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02/06/2013

Austin group says capacity electricity market not for Texas

Texas might have challenges regarding the adequacy of its electrical power supply, but paying generators for new capacity isn't the solution, says the Texas Public Policy Foundation, an Austin-based free-market advocate. Texas has what's called an energy-only market, meaning generators only get paid when they sell electricity. Low wholesale power prices in recent years have discouraged new capacity, and the state's biggest power grid, the Electricity Reliability Council of Texas, has said its margin of supply over projected demand could run uncomfortably short as early as this summer. One approach taken in a so-called "capacity market" is to pay generators a sort of stand-by fee to bring more capacity to the market. Texas' situation has attracted national attention, such as this report.

“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,” co-author Robert Michaels, professor of economics at California State University, Fullerton, says in a prepared release. “Not only will a capacity market fail to address reliability concerns, its costs will almost surely exceed any benefits it might bring,” he says. The study argues that "ERCOT’s reliability challenges do not stem from any inherent flaws in electricity markets that render them incapable of functioning properly," but instead are "a result of intervention such as renewable energy subsidies and price caps that has inhibited – or prohibited – innovation and kept the market from developing solutions to these highly complex issues."

The report drew a cheer from the Texas Coalition for Affordable Power, which represents dozens of municipalities and isn't exactly the biggest fan of the state's deregulated market. TCAP Executive Director Randy Moravec, in a prepared release, said: “We agree that moving to a capacity market is expensive and unnecessary.  A capacity market in New Jersey has cost electricity customers in that state more than $1 billion annually, according to reports.  Creating such a market here will layer extra costs on all electricity in Texas — just like a tax — and drive up prices for both residential and business users.”

A link to the TPPF's study is here.

-- Jim Fuquay

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