AUSTIN – The Texas Public Policy Foundation today released theEnergy Perspective, Does Competitive Electricity Require Capacity Markets? The Texas Experience: A Summary. This Energy Perspective, authored by economists Andrew N. Kleit and Robert J. Michaels, senior fellows at the Foundation's Center for Economic Freedom, examines whether reliability concerns justify the introduction of a capacity market into Texas' electricity market.
"Our examination of ERCOT's history and operation brings a conclusion that the costs of instituting capacity markets in its territory will almost surely exceed any benefits they might bring," said Dr. Michaels, professor of economics at California State University, Fullerton. "Shifting to a capacity market is unnecessary and would in reality be a source of inefficiency and a barrier to competition that would likely increase the cost of electricity for consumers."
Dr. Kleit, professor of energy and environmental economics at Pennsylvania State University, added, "We find the economic theory behind capacity markets to be deeply flawed, both in general and when applied to ERCOT. Many of its arguments depend on oversimplified assumptions that are at variance with reality, particularly those that are necessary to produce the ‘missing money' phenomenon. Other possible market failures including the inefficiencies of nonprice rationing during shortages are becoming less relevant as markets develop, more users see prices based on marginal cost, and demand management becomes more widespread. The theoretical case for capacity markets is weak at best."
The Perspective is a summary of an earlier study published in February. It is the fourth in a series of weekly papers the Center for Economic Freedom will produce examining the debate over the reliability of Texas' electricity market. To learn more visit http://bit.ly/1g07YRA.
Andrew N. Kleit is a Professor of Energy and Environmental Economics at Pennsylvania State University and senior fellow at the Texas Public Policy Foundation.
Robert J. Michaels is a Professor of Economics at California State University, Fullerton, and a senior fellow at the Texas Public Policy Foundation.
The Texas Public Policy Foundation is a non-profit, free-market research institute based in Austin.
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