There’s a lot of absurdities when trying to wade through the inconsistent and illogical arguments in favor of a Texas centralized capacity market, but the latest line being pitched by capacity market supporters may be our favorite.
Recognizing the infirmity of basically asking Texans to pay $3-4 billion as an additional line item on bills for capacity, Texas capacity market supporters not only claim that the capacity market won’t raise prices by all that much, but, with the Brattle economically-optimal reserve margin report, now claim authoritative proof that costs under an energy-plus-capacity market will be “roughly” the same as the energy-only market.
“The false narrative concerning the cost of a capacity market was shattered in one report,” according to a statement from Eric Bearse, spokesman for capacity market advocate Texans for Reliable Power, which appears on the group’s website. “For roughly the same cost in normal years, and for less cost in extreme weather years, we can ensure the reliability of the grid through the competitive market mechanisms of a capacity market. It will cost a tenth of a cent per kilowatt hour to ensure our electric grid has world class reliability beyond the next few years.”
Elsewhere, capacity market supporters claim, based on the Brattle study, that a capacity market would only cost $400 million, on a net basis, when taking into account future energy market price reductions stemming from having a set amount of installed capacity on the grid
Putting aside any quibbles with Brattle’s methodology and inputs used to reach its cost conclusion, and accepting the calculations as stated, you still have to ask one fundamental question.
If capacity market supporters are so sure that the costs of a capacity market will be roughly the same as an energy market, then why is a capacity market even needed? Under their own logic, the aggregate revenues to capacity owners must be the same — if the capacity market is not going to appreciably increase costs to Texas customers, it logically follows that it will not increase compensation to capacity owners. If that’s the case, why is this market even needed?
We’d expect that the capacity market supporters would say that the capacity market gives certainty to those revenues, and we don’t disagree. But implicit in that certainty argument is that energy market revenues are uncertain. Meaning future energy market prices cannot be known with any reasonable confidence in the future; meaning any evaluation premised on a comparison of future energy prices versus future energy-plus-capacity prices amounts to fantasy.
Indeed, the uncertainty of energy prices has been the refrain for years now from capacity market supporters. Even if, with high price caps, there should be no missing money, per se, in the energy market when scarcity conditions are appropriately reflected in prices, the generators claim that this sound market design is irrelevant, because they cannot invest based on uncertain and unpredictable energy prices, and generators proclaim that there is no guarantee that prices will reach scarcity levels.
Now, however, we are suddenly invited to believe that energy prices are not only predictable, but that, on a total cost basis, the energy-only costs will be about the same as the energy-plus-capacity costs. This argument is premised on routine scarcity pricing at the new higher prices caps — a scenario capacity market supporters have repeatedly said isn’t reliable, but now take as gospel.
If generators are so sure of the higher costs of the energy-only market, what’s the hold up to investment? If they are so confident that compensation under the energy-only market will cost the same to customers as under a capacity market, why aren’t they investing?
The answer is clear. Capacity owners know that maintaining an energy-only market will be a vastly less costly solution than mandating a $4 billion capacity line-item tax on Texas ratepayers, and then hoping three years in the future, there’s enough available capacity on the grid to prevent scarcity pricing and avoid both high energy prices and capacity prices.
One need only look to the recent experience in PJM to show that having an installed capacity base in excess of the reserve margin doesn’t provide any meaningful insurance against energy market volatility or scarcity pricing — witness 40% of PJM capacity being offline during the recent January extreme cold weather, and the attendant price spikes which forced retail suppliers to default, and which led to retail rates approaching (if not exceeding) 30 cents per kilowatt-hour.
It’s clear that capacity prices are divorced from real-time energy prices, which is not surprising, since capacity resources are in no way procured in a manner to optimize least-cost dispatch. Indeed, by virtue of the narrow focus on going-forward fixed costs, the capacity market often results in just the opposite — an old, inefficient collection of resources that are able to clear a government-defined hurdle to have access to the energy market (and then aren’t penalized when suffering the inevitable forced outages from running a 50+ year old unit).
Fantasies that carrying a government-determined level of installed capacity is suddenly going to calm energy market pricing and avoid scarcity conditions should therefore be put to rest. As seen in PJM, energy market prices are just as likely to reach scarcity levels in an environment with mandatory capacity purchases at an installed reserve margin; therefore, unless generators are willing to put their money where their mouth is regarding the cost of a capacity market, and accept dollar-for-dollar clawbacks for costs exceeding their forecast calm energy market revenues, arguments that a capacity market will result in lower energy market prices for Texans should be ignored as wishful thinking.
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Reporting by Paul Ring • firstname.lastname@example.org