generation investment in ERCOT continues apace despite official calculations of its unprofitability. In reality a more detailed picture of the choices available to generators shows that building them for ERCOT's actual markets is often profitable," TPPF said.

"In most years of its existence, a three- or five-year projection would show ERCOT falling dangerously short of reserves, but market forces have invariably succeeded in restoring their generation adequacy. The most recent reports also indicate that market forces continue to operate, and that ERCOT is taking advantage of other options such as de-mothballing generation and augmenting demand response," TPPF said.

Moreover, accounting for expected generation not included in ERCOT's CDR, and assuming a low demand forecast (possibly reflecting growth in demand management) rather than ERCOT's high demand forecast, would produce reserve margins of 19.6 percent in 2013, 16.7 percent in 2014, and 13.2 percent in 2018, not counting any additional capacity that might materialize between now and those years, TPPF said.

TPPF said that capacity prices, "provide perverse incentives; for example, maintaining obsolete generation in order to capture capacity market revenues rather than to retire and replace it with more efficient units."

"Owners of otherwise uneconomic generators that remain operable will attempt to protect their income streams, and the politics of RTO governance may allow them to survive," TPPF said.

"The 'demand curves' seen in northeastern capacity markets are unrelated to those that measure consumer valuations in ordinary markets. There are great difficulties in ascertaining the contributions of various types of capacity to reliability, and for determining the value of deliverability. Even the most vocal of advocates for these markets have stated that their institutions and quantitative specifications must be determined by experts without actual market interests who will put theoretical ideals in place, a process quite at variance with the realities of RTO governance," TPPF said.

Separately, Public Citizen released a study that concluded that, "a capacity market takes too long, costs too much and won't be enough to keep the lights on."

"To answer the question of whether a capacity market would benefit Texas, energy experts hired by Public Citizen analyzed a capacity market run by PJM, a regional transmission organization that coordinates electricity movement in 13 states and the District of Columbia, which is the market model most similar to the approach the PUC is discussing. Researchers found that replicating the PJM-run capacity market would take until 2015 and would cost between $1.2 billion and $2.3 billion a year," Public Citizen said.

"In addition, such a market would divert resources from new, more efficient power sources. In the PJM market, $54 billion went to existing power plants while just $4.2 billion went to new resources such as gas, wind and solar," Public Citizen said.

Link to TPPF Report

Link to Public Citizen Report