Is this the end of Texas’s Wild West electricity market?

The blackouts in Texas were more the result of poor planning than a fundamental market failure, some economists say.
The blackouts in Texas were more the result of poor planning than a fundamental market failure, some economists say.
Image: REUTERS/Adrees Latif/File Photo
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When the Texas electric grid crashed this week, fingers pointed faster than guns at a Wild West shootout. Conservative media outlets blamed wind turbines. The Electricity Reliability Council of Texas (ERCOT), which manages the state’s grid, clarified that frozen natural gas pipelines and power plants were really at fault.

But some economists took aim at the market itself. In 1999, Texas joined more than a dozen other states in “deregulating” its electricity system, meaning that it switched from a monopoly power provider to a marketplace of competing power plants and retail utilities. That deregulated market, some say, failed to provide sufficient incentive for companies to invest in winter preparedness.

This argument is missing some nuance. For one thing, this week’s winter storm was truly exceptional in its severity and reach; it’s not clear that even recommendations made after a similar 2011 winter blackout could have saved the day. The neighboring grid in Louisiana, which follows a traditional, vertically-integrated, regulated design, also experienced blackouts. Plus, deregulation advanced decarbonization; Texas leads the nation in wind power.

“I’m not convinced that a different market design would have led to a better outcome,” said Joshua Rhodes, a University of Texas-Austin energy scholar.

Rather than a truly “deregulated” market, the Texas grid’s participants are still subject to ERCOT and other agencies’ rules. So it’s possible for the state to allow competition while also exercising better oversight. To handle climate change, it will need to do just that.

How Texas could improve its power grid

Regulators could mandate winterization upgrades for both the electric grid and natural gas distribution pipelines, revise seasonal expectations, and ensure that not too many plants schedule maintenance at the same time, which was a problem this week. Other deregulated markets in the US also ensure reliability through a so-called “capacity market,” which essentially mandates that a certain amount of power be available (although this, too, only works with accurate demand forecasts). Texas could adopt that, and may also need to build more backup connections to the regional grid.

Can companies be trusted to make these changes on their own, or will they need to be strong-armed? This week, wholesale power prices in Texas went through the roof, which is how deregulation is supposed to incentivize change, Rhodes said. The flip side is that low-income households can wind up with crippling electricity bills, which is one reason why there could be a need to consider equitable, non-grid-based solutions to extreme weather, like targeted bill relief, public warming centers, and tax incentives for home efficiency upgrades.

When it comes to upgrading the grid, companies will need to decide how climate change affects the likelihood of future paydays, and how much capital spending homeowners and businesses are willing to stomach in their regular electric bills in exchange for reliability and lower prices during moments of crisis.

“Some power plants have made more money in the past few days than they have in years,” Rhodes said. “Will other companies act on that price signal? It depends how likely they think this is to happen again.”