Joe Ragan, a VP at Power generation company NRG, recently opined in the Houston Chronicle in favor of a capacity market for the ERCOT power grid in Texas. A capacity market provides what you might call “being there” payments to generators, whether the generator’s power turns out to be demanded in the market or not.
I was struck by two things while reading the op-ed: first, no mention of the role of wind power in shaping prices and economic conditions for generation in Texas even though ERCOT has the highest wind penetration market-wide in the United States; and second, the way “prices” get invoked.
As any economics student knows, prices are the product of the interaction of supply and demand. In the op-ed, however, prices seem to be something driven by and driving the supply side of the market only. The demand side of the market has “needs” driven by the weather, but apparently not linked to the prices that consumers have to pay.
Admittedly, this way of thinking has 100+ years of tradition behind it in the electric power industry–that’s how it was done under the old cost-of-service, monopoly territory, regulated rate system in the electric power industry.
Texas has been trying something different, with more commercial risk to drive efficiency on the supply side, and potentially high price spikes to motivate an active and engaged consumer side of the market. A capacity market would kill the experiment before it has a chance to pay off.