Welfare for Texas Electricity Generators Is Not a Viable Solution

Welfare for Texas Electricity Generators Is Not a Viable Solution

October 21, 2021

By Matt Welch and Landon Stevens

The blackouts in the ERCOT region this past February were a tragedy on multiple levels and should never happen again.  The Texas Legislature passed several laws intended to improve reliability of the ERCOT electric grid, and the Public Utility Commission of Texas (PUCT) has been working quickly to implement market changes in response to that legislation.  But one of the proposed changes that several generation companies have recommended is a California-style capacity market – a proposal that requires customers to pay generators to be available to run whether they actually are needed or not.  Texas has rejected this corporate welfare before and the PUCT should do so again – especially when it would reward the very generation companies that failed to serve Texans in February.

Texans should not be confused by creative labels that are being used to obfuscate the reality that they want to impose a capacity market on Texans.  The Brattle Group, a key advisor to the PUCT, has not been fooled and labeled this proposal what it is – a capacity market.  A capacity market pays generators to be available to generate whether they are actually needed or not.  In contrast, the current Texas competitive market only pays generators when they generate electricity to serve Texans.  Generators that are not needed are not paid.

Under this California-style scheme, the PUCT and ERCOT would use models and central planning to impose an obligation on companies that serve retail customers to contract with generation resources to be available at all times of the year but be required to provide energy only a few hours during the year.  Other than those few hours each year, the generators would face no penalties for non-performance, but customers would be paying for them to be available.  In addition, the companies serving retail customers would face hefty fines for failing to pay these older generators.  And the PUC and ERCOT would use central planning to determine the value of each generator, regardless of their ability to perform when they are actually needed.  As proposed, this construct would favor old technology over new technology to serve customer needs.

These proposals would eviscerate the competitive retail market in ERCOT.  While large, incumbent retailers who are affiliated with large, incumbent generators would flourish under this capacity market construct, new retail providers would be forced to contract with their competitors’ affiliated generators to meet the regulatory obligations imposed on them.  Texans need innovative retail providers to meet their needs rather that the same old solutions that force them to pay too much for unreliable service.  These capacity market constructs have never been implemented in a market with robust retail competition like ERCOT, and their obligations may eliminate the ability of new providers to enter the market.

A competitive market should allow customers and generators to react to real time conditions in order to save customers money.  Today, large commercial customers can determine whether to consume electricity from the grid, generate their own electricity, or reduce consumption based on all relevant factors at the time.  Increasingly, residential customers are able to exercise this same flexibility.  But regulatory obligations imposed to pay for electricity one to three years in advance would squash this flexibility and force retail customers to pay costs that otherwise could be avoided.

The PUCT and Texans should reject such central planning models for the Texas electric grid.  The competitive electric market that ERCOT enjoys today, with targeted changes to increase reliability in more severe weather conditions, is the best solution for Texas customers.  Rather than throw the baby out with the bath water, the Public Utility Commission of Texas should adopt targeted changes that address the specific problems exposed by Winter Storm Uri and reject proposals that will do nothing to protect Texans from another severe cold weather event.

Matt Welch is the state director of Conservative Texans for Energy Innovation (CTEI), a statewide organization that promotes free enterprise, increased competition and less government regulation in our energy economy. For more info: www.conservativeteansforenergyinnovation.org

Landon Stevens is the Director of Policy & Advocacy for the Conservative Energy Network (CEN).   CEN is a national coalition of conservatives active in the clean energy arena in more than 20 states across America.  For more info: www.conservativeenergynetwork.org

Welfare for Texas Electricity Generators Is Not a Viable Solution