A CAPACITY MARKET WILL MAKE TEXAS ELECTRICITY MORE EXPENSIVE, NOT MORE RELIABLE

Bill Peacock

Executive Summary

In 1999, a bipartisan coalition of Texas legislators introduced what became the world’s most competitive electricity market. Though not without its flaws, the legislation passed that session set the stage for an unprecedented experiment in allowing markets to determine how much electricity Texas needs and how much it costs.

For most of the last 22 years, the Texas market has experienced some growing pains but overall has performed well. However, Texas’ winter historic freeze exposed what has been an increasing problem—distortions of market prices in the form of subsidies and uneven regulation.

An effort is now being made in the Texas Capitol to exchange Texas’ “energy-only” market for a “capacity” market in which generators get paid just for existing—then get paid again when they sell electricity. This double dipping would increase the cost of electricity for Texas consumers somewhere between $4 billion to $8 billion per year. If successful, Texans will have an electricity grid that looks much like those of California and New York; no more reliable, but a lot more expensive.

Key Points

• A “capacity” market is one in which generators get paid once just for existing—then get paid again when they sell electricity. This double dipping would increase the cost of electricity for Texas consumers.

• A shift to a capacity market would increase the cost of electricity for Texas consumers somewhere between $4 billion to $8 billion per year.

• Under a capacity market Texans will have an electricity grid that looks much like those of California and New York; no more reliable, but a lot more expensive.

• It should be emphasized that a capacity market is not an actual market, but an energy tax paid by consumers. However, unlike a regular tax, the capacity market payments bypass the government and go directly to generators.

• Looking around the country, there is no evidence that existing capacity markets operated in other states are any more reliable than the Texas market.

• Capacity markets are extremely expensive, and provide very little improvement in reliability.