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More and More, Proposed Changes to Texas Electricity Market Just Look Like Windfall for Generators

By: Brantley Hargrove |

The state’s biggest power generators are agitating for an expensive change in the market model that dictates what your electricity bill looks like. Right now, Texas is the only state with an electricity-only market, which means generators like Dallas-based Luminant make a living based only on the price of power. When prices are high, there’s no better business than selling the juice that makes a Texan’s air conditioner go. The side effect of that model is that the marginal costs — like natural gas — drive pricing. Thanks to a glut driven by shale gas plays in Texas and elsewhere, that price has been low for sometime, and power generators are smarting.
But it also means nobody wants to pony up the financing to build new plants so supply can keep up with Texas’ ever-increasing demand.

They want Texas regulators to change the game: To institute a capacity market whereby the ratepayer — you and me — effectively subsidize the construction of new power plants. If it sounds like the opposite of a free, deregulated market, that’s because it is. You could call it a bailout, where we pay for a power generator’s fixed costs while they get to keep the insane revenues generated when our hellacious climate drives us to the thermostat.

NRG, one of the state’s biggest generators, released a study recently that said a capacity market would cost us $4.7 billion. What a deal, though, because the company commissioned a second study concluding that the rolling blackouts a capacity market will prevent would cost the state $14 billion. “As our reserve margin dwindles, we face two choices: Hope for mild weather or move to a capacity market, which has brought new generation to electric grids in states across the country,” NRG regional chief John Ragan wrote in an op-ed a few months back.

Texas Public Utility Commissioner Donna Nelson has signaled her support for such a model. Her colleague, Ken Anderson, isn’t so sure. They’ve been deadlocked on the issue. That impasse, however, is finished. Governor Rick Perry named Brandy Marty, his chief of staff, to fill the vacant seat, and I imagine the commission will vote on a capacity market in the near future.

As we head toward a decision on the future of Texas electricity, perhaps it is time to question some basic assumptions about the state of power grid reliability, here and elsewhere. In a recent earnings call, NRG CEO David Crane seemed to indicate that, contrary to what his colleague Ragan wrote about the blessings of capacity markets, it isn’t only the Lone Star State that’s looking at future power shortages.

“As the governors of various states consider how they are going to replace the wave of generation capacity that will be retired over the next few years as a result of either economic distress or environmental obsolescence, they are increasingly reaching the conclusion that they need to offer some sort of state-sponsored long-term off-take agreement, even for conventional new build,” Crane said, according to EnergyChoiceMatters.com, a trade journal.

As journal writer Paul Ring notes, Crane obviously isn’t talking just about Texas. “It’s clear the Northeast states with capacity markets were included in his discussion,” Ring writes. If even states with the kind of capacity market that Texas now contemplates are struggling with attracting financing for new power plants, will it truly solve our grid problems?

Ring came up with a second, troubling admission from the industry that seems to cast doubt on the narrative of an impending plague of Texas blackouts. In Arizona, where they’re debating an electricity market similar to ours, opponents pointed to Texas’ predicted electricity shortage as a cautionary tale. But the Retail Energy Supply Association, of which NRG is a member, said “the outlook for dire consequences in Texas appears to be wholly overstated.”

That completely contradicts NRG regional chief Ragan’s ominous op-ed, where it is foretold that rolling blackouts will darken the land and that businesses will pass on the opportunity to locate in Texas, seeking out more reliable grids.

None of this is to say that the Texas electric grid doesn’t face obstacles. But before we institute a capacity market in which generators like NRG simply cannot lose, we need to make sure we know for certain what those obstacles really look like.