WILLIAM RAU
The massive, multi-day electricity blackout in Texas this February vividly highlights the importance of reliable electricity during extreme heat or cold. The economic cost to Texas from days without power will be close to $200 billion, or $75 billion more than the price tag for Hurricane Harvey in 2017. Over 5 million customers were left shivering in the dark and 350,000 had no power for four days. Blackouts hit minority neighborhoods first with the distinct possibility they were reconnected last. Finally, at least 57 people died from hypothermia in unheated homes: loss of life that could occur on a grand scale during a heat wave blackout.
Why the grid failure? Harvard economics professor William Hogan, the architect of Texas’s electricity market, offers a clue. Texas’ fully deregulated electricity market, he asserts “worked as designed.”
“Texas has gone all in,” William Boyd explains on Hogan’s laissez faire electricity mantra. Long before Hogan, Texas avoided interconnecting its grid to the huge, multi-state eastern and western grids which means its intra-state electricity market could escape federal government regulation. Texans opted for independence at the cost of reliability offered through the ability to import electricity from other states.
Currently, the misnamed Electric Reliability Council of Texas (ERCOT) cannot require its utilities to contract for and set aside “reserve margins” to cover periods of peak demand, as is the case for grid managers in the other 49 states. ERCOT is not even a state agency with regulatory power; rather it is a 501(c)(4) nonprofit corporation with staff hired mostly from power merchants and fossil fuel companies. It suggests changes but cannot order them.
Then, in 1995-1999, Texas ordered the complete deregulation of electricity sales. It rejected the foundational “just and reasonable” pricing principle in public utility law and let the “market” determine prices. Wholesale prices are set by daily trading at the ERCOT energy hub which is one of nine regional energy markets, and retail customers negotiate prices with retail energy providers.
With many large buyers and sellers, and increasing amounts of low-cost wind dragging prices down, the wholesale market works well; ERCOT’s trading hub usually has the lowest wholesale prices in the country. Thus, large, powerful customers have negotiated reduced electricity prices. In contrast, families have seen rates rise significantly. Texas retail customers pay substantially more than customers in Texas electricity co-ops or municipal utilities: in fact $1.7 billion more in 2019.
Texas is an extreme price outlier among 14 states with deregulated energy markets, possibly because other states allow retail customers to buy power from their “wires-only” utilities that have the muscle to negotiate low-cost electricity contracts on their customers’ behalf.
Instead, retail customers are forced to buy electricity from one of 30 retail providers, but there’s a catch. Two energy companies, NRG and Vistra, constitute a duopoly through control of 75% of the retail market. It appears that Texas has legalized price gouging by allowing a noncompetitive retail market with no right to opt out of the market.
There’s another catch. Texas is heading into the 2021 summer season with one of the lowest reserve margins in the United States. It also estimates peak summer demand by analyzing 20th century weather. A climate-denying, lowball estimate of possible peak demand, insufficient set-aside generation to meet a large peak, and the inability to import electricity from other states? Not good.
References
Boyd, William. 2021 (March 11). Pricing Power: Market Governance and the Texas Blackouts. Law and Political Economy Project; https://lpeproject.org/blog/pricing-power-market-governance-and-the-texas-blackouts/
Dobbins, James & Hiroko Tabuchi. 2021 (Feb 18). Texas Blackouts Hit Minority Neighborhoods Especially Hard. New York Times; https://www.nytimes.com/2021/02/16/climate/texas-blackout-storm-minorities.html
Halkias, Maria. 2021 (Feb 19). Griddy customers face $5,000 electric bills for 5 freezing days in Texas. Dallas News; https://www.dallasnews.com/business/2021/02/20/griddy-customers-face-5000-bills-for-5-freezing-days-in-texas/
Patterson, Scott & Tom McGinty. 2021 (Mar 8). Deregulation Aimed to Lower Home-Power Bills. For Many, It Didn’t. Wall Street Journal; https://www.wsj.com/articles/electricity-deregulation-utility-retail-energy-bills-11615213623?mod=hp_lead_pos5
Sparber, Sami. 2021 (Mar15). At least 57 people died in the Texas winter storm, mostly from hypothermia. Texas Tribune; https://www.texastribune.org/2021/03/15/texas-winter-storm-deaths/?utm_source=Energy+News+Network+daily+email+digests&utm_campaign=39d7a26332-EMAIL_CAMPAIGN_2020_05_11_11_46_COPY_01&utm_medium=email&utm_term=0_724b1f01f5-39d7a26332-89262483
Uribe, Raquel & Isabel Skomro. 2021 (Feb 26). Kennedy School Professor Who Designed Texas’s Energy Market Defends Skyrocketing Prices Following Winter Storm. The Crimson; https://www.thecrimson.com/article/2021/2/26/hogan-texas-energy-prices/