Part 1 of 2.

Coordination is a central term in economics. And malcoordination is what happened in historic, tragic fashion in the Great Texas Electricity Blackout of 2021, with a death toll nearing 200, damages and uncollectible expenses in excess of one hundred billion dollars, dismissals and resignations of involved regulators and planners, and countless lawsuits.[1]

At fault was the “planned chaos” of central planning, not the (forgone) free-market order. The Great Blackout occurred in a heavily regulated, mother-may-I industry, involving various state and federal laws and different regulatory bodies. The malcoordination also resulted from “net zero” and “deep decarbonization” intervention favoring the least reliable energies at the expense of the most reliable in power generation.

A witches’ brew of intervention came together in a way that shocked everyone, particularly the experts and planners of the Electric Reliability Council of Texas (ERCOT) and the regulators at the Public Utility Commission of Texas (PUCT).

PUCT/ERCOT is the grid monopolist for 90 percent of Texas electricity, serving approximately 26 million Texans. The governmental entity oversees purchases and sales from 710 power generators (81,000 MW) involving 46,550 miles of transmission and 5,000 substations. Tax funded, PUCT/ERCOT implements price controls directly via discretionary price caps and indirectly via winning-bid rules.

Amid the wreckage, more and better regulation is being proposed, not fundamental deregulation.

The Conventional View

Government regulation and planning were not the problem, PUCT/ERCOT defenders insist. Texas’s grid “worked as designed,” system architect William Hogan of Harvard’s Kennedy School stated. Instead, an Act of God (a severe, prolonged freeze) and private-sector mismanagement (lack of weatherization) came together to de-power a tightly coordinated, properly incentivized grid.[2]

The fat-tail/business-failure interpretation, leaving 4.5 million Texas homes and businesses without power, focuses on the seen, the physical why of the debacle. It is based on recorded data of what-when-where-how much. And, in fact, the physical cause of the crisis centered on the unexpected falloff of gas-fired power generation owing to weather-related performance failures from the wellhead to the turbine. There was also weather-related underperformance in coal and nuclear plants.

Consider a recent paper by the research arm of the National Association of Regulatory Utility Commissions (NARUC), Regulatory Questions Engendered by the Texas Energy Crisis of 2021. The authors track ERCOT data show the growing imbalance of demand relative to supply that grew to the point of emergency blackout orders.[3] Renewable energies expectedly tailed off from low winds, little sun, and freeze issues; it was counted-on conventional sources that could not answer the bell.

As for the proverbial next time, weatherization and other reliability upgrades will become mandatory, and new incentives (including “smart meters”) will better regulate demand. New analyses are underway; with regulation as a process, the experts are “on it.”

The moral of the story? Worst-case events happen, problems are part of the improvement process. Do not fundamentally alter the PUCT/ERCOT regime. Fine-tune it.

A Deeper Look

The view presented above ignores the why behind the why, the economic why behind the physical why. Why the failure of the price system to prevent shortages? Why the mass entrepreneurial failure to perform? Reliability, after all, has been the holy grail of electricity service ever since industry pioneer Samuel Insull invested in batteries 125 years ago.

The major cause of the Blackout was government intervention writ large: highly subsidized renewable energies; centrally planned, one-sized design choices; and a forced disintegration of the natural gas and electricity industries. In more detail:

*Government mandated or enabled wind and solar generation, which has grown to 20–25 percent of annual Texas supply, virtually disappeared. While that is a feature of the summer peaks, the renewables drop-off happened during the February freeze.

*Wind and solar, available when it is least needed and least available when most needed, has complicated and compromised the overall system.

*PUCT/ERCOT price design allows low-marginal-cost (but unreliable) wind and solar generation to outcompete traditional baseload generation that has fuel costs (gas, coal, or uranium). Wind power, in particular, is sold at low-to-negative prices to receive the lucrative federal Production Tax Credit, which has been extended 13 times. Such underpricing has caused the premature loss of gas- and coal-fired plants and discouraged building new capacity in those areas.

*Various state and federal laws have required/incentivized the disintegration of the natural gas and electricity industries. Without “natural gas majors” and “electricity majors,” vertically and horizontally integrated, within and across state lines (such as exists with petroleum), the coordination challenge has been exacerbated.

*PUCT/ERCOT price caps, which are liberalized in emergencies to reward reliable generators, proved to be too little and too late. Price spikes at the peak, far beyond what can be paid back, is anathema for a political regime. Getting incentives right between spot bids and backup reserve incentives to achieve reliability is a central planning quandary.[4]

*PUCT/ERCOT transmission-access socialism has depreciated the value of the grid for its owners and created a contrived profit center, retail marketing. (Prominent retailers went bankrupt because of the freeze, and others that passed along astronomical costs face lawsuits and collection issues.)

*Warmer winters in general was the consensus from climate models as well as the official releases from the National Oceanic and Atmospheric Administration. Industry decision-makers no doubt discounted a prolonged freeze event, last experienced in the state in 2011.

In a government-neutral market, costly intermittent wind or solar would not have been built for the grid, and the economics of gas, coal, and nuclear plants would have been that much stronger. Higher margins would have made weatherization more affordable and prudent. More baseload capacity would have been at the ready to avoid shortages.

In a free market, gas and electricity “majors,” integrated from the wellhead to the burner tip, would have simplified the coordination problem in contrast to the fragmented, high-transaction-cost industry that now exists.

Read Part 2 here.

[1] The blackout, lasting for 42 consecutive hours for many, caused 111 deaths from hypothermia, as well as deaths from carbon monoxide (CO) poisoning, medical equipment failure, and other related problems. Economic damages will surpass all previous power outages combined.

[2] Weatherization for sub-freezing infrastructure operation was “a voluntary guideline,” an ERCOT official stated. “There are financial incentives to stay online, but there is no regulation at this point.” Weather models developed after the 2011 freeze, he added, were falsified by the February 2021 storm.

[3] NARUC’s conclusions “elucidate a number of themes: 1) inherent design flaws, 2) insufficient regulatory oversight, 3) market manipulation, and 4) the distinction between reliability and resilience in designing and managing the electric market.” The central-planning framework of PUCT/ERCOT, well detailed by the study, goes unchallenged.

[4] Energy payments are the low-bid winners, always wind and solar with the lowest incremental costs (but high average cost). Capacity payments reward reliability, generation that can meet peak demand. PUCT/ERCOT is wed to energy payments, unlike other power planning regimes that better reward capacity.

Robert L. Bradley is the founder and CEO of the Institute for Energy Research.