It’s time to fix Texas’ Soviet-style electricity market
The Texas electricity market is rife with market manipulation and major disincentives for generators to maintain a reliable supply of power. The latest examples of this have become public in recent days, a state of affairs that costs Texas consumers real money each year.
It is time to rewire the Electric Reliability Council of Texas, or ERCOT.
The partially deregulated market that ERCOT controls — representing about 90 percent of the state’s electric load — began in the early 2000s. At that time, there was an oversupply of generation capacity, and pricing regulations guaranteed profits to the generators, transmission companies and the local distribution companies that produced and delivered electricity to Texas consumers.
As “deregulation” took effect, the generators (but not the transmission companies or local distributors) were shoved into a so-called competitive market, in which they offer to sell electricity at a competitive price. Coal-fired plants, natural gas plants, nuclear plants and the nascent but heavily subsidized renewable electricity generators bid to provide electricity each day.
ERCOT — a nonprofit subject to oversight by the Texas Legislature and the state’s Public Utility Commission — regulated the entry of new companies generating electricity. ERCOT could also delay, if not actually prevent, the exit of older generators. At that time, the low price of natural gas allowed gas-fired generators to undercut the costs of the legacy coal plants and nuclear plants — a state of the market that continues with today’s low-priced natural gas.
For the most part, generators operate in an “electricity only” market that allows them to only make money when they are supplying electricity to the grid. If we use the analogy of the Astros, an “electricity only” market would mean that only those Astros on the field for the game would be paid — not the players on the bench or those in the minors.
For ERCOT, peak demand occurs in August, when most generators can expect to be called into service, especially on days like we’ve had recently when demand surges. However, throughout the rest of the year, many of these power plants sit idle and thus are not earning revenues. More and more of these idle electricity power plants are closing. That reduces the safety margin for the grid, making it less likely we will have enough electricity for really hot days.
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.
Monopsony markets lead to low prices. In ERCOT’s case, these low electricity prices mean that it is uneconomic to build most new generation capacity, even as legacy generating plants cannot cover their costs even when they are generating electricity.
The advent of less expensive sources of electricity via natural gas and windgenerated electricity — Texas is by far the largest producer of wind energy in the U.S. — further squeezes those legacy generators.
ERCOT’s regulated market provides for prices up to $9,000 per megawatt hour, supposedly as an incentive for generators to build new capacity and join the ERCOT market. However, it does not work that way. In fact, generators have the opposite incentive — closing down their power plants and withholding power in order to drive prices higher.
While blatant collusion in U.S. markets is illegal, the Houston Chronicle’s L.M. Sixel has detailed multiple instances of market manipulation. The incentive to remove supplies from the grid is so well recognized that there is booming business in residential and industrial backup generators. In Houston, CenterPoint sells such generators while touting that its reliable supply of natural gas will allow instant replacement of electricity, also supplied by CenterPoint, when the grid goes down.
Continued industrial and population growth in Texas are arguments for more electricity generation capacity. Oddly, ERCOT and the Texas Public Utility Commission prefer to instead rely upon very costly transmission lines even when less expensive new generation capacity is available. An example is the decision to approve the fully regulated Houston Import Project transmission line that has absolutely cost consumers more than the less-expensive generation facilities proposed by Calpine and NRG at the time.
Texas should leave its Soviet-style ERCOT market in the dustbin of history. ERCOT must allow all of the generators who are necessary to supply the grid at peak times to earn profits. There are two ways to do this. Both will cost consumers more at the meter but less than buying a generator to power their own homes and businesses when the grid fails, and certainly less than the cost of a power blackout.
The first approach is to install a valid capacity market. Under this approach, generators will be paid to stay idle on the sidelines for most of the year. In our baseball analogy, all the Astros players on the bench and in the minor leagues will be paid just because they are available to take the field. This will add to the price paid by the consumer but provide assurance against blackouts.
The second approach would be to return to a fully regulated market that guarantees a rate of return to all market participants, including generators. This approach would likely cost more over time because the older, more expensive coal-fired plants would then have incentives to remain in business and prevent the entry of less expensive natural gas and renewable energy plants.
In 2013, a colleague and I predicted that the ERCOT market would deteriorate, with less capacity and more manipulation at the expense of consumers. That is happening, just as we predicted. But there is still time to act.