The Texas Power Grid Failure is More Complicated than Green v. Carbon

The hyper-partisans have already been using the power grid failure as grist for the renewable energy versus fossil fuel debate. However, while the mix of power sources was played a role in the current crisis, it was not the main culprit. Its origins relate to more fundamental issues about markets versus regulation and that all too common human trait – procrastination.

To unwind what is happening this week, we have to begin with the State’s decision to largely deregulate electricity generation in 1999. The legislation, Senate Bill 7, was bipartisan with an equal number of Republican and Democratic co-sponsors. That legislation separated the generation of electricity from the distribution of it. The distribution companies, like Centerpoint in most of the Houston region, were forced to give equal access to their distribution systems to all generation companies. Electricity was deregulated to keep prices down. While there is some debate about how effective it has been at that, it is unquestionably true that Texas has some of the lowest electricity rates in the country.

The bill set up the Energy Reliability Council of Texas (ERCOT) to manage the flow of the generation into the distribution systems. ERCOT is basically a co-op. Its members are various commercial enterprises engaged in the business of generating or distributing electricity.

Its board is controlled by those entities; however, state law gives the Public Utility Commission (PUC) considerable oversight authority, and the PUC Chair is an ex officio member of its board.

A retired electricity executive told me a rough way to think about the relationships is to think of ERCOT as Amazon. The generators are the suppliers of “products” to ERCOT and the distribution companies, like Centerpoint, are the UPS/FedExs.

According to ERCOT almost all of Texas’ power generation comes from natural gas (46%), wind (23%), coal (18%) and nuclear (11%). The other common sources – hydro, solar and geothermal are de minimis.

As nearly as I have been able to sort out, the problems of the last few days boil down to two issues.

The first is the cold shutdown of many of the power generation facilities. ERCOT in a press release said at the height of the crisis that about 28,000 MW of fossil fuel power was offline and 18,000 MW of wind power. That was nearly half of the state’s generation capacity.

This is where the fossil fuel versus renewables debate has some relevance. While every source was affected, wind unquestionably failed at a much higher rate than did the fossil fuel plants.1 The great thing about wind is that it is very cheap power; the problem is that it is more affected by weather conditions than are fossil fuels, and therefore relatively less reliable. As fossil fuel plants (primarily older coal plants) have been replaced by wind, the system has become less resilient to extreme weather events.

The relative reliability of generation sources affects the calculation of something the industry refers to as “reserve margin.” The reserve margin is a calculation of how much extra power is available above what might be demanded. It is obviously affected by both the demand for electricity and the amount available from all generators at any particular time. The more unreliable the sources providing generation are, the greater the reserve margin needed to deal with potential shortages from either a spike in demand or a drop in production or a combination of the two. So, the greater the amount that renewables contribute to our system the larger the reserve margin will need to be.

The critical issue to me, however, is that Texas is alone in the country in not having an enforced reserve margin. Instead, Texas relies on the operation of the market to insure there is an adequate reserve. Ironically, just last month consultants engaged by ERCOT did an extensive study on the reserve margin in Texas. This was the most telling statement in the entire study:

“ . . . unlike all other electricity systems in North America, ERCOT does not have a resource adequacy reliability standard or reserve margin requirement.”

Estimation of the Market Equilibrium and Economically Optimal Reserve Margins for the ERCOT Region for 2024, p. 5.

In other words, Texas does not enforce reliability and a minimum reserve requirement through regulation, as does every other state. According to ERCOT, generators must file winterization plans with it, but ERCOT exercises minimal oversight of generators’ compliance with the plans.

This study clearly shows the risk of losing power in a severe weather event is possible, although perhaps not probable. This Houston Chronicle story documents how previous winter storms had prompted federal regulators to warn that generators should beef up their winterization precautions. So we can hardly say these was completely unforeseen.

This is a place where the market fails to meet the public’s expectation. In an unregulated market, it makes no sense for an investor to spend money to take precautions might be needed only once a decade. If they do, another generator will not and will thus be able to undercut the more cautious generator’s price. This is akin to the concept in economics known as the tragedy of the commons where a cost (in this case of making generation more reliable) is not fully reflected in the production of a good or service but ultimately will be borne by society generally – in this case in form of plumbing bills to fix broken pipes, of example.

If every generator is required to meet certain reliability standards, that will be reflected in the cost of all generators and thus no one generator can obtain a competitive advantage from supplying electricity from a less reliable source. Of course, that enhanced reliability will come at a cost, one that I suspect will favor fossil fuels while being more challenging for wind and solar. It is possible that some sources will just be inherently less reliable. In that case perhaps they should pay a surcharge to create extra standby capacity.

But whatever mechanism is used to make generation more reliable, it will be reflected in higher costs that will be ultimately paid by consumers. Determining the proper balance between risk and the costs will not be easy. One of the problems with turning it over to a regulatory scheme is that regulators tend to err on the side of caution, driving up costs. But it appears to me that we, at a minimum, are going to have to have a serious conversation about this trade-off.

The second issue that has baffled me in this crisis was the failure of the rolling blackout system to function properly. The idea of rolling blackouts is that if demand exceeds supply, enough users will be taken offline to equalize the two. But those who are offline are supposed to be rotated so that everyone gets some level of power during the day. For example, if 40% of the generation was offline, everyone should be getting about 60% of their normal power. So, everyone should have been getting power about 14 hours per day and shut off 10 hours.

There are some limitations to rolling the blackouts. Critical infrastructure like hospitals and water treatments plants are supposed to be prioritized and never taken offline, which reduces the percentage available to households and other non-critical users. But in this event, there are many reports of homes going without power for days and some critical infrastructure facilities, especially water treatment plants, also offline. That is not how the system is supposed to work and that is on the distributors, not ERCOT. I have heard informally that the supply got so low that there was only enough to power circuits with critical uses. But we need to hear from distributors, CenterPoint in particular, definitively why the system did not work as planned and what can be done to avoid that problem in the future.

I fear that in the toxic, hyper-partisan world in which we live today there will be little serious discussion of the issues that caused this crisis. Instead, we will have a lot of finger-pointing and partisans screaming their tired talking points at the top of their lungs. Solutions are almost always found in exploring the nuance of problems and issues. Unfortunately, nuance does not make good headlines or sound bites in campaign ads.


Note 1 – The exact rate at which each source failed is still a little murky. Doug Sheridan at EnergyPoint Research estimates that only about a 33% of gas plants and 25% of coal plants went offline, but over 80% of wind generation did. These are links to a Lium discussion and a Wall Street Journal article which have some data on this issue.

(Bill King can be reached by email: [email protected])