NCPA - National Center for Policy Analysis

Competitive Market Forces Serve Texas' Electricity Needs

February 21, 2013

The Electricity Reliability Council of Texas (ERCOT) administers a power market in Texas unlike any other in the country. New proposals are considering turning the Texas market into a "capacity market," where the government rather than the market determines when supplies of electricity are adequate to meet long-term reliability needs. Given the flawed logic behind capacity markets and the ability of the current ERCOT system to meet demand for electricity, any change to the system would be an unwise transition, say Andrew Kleit and Robert Michaels of the Texas Public Policy Foundation.

  • The debate centers on whether electricity markets can provide adequate generation to reliably power society's needs without government intervention.
  • Proponents of the capacity market argue that free markets do not properly price social returns, such as system wide reliability.
  • This argument is narrow because it does not account for the ability of demand to respond to shifts in supply.

In capacity markets, sellers of power to end-users must own or have contractual access to generation capacity sufficient to cover their loads as determined by the government, not the market. This creates a system where electricity prices are based on levels of available capacity, not actual demand. The prices are administratively set and have little connection with economic efficiency.

  • The process of pricing capacity, reliability and deliverability is wrought with subjective assumptions and theoretical ideals that bear little relation to actual market effects.
  • Official estimates expect that ERCOT will usually fall dangerously short on reserves but market forces have invariably succeeded in restoring its generation adequacy.
  • While official calculations predict ERCOT to be unprofitable, investments continue to keep up with demand and produce profits.

The few existing problems in the ERCOT system stem from the result of intervention that has limited the ability of the free market to develop innovative solutions to the highly complex issues facing the power market. With this in mind, Kleit and Michaels reject the push to transition Texas' current power market into a capacity market. Less intervention, rather than more, is the catalyst needed to allow the market to work more efficiently at providing actual energy, not just capacity, to the market.

Source: Andrew Kleith and Robert Michaels, "Does Competitive Electricity Require Capacity Markets? The Texas Experience," Texas Public Policy Foundation, February 2013.


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