PREDATORY PRICING IN THE TEXAS ELECTRICITY MARKET
Bill Peacock
Executive Summary
Renewable energy generators are driving other, more reliable sources of energy out of the Texas electricity market. The reason is straightforward. Renewable generators often undercut the prices of their competitors by selling electricity below their costs, and even their marginal costs, to gain market share.
In many ways, this behavior matches one of the classic “anticompetitive” behaviors in antitrust theory known as predatory pricing. A few aspects of predatory pricing are missing, however, in the Electric Reliability Council of Texas (ERCOT) market, the largest electricity market in Texas (which covers most of the state geographically and close to 90% of the load). In particular, rather than raise their prices to increase their profit after their competitors have been forced out of the market, renewable generators continue to sell at low prices that undercut the competition. And yet they continue to receive above market rates of return on their investments.
What enables below market prices to provide generators with above market returns is renewable energy subsidies. No matter what price a renewable generator sells its electricity for, it receives a better return on investment than its competitors because of subsidies. And with almost half their income and benefits (in the form of reduced costs) coming from local, state, and federal governments, renewable energy generators are far less concerned about the price at which they sell than their competitors. They have no need to raise their prices to take advantage of competitors exiting the market.
Policymakers and regulators have not pursued the anticompetitive behavior of renewable generators under antitrust law in part because it does not fit the classic definition of predatory pricing. But neither have they sought to reduce or eliminate renewable energy subsidies, despite the obvious harm they are causing to competition and the reliability of the electric grid. Rather, they have responded by making electricity more expensive through administrative price adders (which we will examine in Part 4). In other words, regulators (with the implicit blessing of elected officials) have raised electricity prices and thus revenue for generators by imposing a monopoly pricing regime on Texans. This has further distorted the market with more subsidies for both renewable and traditional thermal (coal, natural gas, and nuclear) generators.
The path toward reducing prices and restoring the reliability of the ERCOT market is clear; let consumers choose what electricity they want to purchase in Texas’ competitive market by eliminating subsidies for all generators.
Key Points
Renewable generators often undercut their competitors by selling electricity below cost to gain market share
This is similar to the classic anticompetitive behavior in antitrust theory known as predatory pricing
Renewable energy subsidies enable renewable generators to receive above market returns with below market prices
Regulators have responded to this by increasing electricity prices through administrative price adders
Consumers will benefit by eliminating all subsidies for electric generators