The Lone Star State could become ‘The Blackout State’

The Texas grid failed in February.The loss of electricity for millions caused scores of deaths and billions in damages. Now, we see that ERCOT’s peak summer capacity of 86,862 megawatts is inadequate as June 14’s demand reached almost 71,000 megawatts, and ERCOT is investigating why generation plants are offline. This is not a surprise.     

The recent bills signed into law by Gov. Gregg Abbott (R) fall dangerously short of addressing problems with the state’s electrical grid. Neither bill addresses the primary weakness of the market and neither bill assures Texans the grid will function in August, or next February.

Two decades ago, the Texas legislature claimed to have deregulated the state’s electricity market. But in reality, all they did was change how it was regulated and in a way that guaranteed a long-term decline in the stability of the grid. Yale professor Paul MacAvoy and I predicted that Texas deregulation would lead to a systemwide collapse. This year it happened.  

Here’s why the current system doesn’t work, and what is needed to fix it.  

For starters, understand that everything runs through ERCOT, the Electric Reliability Council of Texas. ERCOT alone decides who can sell electricity into the Texas grid. ERCOT alone buys the electricity, and it sets the price it will pay. 

ERCOT doesn’t guarantee a future price that would cover the cost of new plants or maintaining existing ones. So electricity generating companies that own power plants, windmills and solar panels have no incentive to make long-term investments in their equipment. This is not news to ERCOT; the organization’s Independent Market Monitor pointed this out in eight of the last 10 annual reports. 

Yet Texas didn’t act following the devastating 2011 winter grid failure. Quoting Yogi Berra, “It’s like déjà vu all over again.”  

Producers understandably do the bare minimum to stay in business. If future prices are not high enough to support generating costs, they will stop generating electricity. Without new plants, generating capacity can’t cover growing demand from an expanding economy and population. Little by little, ERCOT has fallen behind, and today it is only a matter of how often, not if, the grid will fail.   

However, there is a disconnect in the Texas market. Generators do not earn profits but The Wall Street Journal and KPRC-TV in Houston pointed out that Texas consumers spent $28 billion more in recent years than they would have in a regulated market. Where did the money go? No one in Austin seems to know.

The political obstacles are considerable. The commodities exchange (called ICE), where futures contracts on Texas electricity are traded, loves the current system because prices are volatile, and volatility means traders are highly active, generating fees for the exchange. These speculators have sometimes gotten special treatment. 

Another obstacle? The 1,876 pages of regulations and rules contained in the ERCOT Nodal Protocols apparently mean nothing. ERCOT’s interim CEO has stated that his predecessor did not follow the rules in February. ERCOT’s Independent Market Monitor demanded a $16 billion rebate to consumers — a finding embraced by the Texas Senate but not by the House or governor. The $16 billion should be recovered by the state’s attorney general, and anyone who broke the rules should face criminal charges.

But for now, the “free-market” Texas government mandates a bailout of companies and commodities traders, paid for by ordinary Texans via an additional surcharge of $15 to $20 per month for years to come, all to cover that one week in February.    

A special session can fix these fundamental flaws by doing two things.   

First, it must instruct ERCOT to provide generating companies with incentives to build and maintain plants and equipment, not just for today but for the future. 

Second, lawmakers need to redesign the Public Utility Commission and ERCOT board. Commissioners and board members should have zero conflicts of interest. This means no one can have a financial stake in any company involved in the production, transmission, or trading of electricity, nor should they be involved in the production of anything used to power generating plants.

Electricity is a necessity, not an opportunity for Wall Street profits. For a politician to say Texans would prefer blackouts to a viable energy market only shows how little they care about Texas and the people in it.  

Edward Hirs is UH energy fellow at the University of Houston where he teaches energy economics.