Regulators Didn't Need To Raise Price of Electricity To Keep Lights On

Categories: Biz

electric grid.jpg
As of Wednesday, the wholesale price of electricity generators can charge during times of peak demand goes up 50 percent. And as it turns out, that's probably a waste of money.

Regulators are worried because it looks like we won't have enough generating capacity to meet Texas's growing needs. Problem is, none of the generators are stepping up to build new power plants. The price of natural gas generally sets the market price for electricity. That price has been low ever since it took a dive in 2008.

So, the rationale over at the Public Utility Commission is: Give them more money and maybe they'll build new plants and we won't have to resort to rolling blackouts when a summer scorcher tests the grid. That's just blind hope, though. It's basically a free market. They can't makethem build anything.

Inevitably, retail providers pass the buck to the consumer. But if a report from the market monitor that evaluates the ERCOT grid is any indication, we won't get much bang for it. Generators made enough profit to build new plants, the monitor found. But for whatever reason, they just didn't. Average electricity prices in 2011 were 35 percent higher than the year before. During that record August heat, they were 160 percent higher than the same month in 2010. While these revenues might not support new coal or nuclear plants, they're more than enough to justify the construction of a gas-fired plant.

So, why not? Is it our system? A capacity market, for example, pays generators to meet certain supply levels. Our market relies only on high prices that reflect scarcity. Power reserves get low, generators make more money and bring plants online. In the industry parlance, it's called sending the right "price signals." Yet if no one heeds the signals, what then?

In this kind of market -- unique in the country -- is there any incentive to create an adequate supply of electricity, or is scarcity simply good for business?

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22 comments
Sotiredofitall
Sotiredofitall topcommenter

Thank you Gov Goodhair - now pray for rain 

ThePosterFormerlyKnownasPaul
ThePosterFormerlyKnownasPaul topcommenter

I don't know about everyone else, but I am getting mixed signals from the market ...

 

ERCOT says that we have an inadequate margin and need to add capacity.

 

I get offers in the mail (and seen in print and TV) for "1st month Free!" or new lower rates.

 

If capacity is constrained then why are providers encouraging me to consume. and at a discounted price as well.

 

Why are the generators not required to maintain a certain margin between demand and capacity?  Isn't this the same as an airline overbooking a flight?

holmantx
holmantx topcommenter

Don't you just hate it when government can't  order plant contruction?

 

This week, 650 million Indians lost their air conditioning during their Texas summer because the greens had a big chunk of their coal-fired plants taken off line.  The EPA has already ordered Texas to do the same.

 

Reality is that which, when you stop believing in it, doesn’t go away. - Philip K. Dick (1928–82), U.S. science fiction writer. Definition given in 1972. Quoted by Dick in: I Hope I Shall Arrive Soon, “How to Build a Universe That Doesn't Fall Apart Two Days Later,” Introduction (1986).

 

roo_ster
roo_ster

I am so grateful to Laura miller and her fellow neo-luddites for preventing the construction of numerous coal-fired plants a few years back.  I mean, who wants extra capacity for high-demand times?  Or a diversity of fuel inputs to help mellow out price shocks when the price of one fuel source spikes? 

goober
goober

"Average electricity prices in 2011 were 35 percent higher than the year before"

 

Spot market wholesale real time prices do not reflect wholesale nor retail prices as a whole.

 

Here are some actual Jun 2010, 2011, 2012 retail rates for comparison:

 

http://www.puc.state.tx.us/industry/electric/rates/RESrate/rate10/Jun10Rates.pdf

http://www.puc.state.tx.us/industry/electric/rates/RESrate/rate11/Jun11Rates.pdf

http://www.puc.state.tx.us/industry/electric/rates/RESrate/rate12/Jun12Rates.pdf

 

 

cynicaloldbastard
cynicaloldbastard

There is only one reason the wholesale rate ceiling was raised.  So one extremely large holding company can more easily pay off its massive debt to one extremely large Wall Street firm.  And that holding company donated a lot of money to the governor in order to make that happen.

scottindallas
scottindallas topcommenter

 @floribun the answer to your first question is called a lost leader.   As to the second point, we made a utility market a 'free market"  It's not, the incentives are different, the lack of alternatives or any competition (no, your customer service company is NOT competition, but the illusion of same) mean the consumer is powerless.   I say consumer and not customer, cause utilities don't even use the same language as free markets  Professional markets also don't have customers but clients.  It's ignorance and stupidity (or self serving sophistry) that allows people to conflate these different markets.

scottindallas
scottindallas topcommenter

 @holmantx you're too smart to stupidly conflate free markets with utilities.  Go consider the differences, and how the post office, banks and utilities all have the same sorry customer service.  That doesn't happen in the free market, as alternatives and competition creates a situation where the customer is always right.  I get the sense you're a professional (fiduciary responsibility) and you know THAT's not a free market either.

Anon
Anon

 @holmantx Actually, I do. Regions in the country where the government can effectively order plant construction haven't had nearly the same issues as we've had in ERCOT.

scottindallas
scottindallas topcommenter

 @roo_ster stupid, coal plants aren't even cost effective.  Further, new plants have higher pollution standards.  But, gas plants are cheaper to build, cleaner and cheaper to operate.    The stupidest investment has been wind power, which works only 8% of the time according to ERCOT

Bremarks
Bremarks

 @roo_sterYou are placing blame where it doesn't belong.  Generators themselves now prefer natural gas because it is cheaper and much cleaner.  They could have been using their profits to build natural gas plants.  Instead, they continue to choose to pocket the $$$, which will only continue under this latest butt kissing from the Texas Public Utility Commission.

 

ThePosterFormerlyKnownasPaul
ThePosterFormerlyKnownasPaul topcommenter

WARNING -- SARCASM ALERT -- WARNING

 

My point was that ERCOT and the industry are claiming a market approach.  Their contrived market is sending mixed signals.

 

Loss leaders are only used in a shrinking or stable market where the only growth opportunity is to grab market share from another competitor.

 

If the market were tight then loss leaders would not be used

holmantx
holmantx topcommenter

 @Anon "encourage" incentives or disincentives, or autocratically "order"?  

 

Hoist up the order/degree, please.

 

What if government ordered you to shut up?

 

for the common good, of course.

scottindallas
scottindallas topcommenter

 @floribun well, considering that the monopoly remains, and only customer service is "a free market" that's all they have.  Every ad that is run is a waste of money, and a market inefficiency.  Further, it's a waste of time to ask people to search endlessly to find a cheaper deal, when none of that redounds to the suppliers. 

ThePosterFormerlyKnownasPaul
ThePosterFormerlyKnownasPaul topcommenter

 @Sotiredofitall and to Scott ... the mixed signal is that if the market were growing or prices increasing due to restricted supply there would be no need for loss leaders.

 

Loss leaders are used when generally the only way for a company to grow is to take away market share from a competitor.

Sotiredofitall
Sotiredofitall topcommenter

@scottindallas

Believe the correct term is "loss leader" - A loss leader, or simply a leader, is a product sold at a low price (at cost or below cost) to stimulate other profitable sales.  One use of a loss leader is to draw customers into a store where they are likely to buy other goods. The vendor expects that the typical customer will purchase other items at the same time as the loss leader and that the profit made on these items will be such that an overall profit is generated for the vendor.

 

Basically it's a play to sucker you into a bad move

 

scottindallas
scottindallas topcommenter

 @floribun no they're not, they just will screw you later.  Lost leaders are VERY common in contractual arrangements.  Not just in the arcane example you provided.  Most false "free markets" obscuring "utilities" do the same thing, like consumer credit, and banks.

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