Our friend Matt Welch with Conservative Texans for Energy Innovation makes a strong case in the following commentary for the ability of competitive markets to respond to peak demand periods through real-time pricing better than capacity markets. You can find the original in the Oct. 24 edition of The Houston Chronicle.
Given the rhetoric centered around electricity in Texas this summer, one could be forgiven for thinking that the sky, or at least the power lines, were literally falling down. So far, the Texas electricity grid has been described as communist, drunk and a game of chance, just to name a few of the more polite jabs.
The truth is that the most efficient, transparent and competitive electricity market in the world operated beautifully this summer, as true markets do when given the chance. Yes, it got hot this summer, like it always does, and yes, prices in the wholesale electricity market got high, very high!
But any freshman taking Economics 101 can tell you that when supply and demand get tight, the correct market response is for prices to go up. Similarly, when electricity market prices go up, that sends a signal that power is valuable and worth investing in.
Some folks are pointing to the high prices this summer and saying that something is broken. But that is not the case. On the contrary, that is how the Texas electricity market is intended to work. The Texas grid operates as an energy-only market which means that power plants generally are only paid when they produce energy. There are other electricity markets that pay power plants to simply be there, even if they are never called upon. But that is not how we do things in Texas.
Given Texas’ market structure, power plants — particularly plants that run only a few hundred hours or less per year when demand gets really tight — rely on those few high-priced hours to make enough money to stay in business. These high-priced hours are a purposefully designed feature of the Texas market. They encourage companies to invest and make sure Texans aren’t paying them for nothing.
Texas consumers rarely notice the workings of the wholesale market, and most simply pay a flat rate for electricity no matter what time of year or day. The quiet efficiency of Texas’ wholesale market is the reason prices in Texas generally are low and have been for a while, which is good for Texas business and consumers alike.
A few long-term trends came together this year to give us the summer that we had. First, the decade-old fracking revolution has driven down the cost of natural gas, and because such a large share of electricity in Texas is generated by gas-fired plants, the gas glut created lower wholesale market prices. In fact, a 2016 study showed that about 90 percent of the cost declines in the Texas electricity market were due to persistently low natural gas prices.
These lower prices meant that some older, less competitive generation assets — especially coal and older gas plants — have retired. This turnover is good for the system; it means newer, more efficient, cleaner, and cheaper resources are able to take their place.
The retired plants were relics of a bygone era when we had to build massive power plants to achieve economies of scale to make their electricity cheap. These days, we build them smaller which makes them easier to finance. While retirements of old plants reduce electricity capacity, new plants often add it back. Investments in new-generation resources do not happen overnight, so we may be a bit short at times, but any shortage should be temporary. For example, by next summer, ERCOT’s reserve margin (the buffer of excess electricity available over projected peak demand) is scheduled to be much larger than it was this past summer because of new energy source projects coming online.
Texas’ electric grid operator, the Electric Reliability Council of Texas has proven it can handle this situation. ERCOT took discrete, well-planned steps to be sure the lights stayed on as reserves tightened. Texans barely noticed and the economy didn’t miss a beat.
Some vested interest groups have tried to declare defeat and muddy reality, blaming technologies such as wind for perceived market shortcomings. They conveniently leave out that most days wind performed as ERCOT expected while gas plants built to provide almost 5,000 megawatts of energy to the Texas grid (enough to power about 1.3 million Texas homes in the summer) failed to show up on a day that ERCOT expected to hit a new peak demand record.
The Monday-morning quarterbacks throwing shade on the system have no real alternative to suggest. All they can offer is more government regulations by bureaucrats telling companies how to operate their business or a system that forces customers to pay for power plants they may never need or use. They advocate returning to a lumbering, less efficient, and more clunky dinosaur of a system.
The Texas electricity market is still young relative to electricity as a whole. Those in charge of the system have made tweaks that should make the market more inviting for investment while keeping the open-for-business free-market ethos that reflects Texas’ way of doing things. That’s the vibrant, competitive energy system that Texas needs and deserves. And as this summer showed, our system works.
Welch is the state director of Conservative Texans for Energy Innovation, a statewide organization that promotes free enterprise, increased competition and less government regulation in our energy economy.