Policy Documents

Reforming Texas Electricity Markets

Andrew N. Kleit and Robert J. Michaels –
June 11, 2013

In this article for Regulation Magazine (Vol. 36, No. 2) the authors write that electricity restructuring is converting regulated monopolies into market regimes. The characteristics of those markets, however, are critical determinants of their performance and remain the subjects of active policy debate. One important issue is whether electricity markets can—without government intervention— provide adequate generation to reliably power society’s needs. Advocates of intervention believe that competitive markets for energy should include additional payments to firms for having reserve generation capacity beyond what ordinary electricity rates would incentivize. Critics of this idea see such “capacity payments” as unnecessary subsidies to electricity producers. Most U.S. regional transmission operators (RTOs), operate capacity markets. As capacity charges have risen, so has their political salience.

This article reviews the rationales for capacity markets recently proposed for the Electricity Reliability Council of Texas (ERCOT). Some have argued that low levels of investment in generation on ERCOT are reducing reserve margins to levels that threaten reliability. Others believe that ERCOT’s “energy-only” regime can suffice to incentivize adequate investment.




Andrew N. Kleit is professor of energy and environmental economics at Pennsylvania State University.

Robert J. Michaels is professor of economics at California State University, Fullerton.