15 years after deregulation, reliability of grid becomes issue
Texas has the only competitive electricity market in North America without a capacity market. Since 2002, when the state deregulated electricity, Texas has relied on price spikes, euphemistically called “scarcity pricing,” to make it worthwhile for companies to keep extra generating capacity at the ready.
On the hottest days of summer, soaring demand can create temporary shortages in wholesale markets, driving prices from an average of $25 a megawatt hour into the thousands of dollars, leading to a lucrative payoff for generators able to quickly supply the market. Consumers are often insulated from these spikes, but the higher costs eventually filter down to their bills.
This system has shown cracks over the years, leading the Public Utility Commission to lift a cap on wholesale prices three times — from $3,000 in 2013 to $9,000 in 2015 — to provide incentives to power generators to invest in their plants and maintain backup generation. In 2014, the PUC approved an additional surcharge to be paid to power companies when supplies are scarce.
“ERCOT’S market only works if the price is right,” said William Hogan, director of the Harvard Electricity Policy Group, which studies competitive electricity markets.