Texas Electricity: The Pros and Cons of a Capacity Market

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Among the proposals for addressing the problems faced by the Texas electricity market is a switch to a capacity market. Under a capacity market electricity producers would be paid to build new power plants. Vault Energy Solutions looks at the pros and cons for such a scheme.

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Critics of the proposal claim that a capacity market would drive some retail electric companies out of business and limit electric choice in Texas.

In a recent post, Vault Energy Solutions takes a look at the proposal for a “capacity market” for electricity in Texas. Officials in Texas are seeking input on ways to alleviate the looming capacity problem within the Texas electricity grid. Among the proposals put forth, is the idea of switching to a so called capacity market in Texas. Under a capacity market, electricity producers would be paid to build power plants and add to the capacity of the grid.

Under the current structure in Texas, producers are not paid to build power plants but paid when they sell electricity. The price for electricity is set in a real-time marketplace with prices fluctuating, often wildly, based on the current supply and the current demand for electricity. When electricity is scarce relative to the amount of electricity available, prices spike considerably; sometimes reaching a statutory maximum allowable rate. It is during these price spikes that producers make the majority of their money.

One challenge with such a setup is that producers have no incentive to build extra capacity to serve the state in times of need. However, it is the job of planners to ensure that there is enough power in reserve to respond to large jumps in demand such as hot afternoons in August or an unexpected loss in power, such as can sometimes happen during a major weather event. Proponents of a capacity market point out that such a scheme would ensure there is enough idle capacity to respond when the state needs more power.

Payments to producers would be funded by additional fees charged to retail electric providers who buy electricity wholesale in order to provide power to their customers. This cost is ultimately borne by residential and commercial electricity consumers in the form of either higher electricity rates or additional pass-through fees. Critics of the proposal claim that a capacity market would drive some retail electric companies out of business and limit electric choice in Texas.

The piece posted on the Vault Energy Solutions website takes a look at the arguments both for and against a capacity market for electricity in Texas.

About Vault Energy Solutions

Vault Energy Solutions helps consumer exercise their power to choose in Texas and other electricity deregulated states. Our popular consumer website vaultelectricity.com provides detailed analysis and comparison tools for both residential and commercial electricity rates. Visit us today to compare Texas electric companies. Vault is a Texas electricity broker.

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Devon Bass
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