A proposed system for subsidizing power generators would increase Texas electric bills, but without any clear benefit to consumers, a new report concludes.
“A Retreat from Electric Competition: How a Texas Capacity Market Will Lead to Expensive Subsidies, New Regulations and Higher Prices” shows that the proposed subsidies to power generators could increase electricity costs in Texas by billions of dollars each year. The report was co-commissioned by two city coalitions, the Texas Coalition for Affordable Power and the Steering Committee of Cities Served by Oncor.
Generation companies are lobbying regulators to mandate the subsidies. In theory, the extra cash will give generation companies financial incentives to build more plants and keep pace with the state’s growing demand for energy. But generation companies offer few guarantees, and projections relating to the state’s energy future have been fraught with problems, the report shows.
“These subsidies will needlessly increase electric bills, but without any clear payoff in terms of system reliability,” said Dr. Randy Moravec, executive director of the Texas Coalition for Affordable Power. “Mandating the payment of these capacity subsidies also would mark a retreat from the free market principles upon which Texas deregulated its electricity market.”
The new policy primer examines the subsidies as part of a larger proposal for what is known as a “capacity market.” Under a capacity market, retail electric providers — that is, the companies that directly serve residential and business consumers — would face new government requirements to make “capacity payments” to generation companies. These payments would be in addition to the regular cost of wholesale power. The cost of the subsidies will end up in residential and business electricity bills, according to the report.
The creation of a capacity market currently is under consideration by the Texas Public Utility Commission. If approved, the change would mark the most dramatic shift to the Texas electricity market since deregulation more than a decade ago.
Although supporters say a capacity market would help address possible power shortfalls in the state’s future, the new policy primer concludes that the main impact would be to increase electricity costs. The report also shows that the push by generation companies for the capacity subsidies appears to be based on faulty premises.
Together, the Steering Committee of Cities Served by Oncor and the Texas Coalition for Affordable Power collectively represent more than 230 cities and political subdivisions in Texas with more than 5.5 million residents. Their joint report was released Tuesday on the organizations’ websites, www.tcaptx.com and www.citiesservedbyoncor.org.
“With these subsidies, generators would be paid simply for existing,” said Jay Doegey, board chairman of the Steering Committee of Cities Served by Oncor. “These very expensive proposals will almost certainly lead to higher electricity prices. What’s unclear, however, is whether these subsidies really are necessary and how Texas consumers would ever benefit from them.”
The report includes a number of findings:
- By their very design, capacity markets contribute to higher electric costs. By one estimate, the mandated subsidies to Texas generators could total nearly $5 billion annually. However, regulators have yet to conduct any sort of cost-benefit analysis to determine possible bill impacts for home and business consumers.
- Those calling for these subsidies have premised their arguments on speculative technical projections that have consistently proven to be incorrect.
- Similar subsidy mandates in other jurisdictions have not worked well. Even those who stand the most to gain financially — generation owners — have noted serious challenges in other regions.
- By mandating payments of these subsidies to generation companies, Texas would be retreating from the free-market principles under which it deregulated its electricity market.
- Texas regulators have already taken aggressive action to address the state’s reliability concerns, and continue to consider other options that would be less burdensome to ratepayers.
- Although generation companies could reap billions of dollars each year in capacity subsidies, most of that money won’t go towards building new power plants. This is because the subsidies paid to generators would reflect the value of existing power plant capacity, not new construction. Capacity subsidies may end up with generation company shareholders or for any number of purposes unrelated to resolving resource adequacy challenges.
The policy primer also includes historical context and recommendations. “A Retreat from Electric Competition” and other policy reports about the Texas electricity market can be found at our Reports repository.
Is a policy analyst consultant for TCAP, a coalition of political subdivisions in Texas that purchase electricity in the deregulated market for their own governmental use. Because energy costs are typically a significant budget item to our members, TCAP is consistently looking for ways to save our members money, through cost-saving contracts, energy efficiency or demand response programs.