Thinking Economically: Texas’ Competitive Capacity Market

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

Center for Economic Freedom

 

 Texas’ Competitive Capacity Market

 

Regulators and special interests are pushing for a capacity market—and its associated $4 billion a year electricity tax—to replace Texas’ competitive electricity market. But what if a capacity market already existed in Texas?   The term “energy-only,” used to describe the current Texas market, is at best a misleading term because a large portion of power flows under contracts between REPs and generators focused on providing adequate capacity. The truth is that Texas’ competitive market is already functioning as a capacity market without the $4 billion electricity tax andexcessive regulation proposed by advocates of a centralized capacity market.   Energy economist and Foundation Senior Fellow Robert Michaels details how the current competitive market accomplishes the goal of maintaining enough capacity to ensure a reliable electricity grid in his latest Foundation paper and presentation.   Electricity in Texas: Markets, not Manipulation   Profits are hard to come by for some generators in Texas. But Bill Peacock explains in his latest paper why this doesn’t justify increased regulation of the Texas electricity market and a $4 billion a year electricity tax.   The projections of low future reserves used to justify the interventions don’t match with reality. The Brattle Group, for instance, assumes unchanging market conditions. And the projections of both Brattle and ERCOT don’t explain how the future could look so bleak compared to the affordable, reliable supply of electricity the competitive market has provided us for more than the last decade.   Manipulating prices and mandating reserves aren’t the answer for Texas; instead, we should release the full potential of Texas’ world-class electricity market by reducing excessive market intervention by the PUC, supporting the ongoing process of improving the systems and protocols at ERCOT, and eliminating subsidies for renewable energy.

Also see:   Texas’ Wind Lobby Spins an Epic Tale Jan 22nd Kathleen Hunker   ERCOT's Capacity Market: What if it Already Exists? Jan 22nd Robert Michaels   Supply and Demand 101: Making Money in the Texas Electricity Market Jan 16th Bill Peacock   ObamaCare and the Road to Serfdom Jan 15th Bill Peacock

Bill

 

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Bill Peacock

Vice President of Research

Director, Center for Economic Freedom

Texas Public Policy Foundation

bpeacock@texaspolicy.com

 

Thinking Economically: If It Ain't Broke, Don't Fix It

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

Center for Economic Freedom

 

If It Ain't Broke, Don't Fix It 

 

Some people like to tinker with things. And they can be quite handy around the house taking care of all those odd jobs that keep popping up. However, too many of those tinkerers become government regulators and start trying to fix markets that are already working pretty well. Along the lines of that friend who dismantles your lawn mower trying to fix a little rattle but when he’s done can’t put it back together again. That’s what is happening with the Texas electricity market. Despite the fact that competition has provided us with more than enough electricity for more than a decade, the tinkerers are insisting that the free market won’t supply enough electricity to keep the lights on and we’ll soon be subject to rolling blackouts. Their solution to this problem? More government. They want to take apart the competitive electricity market and re-regulate it, turning it into a capacity market that would impose an electricity tax on Texas consumers of about $4 billion a year; the tax would fund subsidies for electricity generators and their bankers. The truth, however, is that Texas is not running low on electricity. Competition produced enough electricity to withstand the record heat and drought conditions of 2011 and the deep winter weather of this week. It has also produced enough electricity to make prices lower today than when the old regulated market still operated in 2001. This being the case, why would these groups want to re-regulate the Texas electricity market? Many of the regulators never liked competition in the first place. Others may be more receptive to competition, but the fear of being held responsible for potential blackouts is pushing them back toward what they know best—regulation. Generators, on the other hand, fully embraced competition when they were making big profits a few years back. But now that the market is more efficient and profits are harder to come by, many of them have chosen to take the easy path to increased profits through government subsidies. Likewise, a lot of bankers and Wall Street investment firms want to profit by loaning money to generators. With Texas being about the only state in the country where new generation is being built, they like the idea of a capacity market to decrease the risks of their investments. Finally, back in 2007 a lot of firms invested money in the Texas electricity market betting that high natural gas prices would keep electricity prices and profits high. Of course, natural gas prices went south, taking prices and profits with them. With losses from those 2007 investments piling up, investors would love a new revenue stream from a capacity market to help bail out them out of their poor investments. Proponents of a capacity market don’t seem to care that capacity markets haven’t increased reliability anywhere else. Nor do they care about the burden that the $4 billion electricity tax will impose on hard working Texas families. Nor do they care that a capacity market would do to the Texas electricity market what the federal government is currently doing to the healthcare market. But Texans should care. And so should the members of the Texas Legislature, who in 1999 told the Public Utility Commission (PUC) that it should “authorize or order competitive rather than regulatory methods to achieve the goals …”of the Legislature’s shift to competitive markets. The Texas electricity market ain’t broke. Texans should join with the Texas Legislature to tell the PUC to stop trying to fix it.

Also see:   The Alternative to Welfare: Freedom Jan 3rd 2014 Bill Peacock   Government Works Against Christmas Giving Dec 17th 2013 Kathleen Hunker

Bill

 

Click here to subscribe to Thinking Economically.

 

Bill Peacock

Vice President of Research

Director, Center for Economic Freedom

Texas Public Policy Foundation

bpeacock@texaspolicy.com