Texas—and free market competition—survive heat wave
Price formation in electricity markets typically is a combination of the short-term price formation via “energy markets” and the longer-term price formation via “capacity markets,” as the R Street Institute explains. Most grid operators determine a need for capacity and then have power plants bid into a capacity market to ensure that such need is met at least cost. Capacity markets act as a sort of insurance policy, and this structure allows power plants that rarely produce electricity to have reliable revenues and remain online. In contrast, energy markets, which form prices strictly based on short-term supply and demand, are riskier but more accurately reflect the momentary cost of delivering electricity.
