Abandoning Competitive Markets is Throwing the Baby Out With the Very Cold Bathwater
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By Matt Welch
The February winter storm shocked Texans to the core. For days, the energy capital of the United States shivered silently in the dark while snow covered the streets, the world shut down, and the human and economic costs soared. Only a fool would continue forward without recognizing that something needs to change so that this never happens again.
However, those who are pointing at markets and electric competition as the culprit are shooting wide of the mark. It’s not the market that needs to change. Instead, it’s the way we oversee our connected gas-electric system of systems, ensure the preparedness of our generating assets, and the way we allow price formation to take place within our market structure that need some serious review and redesign.
Perhaps it would help if we step back and take a brief look at two issues: 1) what actually happened and contributed to the cause, and 2) what drove the eye-watering, real-time costs for the electricity that actually flowed during those four unforgettable days – costs that may be reflected in some customer bills for decades. Only then can we come up with a realistic appraisal of the key issues that need to be solved and the appropriate remedies that we, as a society, should consider adopting.
Systemic failure: Let’s start with what actually happened
Before prescribing the remedy, let’s start by assessing the malady. The most comprehensive reviews of this event to date have been the preliminary Joint FERC/NERC/Regional Entity Inquiry into the February 2021 Cold Weather Event (the Inquiry)1 and the University of Texas, Austin report (the UT Report) on the topic.2
The Inquiry stated that the Electric Reliability Council of Texas (ERCOT) saw an average of 34,000 megawatts (MW) of generation “unavailable for two consecutive days from February 15 to 17, equivalent to nearly half of its all-time winter peak electric load of 69,871 MW.” The report made some critical observations highlighting a broad and systemic failure involving multiple contributing factors including extreme weather, inadequate weatherization practices of both natural gas and electricity infrastructure, and a failure to account for the critical inter-relationships between the natural gas and electric systems.
With respect to gas supply, the Inquiry noted that the cold weather contributed to the “largest U.S. monthly decline of natural gas production on record,” which plummeted by 28% from February 4 to February 17. Frigid weather froze assets at the gas wellhead while outages at gas gathering and processing facilities further constrained supplies. Meanwhile, some of those gas-fired generators that still had access to gas were unable to generate electricity, as they had not been adequately weatherized.
In total, 75% of the generator outages or de-rates in the areas affected – Mid-Continental ISO, Southwest Power Pool, and ERCOT resulted from freezing and fuel issues, with poor winterization being the largest contributing factor. The most common sub-causes were frozen instruments and icing on wind turbine blades (although as one can see below from the UT Report, the expected contribution of wind generating capacity was relatively minimal; the critical system failure was in the gas generation fleet).
ERCOT: Down 2,800 MW of wind, 26,300 MW of thermal generation forced outages3
To further compound matters, the natural gas infrastructure relies upon a viable electric grid in order to produce, process and transport gas to power plants and other end users. However, the Inquiry observed that while load shed plans were designed to avoid cutting power to critical electric loads, “most of the natural gas production and processing facilities surveyed by the inquiry team were not identified as critical loads or otherwise protected from manual load shedding.” This further cut critical gas supplies.
Incredibly, the University of Texas at Austin report to the Texas Public Utilities Commission observed that 67 locations (electric meters) in the generator fuel supply chain were enrolled in ERCOT’s voluntary Emergency Response Service program, meaning they were designated to have power cut when those programs were activated on February 15. At least five locations later identified as critical natural gas infrastructure were enrolled in this program.4
Finally, while other grid operators had some ability to import electricity from neighboring power grids, ERCOT, with its limited interconnections, had no such resource available.
The Inquiry team made 29 preliminary recommendations, including nine key ones relating largely to improved weatherization of natural gas and electric generation infrastructure, improved coordination between the two industries, and the development of more precise load shedding strategies. What the team did not recommend were any changes to the market structure, as the FERC has no jurisdiction in that area.5
Arbitrary market signals resulted in a massive transfer of wealth
Much attention has been paid to the fact that during the critical four days in Texas, real-time electricity prices pegged out at the $9,000 limit, remaining there for the duration of the event. Consequently, some fortunate generators and financial houses reaped outsized windfall profits. Where did those profits come from? Quite simply, from those unfortunates on the other side of the transaction, some of whom will be paying this price for years to come, perhaps even decades from now. But that’s not a failure of competitive markets per se. It’s a failure of regulators to step in and address of one of the greatest instantaneous transfers of wealth this country has ever seen, with cumulative energy costs of the event exceeding $45 billion.
