Why the Texas electricity market failed

by John Quiggin on February 25, 2021

Some thoughts on the failure of the Texas electricity market to deal with unexpected cold weather, published at Inside Story. Focus on implications for Australia, but much of it should be of interest to US readers also.

{ 18 comments }

1

Max Sawicky 02.25.21 at 12:44 am

No disrespect to JQ, but Jamie Galbraith’s column on this is a must-read.

https://www.project-syndicate.org/commentary/free-market-utility-model-failed-texas-by-james-k-galbraith-2021-02

2

bad Jim 02.25.21 at 7:00 am

Both Quiggin and Galbraith are good, of course, but some of the problems Texas faced are due less to the structure of its market than to characteristics of its natural gas infrastructure, specifically that gas runs straight from the wellhead into the pipelines.

In places where gas is imported, which is to say nearly everywhere else, gas is stored in pressurized containers. In Texas the source was considered the storage, and the wells froze along with everything else. Gas plants and home heating were fed by the same failing pipelines, the pressure dropped, and nothing worked.

Most of the time the state contends with intense heat, so power plants are designed to maximize cooling. Retrofitting them to cope with occasional incidents of extreme cold would be awkward and expensive.

Actually, this is a golden opportunity for Texas, a state blessed with an abundance of wind and solar energy, to embrace the Green New Deal and replace their problematic fossil fuel plants with more resilient and economical alternatives.

3

Hidari 02.25.21 at 8:26 am

‘“Obviously, this week is like hitting the jackpot,” boasted Roland Burns, the chief executive and chief financial officer of Comstock Resources, a shale drilling company that benefited from the sudden demand for natural gas, in a call with investors last Wednesday. The price for gas, said Burns, has been “incredible.”

Marshall McCrea, the co-chief executive of pipeline firm Energy Transfer, told investors last Wednesday that his company has “been able to benefit,” given its ability to transport gas from storage facilities near Houston to power plants across the state. The company, McCrea said, has transported large volumes of gas in Texas and capitalized on “very strong commodity prices.” Energy Transfer, when reached for comment, said that McCrea’s comments “are pretty clear.”’

There was no market failure. Markets exist to ensure that companies and corporations make profits. Companies and corporations made lots of profits. Therefore this was not a market failure. It was a market success. The system worked to help those who set up the system (who set it up in their own interests, obviously, why wouldn’t they do that?).

Which is precisely what it was designed to do.

https://theintercept.com/2021/02/23/texas-winter-storm-gas-prices-executives/

4

Gorgonzola Petrovna 02.25.21 at 10:52 am

While there is no question that Texas energy system did fuck up, Galbraith, it seems to me, overstates the case. Electricity demand is not inelastic; surely households are likely to set their ACs higher and heaters lower, switch off some lights, postpone washing and dry on a rack, avoid using dishwashers, etc. when the rates are high.

As for market vs. regulated monopoly, I see no reason to believe that the latter would necessarily do better. It may or may not; it depends.

There is a way, though. Nationalize utilities, and assign an administrator responsible, vested with broad powers. The ‘czar’ of electricity. Now “every mistake has a name, surname and patronymic”, as Lavrenty Beria used to say. After each system hiccup, prosecute and shoot the administrator, and assign a new one. After two-three hiccups the system will work like a clock, I promise.

5

Orange Watch 02.25.21 at 2:16 pm

Hidari@3:

Except, of course, as bad Jim above you underscores, the system was not set up by or for shale drilling companies. They’re come-latelys who had a bonanza because the companies for whom the system was designed failed catastrophically. This is why we had the Texas governor talking about federal aid monies being directed to pay residential price gouging; the actors who were supposed to profit were suffering losses due to resource shortfalls and/or infrastructure damage.

6

Mike Furlan 02.25.21 at 3:38 pm

“There was no market failure”

And next will come “Disaster Capitalism” taking advantage of the current chaos to get no-bid contracts, new subsidies, regulatory “relief” a further erosion of consumer protection and talking points against the “Green New Deal.”

And in 2022, Texicans will go to the polls and vote in record numbers for the Republican party to signal their approval.

7

bad Jim 02.26.21 at 4:29 am

Texas uses more electricity than California, despite having a smaller population (74 GW for 29M vs 50 GW for 39M), which suggests that investing in efficiency would be profitable.

8

Matt 02.26.21 at 9:29 am

Electricity demand is not inelastic; surely households are likely to set their ACs higher and heaters lower, switch off some lights, postpone washing and dry on a rack, avoid using dishwashers, etc. when the rates are high.

