Texas still has the freest electricity market in the country, despite government interference

There’s an old saw about the optimist talking with the pessimist. The pessimist says “things are so bad, they can’t get any worse.” To which the optimist replies “oh yes they can!”

Tuesday’s election returns are proving that the Texas electrical market is a shining example of this old chestnut. Texas did not have any statewide candidates on the ballot, but it did have a whole host of ballot measures, including one, Texas Proposition 7 (Prop 7), that recently passed and will make significant changes to the nature of power generation in the state. Prop 7 authorizes Texas’ electrical regulator—the Public Utility Commission (PUC)—to make grants and loans to encourage energy companies to build or upgrade dispatchable power plants.

Many electricity experts have expressed opposition toward Prop 7. The PUC doesn’t have any expertise in running a bank and it’s not clear that generators need to be given billions in subsidies in order to invest in power plants in Texas.

The criticisms of Prop 7 are valid. At the same time, the changes that have been made should not be exaggerated. Texas remains one of a minority of states where people are allowed to choose their retail electric provider. In most of the country, an individual only has one choice when it comes to electric service: a local monopoly utility. Most states where retail choice is available gives preferential treatment to the utility as a retail provider, which discourages the development of a robust competitive retail market. Texas, by contrast, has effectively “quarantined the monopoly” allowing retail competition to thrive.

The market for generation likewise remains free and open. While government bureaucrats have gotten involved in the process more than they should, decisions about how and whether to invest in generation are still ultimately made by the market, rather than by top-down planning.

One main concern about Prop 7—and other recent changes to the electricity market—is Texas moving toward the creation of a capacity market. A capacity market is a mechanism meant to ensure that the grid has adequate capacity to meet demand throughout the year. Power plants receive payments to be available to generate when called upon.

Texas has traditionally shunned a capacity market approach. Instead, generators get paid when they actually produce energy, and this is assumed to provide the necessary incentive for investment in new capacity. Capacity markets can be expensive, and are in bad odor in Texas due to the fact that they amount to paying power plants to sit around not producing power. Initiatives like Prop 7 could be thought of as attempting to do the same thing as a capacity market through more convoluted means.

Here’s the thing, though. Every other state that has competition already has a capacity market. Even the passage of Prop 7 doesn’t make the overall picture of competition in the state worse than elsewhere in the nation.

None of this is to dismiss concerns about the direction the Texas electric market has been moving over the past two years. Those criticisms are sound, and those who value the Texas model are right to oppose increased government interference in the electric system. But let’s not lose perspective. The Texas system isn’t perfect, but it remains the freest and most competitive system in the nation.