As Texas approaches summer heat, a searing debate in the electricity industry was on display Thursday at the IHS CERAWeek conference in Houston over whether the state’s deregulated power market should add a capacity market, which compensates generators for the investment of putting nameplate capacity in the ground – and keeping it online — beyond the payments they would see for providing megawatts of energy.
The chairman of the Public Utility Commission of Texas, Donna Nelson, would not be pinned down on which side of the issue she may ultimately vote, but she urges a thorough, honest evaluation of the pros and cons of both an energy-only market (payment for power provided at wholesale) and capacity markets (adding payments for capacity provisions).
For an energy-only market to be true in spirit to a free market, it would lack price caps and could function with an 8% reserve margin, she told reporters. Nelson also said she did not think capacity markets need add as much in costs as some have projected.
Currently, Texas has an energy-only market with some price caps and a 14% reserve margin (the measure between resources and firm demand). But as the firm load forecast is expected to rise from 65,952 MW this year to 73,214 MW in 2018, the reserve margin would go from 13.2% to 7.1% in those respective years, according to a PUC report issued in late December.
The average wholesale price in 2011, with its extremely hot summer, was $53/MWh, but it dropped to $28/MWh in 2012, Nelson said during a panel discussion. And, $55/MWh is more in the neighborhood of justifying investment, she said. The systemwide offer cap was raised to $4,500/MWh from $3,000/MWh, and it will be $5,000/MWh this summer, $7,000/MWh in 2014 and $9,000/MWh. “Obviously, what we’re trying to do there is signal scarcity,” Nelson said.
While she did not stake out whether Texas should adopt a capacity market, others on the conference panel drew a line in the sand. “We’re very much advocating for a capacity market as a needed change,” said Thad Hill, president and chief operating officer of power generator Calpine.
The problem generators have with energy-only markets is they discourage spare generating capacity, he said. “You only get paid when you run… you make a megawatt hour you get paid, you don’t make a megawatt hour, you don’t get paid,” Hill said.
“That’s a hard way to encourage units to stay active,” he added.
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Another speaker called for careful construction of any changes in the Texas power market design, and urged transparency for market participants and consumers.
“The devil is really in the details,” said Hunter Hunt, president and CEO of Hunt Consolidated Energy, who along with other members of the Ray Hunt family owns Sharyland Utilities in Texas. “I’ve seen capacity markets that have either been black boxes or, alternatively, there are so many knobs… you could actually end up with volatility coming through on the price signals for forward capacity that are as equally incorrect as the angst created by an energy-only market.”