POWER February 2014 - 52

Power Policy
Texas and the Capacity Market
Debate
The odds that the Texas electricity market will undergo change this year are high.
Despite the promise of low costs in an energy-only market, that market alone is
providing insufficient incentives for the reserve capacity needed by the state's
growing population and economy.
Kennedy Maize
O
n Feb. 2, 2011, a winter storm gripped
the Lone Star State, bringing freezing
temperatures and heavy ice loads
onto the state's electric infrastructure. Texas
experienced a series of unexpected rolling
blackouts. That circumstance changed the
dynamics of energy policy in the state, along
with the shape of energy politics. The outages
raised the issue of whether Texas should
implement a capacity market along with its
long-functioning energy market, to ensure
adequate electricity to consumers.
In the 2011 outage, more than a million
Texas customers lost service, some for extended
periods. More than 200 power plants
shut down under ice loads and complications
of cold temperatures, including frozen
coal piles at generating stations. The Electric
Reliability Council of Texas (ERCOT),
the state's wholesale electric market, scrambled
to find adequate supplies of electricity
(Texas has sparse interconnections to the
rest of the U.S. grid), and short-term electricity
prices soared.
As the crisis passed, Texan electricity boffins
scratched their heads (after removing
their Stetsons, of course) and began thinking
about an aspect of the state's wholesale
market that is different from several of the
other large electricity markets that have
come to dominate over half of the U.S., including
PJM Interconnection (PJM) in the
Middle Atlantic states, the Independent System
Operator-New England (ISO-NE), and
the New York Independent System Operator
(NYISO). What those big markets have implemented,
and what Texas so far lacks, is a
market for electric capacity, or potential electricity
supply, to exist alongside the conventional
market for energy supplied each and
every day (see sidebar " Capacity and Energy
in Electricity Markets " ).
Restructured Markets and the
Disappearing Reserve
A little explanation is in order for those not
52
deep into the weeds of electricity market economics.
For those who already get it, please
bear with us.
In traditional regulated monopoly markets,
which dominated the U.S. until around
the turn of the 21st century and which still
prevail in much of the Southeast and West,
state regulators require utilities to carry a reserve
margin-generation in excess of what's
needed to meet day-to-day needs. This means
backup electric generating plants, paid for by
customers, which are ready to kick in when
it looks like the utility is going to be stressed
by weather or other events to meet its customers'
needs for electricity. This amounts to
generating inventory.
Inventory is expensive. That's a fact for
most businesses (and one of the motivators of
online commerce). But too little inventory is
also expensive, in terms of lost sales and lost
customers. In electricity markets, blackouts
are devastating in terms of economic costs and
political impacts. Though most electricity customers
pay no notice when the lights go on as
expected, they often raise a ruckus when the
lights go off unexpectedly. No utility distribution
company wants to go before its regulators
to try to justify hundreds of thousands of customers
sitting in the dark for hours, days, or
weeks. And those customers have no choice
about seeking other suppliers. It's often a toxic
political environment for the suppliers.
Capacity and Energy in Electricity Markets
What's the difference between " capacity "
and " energy " when it comes to electricity
markets, and does it make a difference?
That question is a key to understanding
the debate about how to structure the
organized wholesale competitive markets
that now provide electricity to more than
half of U.S. customers.
Capacity is the amount of electricity a
plant can deliver when it is operating at
full power. For example, a nuclear power
plant typically has a capacity of 1,000
MW. A wind plant may have a capacity of
something on the order of 100 MW. But
those numbers can be misleading, as
the nuclear plant's capacity is available
around the clock, while the wind plant's
capacity varies based on whether the wind
is blowing and how fast.
The U.S. Energy Information Administration
defines capacity as " the maximum
electric output a generator can produce
under specific conditions. Nameplate cawww.powermag.com
pacity
is determined by the generator's
manufacturer and indicates the maximum
output a generator can produce without
exceeding design thermal limits. "
On the other hand, energy is the amount
of electricity generators actually provide to
the grid and is available to be used at any
moment. Organized wholesale electricity
markets buy and supply electricity instantaneously.
That's energy. They buy capacity as
backup, or inventory, in case of shortages.
The PJM Interconnection, which has
the most mature and robust energy and
capacity markets for electricity, dating
back some 75 years, offers this definition
of capacity versus energy markets: " Energy
markets are used to coordinate the
continuous buying, selling, and delivery
of electricity. Capacity markets provide
incentives that are designed to stimulate
investment both in maintaining existing
generation and in encouraging the development
of new sources of capacity. "
POWER | February 2014
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POWER February 2014

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