For what it’s worth, my (Australian) power company charges different rates for both electricity and gas in different times of year and different times of day. I’m not sure if this is just based on predicted use, or on actual demand, but each bill I get has various different rates that I’ve been charged, based on (actual or predicted) demand. And, I do tend to put up with higher temps in my house during the day most days (even while “working at home”) than I do at night, when the rate is lower. If I were more conscientious I might try to do my laundry or run the dish washer in lower charge times, too. But — importantly — the differences are not huge, and the weather not extreme, so I can make due with this in a way that others might not be able to.

9

Barry 02.26.21 at 8:21 pm

“Electricity demand is not inelastic; surely households are likely to set their ACs higher and heaters lower, switch off some lights, postpone washing and dry on a rack, avoid using dishwashers, etc. when the rates are high.”

This has been covered in news article. You are giving the Econ 101 description.

10

KT2 02.26.21 at 10:20 pm

I realize my language is poor and my ignorance rich, (educate me) but…

JQ, imho you gave the central planning power to the wrong central planning power. 

Misattributed “centrally planned”. Your last paragraph at Inside Story reads;  “Such a system would maintain competition in generation and retail, but would otherwise be centrally planned.”

I find that the central planning can and should also be applied to the conservative and ‘market’ side. Central planning has little to do now, other than as a political concept, except to bludgeon any market reform, or dog whistle history & tribe.

‘Centally planned’ is simply “where the history, data, system, dynamics and action knowledge resides”.  

Do you call the capitol, legislature ‘central planners’?; why not? Republican State Central Committee? “The Politician”. The Electoral College? All seem to me to be appointees of central planning for disputed / command central decisions.

(** our current technology could cease ALL central planning tomorrow if we had immediate voting for everything for example. I am not suggesting we let that happen without being (centally!) planned and voted in by everyone.)

In other words, ‘they’ have the language wagging the dog, leading to your, imho, unecessary, one sided and reverse attribution of the use of ‘centrally planned “. Thanks Max Sawicky for this via Project Syndicate link Galbraith says:  “Texas had a self-enclosed energy grid, cut off from interstate commerce and thus exempt from federal regulations.”, which seems to me, centrally planned,  by making Texas a central node in a finite system. 

And in fact just because the institutional knowledge ‘may’ reside in a ‘central building at a fixed location where decisions are made and disseminated’, does not include the probable decentalised role of local generation vs weather / industry / special needs / profit usage etc. Aka the network. If we were topologists, wouldn’t everything be distributed and flexible? Topologists, any answers?

So the central planning I’d like to see highlighted, [ seperate post please] is the fuzzy but ‘central to’ planning of the gop, Texas repubs, gerrymandering, and the market. Central planning in a neolib market  base seems to be ‘concept collusion for my tribe’ – 

“Instead, Republicans, who have controlled every statewide office and both houses of the legislature since 2003, have prioritized social battles like Patrick’s national anthem crusade

The cold knows no planning,  central or diffuse.” [Huffpo link below]

No central planning in nature. Just whole system. Maybe ‘whole system planning’ instead of central.

Re Texas event, we could remove the nominal ‘market’ and replace it with ‘system’ or ‘needs’ and use language to highlight that ‘central planning’ is actually good for ‘human optimal equilibrium’ and or ‘long term sustainable economics and finance’. 

Otherwise the ‘debate’ (oops – ‘central planning gop legislature & centrally planned market optimizing department”) will continue to have language be at the central planners – gop rentiers – mercy.

Central planning examples???
● U.S. Treasury and Fed 
● CDC
● Swap relationships 
● State Dept
● IMF G7 G20
● “JP Morgan paid a billion dollars on April 1st to take control of a Chinese asset management fund. Why on April 1st?”
●” European Central Bank has to rely on BlackRock”
(central planning double?)
● “This is because BlackRock has the expertise to do it, nobody else has the expertise.” (which we lost or let BlackRock centrally plan and control) 
● my fave central planner Commander & Controller Larry Fink –  
“At the same time, Larry Fink has a financial markets advisory firm, which doesn’t make a lot of money and he claims is watertight from their other operations, which is advising governments around the world on the very questions you’re asking me. So what we see in this respect is how dependent these allegedly democratic states are on his expertise, which reflects the very fact that the system operates at the financial level through these types of private institutions  – [read ‘central planners]”
(quotes above from  https://theanalysis.news/interviews/pandemic-shows-need-for-democratic-central-planning-and-public-ownership-leo-panitch/ )

“Language is a process of free creation; its laws and principles are fixed, but the manner in which the principles of generation are used is free and infinitely varied. Even the interpretation and use of words involves a process of free creation.”
Noam Chomsky

“Political language… is designed to make lies sound truthful and murder respectable, and to give an appearance of solidity to pure wind.”
George Orwell

Investopia says:
– (bait n switch) Central Plan to ‘command’. 
– Economic to ‘central economy’. Market economy (my fave) 
“Centrally planned economies are different from market economies, in which such decisions are traditionally made by businesses and consumers.” – read imo as a dog whistle, and you are back to China or stalin or nazi germany “is often done by state-owned enterprises, which are government owned companies.”
– central planning now becomes  ‘command economies”, prices are controlled by bureaucrats.”

