5 ms·

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 squ

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.
  - bryanlarsen 5y ago
    That was a one in a century or so storm. It was predictable.
    - jabl 5y ago
      How are you going to get investment money for a project that may, or with some probability may not, hit the jackpot sometime during the next century but otherwise lose money all the time?
    - denton-scratch 5y ago
      Why do once-in-a-century weather events seem to happen so much more than once in a century?
    - ocschwar 5y ago
      Predictable isn't good enough. Predictable is a reason for a government regulation. Without that, you need quantifiable. What is the probability of a polar vortex this year? (P) How many hours of high prices would that cause? (H) What will the price be during those hours ? (Pr) What is the probability that our grid uplink will go down and cut us off? (Pd) So, on the profit side: P x H x Pr x (1-Pd) Liability: What is the probability that our failure to winterize will cause a blackout? (Pb) How much damage will that cause ? (D) How much of it is our legal responsibility? (L) Pb x D x L Now: how much will winterizing cost? C The big question: C ?>? Pb x D x L + P x H x Pr x (1-Pd) Complicating factors: in Texas, L is 0. For everyone. And P,H,Pr, and Pd are all non-zero, non-negligible, but not quantifiable.
- jabl 5y ago
  Sometime ago I read an article (I don't remember the name or authors, sorry) that argued the problem with the old pre-deregulation vertically integrated utility model wasn't that the utilities were per se inefficient, but rather a form of regulatory capture. Namely the rate of return was fixed by regulation, so the only way to get more profits was by increasing capital investments. So that was what the utilities argued for to the regulators. Combined with the various Public Utility Commissions (PUC's, the bodies that handle the regulation) were more afraid of large-scale blackouts than high prices. So the result was a lot of excess capacity, which yes, increased reliability but also costs borne by the consumers. When the industry was deregulated, yes customers got to enjoy lower prices, but that wasn't per se due to some supposed higher efficiency of private operators, but because the incentive to overinvest had disappeared and customers were reaping the rewards of previous investments. Now, however, the chicken is coming home to roost, so to speak, as demand growth, retirements of old plants etc. have caught up with the previous excess capacity, so there is again a need for a cycle of investments. That will need to be paid for in one way or another.

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.
- bryanlarsen 5y ago
  That was a one in a century or so storm. It was predictable.
  - jabl 5y ago
    How are you going to get investment money for a project that may, or with some probability may not, hit the jackpot sometime during the next century but otherwise lose money all the time?
  - denton-scratch 5y ago
    Why do once-in-a-century weather events seem to happen so much more than once in a century?
  - ocschwar 5y ago
    Predictable isn't good enough. Predictable is a reason for a government regulation. Without that, you need quantifiable. What is the probability of a polar vortex this year? (P) How many hours of high prices would that cause? (H) What will the price be during those hours ? (Pr) What is the probability that our grid uplink will go down and cut us off? (Pd) So, on the profit side: P x H x Pr x (1-Pd) Liability: What is the probability that our failure to winterize will cause a blackout? (Pb) How much damage will that cause ? (D) How much of it is our legal responsibility? (L) Pb x D x L Now: how much will winterizing cost? C The big question: C ?>? Pb x D x L + P x H x Pr x (1-Pd) Complicating factors: in Texas, L is 0. For everyone. And P,H,Pr, and Pd are all non-zero, non-negligible, but not quantifiable.
jabl 5y ago
Sometime ago I read an article (I don't remember the name or authors, sorry) that argued the problem with the old pre-deregulation vertically integrated utility model wasn't that the utilities were per se inefficient, but rather a form of regulatory capture. Namely the rate of return was fixed by regulation, so the only way to get more profits was by increasing capital investments. So that was what the utilities argued for to the regulators. Combined with the various Public Utility Commissions (PUC's, the bodies that handle the regulation) were more afraid of large-scale blackouts than high prices. So the result was a lot of excess capacity, which yes, increased reliability but also costs borne by the consumers. When the industry was deregulated, yes customers got to enjoy lower prices, but that wasn't per se due to some supposed higher efficiency of private operators, but because the incentive to overinvest had disappeared and customers were reaping the rewards of previous investments. Now, however, the chicken is coming home to roost, so to speak, as demand growth, retirements of old plants etc. have caught up with the previous excess capacity, so there is again a need for a cycle of investments. That will need to be paid for in one way or another.