Thinking Economically: Texas' New Wind Record and Renewable Energy Subsidies

Musings on Economic Freedom from the Texas Public Policy Foundation’s

Center for Economic Freedom

 

A recent cold front moving through the state last weekend propelled Texas to a new record for wind power, according to the Electric Reliability Council of Texas (ERCOT).

 

Wind-generated electricity provided 9,481 MW on Feb. 9, close to 28 percent of the power generated in ERCOT at that time. This surpassed the previous record of 8,667 MW set only two weeks earlier.

 

Lest we get too excited about this recent surge in renewable energy, we must remember that these records are being set in large part because of renewable energy subsidies. These subsidies are harmful on multiple levels: taxpayers, consumers, and businesses (that don’t receive the subsidies) are all harmed, as we showed in our November paper on the federal production tax credit and Texas-based renewable energy subsidies.

 

Here are some key points to keep in mind when thinking about renewable energy and related subsidies:

 

·         Before the wind started blowing heavily on Feb. 9, the electricity that was soon to be replaced by wind power was being supplied by gas turbines.

 

·         Once the wind began blowing, the gas turbines had to stop generating electricity to accommodate the electricity from wind turbines. An electrical grid cannot handle at any one moment more generation than is needed to meet demand.

 

·         Owners and operators of gas turbines that were forced off the grid by wind lost money from the sales they would have otherwise made. Wind turbine owners and operators, then, gained much of the money they earned at the expense of owners and operators of gas turbines. Owners and operators of coal-and nuclear-fired generation were likely also harmed, perhaps not because they were displaced on the grid, but because wind likely drove down prices.

 

·         The reason the wind turbines can force the gas turbines off of the grid is because the wind operators get subsidies from taxpayers. Therefore, they can offer electricity at a lower price than the gas operators. This is not a case of the free market at work. In fact, because of the subsidies, wind operators can actually pay companies to take wind from them and still make a marginal profit—nothing free market about that.

 

·         However, some gas turbines have to keep running on idle to be ready for when the wind stops blowing. Because when wind-generated electricity goes away, the gas generators have to start producing or there won’t be enough electricity. The gas turbines don’t run for free—somebody has to pay for the gas turbines held in reserve.

 

·         Buyers of electricity generated from wind on Feb. 9 may well have paid less for it than they would have had they continued to purchase from gas turbine operators—though most consumers who are on fixed contracts wouldn’t have noticed any difference. But the wind-generated electricity wasn’t cheaper. In fact, it is almost certain that the wind-generated electricity cost more when the consumer payments, taxpayer subsidies, and the cost of the backup gas generation  are added together. There is no doubt that it cost significantly more to generate electricity from wind than from natural gas.

 

·         Renewable energy subsidies are a transfer of wealth. They are a transfer of wealth from one set of consumers/tax payers to another set of consumers/taxpayers. They are a transfer of wealth from people generally south and east of Abilene to people generally north and west of Abilene because landowners, cities, counties, taxing districts, and others get more revenue where wind turbines are built. They are a transfer of wealth from generators using gas, coal, and nuclear fuel to owners using wind and other “renewable” fuels eligible for the subsidy.

 

·         Renewable energy subsidies also have harmed the reliability of the Texas electricity markets. As prices are pushed artificially low, investors and generators (who are receiving less revenue) put less money into new generation from conventional fuels, and thus future supplies are lower than they would be otherwise. While our free market electricity system can still provide enough electricity in spite of the subsidies, the electricity will be more expensive that it otherwise would be over time because of higher demand in the face of lower supplies.

 

·         Not everyone is convinced our free market system will provide enough electricity in the future in the face of the renewable energy subsidies, so renewable energy subsidies may actually play are large role in forcing Texans to pay billions of dollars in subsidies to generators using conventional fuels through a capacity market.

 

Let me recap: In the past, because wind (and other renewable sources) is a pollution free but new way of generating electricity, policymakers decided it should receive subsidies so that it can one day displace electricity from pollution-generating fuels. Now, because of renewable energy subsidies, 1) we have to keep turbines using pollution-generating fuels sitting on idle in case the wind stops blowing—or the sun stops shining, etc., and 2) we may have to spend billions of dollars in additional subsidies to ensure that the owners of plants using pollution-generating fuels build enough new plants to supply us with enough electricity to keep the lights on. Going forward, even though wind power is setting new records for use and breaking all the goals for it set by the state, it is still not a “mature” technology—despite the fact that it has been in use for thousands of years—and so it must continue to receive subsidies that may in turn mean more subsidies for conventional fuels.

