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Will February 2021 go down as the event that hobbles energy only market design for decades, as Enron set back deregulation twenty years ago? Should the events of Feb 2021 make us rethink our admiration for the simplicity and economic efficiency of an energy only market? A thread:
2/Would a capacity market have helped Texas weather this storm? I think the answer is no and maybe. No, because a higher reserve margin would not have helped TX given the extreme peak coupled with extreme outages.
3/TX would still have suffered mightily given ~50% of gas generators were offline due to lack of fuel and weatherization. A 15% or 25% reserve margin would still have fallen short (e.g. see the outages in nearby @SPPorg and @MISO_energy with more traditional capacity mandates)
4/But maybe, because a capacity market provides a mechanism to impose resilience requirements on generators to qualify for capacity payments. @isonewengland has been working on this – making sure “pay for performance” means you can perform during winter peak.
5/If that means firm gas contracts, dual fuel capability, or winterizing your plant (gas, wind or nuclear!), or all three, these sorts of resilience requirements would help. Another approach would just be direct regulation: PUCT could mandate these measures, and may do so now.
6/A key insight is that the promise of $9,000/MWh payments for generating during a crisis was not enough of a carrot to incentivize generators to winterize (even after the strong recommendations from FERC/NERC after 2011).
7/Direct regulation appears to be required to force markets to provide a public good (electricity) even if you would not choose to do it economically. A clear example of market failure, you need physical insurance (winterize the grid!) not just financial hedges.
