NCPA - National Center for Policy Analysis

A Threat to Texas' World-Class Energy Market

October 9, 2013

Despite years of success, many policymakers have begun to question whether Texas' energy-only market can continue to deliver adequate generation in the years ahead. They worry that low investment and projected shortfalls in the Electric Reliability Council of Texas' (ERCOT's) capacity reserve margin indicate that Texas' competitive market can no longer induce sufficient incentives for new peak generation, says Kathleen Hunker, a policy analyst with the Center for Economic Freedom at the Texas Public Policy Foundation.

  • Instead of looking at current regulations that distort the market, recent debate has centered on installing a top-down, system-wide capacity market that subsidizes the operational costs of energy production in the hopes that energy companies will invest in new capacity.
  • Advocates claim that the centralized market will offer reliability both in terms of averting disruptions in the grid and furnishing generators a reliable source of income.
  • Past experience, however, shows that capacity markets, at best, have a weak track record at boosting energy investment.

Policymakers would have better success at boosting investment in peak-time energy capacity if they turned instead toward eliminating those government regulations that impede market incentives, such as system-wide offer caps, wind subsidies and the power to disgorge profit. Hunker seeks to explore the structure, costs and past "successes" of capacity markets in order to show that they do not represent a good investment for Texas ratepayers, especially when compared to the alleged limitations of the energy-only market and the availability of more efficient solutions.

  • Its cumbersome regulations cannot accurately recreate the incentives naturally found in the market, resulting in a multi-billion dollar redistribution scheme whose greatest success will be at inflating electricity rates all the while shifting the risks of bad business decisions onto consumers.
  • Capacity markets provide ratepayers no appreciable benefit that they cannot get from an energy-only market at a more reasonable price.

Capacity markets can never be as successful and efficient as Texas' energy-only market. Policymakers should reject the push for a capacity market and turn instead toward removing those government intrusions that distort market incentives and inhibit investment in Texas' world-class energy only market.

Source: Kathleen Hunker, "A Texas Capacity Market: The Push for Subsidies," Texas Public Policy Foundation, September 2013.


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