Ed Hirs, Energy Fellow for Natural Resources at BDO and a lecturer at the University of Houston, claims in an op-ed in the Houston Chronicle that ERCOT needs to ditch its "Soviet-style" energy-only market -- in favor of a capacity market or re-regulation, which ostensibly somehow don't suffer from the same "command-and-control" characteristics to which Hirs likens ERCOT

Hirs writes, "ERCOT is the sole buyer in the market, creating what economists call a 'monopsony.' A monopsony strongly resembles the old Soviet Union’s command-and-control economy, in which the industry bureau controlled who would produce electricity and how the electricity would be priced."

We cannot fathom such a description was written by anyone with any credible knowledge of the ERCOT market, or anyone who wanted to provide a serious discussion of policy and not rhetoric

Putting aside the pedantic point that ERCOT does not "buy" power even in the real-time market (and even that ignores all the bilateral arrangements among QSEs, see **note further below) one of Hirs's proposed alternatives, a capacity market, would be a true "command-and-control economy" (as would his other proposal, re-regulation).

Through various market designs set by administrative rule -- the reserve margin, the demand curve, the Cost of New Entry, any offer floor -- pricing in the capacity market would be set by the policy choices of regulators, not true market fundamentals. Worse, all customers would be compelled to purchase a government-determined amount of capacity, and only from qualified or eligible resources (e.g. either through the centralized market, or through some arcane opt-out), unlike in the energy-only market where there are no compulsory purchases

Indeed, Hirs undermines his own unsupported labeling of the energy-only market as "Soviet" by claiming that the market is easily "manipulated" -- as this assertion undercuts the claim that ERCOT, the sole "buyer" (or industry bureau), controls who produces electricity and how the electricity is priced (as such manipulation would not occur if ERCOT "controlled" pricing and who produces power).

In fact, it is the capacity market where regulators wield out-sized control over a putatively competitive "market", unlike energy-only where it is the true preferences of buyers and sellers driving pricing

Nothing screams Soviet like the situation customers will face under a capacity market. Under the energy-only design, customers can avoid high prices by hedging and changing their behavior, allowing customers to properly value power and make meaningful decisions. Under the capacity market, customer reductions in energy use will be blunted because of a static annual capacity tag. Customer choices to reduce their energy bills in real-time will be thwarted, not rewarded, unlike an actual market.

Capacity markets are the true Soviet-style planned economy. The arguments for a capacity market as being beneficial to Texans are apparently so weak that supporters must now blatantly mis-characterize various market designs to make their case.

Moreover, under the presumption that a PJM-style capacity market were introduced with a long forward requirement, new entrants to the market -- innovative generation that does not take three years to build (distributed solar, etc.) -- would be barred from being able to compete in the market for a number of years. Once again, the government would be intervening in the market and deciding what resources should be built (or maintained), contrary to Texas' current paradigm

Due to the immutable nature of the capacity market (prioritizing units with low going forward costs), this means old, heavily depreciated units will be procured by the central planner (e.g. the administratively set market design). A capacity market tilts the playing field in favor of these "legacy" units, creating barriers to entry for new units -- whose marginal production costs may be significantly lower than inefficient legacy units, but whose going forward costs are too high to clear the capacity auction. Such new units also can't be built, in a capacity market environment, on a true "merchant" basis, because the capacity market will (theoretically) blunt energy prices enough such that new units won't be able to earn significant inframarginal revenues that these units need to be built in the absence of a capacity payment

Deciding to adopt a capacity market is a decision to eschew competition in generation, and reward incumbent generating units at the expense of new entry -- the very definition of command and control

Surely, discussion of the costs/benefits of energy-only versus capacity market is appropriate, and while we believe that the superiority of energy-only is self-evident based upon the history of ERCOT versus the eastern RTOs with capacity markets, we have no quarrel with legitimate differences of opinion. However, it escapes us how the energy-only market which contains no obligation for load to buy electricity, with free entry and exit, and pricing determined by interactions between buyers and sellers (admittedly moreso before ORDC) can be credibly called "Soviet", when it is the capacity market where all major outcomes -- including pricing and amount of installed capacity -- are driven by administrative fiat, and not buyers and sellers

See Hirs's op-ed here

** We agree ERCOT runs SCED, taking into account any units self-scheduling due to QSEs separately "buying" output from such units. However, ERCOT's "purchase" of supplies via SCED in real-time is merely a reflection of individual choices made by QSEs to buy power via the real-time market. ERCOT makes no individual decision to "buy" power as is the implication from Hirs; any decisions from ERCOT reflect the election of LSEs not to self-schedule, and LSEs are the entities making the purchasing decision to rely on the real-time market (and by implication, SCED).

As noted in an ERCOT market guide:

• "LSEs forecast their customer load and negotiate privately with other market participants, like resources or power marketers, to buy energy. LSEs communicate the resulting schedules to ERCOT through a QSE."

• "Resource Entities (REs) negotiate privately with other market participants to sell their energy, and communicate the resulting schedules to ERCOT through their QSEs. These entities also own and/or operate generation or loads that provide ancillary services ERCOT needs to manage system reliability. The RE must register applicable Resource Assets with ERCOT in order to properly model, plan, dispatch, and settle wholesale transactions from these Resources."

• "Load Serving Entities (LSEs) buying energy and Resources selling energy communicate operational information such as their bilaterally arranged schedules of loads and resources to ERCOT through their Qualified Scheduling Entities (QSEs). ERCOT ensures that the power grid can accommodate the schedules that were generated by the bilateral market."

Doesn't sound like the Soviet Union to us.

Finally, we concede this is a mass media op-ed, and in lay terms it may help to describe that ERCOT is "buying" power. Normally, we would take no issue with such a description, but Hirs is specifically likening ERCOT to a Soviet agency due to ERCOT's purported role in "buying" power and acting as the sole buyer, so such an inaccurate description of the market cannot be tolerated

-- By Paul Ring