JQ, you have shown the failure of markets many times in many ways. Yet by continuing to use central planning in the manner used in Inside Story article, you are imho, just playing into the hands of the gop and Republicans and rentier monopolists. 

All language use can be to disempower & disemble any and everything associated with any word or concept ala cental planning. The dog’s tail wins language game. Therefore they win concepts, and future, and imagination of those listening. 70m at last count. 

And yes, in the above examples I am reversing ‘norms’, but this paragraph from theanalysis dot news,  shows capitalism does and will, especially in crises, be central planners. It is just that I feel this is what they do now, to a lesser or greater extent, but have language usage titled entirely in their favour.
“And it’s the same across the country and it’s essentially down to what Canada has when it comes to health care, central planning. But this is part of the irrationality of capitalism, as you just said, and it’s being so exposed because it’s killing thousands of people. And it’s more and more pushing that there’s going to have to be some kind of central planning, even like you’re talking about the Roosevelt type of direct federal work plan with massive infrastructure program.”

Ikonoclast agrees:
“The old Bogeyman of centralised planning! It’s ludicrous to suggest that centralised planning does not play a necessary and indeed central role in modern civilization.”
johnquiggin.com/2019/01/07/monday-message-board-403/#comment-203476

Thanks.

https://huffingtonpost.com.au/entry/texas-republicans-priorities-energy-grid_n_60353af4c5b6cc8bbf3eda06

https://www.investopedia.com/terms/c/centrally-planned-economy.asp

11

floopmeister 02.27.21 at 4:41 am

A great analysis – I would only expand upon this point:

Second, the system made it unprofitable for generators to invest in “winterising” their plants to protect them against rare extreme events like the polar vortex.

I see this as another example of the tension between a clear and sensible economic rationality (ie balancing up risks, costs and expected outcomes) and a more systems-focussed approach…

It is again the tension between Efficiency (in the traditional economic sense) and systemic Resilience.

Within which economic frame does it make sense to consciously invest in excess capacity (systems redundancy) to address the possibility of extreme events that the same economic decision makers do not see as likely?

<a href="https://anthonyrichardson.net/predictably-unpredictable/&quot; title="For a further explanation"

Essentially, focussing on system resilience (through redundancy) can often be economically irrational – especially when the losses do not accrue to those making the calculus (ie <a href="https://www.usatoday.com/story/news/nation/2021/02/24/ercot-board-members-resign-texas-power-outages/4572169001/&quot; title="the board of ERCOT")

12

floopmeister 02.27.21 at 4:44 am

A great analysis – I would only expand upon this point:

Second, the system made it unprofitable for generators to invest in “winterising” their plants to protect them against rare extreme events like the polar vortex.

I see this as another example of the tension between a clear and sensible economic rationality (ie balancing up risks, costs and expected outcomes) and a more systems-focussed approach…

It is again the tension between Efficiency (in the traditional economic sense) and systemic Resilience.

Within which economic frame does it make sense to consciously invest in excess capacity (systems redundancy) to address the possibility of extreme events that the same economic decision makers do not see as likely?

title=For a further explanation

Essentially, focussing on system resilience (through redundancy) can often be economically irrational – especially when the losses do not accrue to those making the calculus (ie title=the board of ERCOT)

13

OmegaCentauri 02.27.21 at 4:54 pm

bad Jim
One difference between California and Texas is that the later does a lot of petroleum refining, which consumes a lot of electricity. Also California has made efficiency an important priority going back decades. High rates have also driven some energy-intensive operations out of state. I regularly see Keep it Golden adds in California, which are promotions of efficiency and load shifting. During power emergencies there is strong response from consumers to appeals for conservation and load-shifting.

14

Michael Cain 02.27.21 at 8:38 pm

For purposes of accuracy… Despite its name, the Southwest Power Pool is part of the US Eastern Interconnect. El Paso is part of the Western Interconnect, and would have drawn on sources in New Mexico and Arizona if necessary. They do that routinely anyway — El Paso Electric owns 16% of the Palo Verde nuclear station near Phoenix, AZ.

