Musings on Economic Freedom from the Texas Public Policy Foundation’s
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
No comments:
Post a Comment