Texas power grid cries out for vast overhaul
Over the past week, we’ve heard countless Texas political leaders bemoan price-gouging by electricity providers.
In the wake of a devastating winter storm that brought the state’s electric grid to its knees and left more than 4 million Texans without power, stories emerged of customers who had been saddled with outrageous electricity bills.
The New York Times provided the example of Scott Willoughby, a retired Army veteran who lives in suburban Dallas. Last week, Willoughby’s life savings were cleaned out by a $16,752 power bill charged to his credit card.
Gov. Greg Abbott promised to protect Texans from getting “stuck with skyrocketing energy bills.” U.S. Sen. Ted Cruz tweeted, “No power company should get a windfall because of a natural disaster.”
These responses suggest we’re seeing the same strain of crisis exploitation that occurred when Hurricane Harvey hit the Texas Gulf Coast in 2017. In that case, convenience stores charged hurricane victims up to $99 for a case of water and $20 for a gallon of gas.
That was price gouging in its purest form. What we’re seeing now with electrical rate spikes is different. It’s a thoroughly predictable product of the system that Texas operates. Price gouging, you see, is built into the Texas electricity market.
It was only a year and a half ago that the state endured a few excessively hot summer days that drove up electricity demand and put the grid at risk.
Wholesale power rates went up 49,000 percent to reach the cap of $9,000 per megawatt hour established by the Electric Reliability Council of Texas (ERCOT), the nonprofit that operates the grid for most of the state.
The rate hike was the result of ERCOT’S energy-only market system, in which electricity is purchased from power-generating companies on a day-by-day basis, based on the perceived need at the moment. Under an energy-only system, when emergency shortfalls happen, rates go through the roof.
That system is in contrast to a capacity market, in which utilities compete in auctions to purchase electric capacity years in advance. The capacity market means higher short-term costs, but also more stable rates and more incentive for electricitygenerating companies to invest in new power plants and maintain their existing ones.
Most important, it means we can count on the grid to have the capacity it needs during periods of high demand.
After Texas suffered through a 2011 cold snap that led to rolling power blackouts, Donna Nelson, then the chair of the state’s Public Utility Commission, became a capacity-market convert.
“When industrial and commercial customers believe that Texas may not have an adequate supply of electricity,” Nelson said in 2013, “those customers may choose not to move to Texas.”
Consider this observation from a report on the 2011 Texas blackout debacle by the Federal Energy Regulatory Commission and the North American Electric Reliability Corp.: “Very high prices are an expected response to scarcity conditions, one that is built into energy-only markets.”
An NRG Energy study from the same period included an analysis by a Public Utility Commission consultant, the Brattle Group, concluding that a capacity market in Texas would cost $18.7 billion in a typical year, compared to $18.3 billion for the existing energy-only market.
But the higher cost of the capacity market would be “more than offset by the projected savings, reduced outage costs and statewide economic benefits of more reliable electric generation.”
As we go through the inevitable political post-mortems on what went wrong last week, our elected officials need to look beyond easy scapegoating and examine systemic problems.
In addition to a serious debate on the merits of the energy-only market, we need to consider moving Texas out of its current go-it-alone grid and into an integrated, multistate network.
We also need the state to mandate the kind of winterization of energy-generating facilities that was recommended in the FERC/NERC report a decade ago, but that was generally ignored by energy producers.
Bexar County Judge Nelson Wolff has made the persuasive case that the Legislature should revisit its 1999 move to deregulate the Texas electricity market.
In a February 19 letter to Abbott, Wolff said deregulation “unbundled public utilities” and split the industry into producers, distributors and retail sellers of electrical power.
Wolff pointed to CPS Energy, a city-owned utility that was insulated from the effects of deregulation, as an example of how this integrated system can work.
Wolff noted that CPS Energy had enough energy to power San Antonio during last week’s freeze but had to institute blackouts “to help ERCOT balance the statewide grid.”
The lesson should be clear: Forcing out ERCOT commissioners or firing off angry missives about power-generating companies won’t get it done. We need systemic change.