Texas electricity officials are considering a switch to a “capacity market” as a way to solve the state’s pending supply and demand imbalance. Under a capacity market, producers of electricity are paid just to build power plants and make the supply available to the grid.
This would be a change from the current system where electricity producers are paid only when they sell the electricity they generate. The price the producers receive for their electricity is mostly a function of the available supply and demand for electricity in the real-time marketplace.
When electricity becomes scarce relative to the current demand, prices spike to many times higher than normal. It is the prices paid during these brief moments of scarcity that make up most of the profit realized by electricity producers.
In other words, the current system creates an environment where producers are most profitable when the grid is running right on the edge of having enough power to meet demand.
The state likes to have excess capacity (called reserve margin) as a safety cushion in case demand jumps or supply is unexpectedly lost. The problem with this is that building power plants requires a lot of money. Power producers don’t like to invest large sums of money to build power plants that might set idle and not generate revenue.
Under the capacity market plan the retail electric companies would pay a fee to the Electric Reliability Council of Texas (ERCOT) which would use the money collected to pay generators for building new plants that would add to the reserve margin. Though on paper the extra fees are paid by the retail electric providers, the money would ultimately come from end users who would pay higher electricity bills to fund the scheme.
Not surprisingly, the idea of a capacity market is backed wholeheartedly by Texas’ two largest producers of electricity; NRG and Luminant. The politics of the situation are made sticker by the fact that the largest generators of electricity in Texas are part of corporate families that also include the largest electricity retailers in the state. Luminant for example, is owned by the same company that also owns TXU. Critics contend that this would give such companies an unfair advantage in a capacity market structure.
For discussion of Pros & Cons see the orginal posit: Will Texas Switch To A Capacity Market For Electricity?