4 ms·

I havent studied this in depth, but my intuition tells me that having capacity payments such that the grid as a whole has sufficient overhead for extreme events

I havent studied this in depth, but my intuition tells me that having capacity payments such that the grid as a whole has sufficient overhead for extreme events nullifies any "efficiency" arguments for having these market mechanisms in the first place. Call me crazy, I think that Texas is doing exactly what it set out to do with deregulation. Run the grid more efficiently via market mechanisms. The method that is used to make the grid more efficient is simply to shave off the traditional 20% capacity overhead meant to cover these sorts of situations. There you go, slightly cheaper electricity 99% of the time.

selectodude 5y ago
And then the long-tail events completely wipe out decades of savings. Griddy was charging over $9/kwh last year.
- abathur 5y ago
  It's worth clarifying that Griddy wasn't "charging" these rates in an effort to gouge, nor was this rate an active decision they made during the crisis. (You likely know this; just providing context for casual readers.) Griddy charged a fixed monthly subscriber fee, and then passed through delivery charges, taxes/fees, and the 5-minute wholesale electric rate (IIUC, as set by the ercot market). These all came out of pre-paid customer deposits, generally backed by auto-pay when the account was below some amount. Griddy "charged" $9/kWh intermittently while demand was outstripping supply but the system was largely stable. This model was approved by the (de-)regulators. After the large-scale blackouts, the public utility commission pegged the rate to the regulatory cap in the market for a few days. This was ostensibly to ensure maximum incentive to bring all possible generation back online (though plausible, I personally suspect this ended up just being a reward to large operators who owned both plants that were part of the problem, and plants still online to rake in market-cap rates for several days.) Any retail power companies whose pockets weren't deep enough to stay solvent while paying ~200x normal wholesale rates for several days went under. In Griddy's case, bankruptcy was a step removed; these rates were passed through to customers via autopay until the transactions stopped clearing, either because the account was empty, or the customer removed the payment method. IIRC none of the providers were legally allowed to cut customers off during the emergency, so these turned into massive bills (though I think Griddy clarified pretty quickly that they wouldn't be pursuing anyone for these). Since Griddy was a pre-pay service, I doubt they had enough of a buffer to absorb these whole-sale costs without payment for long.
  - deleted 5y ago
    [deleted]
ocschwar 5y ago
Capacity payments ARE a market mechanism. It's like paying the ambulance squad for answering your call when you need medical help, and paying the ambulance squad to exist in the first place regardless of whether you call. Both services are valuable. And both of them can be paid for in a market mechanism.
- cool_dude85 5y ago
  >Capacity payments ARE a market mechanism. Yes, I think maybe my post wasn't clear enough. The usual justification for deregulation as in Texas, California, and other states is the supposed improved efficiency of generation assets as a result of these market mechanisms. I claim, to be fair without evidence, that the way these "efficiencies" are realized is to cut down on surplus capacity. As such, the existence of capacity fees and/or capacity markets, as they provide incentive to build surplus capacity, seem to me to be an argument against the existence of the market mechanisms at all. Simply: 1 - We need to deregulate because it will make generation more efficient. 2 - The only real way to make generation more efficient is not to have surplus capacity (this is my own claim). 3 - Market mechanisms are needed to incentivize surplus capacity, or else we wind up with blackouts. I think that the fact that point 3 seems to follow is in fact a clear argument against point 1. Why deregulate if not for the supposed efficiencies in generation? If they're eaten up as soon as we have a separate market mechanism to incentivize surplus capacity, then the two markets don't do anything but justify one another. Just go back to vertical integration and be done with it.
  - ocschwar 5y ago
    SO here's the thing: " 3 - Market mechanisms are needed to incentivize surplus capacity, or else we wind up with blackouts." Market mechanisms DO incentivize surplus capacity. There are peaker plants stationed all over the US that operate under 24 hours a year. The rest of the time they're either paid to be on standby through a capacity auction, or they're just not paid. SOme of these plants also exist in Texas. And they are there because companies crunched the numbers based on past data and saw that the money coming in for those few hours is enough to cover that whole year. The thing is, those high pricing events, which usually happen during heat waves, are something you can quantify: how often do they happen, how much money can you make, how much money will it cost to set up and wait for those events. Probabilty and severity are both quantifiable. The polar vortex events that hit Texas this year, last year, and 10 years ago, are something that is not quantifiable. I know, because otherwise my company would be quantifying it. SO it's high severity, incalculable probability - ergo a black swan event. The market cannot deal with those.
hiptobecubic 5y ago
I don't think "let's save $5 a month and then have a catastrophic blackout" was a goal. I think it was the usual handwavey "the market will solve everything because good markets are so efficient" argument, which turned out as it usually does because the market isn't good.

