by Andrew N. Kleit, Robert J. Michaels
Texas Public Policy Foundation
February 13, 2013
This paper examines the potential value of a capacity market in Texas. In a capacity market the government rather than the market determines when supplies of electricity are adequate to meet long-term reliability needs. We begin with a critique of the economic theory behind capacity markets, which we find deeply flawed. We then apply that theory to the Electricity Reliability Council of Texas (ERCOT). In the process, we reexamine research on investment adequacy in ERCOT and the value of energy prices as signals for generation investment. We conclude that investment in generation in ERCOT is likely to continue and, as it has in the past, provide sufficient reserves to maintain reliability. 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.