The current ERCOT market structure involves a number of complexities, but in its simplest form, it allows wholesale spot-market prices to soar as high as $9,000 per megawatt-hour (MWh) in order to attract new generators to the market. In general, this is based on a classic Economic 101 supply-demand market function. In this case, although there was zero additional generation available to the system, the PUCT issued orders that kept the price at $9,000 per MWh. Put another way, the price could have been set at $1 million per MWh and the supply outcome would have been no different.
In that sense, the artificial structure imposed by the PUCT achieved no marginal supply outcome, while enriching a fortunate few. The fundamental concept of competitive markets itself is not responsible for this outcome. Rather, the convoluted rules (discussed in detail in the UT Report) and the arbitrary nature of the PUC decision are squarely to blame. These costs even include an estimated $16 billion approved by the PUCT after the load shedding events had terminated, artificially “inflating” the price adder for an additional 32 hours, an action that the independent Market Monitor strongly (and fruitlessly) opposed.6
Those on the wrong side of that equation, such as the state’s largest public municipal electric utility – CPS Energy – which reported losses on power costs between $175 and $250 million, were severely damaged. Ratepayers of that utility may be paying charges for the next 25 years.7
How to think about this going forward: Don’t throw out that baby
Markets can be very efficient mechanisms for allocating capital to maximize efficiencies. But they do not address all aspects of society, they never have, and they should not be confused for doing so. Competitive markets cannot remedy the shortsighted approaches that led to the widespread outages caused by failures in the gas patch, physical utility infrastructure, and the poor coordination between the two systems. Only determined regulatory oversight – combined with a regime of incentives and meaningful penalties – is likely to achieve that outcome.
As for the energy economy, wholesale competition has led to a years-long stretch during which Texans enjoyed increasingly clean and relatively low-cost electricity, attracting billions of dollars of new investment in energy generation and storage technologies. Competition is not the problem. The issue here was quite simply that the specific market design did not anticipate a severe weather situation, poor coordination and preparation leading to what economists call “an inelastic supply curve,” in which generation could not be added at any price.
In such a case, sheer common sense suggests that regulators should step back and examine ways to re-design the market to achieve something other than a highly arbitrary and inequitable transfer of economic resources. A failure to do so invites the opponents of free markets to attack the entire system when in fact only one small – but highly impactful element – of the system is broken.
In other words, its not competition that must go. It’s the notion that markets can do everything. We need to take responsibility for common sense behaviors – identifying what we do and don’t want, and setting up the rules accordingly. Let’s not throw out that competitive baby with the bathwater.
Matt Welch is the state director of Conservative Texans for Energy Innovation, a statewide organization that promotes free enterprise, increased competition, and less government regulation in our energy economy.
1 https://www.ferc.gov/media/february-2021-cold-weather-grid-operations-preliminary-findings-and-recommendations-full the full report will be issued this winter.
3 https://www.puc.texas.gov/agency/resources/reports/UTAustin_(2021)_EventsFebruary2021TexasBlackout_(002)FINAL_07_12_21.pdf
4 https://www.puc.texas.gov/agency/resources/reports/UTAustin_(2021)_EventsFebruary2021TexasBlackout_(002)FINAL_07_12_21.pdf
5 Since ERCOT does not import or export any significant quantities of electricity, it is not involved in interstate commerce that would make it subject to FERC oversight. However, it does have the standing to regulate reliability, including the imposition of mandatory weatherization standards
6 https://interchange.puc.texas.gov/Documents/51812_61_1114183.PDF
7 https://www.sacurrent.com/sanantonio/cps-energy-wants-san-antonio-customers-to-pay-450-million-in-costs-for-februarys-winter-freeze/Content?oid=27346911