Is Texas running out of electricity? Are rolling blackouts just around the corner? Has the competitive market failed to provide meet the needs of Texas electricity consumers? Are billions of dollars in subsidies to generators the only way to avoid Armageddon?
These questions are at the center of a debate in Austin that may wind up costing Texas consumers $4 billion a year through a new electricity “tax.”
The answer to all these questions-which is no-is discernible through a straightforward examination of the facts. Yet the Public Utility Commission of Texas (PUC) is moving forward with a process to replace competition in Texas’ electricity market with centralized government planning and corporate subsidies.
It doesn’t need to be this way.
In the 18 years since Texas began its transition to a competitive electricity market, Texas has been blessed with an abundant, affordable supply of electricity. Prices are lower today in real dollars than they were in 2001. The market provided enough electricity to make it through 2011’s record drought and heat wave.
This history hasn’t stopped many regulators and generators from claiming that we will soon be running out of electricity because prices are too low to incentivize new generation. The PUC recently held a workshop to examine these claims and discuss what remedies should be adopted to increase generation capacity.
The evidence for this claim, however, is not based on experience-the competitive market in Texas has never run out of electricity because of inadequate investment in new generation. Just the opposite-prices are low today in part because we have too much generation.
Because reality won’t cooperate, advocates for moving toward what is known as a capacity market-which allegedly would guarantee more investment by imposing fees, i.e., taxes, on consumers-are using projections from reports as the foundation for their claim.
One report by Texas regulators claims to show that there is “missing money” in the system, that there is simply not enough money in the market for generators to earn a profit on new investments.
However, two energy economists who have done research on this issue for the Texas Public Policy Foundation discovered that this report didn’t count all the sources of revenue that is available to generators. After a careful analysis of the data, they found that new investment in generation can indeed be profitable.
Another report by regulators claims that we won’t have enough generation resources in the coming years to meeting future demand. Yet our recent paper shows that past versions of this report overestimate future demand at least 79 percent of the time and consistently underestimate future supply.
Correcting for these factors shows that Texas has enough existing and planned generation to meet demand for at least the next five or six years.
Confirming these findings are the actions of the market itself. While claiming the market isn’t profitable, generators and investors have announced at least 5,731 MW worth of new generation for Texas. Some of these new projects are quite recent, having been announced since the PUC’s move to increase the wholesale price caps made profits even more accessible.
All this doesn’t mean the market is in perfect shape. It’s not, and it could be improved. But the main problem is not the competitive market; it is excessive government intervention in the market. There are three main challenges: 1) renewable energy subsidies, 2) excessive regulation of the wholesale market, and 3) the regulatory uncertainty created by the PUC’s willingness to entertain a move to a capacity market.
The chorus from Austin is nearly unanimous in proclaiming the failure of Texas’ competitive electricity market. But that is simply not the case. While there are challenges in the market, it is working. If something doesn’t change, however, Texans might soon be about $4 billion poorer.
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