Texas’s predicament stems from a decision that state lawmakers made about 20 years ago to abandon the traditional model of fully regulated electricity utilities. Still used across many areas of the nation, these electric companies — described as vertically integrated utilities — do not compete for customers and are allowed to earn a rate of return on investment. They can raise rates only with the permission of state regulators.
The deregulation of the California electricity grid in the 1990s generated profit opportunities by commoditizing electricity and creating trading regimes presented to voters as a way to lower electricity bills. The charge to “deregulate” the larger Texas grid was led by the innovative energy trading firm Enron. Gov. George W. Bush (R), his successor Rick Perry (R) and the state legislature bought into the free market narrative. The state split apart the utilities. Only the transmission companies and local distribution companies remained fully regulated by the Public Utility Commission of Texas — there’s no real need for a dozen power lines to one’s home.
The operation of the electrical grid was consigned to the Electric Reliability Council of Texas. It is a nonprofit consortium that operates the grid for about 85 percent of Texas. Understand, ERCOT has no ability to invest in generation or infrastructure. It acts only as the air traffic controller for electrons on the network. ERCOT is accountable to no one, but it reaps hundreds of millions in fees. Because it is contained within Texas, ERCOT is not subject to federal oversight.
ERCOT created a system whereby generators, companies that own power plants, compete by bidding to provide electricity for the “day ahead” and in real time during the day. It is called an “electricity only” market. Think of it this way: If the players on the Washington Nationals were paid in the same fashion, only those players on the field for the game that day would earn a paycheck. Everyone else on the roster would be unpaid. Players would offer bids to play for the next day, each undercutting the other.
Like the Nats in my example, the generators, to sell any of their power, often bid their power so low they don’t make a profit. Some generators, strapped for cash, began to defer maintenance. Others played an even smarter game by closing power plants or not building new capacity to serve the growing population of Texas. As demand inexorably increased, they could look forward to charging more for their electricity because there was less of it. Really, not much different than what Enron did in the California electricity market in 2000-2001. Except that market manipulation was illegal in California, but not in Texas, thanks to ERCOT. It was destined to come crashing down, and the polar vortex of 2021 was the assault that finally broke the Texas grid.
The blame game has some pointing to frozen wind turbines as the cause of the blackouts. But the real problem in Texas is that generators have no financial incentive to invest in their own assets and keep them ready for winter, because the less stable they are, the more money they charge for their power.
Resolving Texas’s energy debacle requires major structural changes. An expedient solution is to create a capacity market similar to those in other states wherein generators would be compensated to keep their equipment ready. A second option is to return to a vertically integrated market that is focused on reliability such that power is available every day and the utilities earn a guaranteed return on investment for building out capacity that may only be required a few days a year when demand peaks.
Ultimately, electricity’s value is not in the cost at meter, but rather what it allows us to do: care for the sick, conduct commerce, live in comfortable homes and communicate with our loved ones across the globe.
It’s not really a mystery as to what’s going on, yet Texas’s leadership, including the governor, is promising investigations. But without fundamental changes to the state’s power grid, another failure is certain and with it further loss of life. What’s scarier is that other states are looking at Texas for inspiration on how to deregulate their own electric markets. I’m guessing those politicians across the nation pushing deregulation are now watching us shiver and having second thoughts.