NEWPORT NEWS, Va.--(EnergyChoiceMatters.com.)--Texas electric rates are lower in nearly all instances than electric rates available to customers in states that rely on "capacity markets" for resource adequacy, according to a review of data conducted by
“The price for electricity in states with capacity markets shows that Texas businesses and residents are in danger of paying substantially more for electricity if the Public Utility Commission of Texas elects to adopt a capacity market in Texas”
"The price for electricity in states with capacity markets shows that Texas businesses and residents are in danger of paying substantially more for electricity if the Public Utility Commission of Texas elects to adopt a capacity market in Texas," said Paul Ring, publisher of EnergyChoiceMatters.com.
The price analysis, available for download here, compared all-in electric rates for Texas, as published by the U.S. Energy Information Administration (EIA), with rates in states with restructured electric markets that rely on a centralized capacity market. The results showed that residential, commercial, and industrial customers forced to buy capacity through a capacity market pay more for electricity than Texans.
For example, for June 2012, the all-in average Texas residential electric rate was 11.19 cents per kilowatt-hour (kWh). The rate was higher in every restructured state which features a centralized capacity market or capacity mandate, from rates in the 13¢/kWh range in Pennsylvania and Maryland to as high as 18¢/kWh in New York.
Texas' electric rates for commercial and industrial customers are similarly lower than rates in states which exclusively rely on a centralized capacity market for resource adequacy.
"Of course, rates may be higher in capacity market states for a variety of reasons," Ring said. "However, the fact that each and every capacity market state, representing some 14 states, have rates higher than Texas cannot be dismissed as being driven solely by other parts of the electric bill, such as distribution rates or generation mix. When 14 otherwise diverse and independent states all have higher costs than Texas, and share a major market design element such as a capacity market, it's easy to see where customers' money is going."
Although the EIA data may not be perfect, Texas electric rates are lower when comparing actual offers from retail providers as well. For example, in the Oncor service area, a residential customer can find a 12-month fixed rate at a cost of 4.8¢/kWh for commodity energy (referring to 4Change Energy's Savvy Saver 12 plan, excluding transmission and distribution charges in order to make an apples to apples comparison to states where retail providers do not charge for distribution). At Duquesne Light in Pennsylvania (chosen because it is a relatively less congested part of PJM), a utility which is within a capacity market, the lowest 12-month residential fixed offer is 6.39¢/kWh (from Reliant Energy).
"One back of the envelope calculation has pegged the potential cost to Texas customers from a capacity market at $3.6 billion per year," Ring noted.
These billions of dollars in capacity costs would be in addition to the current rates paid by Texans for electricity, and why, as EnergyChoiceMatters.com's analysis shows, electric rates are higher in states with capacity markets.
Texas is considering a capacity market, which is an administrative mandate, among several proposals in response to narrow reserve margins and to incent investment in new power plants. Capacity markets are a mechanism used in certain states that mandate that customers pay capacity suppliers, such as power plants, for simply being available to meet demand in the future.
Essentially, under a capacity market, government regulators would mandate how much capacity to buy for future years in order assure reliability, and then would assign costs to each individual customer based on the customer's demand placed on the electric grid. Prices for capacity would be determined by an administrative construct designed to mimic a competitive auction, but whose prices would be heavily influenced by the design choices made by state government officials.
"It's inconceivable that a state and administration which was so fiercely opposed to a federal mandate to buy health insurance is now considering mandating that Texans purchase capacity as a condition of simply being an electric customer," Ring said.
"The Perry administration has called the Affordable Care Act, 'a far-ranging and ever-more-expensive collection of price fixing and individual mandates.' A capacity market, or capacity obligation, isn't much different. As the Texas Industrial Energy Consumers succinctly stated, a capacity market is a 'fictional product ... relying on taxes and penalties to enforce a government-created obligation,'" Ring added.
While a capacity market has been proposed to keep the lights on and maintain Texas' attractive climate for economic development, the higher electric rates paid by businesses in capacity market states should dampen any notion that introducing a capacity market to Texas will make the state attractive to businesses. Indeed, a recent review conducted by EnergyChoiceMatters.com found that none of the top states for business in the United States, as judged by numerous publications, relied on a capacity market.
"In addition to higher rates, a capacity market could also reduce the price-disciplining choice available to Texans when it comes to their electricity provider, as the fixed payments mandated under capacity markets will provide an artificial windfall to certain retail electric providers affiliated with generation, potentially allowing them to assert dominance in the market," Ring concluded.
Link to Capacity Market Price Study: http://www.energychoicematters.com/stories/capacitymarketpricecomparison.pdf
EnergyChoiceMatters.com is a free news and information service offering original and proprietary research, analysis, and coverage of retail choice in the electric and natural gas markets. Publisher Paul Ring formerly led regulatory affairs for a retail electric provider and has testified as an expert on retail energy deregulation.