15

Rapier 02.28.21 at 3:12 am

I’d read early on that Texas has little gas storage. Later I read that Texas has a very high ranking among states for quantity of gas storage. I am guessing that its storage total is due to the high production in the state and thus a central area for distribution to the rest of the country. So by my guess the storage is not meant to supply the states network and in fact that network only feeds the storage sites for gas exported out of state.
Only a guess mind you.

16

Alex SL 02.28.21 at 11:12 am

Hidari,

‘Market failure’ is defined in a way that makes this a market failure, as far as I understand: if profits are low, prices are stable, and the things need to happen, happen, (e.g. people get the stuff they need) a market works; if profits are high, prices are volatile, and/or the things that need to happen don’t happen, the market has failed.

The problem is not that people don’t understand that this is actually the market working as intended, because it isn’t the market working as intended. It is that people naively assume that any system that is under private ownership and deregulated will magically be a well-functioning market with stable prices and reliable supply*. And that is clearly not the case.

*) That most people do not actually understand that high profits are indeed a sign of market failure, of a failure of price competition to take effect, is a different topic.

17

GMcK 02.28.21 at 11:04 pm

The analyses by JQ and JG are reasonably good for non-native non-specialists. But the situation in Texas is more thoroughly gridlocked than you imagine, as can be seen by clarifying the responsibilities for the system design.

ERCOT is responsible for operating the electricity market and managing the production of the 377 power plants in the state. Their engineers failed massively in their duty to conduct an orderly process of load management and load shedding. They knew as much as a week in advance that demand was going to far outstrip supply, and don’t seem to have had any contingencies available beyond a few lightweight “rolling blackouts”. To date, seven members of the ERCOT board, who are all ex-power company officials, have resigned.

The Texas wholesale electricity market has a “planning” lookahead of two days. As you have observed, in theory prices under inelastic supply that can’t meet an inelastic demand can go to infinity when the market breakdown occurs; the $9,000/MW price is already an artificial cap. Compounding this is the quarter-to-quarter profit demand for public companies that prevents planning for once in a decade weather events, no matter how much infrastructure investment money hindsight would have recommended for those offline plants that missed a once in a decade ridiculously-high profit event.

The design of the electricity market in Texas is the responsibility of the Public Utility Commission and the State Legislature. The PUC chair mumbled her way through her hearings in front of the responsible legislative committees, and will probably keep her job. For the legislators, a once in ten years event is five election cycles away, far beyond the short memory of voters. A week and a half after the event, the temperature in Houston is in the low 80s, and the Dallas area is under severe storm and flood warnings. This tempest has already blown away and been replaced by other distractions; there remains little motivation for anything to change.

If I didn’t live in a heavily forested part of the state, I would invest in household solar power and battery backup, since they are less vulnerable to cold, and will do some good even when the sky remains overcast all day. As things stand, I’ll need to put more effort into winterizing my standby generator, and hope that the gas pressure remains adequate to keep it running the next time this happens.

18

Bruce W. Kahn 03.01.21 at 12:34 am

In 2011, another weather related power failure occurred. The FERC issued a report and recommended changes to the power infrastructure. The report fell on death ears and nothing was done.

In 2014, TCAP released a report contending that dergulation (or “restructuring”) of the Texas electricity markets had cost retail customers $22 billion more than they would have paid under the previous regulated regime. That report fell on deaf ears.

Two weeks ago the infrastructure nearly collapsed, and the market structure caused massive charges to some customers.

On February 24, The Wall Street Journal printed the article “Texas Electric Bills were 28 billion higher under dergulation”. https://www.wsj.com/articles/texas-electric-bills-were-28-billion-higher-under-deregulation-11614162780,

Has the state government been AWOL each time there has been a failure of restructured market to perform to the benefit of consumers? Why?

Did the legislature insufficiently analyze the impact on customers of the restructuring (deregulation) in the lead up to finalizing the law?

Is it normal for the Texas legislature or executive branch to make monumental industry decisions without charging a government agency to perform periodic reviews of the impact of those decisions?

Didn’t anyone in Texas at the state house or legislature remark on the higher prices paid by consumers between 2004 and 2014 when the TCAP report was issued? Why not?

Why didn’t this “deregulated” market behave like many competitive markets, i.e. competitive prices closer to cost?

Is this a market that is fundamentally a natural monopoly and the regulated “cost of service” serves the public best?

What value do retail electricity companies offer? Or are they empty middlemen with nothing to offer?

If the power crisis did not occur, would Texans continue to be totally oblivious of the potential for catastrophic outages and being ripped off by the retail electric providers in cahoots with the rest of the generators, transmitters, distributors and state officials?

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