New Public Citizen Study Finds Electricity Shortfall Won’t Be Solved by Paying Utilities Based on Their Capacity to Generate Power

Costs Would Increase; Existing Power Plants Would Get Windfall

The state’s electricity shortfall won’t be solved by paying utilities based on how much power they can generate, rather than how much they actually generate, a new Public Citizen report finds.

The report comes as debate rages among regulators and state lawmakers over how to keep the lights on in Texas. Demand for electricity is increasing while new power plant construction is slowing down.

Some want a “capacity market” – one in which power plant owners are paid for being ready to generate electricity. Others prefer to create incentives for reducing electricity consumption. A new study released today by Public Citizen found that the state’s electricity shortfall won’t be solved by a capacity market. Instead, a capacity market would just reward the owners of existing power plants with substantial windfall profits.

“Our study has found that a capacity market takes too long, costs too much and won’t be enough to keep the lights on,” said Tom “Smitty” Smith, director of Public Citizen’s Texas Office. “We’d be better off developing a new market structure that creates incentives for people to use less electricity.”

The debate about whether to pay electric companies for the energy they produce or the capacity to produce energy has occurred in many parts of the country over the past 10 years. The state’s Public Utility Commission (PUC) has been discussing this issue for more than a year and will consider it again on Thursday. It could vote on whether or not to create a capacity market.

To answer the question of whether a capacity market would benefit Texas, energy experts hired by Public Citizen analyzed a capacity market run by PJM, a regional transmission organization that coordinates electricity movement in 13 states and the District of Columbia, which is the market model most similar to the approach the PUC is discussing. Researchers found that replicating the PJM-run capacity market would take until 2015 and would cost between $1.2 billion and $2.3 billion a year.

In addition, such a market would divert resources from new, more efficient power sources. In the PJM market, $54 billion went to existing power plants while just $4.2 billion went to new resources such as gas, wind and solar.

“Creating a capacity market would take way too long and would cost way too much,” said Anna Sommer, president of Sommer Energy and the report’s principle author. “In addition, it would prop up dirty and inefficient energy plants. A capacity market clearly is not the solution.”

Added David Schissel, president of Schlissel Technical Consulting and a report co-author, “We looked at the other grid operators and their capacity markets and found that in those markets, existing fossil fuel and nuclear plants were the big winners.”

David Power, deputy director for Public Citizen’s Texas office said, “We have been debating this issue for several years. It’s time to act. Even consultants who are recommending a capacity market have concluded that the cheapest, fastest way to keep the lights on is to develop new ways to reduce the demand or the amount of energy we use at peak times when customer demand is highest. The commission can and should develop a one hour ahead demand reduction market.”

This is the first of two studies to be released this week by Public Citizen. The second study will focus on whether a shift to a capacity market would be enough to keep Energy Futures Holdings from slipping into bankruptcy.

The report is available here.