The Texas Power Lottery
You Get What You Pay For, Especially with Electricity
This is another essay in Civic Way’s series on Texas’ recent energy debacle. Our first essays addressed the storm’s aftermath and chronicled the deregulation of energy. This essay focuses on possible strategies for Texas. Our next essay will outline some promising ideas for the nation. The author, Bob Melville, is the founder of Civic Way, a nonprofit dedicated to good government, and a management consultant with over 45 years of experience improving governmental agencies across the US.
The Texas energy fiasco was a result of state policies and external factors; avoiding another crisis will require a fuller understanding of all of these factors
Crafting a new energy management model, one that balances affordability and individual choice with reliability and responsible regulation, must begin with holding Texas politicians accountable
State leaders should improve deregulation, integrate the Texas grid with a new national grid and create a unified, robust state regulatory framework
To avoid massive future blackouts, Texas must add a capacity market to its deregulation model and require power generators to make the requisite investments in winterization
Texas should increase its use of and reliance on renewable energy sources
Texas should adopt a new strategy for engaging and informing its energy consumers
In today’s polarized political environment, it is easy to view the Texas energy debacle as a simple ideological clash between individual choice and the common good, deregulation and regulation, capitalism and socialism. Some have pounced on the tragedy to attack deregulation and anti-government policies. Some have blamed renewables, regulations and government.
As with most problems, the truth is more elusive and nuanced. The Texas energy fiasco was caused by several factors, some attributable to decisions made by state politicians, some well beyond their control. Forging a better path forward on energy requires a more objective and in-depth understanding of these factors, not only those unique to Texas, but those that affect all 50 states.
This essay tackles the home-grown causal factors, that is, decisions and conditions peculiar to Texas. It also offers some potential strategies for preventing future crises in Texas. Our next essay will move beyond Texas, striving to apply the lessons learned there to the rest of the nation, and introducing some plausible ideas for modernizing the nation’s entire energy management system.
Remember the Blackouts
In some cases, a conspicuous line can be drawn between a crisis and a state’s policies. That is true for Texas’ recent energy disaster. While the state’s policies were not the only root causes, the crisis would not have occurred without them. Texas’ leaders can—and should—be held accountable for their blunders.
Texas’ political establishment rolled the dice. They determined that most Texans valued cheap energy over reliable energy, unfettered markets over sensible regulations. They saw an opportunity to reinforce the state’s reputation for low-cost living. With federal acquiescence, they adopted policies that delivered cheap energy to consumers and short-term profits to investors, at the expense of reliable energy, especially during peak demand periods (like severe weather events).
Their bet was that Texas would always have easy, uninterrupted access to affordable, plentiful energy. And that the benefits of economical energy would outweigh the risks of power outages. They gambled that Texas’ isolated grid and moderate weather would not unduly strain their energy systems. That failing to require or even incentivize investments in emergency power needs posed minimal risks. This may not have an unreasonable bet, especially for climate change skeptics.
Regrettably, while their gambit paid short-term dividends, it ultimately came up snake eyes for hundreds of thousands of Texans. At one point, over one-third of the state’s generating capacity (34 gigawatts) went offline. Power shortages increased wholesale electricity prices by over 10,000 percent. Thousands suffered. Scores died. While some blamed renewables for the crisis (e.g., the Governor of Texas and the Wall Street Journal editorial board), available state data revealed coal and gas plants as the most significant culprits.
There is no phrase more closely associated with Texas than “Remember the Alamo.” Texans must show the same resolve in remembering what happened this February. They must confront what happened and apply those lessons to the future. And they must encourage their leaders to craft a new approach to energy management, one that strikes a reasonable balance between affordability and reliability, competition and market-based regulation, individual choice and the public good.
Rebalancing Deregulation and Regulation
Texas designed its grid to circumvent federal regulation. By staying within state borders, Texas’s power grid could evade national utility guidelines and its energy companies could earn profits under the cover of self-reliance. During the winter storm, Texas’ island grid limited its ability to import electricity from other grids as its generators went offline. In contrast, MISO, hit by the same storm, and El Paso Electric, on the Western Interconnection grid, drew power from other sources.
Even as it evaded the federal regulatory structure, Texas fragmented (and weakened) its own. In Texas, no single state agency regulates the power system. The Electric Reliability Council of Texas (ERCOT) , the nation’s first ISO, operates the power grid for the entire state except El Paso, the upper panhandle and parts of East Texas (over 90 percent of the state’s electric load. It runs the wholesale power market, but lacks regulatory authority. It is neithersubject to federal oversight nor effective state accountability.
The Texas Public Utility Commission (TPUC), a three-member body appointed by the Governor and overseen by the state legislature, oversees the state’s many electric and water utilities, but lacks an effective inspection program for power plants. The Texas Railroad Commission regulates the oil and natural gas industry. The state legislature is the only public body with the authority to mandate certain power generator practices (e.g., winterization), but has appeared reluctant to exercise this authority (at least until recently).
State leaders should support efforts to integrate the Texas grid with a new national grid and create a unified, robust state regulatory framework. They shouldn’t abandon deregulation, but rather strengthen it with a more effective grid and regulatory structure.
