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SMU Academic Says ERCOT Needs Capacity Market

September 04,2018



In an op-ed published on TribTalk.org, Bernard L. Weinstein, Associate Director of SMU's Maguire Energy Institute, claims that a "capacity charge" in ERCOT, "offers the most promise", in meeting future power needs for the region, "and would also enhance grid reliability."

This recommendation comes despite the fact that capacity markets are collapsing in every other organized market in the U.S.

We also note the use of, to be generous, slippery language by Weinstein to describe the capacity construct, which paints it in a much less command-and-control light

Weinstein writes that an alternative to energy-only would be, "to allow base-load power plants to include a 'capacity payment' in addition to the current energy-only charge to cover part of their fixed costs." [emphasis added]

We're certain that Texas generators are currently "allowed" to seek a capacity charge in any proposed transaction they wish to make with willing buyers, the issue is that there are no willing buyers for such a "capacity charge", because capacity is a fictional product -- just like "grid resiliency" and "fuel security" -- administrative constructs rightfully criticized as subsidies, yet somehow capacity markets, which are no different, have escaped such derision from a large part of the academic economic community.

Rather than "allowing" for a capacity charge, what capacity markets do, and what Weinstein is apparently seeking, is to compel that Texans pay a capacity charge, instead of allowing Texans, via the free market, to decide if capacity is an attribute that has value to customers.

Weinstein warns that, "Absent new investments in base-load power, another hot summer like 2018 could stress the grid to the breaking point and derail the dynamic Texas economy."

However, we're certain, again based on the indisputable evidence from the actual experience with capacity markets, that implementing a capacity market is a guaranteed way to stop new investment, and instead prolong the life of old "clunkers", that aren't reliable, yet, due to their long life and depreciation, can more easily clear the administratively constructed capacity market, which focuses on a meaningless metric, going forward costs, rather than the real-world cost to the consumer (which is what the Texas market currently and appropriately values).

Recall that five years after the implementation of PJM's Reliability Pricing Model capacity market, more than 93 percent of the total revenue paid by customers under the PJM Reliability Pricing Model had gone to the owners of existing power plants. Only about 7,000 MW of new generation capacity was built in the PJM region from 2007-2011, despite $50 billion in capacity payments. While new build in PJM has increased since then, it has been due to exogenous economic factors (the shale revolution making coal uneconomic) and regulatory factors (coal pollution rules) which have led to replacement capacity, not additional capacity, the latter of which is what Texas ostensibly needs.

Speaking of "reliability," remember that in one ISO, unplanned generation outages doubled after introduction of a capacity market, and multiple ISOs (here and here) went nearly a decade of paying generators, who cleared the capacity market, for capacity regardless of whether such generators actually provided energy associated with such capacity when needed. But we're sure, this time, all those problems have been fixed.

See Weinstein's full op-ed here

Tags:
Texas   Capacity Market   Energy-only  

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