Not too long ago, in a guest column for the Houston Chronicle, an executive for energy giant NRG issued a full-throated endorsement for what’s called a “capacity market.”
If you’ve been following along lately you already know about capacity markets. That’s the concept where generators receive “capacity payments” on top of whatever price they set for wholesale electricity. That is, generators receive payments simply for existing.
It should come as no surprise that John Ragan, the NRG regional president who penned the guest editorial, loves this idea. His company stands to make a mint.
For instance, in his guest editorial that appeared in June, NRG’s Ragan raised the specter of future blackouts. He warned that Texas was falling behind with regards to generation construction and could face serious shortfalls without a capacity market. The theory here is that a capacity market would deliver big bucks to big generation companies, which then could invest the money in new power plants.
But then in August, in an earnings report to investors, NRG CEO David Crane acknowledged that new generation construction was not supported in competitive electric markets anywhere in the U.S. — including in those that already allow capacity payments. According to a report in the Energy Choice Matters, a trade journal, Crane said “in the low gas price environment that exists, it’s nearly impossible to justify the construction of new capacity on a merchant basis.”
Ragan also appeared to have been contradicted in Arizona by an electric industry trade group, which claimed in written comments that the “outlook for dire consequences” with respect to generation reserves in Texas “appears to be wholly overstated.”
The question might be asked: “wholly overstated by whom?” This trade group, the Retail Energy Supply Association, counts NRG among its members. But it was NRG’s John Ragan who raised the specter of future calamity without a capacity market.
The Texas Coalition for Affordable Power and other consumer and free market organizations have warned about the high costs associated with capacity markets. That’s why we oppose one for Texas. How much would capacity payments cost? According to one of NRG’s own studies, an astronomical $4.7 billion annually. The company-financed report claimed there would be offsetting savings, although the assumptions it used to calculate the offsets have been criticized.
And again, we’re talking $4.7 billion.
To put that number in context, $4.7 billion amounts to more than $180 for every man, woman and child in Texas. Although these capacity payments would be added to wholesale power costs — and benefit companies like NRG — the burden would eventually fall upon the shoulders of all of us.
NRG has said a capacity market would be worth it. Again, the question might be asked: “for whom?”
Want to learn more about the capacity market debate? You can find a quick TCAP primer here.
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.