Thu, 03/11/2021
This post is a summary of Episode 11 of The Nebraska Governance & Technology Center’s Podcast Series, Tech Refactored. Host Gus Hurwitz was joined by Lynne Kiesling, Co-Director of the Institute for Regulatory Law & Economics at Carnegie Mellon University.
Over the course of March 10th-17th, an unprecedented winter storm hit the state of Texas, resulting in rolling blackouts and power outages that left consumers without electricity, some for several days. Unlike many winter storms that cause outages as a result of downed power lines and damaged transmission infrastructure, Texas’s power blackouts were primarily a result of a loss of power generation capacity, as well unprecedented wintertime power demand that was needed to heat homes and businesses. The power outages resulted in damage to homes in the form of burst pipes, caused individuals to seek warmth in overcrowded shelters in the midst of the Covid-19 pandemic, and have unsurprisingly lead politicians and regulators to argue who was at fault, and what, if anything, this says more generally about Texas’s deregulatory approach to power generation.
Single-digit temperatures are exceedingly rare in Texas; therefore many buildings are not sufficiently insulated for extreme winter cold, and likewise rely on electricity, or a combination of electricity and natural gas, for their heating capacity. Just as electrical demand for heating was surging, Texas’s cold temperatures were causing enormous supply-side disruptions. 51% of Texas’s electricity comes from natural gas; when natural gas is removed from the ground, it is accompanied by water — when that water froze at the wellheads, they ceased to be able to produce the natural gas needed to power electrical generators. Likewise, a number of wind turbines froze because they had been weatherized to promote ventilation during Texas’s hot and humid summers, and nuclear power plants were taken offline when their sensors detected frozen water, even though the reactors themselves were unaffected.
Were these breakdowns a result of Texas’s reliance on privatization of electrical generation capacity? In order to contextualize the debate surrounding Texas’s regulatory approach to electrical power generation and the question of whether it was a factor in Texas’s winter energy crisis, Kiesling grounded the debate in a historical perspective. Prior to the 1990’s, electricity in Texas was predominantly supplied by “vertically integrated utilities,” municipal utilities that had a monopoly on the generation and distribution of electricity. In the late 90’s, Texas determined that the traditional monopolistic model was not keeping costs as low as the state would like, and sought to introduce a level of efficiency into the system by introducing free-market competition into the electricity sector by selling off power generation capacity to independent power producers.
A single area where a monopoly was maintained was in the physical transmission wires and the operation of the energy market; privatization wasn’t thought to make sense in that context because the supply of transmission wires represents a natural monopoly (it doesn’t make sense to have several power companies with their own set of wires running alongside one another as such a system would be unacceptably redundant). The Electric Reliability Council of Texas (ERCOT) was created to manage the physical electrical grid and the function of the energy market, organized as a 501(c)(4) non-profit corporation. Unlike other energy markets, ERCOT is entirely contained within the state of Texas, meaning it is not subject to federal regulation in the same way that it would be if it crossed interstate lines.
A second significant difference in the structure of Texas’s energy market is that it is an “energy only market,” meaning that the price electrical generators receive for their output is entirely determined by the going price in the competitive energy market (that is to say, it functions as a free market where individual generators compete to provide supply at competitive market prices). This is in contrast to other regional transmission organizations (RTOs) which enforce regulatory price caps that attempt to keep high energy costs from flowing through to energy consumers (technically ERCOT has a price cap as well, but at $9,000/MWh, compared to most United States RTOs that cap prices at $1,000/MWh, it rarely comes into play). In those RTOs where price-caps operate, the producers are then paid to build extra capacity and keep it available, because the price caps effectively disincentivize the building of additional energy production that might be idled during periods of weak demand.
Hurwitz offered an overview of the ways in which the Texas energy crisis has been spun by political actors across the political spectrum. “If you are on the traditional right, then ‘the renewables are to blame because the windmills failed’ — (the windmills) did not fail, or to the extent that they did, it was a very small part of the overall problem. Most of the renewables continued to work just fine.” Likewise Hurwitz challenged the narrative from the left that Texas’s disaster was a function of deregulation — “ERCOT was regulating just like any other regulator would. And any other regulator would have made the exact same predictions, they would have authorized the exact same plant reparation, (knowing that) lots of plants go down every winter because in Texas that’s when you do maintenance work. So we probably would have had the exact same issues if we had any other regulatory system in place.”
Kiesling explained that the breakdown in Texas’s electrical system was not a function of a general inability of the market to supply electricity during periods of peak demand, but instead a failure to predict the full scope of when those periods of peak demand would occur, and to weatherize systems accordingly. The infrastructure in Texas is well suited to meet periods of high demand during Texas’s hot and humid summer, where the key to maintaining capacity is ventilation; ensuring the infrastructure doesn’t overheat. Unfortunately, that very form of weatherizing is counterproductive during periods of exceptional cold, where insulation is essential. The issue, for Kiesling, is that the recent cold snap was really a “one in 20 or 30 year event, or to put it statistically, an extreme tail event, and an extreme tail event in the opposite tail of what the systems are engineered to do.”
So what is the solution to preventing catastrophic winter weather-related grid failures from occurring in the future? While Kiesling felt that interconnecting the Texas grid with other electrical grids in a more substantive way (some relatively modest interconnection already exists) might help mitigate the risk somewhat, she felt that the size of the state and the diversity of its energy resources made that solution of limited benefit. Instead, she suggested approaching the problem by identifying “what are the cheap and effective ways that we can assign legal liability” such that the least cost avoider is tasked with limiting the potential for these catastrophic losses. Secondly, she proposed that ERCOT might implement a market rule that requires generators who want to participate in the energy market to have an insurance certificate that verifies that they have weatherized their facilities up to a set of agreed-upon standards. She also proposed that there might be ways to introduce “demand-side flexibility” whereby energy consumers could choose, through smart thermostats, to automatically lower the heat in their homes if consumer energy prices exceed a certain threshold, reducing their energy costs and lowering the demand on the grid. Finally, she noted that consumers may choose to install household generators or battery capacity in their homes in order to hedge against high prices during peak periods of demand; a solution, Hurwitz pointed out, that would only be viable for the portion of Texas’s population with the financial resources to make such substantial home investments.
Where does Texas go from here? At the time of writing, 7 members of ERCOT’s board of directors have resigned, and governor Greg Abbot has called for an investigation into ERCOT’s role in the power failures. Whether such an investigation will lead to regulatory changes in a state that prides itself on its regulatory soft-touch remains an open question.
