According to a recent Energy Alliance study, renewable energy producers in Texas are undercutting the prices of their competitors by selling electricity below costs, including marginal ones, in order to gain market share.
The practice is known as predatory pricing, explains Robert Michaels, a renowned energy economist and former Cal State Fullerton University professor.
“It means you're trying to get power over the market by attempting to eliminate your competitors,” Michaels told the Lone Star Standard. “You've taken a loss while you're engaged in this strategy but if it works out, your competitors will vanish and you will have a monopoly that could go on for a long time.”
Energy economist Robert Michaels
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For example, wind farms in Texas are selling wind units below their actual cost, according to Michaels.
“The full cost for the wind unit that imposes on the system is not the same as the cost that is operating it, which is zero because the system has to be firmed up and the wind turbines do not pay their freight,” Michaels said. “Everybody else pays it.”
The Electric Reliability Council of Texas (ERCOT) is the largest electricity market in Texas, operating the electric grid and managing the market for 75% of the state. The Energy Alliance report examines the effects of renewable generators in ERCOT's undercutting their competitors' prices.
“What is needed to ensure fair and market-based pricing is competition in which everybody pays the full cost or freight of what they are putting on the system,” Michaels said. “The difficulty is a wind turbine owner benefits because it is able to sell its power at the market price and it's able to do so only to the extent that there are other plants out there, which have to bear some of the costs and those people who bear some of the costs in most cases are likely to be consumers. Sooner or later it gets passed on to consumers, households, businesses, industries, and so on. Everybody pays part of that freight.”
As previously reported, a renewable generator receives a better return on investment than its competitors because of subsidies.
“These kinds of practices do not naturally occur because in a competitive market everybody does have to pay the full amount,” Michaels said. “A subsidy doesn't matter but here a subsidy comes about because it gives an advantage to people with wind units that they would not have if their output were actually contained."
The role that subsidies do play, particularly in Texas, is giving energy producers a break they would not secure in a competitive market in which generators stand on their own two feet, Michaels added.
“Any kind of subsidy makes something cheaper than it would be in an ordinary free market,” he said. “Here the subsidy takes the form of things like the production tax credit for wind units or accelerated depreciation, which gives them special treatment relative to conventional plants. It advantages wind to a degree, which it should not if you were going to have an efficiently functioning market where all the power sources paid their own way.”
