Watchdog group criticizes plan for advance electricity purchases

Locking in future electricity demand for generators is not a cost-effective way for making sure the lights stay on, a consumer advocacy group said   Tuesday.

Public Citizen says an approach under consideration that would allow retail providers to buy a year’s worth of electricity three years in advance would do little to encourage generators to build additional plants, especially in the near term.

The group’s report is part of a continuing  debate over how to ensure that the Texas grid is capable of meeting peak power demand.

The advance purchase proposal, called a forward capacity market, would take at least three years to have any effect and wouldn’t establish the long-term  incentives necessary to encourage construction of additional power plants, Public Citizen said in its report.

A faster and cheaper approach would be managing electricity power demand through conservation and other measures, said Tom “Smitty” Smith, Texas Director of Public Citizen.

“A capacity market is no guarantee that there would be additional resources being built,” Smith said. “The people ending up profiting are the existing generators.”

UBS Securities has estimated that generators would receive $1.1 to $2.3 billion in capacity payments in a forward capacity market system, the Public Citizen report said.

The Electric Reliability Council of Texas, which operates most of the state grid, has expressed concerns about whether generation will be sufficient to meet growing peak demand. In December, the grid operator estimated that electricity reserves could drop below the preferred 13.75 percent margin as early as next summer, and as low as 10.9 percent by the summer of 2014.

A forward capacity market was one option proposed by the Brattle Group in a study for the Public Utility Commission of Texas, the state regulator, as it looks for incentives to encourage power plant construction.

Last year, the commission raised the cap on the price a generator could charge for electricity at peak times, hoping to sweeten the pot, but it’s too soon to determine whether that will affect future power plant construction.

Critics have complained that by locking in short-term sales, forward capacity markets reward existing generation and may discourage investment in new capacity.

The Brattle report estimated that a forward capacity market would add a recurring, constant charge to ratepayers’ bills but lower their rate per kilowatt-hour, resulting in a net rate increase of about 1.4 percent.

The report proposed a second option, called demand-response, in which customers would receive a financial incentive to reduce their use of electricity at peak times.