The Texas Electricity Two-Step: In reacting to Winter Storm Uri, did the state return to unnecessarily costly supply?

• Author: Kleit, Andrew N.
• Position: ENERGY

On February 14, 2021, Winter Storm Uri struck Texas, and a deep winter freeze settled over the state. Tens of thousands of megawatts of generation went off-line as producers with various technologies found themselves unable to provide electricity in the cold conditions. The power that was available sold at prices up to 200 times normal levels. For almost four days, the Electricity Reliability Council of Texas (ERCOT), which operates the power grid for most of the state, imposed continuous blackouts on 4-5 million people. The resulting death toll was over 200, and the cost to the Texas economy was estimated at over $100 billion.

The policy consequences of the storm continue to play out. Initially, regulators imposed weatherization standards on power generators and the electricity grid operator took precautions to ensure more capacity was available for the market, at significant cost to consumers. In 2023, the elected politicians took over. Texas lawmakers took two important actions. The first would create a variant of a capacity market to supply dispatchable generators with the "missing money" that arises in electricity markets, as explained below. The second, subject to approval in a referendum this fall, would spend at least $5 billion in taxpayer money to subsidize electricity generation.

FINGER-POINTING AND REGULATORY STEPS

The blame game began soon after Uri. The leadership of ERCOT and the Public Utility Commission of Texas (PUCT) were removed. Texas Gov. Greg Abbott and others accused renewable energy sources of being the primary culprit in the crisis, even though renewable sources performed about as well as anyone would have predicted during the storm. (It was already under stood that solar generators would not see much sun and windmills would have a hard time turning during ice storms.) The finger-pointing then shifted to natural gas producers and pipelines. Many producers were shut in, and pipelines were frozen during the storm.

Upon reflection, however, it seems that the primary culprit was natural gas generators, which were even more unprepared than producers and pipelines for the storm. The regulatory agencies took the first shot at addressing this problem. The new leadership of the PUCT, an appointive body, passed regulations requiring fossil fuel generators to be able to operate under weather conditions like those that occurred during Uri. Generator company executives must now attest that their generators will be ready for the next deep freeze. Of course, it is hard to know what will actually happen should another major storm hit.

Natural gas producers and pipelines in Texas are regulated by the elected Texas Railroad Commission (RRC). (The modern RRC has nothing to do with railroads.) If one wants to be elected to the RRC, one needs substantial campaign contributions, and a good source of such contributions is the oil and natural gas sector. Unsurprisingly, RRC commissioners are often friendly toward oil and gas companies. Thus, while the RRC passed new regulations imposing winterization conditions on natural gas production and pipelines, it is claimed the measures have substantial loopholes in them. Only when the second version of Uri strikes will we know if these regulations are effective.

BLOWING A HOLE IN THE TEXAS ELECTRICITY CONSTRUCT

ERCOT directs an innovative restructured electricity market created at the turn of the century, with generators subject to market forces and a highly competitive retail market for power. ERCOT is also proudly the home of the only grid operator in the United States without a capacity market or similar construct. Capacity markets address a long-standing flaw in...