Competition, Not Subsidies, will Keep the Lights on in Texas

By Bill Peacock, TPPF

Many generators, regulators, and consultants are making a push to load $2 billion worth of subsidies on the backs of Texas electricity consumers.

The subsidies, which would come in the form of a capacity market, are being touted as a way to ensure that Texas doesn’t run out of electricity and suffer rolling blackouts during our hot summers. Proponents say that in Texas’ world-leading competitive market, “the potential for profit is not great enough to encourage the construction of new generation.”

But Texans need not hand over $2 billion or more per year  to pay for additional “capacity.” As Andy Kleit and Robert Michael’s ask in a new article in Cato’s Regulation magazine, “If you buy the power, why pay for the power plant?”

Professors Kleit and Michaels point out the novelty of capacity markets:

Capacity markets do not exist for goods other than electricity. The dairy industry remains viable without payments by retailers for “cow capacity” on top of milk prices. Any argument for electrical capacity markets should explain why they are needed when such markets are unnecessary or inefficient elsewhere.

Building on their extensive research examining the Texas electricity market, Kleit and Michaels show how using real world numbers–rather than the artificial calculations of profits determined by a formula developed by the Public Utility Commission of Texas–results in plenty of profit in generation for an efficient generator. They also examine future forecasts of generation versus load and show that Texas is not likely to run out of electricity anytime soon–especially taking into consideration recent announcements of investment in new generation.

Getting beyond the technical analysis, supporters of the free market ought to consider why anyone thinks government involvement in the electricity market is a good idea. Does anyone really think that using a North East model of government intervention will bring Texans more reliable reserves of electricity or cheaper prices? Intervention hasn’t work with airlines, trucking, telephones, health insurance, or any other market i can think of. All its gotten the residents of New York is prices twice as high as what Texans can buy electricity for today.

The Foundation’s research, aided by professors Michaels and Kleit, shows that to the extent Texas is having problems with electricity reserves, it is due to market intervention already taking place in Texas; along with the uncertainty the market is facing as regulators decide whether or not to adopt subsidies. We’ll look more closely at this in future posts.

More competition, not more intervention, is the way forward to an abundant, affordable, and reliable supply of electricity in Texas.

Bill Peacock is the Vice President of Research; Director, Center for Economic Freedo.
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