The companies that sell electricity to Texas residences and businesses say their customers will have to pay more if the state makes changes in the market that some power industry officials and regulators are proposing.
Two of the three members of the state Public Utility Commission indicated at a meeting last month that they would consider paying generators to keep additional capacity available for times of peak demand, as a way of ensuring sufficient power on Texas’ hot summer afternoons, when air conditioners drive electricity demand to its upper threshold.
Some other states use the system, called a capacity market, but it is a departure from the arrangement used in Texas since 2002, when most of the state’s electric power market was deregulated.
The state’s existing approach, called an energy-only market, pays generators for electricity they actually provide, not for maintaining extra capacity. Their incentive for maintaining extra capacity is that the wholesale price they can charge rises dramatically when demand requires power from those extra plants — often called peakers — which are idle at other times.
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Retailers, which buy power wholesale from generating companies and compete to sell it to consumers, say the extra payments to generators in a capacity market would make it more difficult for them to set fixed prices. This especially would be true for longer-term contracts since, depending upon how the capacity market were structured, the retailers might not know what capacity payments would be more than a couple of years out.
No one has decided what a capacity market would look like in Texas. The most commonly used model, the PJM market in several East Coast states, projects demand three years in advance and calculates capacity payments on that basis.
‘Muddies up the water’
“It would mean regulatory uncertainty,” said John Werner, president of Source Power & Gas, a Sugar Land-based retailer. “It just muddies up the water and is not a market-based solution, determining what the cost should be. You don’t have a normal buyer and normal seller. You have a regulatory body in the middle, trying to determine what is fair and reasonable, and you hope they get there.”
Werner also said retailers would find it difficult to price and offer new contracts until regulators worked out specific details, such as the size of capacity payments and how the capacity payments would be passed on to customers.
“That uncertainty would definitely affect the wholesale markets,” Werner said.
A study prepared by the Brattle Group consulting firm has estimated that moving to a capacity market would require about $4.7 billion in upffront payments to generators, but that much of this cost would be offset by lower peak-time electricity prices, leaving customers with about $400 million in additional costs to ensure a 14 percent cushion of guaranteed excess capacity on the grid.
But retailers and other critics of capacity markets say that consumers would take a direct hit in their monthly bills.
“Depending on the market structure, we believe it would increase prices by $5 to $15 a megawatt-hour,” said Michael Harris, CEO of Unified Energy and president of the Energy Professionals Association, a trade group of retailers and brokers.
Harris said an office building might see its annual electric bill rise $25,000 or more, depending on how the capacity market were structured.
During normal demand conditions, wholesale prices usually are under $100 per megawatt-hour. One megawatt is enough to power about 500 homes during such times.
But as demand approaches peak generating capacity, wholesale prices rise and state regulators allow power plants to charge as much as $4,500 per megawatt- hour — a cap that will rise to $7,000 next year and $9,000 in 2015.
Stability as a draw
The generating industry, which would benefit from a capacity market, say retailers and their customers also would reap rewards through more stable prices. They argue that because capacity payments would guarantee an extra power margin, demand would be less likely to reach the point at which wholesale prices approached their caps.
John Ragan, president of generator NRG Energy’s Gulf Coast Region, noted that according to calculations in the Brattle report, power prices would rise 1.4 percent in a capacity market.
“This modest price buys more power resources, greater reliability, and confidence in our electricity market,” he said.
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Retailers worry, however, that they’d shoulder the blame for price hikes because they send the electric bills.
“There is some potential customer backlash that would result from higher prices,” said David Roylance, founder and principal at Prism Energy Solutions, an energy consulting firm.
He said about 35 percent of residential bills already are for regulated charges over which retailers have no control.
Adding a capacity charge would increase this percentage, leaving retailers with less to work with in offering competitive pricing, Roylance said.
Value of smart meters
Werner, of retailer Source Power & Gas, said the capacity market also could reduce the value of smart meters, which have been installed statewide and give customers real-time information they can use to monitor and modify their electricity use.
“Over the past year, billions of dollars have been spent on the deployment of smart meters,” Werner said, noting that their introduction allows retailers to offer more products and devices to help customers reduce their power consumption.
Guaranteeing peak capacity, he suggested, would lower the incentive to reduce electricity use.“If capacity markets are introduced into Texas, it is going to slow down a lot of the research going on and the hoped-for elastic demand,” he said.