Planning for—and Investing In—the Future
Perhaps the state’s most glaring malfeasance was its utter contempt for the future. First, it failed to establish a functioning capacity market, fearing that it could inflate energy costs and damage the state’s low-cost reputation. Its laissez-faire market model paid producers for generated power, not peak demand power. As such, it offered no incentives to build reserves for accommodating peak demands. In contrast, other deregulated grids (e.g., PJM Interconnection) run capacity markets to meet peak demand.
Texas’ decision to forego a capacity market not only put its consumers at grave risk, but its power generators as well. Since they are paid only when they are selected to provide power, they sell power at low rates. This forces them to cut their costs and investments. Some also hedge their positions with set-rate contracts with financial institutions. When they go offline, they must buy power from the spot market to fulfill their set-rate contracts, often at a staggering loss. The most recent outages will likely bring a cascade of bankruptcies.
While the lack of a capacity market certainly put Texas-based power generators at a disadvantage, they did themselves and customers few favors. Despite a severe winter storm and massive power losses in 2011, and a subsequent FERC report recommending winterization investments, most Texas generators (including private and public generators) did little to prepare for extreme winter weather. And ERCOT failed to order energy firms to implement the FERC recommendations (it issued voluntary guidelines).
In contrast, El Paso Electric heeded FERC’s counsel. It built a new power station with dual-fuel capabilities and spent $4.5 million to winterize their facilities. As a result, only 3,000 of its customers lost power, of which 2,000 were restored within five minutes. In Round Rock, located just north of Austin (and within the ERCOT grid), upgraded its energy infrastructure after 2011 and had no major outages or boil water notices in 2021. Unlike power operators in colder regions, Texas failed to prepare for severe winter weather—or even institute a financial model to encourage its generators to do so—and it paid dearly for its negligence.
Will Texas change course? Will its leaders, generators, consumers and voters be willing to pay a little more to ensure more reliable power? To avoid future blackouts on the scale experienced in February, Texas must add a capacity market model and make the requisite investments in winterization.
Continuing the Shift to Renewables
One of the ironies lost in the debate about the Texas outages is the effect of deregulation on renewables. Despite the whining about renewables from so many Texas officials—and their media enablers—deregulation has encouraged greater use of renewables. The state’s obsession with short-term power prices and low costs has given renewables a substantial competitive edge over other sources, including natural gas.
Still, Texas remains heavily dependent on natural gas for power. It is a leading natural gas producer. During wintry conditions, natural gas provides about two-thirds of the state’s power (compared to 10 percent for wind turbines). The state enjoys large natural gas surpluses, but frozen pipelines prevented power generators from converting such surpluses into electricity. Thermal power plants running mostly on natural gas went off-line causing power losses five-fold those resulting from frozen wind turbines.
When the political noise subsides, Texas should renew its commitment to deregulation (coupled with a robust capacity market) and renewables. It should adopt policies and incentives to ensure that renewables continue to outperform expectations for extreme weather conditions. It also should explore strategies for offsetting the current restart advantages offered by coal-fired plants (e.g., new transmission and storage technologies).
Reconnecting with Consumers
Perhaps the most mystifying aspect of the Texas outages was the disconnect between utilities and consumers. As generators went offline and blackouts descended on most of the state, most consumers were left in the dark—literally and figuratively. Even utilities complained about the lack of warnings.
Even before the winter storms, Texas’ system was characterized by inconsistent customer service, utility management and accountability practices. For instance, in lieu of a state mandate, many power generators failed to file the requisite paperwork to register as emergency suppliers (and thereby avoid having their power cut off). No agency is required to report natural gas malfunctions that could cause or exacerbate outages.
As power becomes more distributed, and more consumers become generators, the need for more information and education will rise. Texas will need a new strategy for engaging and informing its consumers, including guidelines for preventing or mitigating outages, a statewide alert system for anticipated outages, a system for updating consumers during a crisis and better statewide disaster coordination and communications.
Moving Beyond Ideology in Texas
The energy issue is bigger than Texas politics. Bigger than self-serving press releases like Senator Cruz’s attack on California’s 2020 outages (“it is now unable to perform even basic functions of civilization”). More consequential than ideological stunts like the Lieutenant Governor’s proposed Star-Spangled Banner Protection Act. More impactful than inane calls for secession, a move endorsed most recently by the chair of the Texas GOP
Texas’ recent energy calamity demonstrated that Texas—despite its vast energy resources—cannot assure its citizens safe, reliable and affordable energy with rhetoric or ideological purity. It cannot effectively manage energy systems in a dynamic environment with an isolated grid, porous regulations and a myopic vision. It cannot treat energy as another binary policy issue and reasonably expect to serve the entire state.
Rather, the state’s leaders should find common ground. Instead of viewing every problem and solution through a prism of zealous partisanship, they should approach the issue as dispassionate problem-solvers. Replace pride with humility, self-righteousness with curiosity, bias with evidence. Whatever they call it, they should design an energy management model that reconciles the benefits of competition and consumer choice with those of regulation and the public interest.
Family Guy, Replacing Government
A modern, agile and efficient energy management model offers many benefits to Texans, including sustained economic growth, cleaner electricity, lower greenhouse gas emissions, more dependable energy, fewer outages and disruptions, enhanced consumer independence and significant savings (not only in energy bills, but in lower health and environmental costs).
Will Texas be humble and smart enough to learn from its mistakes?