Texas Legislature Considering Capacity Markets in Texas- Good or Bad for Consumers?

April 23, 2021

House Bill 4378, a proposition to incorporate a capacity market in Texas, was introduced and was still pending committee review as of April 22, 2021 by the 87th Texas Legislative Session. Capacity markets can be extremely expensive to consumers and may not solve the ERCOT problem regarding Winter Storm Uri. Consumers in Texas could see a $10 to $15 MWh uplift in

energy prices if this new market is implemented.

Unfortunately, a capacity market would not have helped during Winter Storm Uri as ERCOT had nearly 40% reserves in February, meaning 40% “extra” generation. Therefore, there was plenty of capacity in Texas for the winter event. The February 2021 event was a weatherization issue for the electric generators and natural gas suppliers. As a result, the implementation of a capacity market in Texas would not improve reliability. A capacity market would force Texans to subsidize power generators that already exist.

Concerns for Texans

– Adding a capacity payment to generators does not directly translate to construction of new generation sources

– ERCOT, without a capacity payment, has surpassed PJM (that has a capacity market) in new build generation

– The polar vortex was not a capacity issue, it was a lack of available generation due to winter related outages, including loss of fuel supply. More generation exposed to the same loss of fuel would not have changed the outcome

– Capacity markets will guarantee a revenue stream for generators, today and in the future. However, it will not guarantee availability or new-build generation in the type, location and reliability required

– Capacity markets, like PJM, have a three to four year horizon for contracting electricity and do not offer the same contracting opportunities that exist for ERCOT customers. ERCOT customers can enjoy contracts in the market for up to 10 years. Capacity markets tend to limit the  customer’s ability to transact longer term agreements