Tag Archives: hourly markets

Chasing gold at the end of the rainbow: how reliance on hourly markets doesn’t spur generation investment

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Commentators have touted the Texas ERCOT market as the epitome of how a fully functioning hourly electricity market can deliver the economic signals needed to spur investment in new capacity. They further assert that this type of market can be technology neutral in what type of investment is made. The Federal Energy Regulatory Commission (FERC) largely adopted this position more than two decades ago when it initiated restructuring that led to the creation of these hourly markets, including the California Independent System Operator (CAISO). And FERC continues to take that stance, although it has allowed for short term capacity markets to backfill for reliability needs.

But now we hear that the Texas market is falling short in incenting new capacity investment. ERCOT which manages the Texas grid projects near term risks and a growing shortfall at least to 2024. At issue is the fact that waiting around for the gambler’s chance at price spike revenues doesn’t make a strong case for financing capital intensive generation, particularly if one’s own investment is likely to make those price spikes disappear. It’s like chasing the gold at the end of the rainbow!

This is another sign that hourly markets are not reliable indicators of market value, contrary to the view of proponents of those markets. The combination of the lumpiness of generation investment and the duration of that generation capital, how that new generation undermines the apparent value in the market, and the lack of political tolerance for failures in reliability or meeting environmental targets require that a much more holistic view of market value for these investments. The value of hedging risk, providing cost stability, improving reliability and resilience and reducing overall portfolio costs all need to be incorporated into a full valuation process.