Three things every state can learn from the Texas utility meltdown

Late-night hosts and pundits were quick to poke fun at the Texas power system when scenes of winter storm devastation there began rolling in. But the challenges facing Texas are not unique to Texas. Similar organizations control electricity in much of the country, and utilities everywhere face damage from severe storms. The struggles facing Texas today could be yours tomorrow. So, what can we learn from Texas’s woes?

Reliability isn’t always rewarded

Wholesale power markets serve about 60 percent of the United States. These markets, where power companies compete to sell their electricity, incentivize low-cost production. Companies offer their electricity, typically at a price per hour, on exchanges run by operators like Texas’s ERCOT. Those operators figure out how much electricity is needed across the regions they serve and choose the lowest-cost bidders to supply it — meaning power generators have an incentive to bid low and sell as much electricity as possible.

Power companies in Texas are facing criticism that they weren’t prepared for extremely cold temperatures. But a company that decides to invest in winterization will have higher costs than its competitor and may be forced to charge more, potentially losing out on opportunities to sell its electricity. Despite being better prepared for severe weather, the company that winterizes may have a more difficult time staying in business. A competitive market lets each power generator decide what makes it sustainable in the long run. That’s also a weakness of the market.

The customer isn’t always right

In Texas and 15 other states, some customers can choose their electricity supplier: not the company that delivers power to their homes, but the company that purchases power for them on the wholesale market.

They don’t all pay electricity costs in the same way. Some customers chose rate plans that fully exposed them to the risk of the wholesale market in real-time. This is the equivalent to a car owner who chooses auto insurance with a low premium, but not much coverage. If something goes wrong, the driver is facing a big bill. And while those customers can mitigate risk by driving carefully, a household doesn’t have much control over the risks of wholesale power markets. A big, sophisticated business customer might employ energy managers to mitigate the risk of consuming power when prices are high, but the average household doesn’t have that ability.

We often assume that customers make informed choices that weigh risks and rewards. The Texas situation shows us that it is very difficult to evaluate the risks associated with extreme events, especially when you’re more concerned with paying your bills.

Improving reliability is everyone’s responsibility

Everyone has a role in improving grid reliability. The utility has to do the work and has the best information on the costs. The regulator has to ensure that the costs provide commensurate benefits for the consumers. The government provides the framework, and the people need to make sure that their concerns are being heard. To move forward, communities need to answer these questions:

• What types of events should people be protected from? We can always make a system more reliable by spending more money, but does that represent value for the people?
• How do we pay for resiliency? Costs could be assessed based on the number of kilowatt hours each household uses or a flat fee per customer, which could benefit heavy electricity users. Or they could be covered through new taxes. How will decision-makers respond a year from now, when people ask, “The weather is great, and the system is doing fine, so why am I paying more for my electricity?”
• How does money consumers pay to improve the system translate into projects? Who would disburse the money? Who is ultimately responsible for implementing changes and accountable if things don’t improve?

Communities need to determine how these changes affect the goal of the electricity industry: providing safe, reliable service at fair and reasonable rates. Without those answers, the suffering we saw in Texas could happen anywhere.

Theodore J. Kury, Ph.D., is director of energy studies at the University of Florida’s Public Utility Research Center.