Five Myths of the Texas Power Crisis
Last year, I wrote about how California’s utility model lay at the heart of that state’s summer power problems, drawing parallels between it and Texas. In both states, as the Los Angeles Times recently noted, utility deregulation played a role. Customers were put at risk when the grid could not provide reliable power under a variety of operating conditions. In regulatory-speak, it was a failure to ensure “resource adequacy.”
To avoid more crises like what we have seen this past year, policy makers will have to come to terms with the root causes of what ails the utility sector in these states. That means debunking and rejecting some of the myths that have begun popping up. Among the biggest fallacies:
- The market is working, and no grid could have prevented something like this. The Texas market was built around the theory that high prices and market volatility would encourage generation investment, thereby achieving resource adequacy. But when a system is designed to run at the razor’s edge of scarcity and average citizens are at risk of losing power when they need it most, that is a market failure. No market should threaten the safety and well-being of citizens. Resource adequacy must be built into the system, and compensation must be provided for those resources that can provide it. In this regard, the regulated utility model has certain advantages which may better consider how resource adequacy is supported.
- If the Texas grid was just interconnected with the rest of the U.S., everything would have been ok. In reality, Texas’ insulated system likely prevented blackouts from spreading across a larger region. So, while it would have been helpful to Texas, itself, to be able to import more power, other states would have had that much less available to supply their own customers. While the Texas deregulated model is proving to have its own market design flaws, Texas being disconnected from surrounding states probably prevented neighboring citizens from paying the price for a deregulatory experiment gone wrong.
- This would not have happened if Texas and California had “capacity markets.” Capacity markets incentivize the availability of power in all situations but are still no silver bullet. They are complex and often conflict with state public policy goals. In addition, their incentives don’t always outweigh their penalties for failure to invest in resilience. So, while there is a grain of truth to this point, simply applying a capacity market to Texas and California without addressing the underlying issue of planning to have enough available generation during all sorts of weather conditions does not fix the problems deregulation caused – and certainly doesn’t turn the heat back on.
- It’s renewables' fault. The underlying premise that “you cannot run the grid on renewables alone,” is correct, but simply having fewer renewables would not help in these situations. The issue is how to encourage the retention of other generating capacity needed during times of system stress. In Texas, renewables appear to have performed as engineers predicted, but they were no match for a utility structure that doesn’t create incentives for having adequate resources to supply customers during a cold weather event.
- This is all just about freak cold weather. The reality is, the dangers associated with cold weather operations were well-known. The Federal Energy Regulatory Commission warned about the risks following a different regional cold weather-related event in 2011. Unfortunately, deregulated generators have little incentive to invest in winterization or fuel source security because tight markets are the name of the game. Without some reasonable expectation that they’ll have an opportunity to recover the cost of their investments, energy suppliers won’t spend on resilience on the mere chance that a one-in-twenty-year event will occur.
To be clear, even traditionally regulated utilities are not immune to difficult operating conditions, and even grids outside of Texas were stressed during the recent cold weather event. But avoiding Texas- and California-like crises in the future requires regulators who will oversee utility planning and investment to ensure the energy is available when communities need it most.
The analyses are just emerging when it comes to the tragedy of recent weeks, but one thing is certain: Resilience is crucial. This is why the regulatory tools that have worked well in the past are best positioned to meet the challenges of the future.
Tony Clark was a member of the Federal Energy Regulatory Commission from 2012 to 2016 and is a former Chairman of the North Dakota Public Service Commission. He is a Senior Advisor at the law firm of Wilkinson Barker Knauer, LLP, which represents clients in the energy and communications industries.