 

The big losers here? Consumers.

 

I was quoted in a New York Times story today discussing the prospects of renewable energy subsidies in the 83^rd Texas Legislature. The article points out that at least two bills have been filed to extend/increase renewable energy subsidies. HB 621 would extend property tax credits for renewable energy that are set to expire next year. HB 723 would add new subsidies for electricity generated by solar power. Heading in the other direction, there will also likely be legislation filed to eliminate the current renewable energy credits mandated under Texas’ renewable portfolio standards. These credits will cost consumers about $70 million this year, with a ten year price tag of more than $500 million beginning 2006.

 

The has never been a better time than now to end renewable energy subsidies in Texas.

 

This post and previous Thinking Economically posts can be found at www.thinkingeconomically.net. We will be adding automatic subscribe and unsubscribe functionality to this email. In the meantime, if you’d like to do either, please send an email to bpeacock@texaspolicy.com.

 

Bill Peacock

Vice President of Research

Director, Center for Economic Freedom

Texas Public Policy Foundation

o: (512) 472-2700

c: (512) 965-6476

bpeacock@texaspolicy.com

Thinking Economically: Save Texas' Free-Market Electricity Market

Musings on Economic Freedom from the Texas Public Policy Foundation’s

Center for Economic Freedom

 

Nowhere in the world is there a better example of deregulation than the Texas electricity market.

 

Trucking and airline deregulation from the 1970s have rightly received attention for all the benefits they have delivered. But the case of the Texas electricity market is more remarkable in that it produced equal success out of a collection of government-created monopolies—there was no real electricity market in Texas prior to deregulation. And we succeeded where almost no one else did. Texas was one of many states and countries that began this process in the 1990s, but we are just about the only one that made it through to the end with fully competitive wholesale and retail markets.

 

Today, despite what the critics say, the world-class Texas electricity market is alive and well, generating billions of dollars of investment and strong levels of reserves of affordably priced electricity. One of the primary reasons for this is that Texas operates an energy-only market for generation, i.e., a market that is driven solely by the decisions of market participants. Generators can build in Texas and try to make a profit, but they only do so if people buy enough of their electricity at a high enough price. This is different from the old system where generators were guaranteed profits under rates set by the Public Utility Commission of Texas (PUC). What deregulation, or competition, has done is shift the risk of investment from consumers to generators, saving consumers billions of dollars over the years.

 

Not all of Texas benefits from competition. The competitive portion of the Texas market is within the area managed by the Electric Reliability Council of Texas (ERCOT). This is due to the fact that Texas has had to isolate its electric grid from the rest of the country to escape federal regulation, which in turn gave us the flexibility we needed to design a competitive market. More on this below.

 

There have been concerns of late that within ERCOT there might not be enough future supplies of electricity to maintain a reliable system. In other words, some people fear we are heading towards rolling blackouts. The reason for this being that electricity prices are so low today that there is not enough incentive for companies to invest in new generation.

 

In response to this concern, some are calling for Texas to create a “capacity market.” I won’t bore you with the technical details, but essentially a capacity market would provide billions of dollars of subsidies to generators for producing electricity in the future, whether we need it or not—much of the money supporting existing generation rather than the new generation we need. As TPPF Senior Fellow Robert Michaels puts it, “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.”

 

To more closely examine the claims of problems in our energy-only market and whether a capacity market would help matters, we commissioned a study from  two economists highly experienced in energy markets, Dr. Andrew Kleit from Penn State and Dr. Robert Michaels from Cal-State, Fullerton.  

 

I’ve include the press release below, so you can see the details of the study there. I’ll wrap up by saying there is no need to transfer the risk of building generation back to consumers at a cost of billions of dollars. The current energy-only market can produce enough electricity to power our future—if the government will leave it alone; a capacity market would do no better, and likely do worse, and would certainly be more expensive. The Foundation is joining with others from the left, right, and middle to press home this point to the Texas Legislature and the PUC.

