Energy Alliance analyst: A capacity market for electricity comes with ‘high costs’

By Savannah Howe (this article was originally published in the Lone Star Standard)

The future of Texas’ electric grid remains up in the air as controllers, legislators and advocacy groups battle over whether the competitive market should continue. 

While the state has been operating on a competitive market – where consumers are offered an array of different electricity retailers, rates and plans – since 2002, recent blackouts have fostered concern that something in the current system isn’t working. State Rep. Chris Paddie (R-Marshall) introduced House Bill 4378, calling for the state to give up the current market approach and adopt a capacity market, where Texans pay for their grid’s capacity to produce electricity rather than their actual electricity use. 

Others argue, however, that the alternative to the current market, a capacity market, is far from a solution. Energy Alliance Policy Director Bill Peacock argues that a capacity market will skyrocket electricity bills across Texas.

“It is basically an electricity tax of about $4 billion to $8 billion a year,” Peacock told Lone Star Standard. “The reason for this is that a capacity market would tax Texans to pay for plants they already have and for future plants they may not need.”

The Texas Public Policy Foundation agrees that the implementation of a capacity market will do little more than import failed regulatory policies from the Northeast. The foundation said the Lone Star State has a history of pushing back against the spread of policies that other regions have adopted, such as when it halted the push for Medicaid expansion. 

Warren Buffett proposed an $8 billion development plan to establish power plants across Texas, an idea Peacock says is a capacity market on full display. 

“Texans would be [paying] Buffett $8 billion for building the plants even if they are never used,” he said. “At least [Buffett] is very upfront about it. Proponents of the capacity market legislation and similar measures taken by the Public Utility Commission of Texas [PUC], however, rely on stealth to avoid discussing the high costs of capacity markets.”

Peacock added that capacity markets will do nothing to improve the reliability of the Texas power grid. He said the capacity grids that failed in the harsh Northeast cold during the winter of 2014 can serve as an example. According to TPPF, the brutal cold temperatures combined with high natural gas prices caused the 40,000 added megawatts of electrical capacity in the capacity market across the mid-Atlantic coast, PLM, to fail. The policy foundation encourages consumers to consider the 2014 Northeast capacity market failure indicative of how implementation of the market would go in Texas. 

“In fact, [capacity markets] are less reliable than competitive markets,” Peacock said. “They just cost more money. In its first five years a capacity market in the Northeast (PJM) cost consumers over $50 billion in capacity payments to generators but was actually less reliable than the Texas market.”

In a 2018 PPF commentary, Peacock likened capacity markets to Dallas Cowboy season tickets. 

“In order to purchase a season ticket from the Cowboys, one first must purchase a personal seat license,” Peacock wrote. “But after purchasing the PSL for as much as $50,000, the buyer doesn’t actually have a seat. That will cost, on average, another $2,000 per year. Likewise there are Arlington taxpayers who will pay off their share of more than $300 million of city debt for seating capacity in AT&T Stadium that they can use only by forking out more money to buy tickets.”

Peacock said the answer for reliable and affordable electricity in the Texas starts with eliminating subsidies for generators and transmission companies. 

“[That is] just the opposite of what a capacity market would do,” he said. “And to take control of the market away from regulators and turn it over to Texans who know far better what products suit them than Austin bureaucrats.”