A record-setting winter storm left many Texas households without power for days last week—and left those who did manage to get power stuck dividing a $50 billion electric bill, the product of a wild upward swing in wholesale power prices.
This is the gamble at the heart of a deregulated electricity market, in which companies compete to produce and sell electricity, as opposed to a monopoly system with rates fixed by regulators. In this kind of system, which covers about 60% of the US, consumers accept some price volatility in exchange for, in theory, lower rates and better service most of the time. Some types of retail contracts offer more insulation from wholesale price swings than others. But ultimately, all customers have to trust that the companies and officials running the grid will invest and plan in a way that will produce the greatest reliability at lowest cost.
The Texas example shows how ratepayers can be left holding the bag when that calculus doesn’t, or can’t, account for increasingly erratic extreme weather events. There are steps companies, policymakers, and homeowners can take to make the grid more reliable. They all cost money, and, one way or another, electricity consumers will end up with the tab. But a cleaner, more resilient grid could ultimately lower energy costs for everyone, many economists believe—if companies wise up about climate change and invest accordingly.
How to fix the electric grid
If Texans knew their winter weather was taking a permanent turn toward cold extremes, there are plenty of engineering solutions they could borrow from colder climes: Warming devices for wind turbine blades and natural gas pipelines, for example, or moving transmission lines underground to avoid falling trees and other hazards. Power companies may be forced to study those options, if governor Greg Abbott succeeds in his post-blackout push to require some degree of winterization by law.
There are also measures that would allow the state to make better use of its power generation resources. The grid, which in Texas is mostly isolated from the rest of the country, could be made larger, with more connections to other states; this would be especially helpful in balancing the flow of intermittent sources like wind and solar. At the same time, it can be segmented into smaller sections by hooking some neighborhoods or single big users (a hospital or factory) up to a microgrid, which runs off a few wind turbines or a small power plant and can be autonomous from the larger grid. Software-equipped meters and AI-driven grid management systems can allow operators to spread a lower amount of power more evenly when it’s in short supply, rather than having to completely black out some regions, and to tap rooftop solar, home batteries, electric vehicles, and other distributed sources.
The cost of fixing the grid
How much will all this stuff cost? Winterizing wind turbines adds about 5% to their cost of around $2-4 million; gas wells can be cold-proofed for $20,000-50,000 on top of their $5-9 million cost, according to S&P Global. Florida’s electricity utility, which is constantly at war with hurricanes, has spent more than $5 billion since 2006 on grid resilience upgrades. In California, beset with wildfires, the level of annual revenue utilities say they need to offset transmission line repairs and upgrades has more than doubled since 2005, to more than $3 billion; the cost of burying all those lines would reach $240 billion, according to BloombergNEF. In Texas, extending the reach of transmission lines to connect more zero-carbon power sources would cost $11 billion by 2035, according to a 2020 University of California study.
All that capital spending does eventually filter down to customers’ bills. For example, in California, average rates have gone up 25% since 2010, and are among the highest in the nation. But capital costs are just one piece of a retail electric bill, and rates aren’t particularly high in weather-vulnerable places like Florida or the upper Midwest. Good planning helps keep wholesale prices low—part of the reason California’s rates are so high is not because of wildfire costs, but because customers are still paying off the massive wholesale price spikes caused by the 2000 Enron energy trading scandal. In other words, Texas customers might have come out ahead, long-term, if more prudent investment had averted this month’s crisis.
“Will costs be higher if we modernize the grid and protect it against these events? Yes,” said Paul DeCotis, a utilities expert at the consultancy West Monroe. “But will the costs be higher than they would have otherwise been? The answer is no.”
Grid investments are a form of insurance
Ultimately, the costs of grid upgrades are well worth it if bad conditions occur regularly, said Ted Kury, director of energy studies for the Public Utility Research Center at the University of Florida. It’s like insurance. But, like with insurance, gauging risk is often contentious. Florida is a case in point: Storm hardening proposals there tend to be contentious even though hurricanes are a routine fact of life.
“No matter what you do, you’re going to annoy some people,” Kury said.
It doesn’t help that utilities’ track record on spending money on resilience isn’t great. Residential customers in Texas’s wholesale markets have already paid $28 billion more for power since 2004 than their neighbors in monopoly markets, according to a Wall Street Journal analysis, which suggests that the original promise of deregulation—better service at lower prices—hasn’t panned out. Nationwide, as spending on transmission and distribution systems has increased from $14 to $49 billion since 2000, overall reliability has gotten slightly worse, according to the research firm McKinsey.
A cleaner, better grid should save money
Climate change impacts are landing at the same time utilities are already dealing with other unprecedented challenges and expenses. Pressure is mounting to decarbonize, with Joe Biden wanting the nation’s grid to be 100% clean by 2035. Meanwhile, overall demand for electricity is growing, especially as more buildings and vehicles go electric, and could be 13% higher than today by 2035. But utilities still have reason to be nervous about investing in resilience, since they are also losing some customers to rooftop solar. High prices accelerate that process; solar companies are already ramping up their presence in Texas since the storm. That means the costs of grid upgrades will be spread among fewer households, particularly those that can’t afford to defect (although most US households are likely to remain on the traditional grid for the next couple of decades).
Yet a cleaner, more reliable grid should ultimately pay off. Using technology to more efficiently match distributed sources of supply and demand should lower utilities’ operational costs. Those power plants in Texas that did adopt winterization and stayed online during the storm made more money than they had in years. Every dollar spent on new connections between the main US grids saves consumers at least $2.50, according to the National Renewable Energy Laboratory. The UC study found that meeting Biden’s decarbonization goal would lower the cost of wholesale power by 10%, and avoid $1.2 trillion in health and environment damages. More efficient appliances and houses take pressure off the grid and can lower monthly bills even when rates go up.
“We’re pretty convinced that increased wholesale sales, and savings from lower-cost generation [sources like wind and solar] are fully capable of paying for that transition,” said David Wooley, executive director of the Center for Environmental Public Policy at UC Berkeley. “These numbers look really big until you realize that the sales figures are giant and they’re going to go up. So there’s plenty of room to spread those costs without hurting consumers.”
Can the grid change fast enough?
The Biden administration has promised to help with this transition, as part of a $1.9 trillion infrastructure bill that is currently in the works. The Department of Energy could increase its spending on basic grid tech R&D, and increase its provision of grants and loans to power companies making climate-savvy investments.
Outside of public funding, the question is whether the market can motivate businesses to make the right investments, fast enough. Most states with wholesale power markets, not including Texas, have a secondary capacity market, in which the operator pays some generators to stay available when they’re not needed. That may have helped Texas in this case. But grid operators like the Electric Reliability Council of Texas (ERCOT) have an even more important lever to pull to get power generators to do the right thing. They’re responsible for the seasonal demand forecasts from which companies take their investment cues. Those forecasts can only work if they account for climate change, which is an unfamiliar modeling challenge for utilities, and one that can be politically controversial in Texas.
“Businesses are typically not good at thinking about low probability events with big consequences,” said Mar Reguant, an energy economist at Northwestern University. “The grid will be cleaner and cheaper at the end of the day, but it could be a rough ride until we get there.”