 

One last thing: the debate over the Texas electricity market has gone national, and the federal government is weighing in on the side of heavier regulation and subsidies. For instance, North American Electric Reliability Corporation (NERC) CEO Gerry Cauley sent a letter to ERCOT saying, “It is clear to me that these [reserve] levels imply higher reliability risks especially the potential for firm load shed, and ERCOT will need more resources as early as summer 2013 in order to maintain a sufficient reserve margin.” Additionally, Federal Energy Regulatory Commission (FERC) Chairman John Wellinghoff recently said, “It would be in Texas' best economic interest to actually interconnect very strongly with other interconnects -- either the Western or Eastern Interconnect.”

 

One has to read between the lines a bit, but it seems as if there is no interest within the federal government for maintaining Texas’ highly successful experiment in free markets. There is also a strong link here to subsidies for renewable energy which Mr. Wellinghoff cites as the main reason for Texas to interconnect with the national grid. While this hasn’t yet raised to the level of bullying that we have seen from the Environmental Protection Agency (EPA) over Texas air quality programs, it is one more source of pressure on Texas policymakers to adopt a capacity market. They shouldn’t do it though.

 

If you have any questions or would like to know about our efforts to protect consumers and preserve free markets in Texas, please let me know.

 

 

FOR IMMEDIATE RELEASE                                                                                                                                                                            CONTACT:           Kristen Indriago

February 6, 2013                                                                                                                                                                                                                               (512) 472-2700

 

 

TPPF study finds that a capacity market

would not improve Texas’ electricity market

 

Foundation Senior Fellows Robert Michaels, Ph.D., and Andrew Kleit, Ph.D., report that a shift to a capacity market would be an ineffective and costly approach to dealing with reliability concerns

 

AUSTIN – An analysis of the Electric Reliability Council of Texas’s competitive electricity market shows that reliability concerns can be best addressed through Texas’ world-class, energy-only market rather than through creating a “capacity” market, which would raise electricity prices for Texas consumers. The analysis is detailed in a new study, Does Competitive Electricity Require Capacity Markets? The Texas Experience by Andrew Kleit and Robert Michaels, published by the Texas Public Policy Foundation.

 

“Concerns about reliability do need addressing,” said Bill Peacock, the Foundation’s vice president for research and director of the Center for Economic Freedom. “The answer, though, is not to abandon competition for the heavy regulation of a capacity market, but to decrease regulation in the Texas market so it can efficiently address the concerns.”

 

The study finds that there is enough profit potential in the Texas market today to incentivize new generation. As reflected in realistic reserve forecasts and the recent announcement of a new 800-megawatt natural gas generation plant in Brownsville, sufficient investment in generation in ERCOT is likely to continue and, as it has in the past, provide adequate reserves to maintain reliability.

 

“Shifting to a capacity market is unnecessary,” said Andrew Kleit, Foundation senior fellow and professor of energy economics at Pennsylvania State University. “A Texas capacity market would be a source of inefficiency and a barrier to competition that would increase the cost of electricity for consumers.”

 

ERCOT’s reliability challenges do not stem from any inherent flaws in electricity markets that render them incapable of functioning properly, according to the study. Instead, they 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.

 

“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,” said Robert Michaels, Foundation senior fellow and professor of economics at California State University, Fullerton. “Not only will a capacity market fail to address reliability concerns, its costs will almost surely exceed any benefits it might bring.”

 

The debate over the Texas electricity market has become national. The Federal Energy Regulatory Commission wants Texas to submit ERCOT to federal jurisdiction, while the North American Electric Reliability Corporation is pressuring Texas to go beyond already successful efforts to enhance reliability. Both of these would harm Texas’ energy-only market. The study may be found here.

 

We will be adding automatic subscribe and unsubscribe functionality to this email. In the meantime, if you’d like to do either, please send an email to bpeacock@texaspolicy.com.

 

Bill

 

Bill Peacock

Vice President of Research

Director, Center for Economic Freedom

Texas Public Policy Foundation

d: (512) 615-7952

o: (512) 472-2700

c: (512) 965-6476

bpeacock@texaspolicy.com