selectodude 5y ago

And then the long-tail events completely wipe out decades of savings. Griddy was charging over $9/kwh last year.

abathur 5y ago
It's worth clarifying that Griddy wasn't "charging" these rates in an effort to gouge, nor was this rate an active decision they made during the crisis. (You likely know this; just providing context for casual readers.) Griddy charged a fixed monthly subscriber fee, and then passed through delivery charges, taxes/fees, and the 5-minute wholesale electric rate (IIUC, as set by the ercot market). These all came out of pre-paid customer deposits, generally backed by auto-pay when the account was below some amount. Griddy "charged" $9/kWh intermittently while demand was outstripping supply but the system was largely stable. This model was approved by the (de-)regulators. After the large-scale blackouts, the public utility commission pegged the rate to the regulatory cap in the market for a few days. This was ostensibly to ensure maximum incentive to bring all possible generation back online (though plausible, I personally suspect this ended up just being a reward to large operators who owned both plants that were part of the problem, and plants still online to rake in market-cap rates for several days.) Any retail power companies whose pockets weren't deep enough to stay solvent while paying ~200x normal wholesale rates for several days went under. In Griddy's case, bankruptcy was a step removed; these rates were passed through to customers via autopay until the transactions stopped clearing, either because the account was empty, or the customer removed the payment method. IIRC none of the providers were legally allowed to cut customers off during the emergency, so these turned into massive bills (though I think Griddy clarified pretty quickly that they wouldn't be pursuing anyone for these). Since Griddy was a pre-pay service, I doubt they had enough of a buffer to absorb these whole-sale costs without payment for long.
- deleted 5y ago
  [deleted]

ocschwar 5y ago

Capacity payments ARE a market mechanism. It's like paying the ambulance squad for answering your call when you need medical help, and paying the ambulance squad to exist in the first place regardless of whether you call. Both services are valuable. And both of them can be paid for in a market mechanism.

cool_dude85 5y ago
>Capacity payments ARE a market mechanism. Yes, I think maybe my post wasn't clear enough. The usual justification for deregulation as in Texas, California, and other states is the supposed improved efficiency of generation assets as a result of these market mechanisms. I claim, to be fair without evidence, that the way these "efficiencies" are realized is to cut down on surplus capacity. As such, the existence of capacity fees and/or capacity markets, as they provide incentive to build surplus capacity, seem to me to be an argument against the existence of the market mechanisms at all. Simply: 1 - We need to deregulate because it will make generation more efficient. 2 - The only real way to make generation more efficient is not to have surplus capacity (this is my own claim). 3 - Market mechanisms are needed to incentivize surplus capacity, or else we wind up with blackouts. I think that the fact that point 3 seems to follow is in fact a clear argument against point 1. Why deregulate if not for the supposed efficiencies in generation? If they're eaten up as soon as we have a separate market mechanism to incentivize surplus capacity, then the two markets don't do anything but justify one another. Just go back to vertical integration and be done with it.
- ocschwar 5y ago
  SO here's the thing: " 3 - Market mechanisms are needed to incentivize surplus capacity, or else we wind up with blackouts." Market mechanisms DO incentivize surplus capacity. There are peaker plants stationed all over the US that operate under 24 hours a year. The rest of the time they're either paid to be on standby through a capacity auction, or they're just not paid. SOme of these plants also exist in Texas. And they are there because companies crunched the numbers based on past data and saw that the money coming in for those few hours is enough to cover that whole year. The thing is, those high pricing events, which usually happen during heat waves, are something you can quantify: how often do they happen, how much money can you make, how much money will it cost to set up and wait for those events. Probabilty and severity are both quantifiable. The polar vortex events that hit Texas this year, last year, and 10 years ago, are something that is not quantifiable. I know, because otherwise my company would be quantifying it. SO it's high severity, incalculable probability - ergo a black swan event. The market cannot deal with those.

hiptobecubic 5y ago

I don't think "let's save $5 a month and then have a catastrophic blackout" was a goal. I think it was the usual handwavey "the market will solve everything because good markets are so efficient" argument, which turned out as it usually does because the market isn't good.