The real problem in Texas: Deregulation

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ICYMI: Energy Fairness Executive Director Paul Griffin authored an op-ed in Utility Dive discussing how Texas’ deregulated electricity system contributed to the mass outages last week. The original piece can viewed here

As extreme winter weather gripped much of Texas and millions of customers were left without power because of blackouts, national conversations took a familiar and predictable turn down partisan lines. Opponents of renewable energy pointed the finger at the state’s robust wind energy, as roughly half the state’s wind capacity was knocked offline. Others cast the blame on traditional thermal sources, as 30 GW of generation from nuclear, coal and natural gas were unavailable for dispatch.

In the fog of war — or winter as it were — we fear many observers may have missed the real point. It wasn’t an electricity source that failed customers in Texas’ mostly deregulated marketplace. It was an electricity system. That’s because while regulated electricity markets are designed to serve customers, deregulated electricity markets are made to serve power providers.

The Texas experiment with electricity deregulation has been a long one, dating back to 2002. The system is far from simple. Unlike large, centrally-controlled utilities in a regulated market, electricity in Texas is generated by more than 650 different power plants owned by various companies or just a single merchant owner. After power is generated, five major utilities are responsible for delivering electricity to customers across 46,500 miles of transmission lines. Unlike a regulated market, five in six Texas customers are free choose their retail energy supplier, meaning the company they choose as their retail provider likely doesn’t own the means of generation and transmission of electricity, but simply pays to contract those services.

The result for Texas customers hasn’t always been clear. Some customers have saved money under deregulation, but many have been worse off. That’s because Texans in deregulated markets have paid higher average prices than those in regulated ones. In fact, one report showed that Texas customers could have saved $27 billion from 2002 through 2016 had they paid the same price as customers living in regulated parts of the state. Energy choice, it turned out, wasn’t all that it seemed.

The result for Texas’ power system? That’s becoming more clear by the year. In July of 2018, we wrote that the reserve margin in Texas — the measure of how much surplus power the grid can count on in extreme conditions — had fallen to less than 10% as three coal-fired power plants and one natural gas plant were forced into retirement. That July, peak demand in Texas hit 71,444 MW, with actual reserves of just 2,000 MW, or just one more closed power plant away from brownouts.

Projections for the summer of 2019 were no better, with the reserve margin at just 7.5% and Chairman of the Texas Public Utilities Commission (PUC), DeAnn Walker, calling the situation “very scary.” Consider that in 2001, just one year prior to Texas memorializing deregulation into law, Texas PUC Chairman Pat Wood boasted of the state’s 25% reserve margin being North America’s largest.

Now, blasted by winter storms that sent demand soaring to a seasonal record of 69,150 MW on Valentine’s Day, the Texas grid simply couldn’t deliver. That’s because the power system in Texas wasn’t really designed to deliver power to customers. It was designed to deliver revenue to the patchwork quilt of companies that choose to participate in its marketplace. Companies that could disappear in a year. Companies that collect bills from customers, but have no obligation to restore downed power lines, because someone else owns them. Companies that promise the moon to customers in the hopes of gaining market share, but have little to no stake in what happens to Texas communities in the coming decades.

It’s little wonder, given that model, why some owners of Texas power production wouldn’t protect their assets against extreme weather. Why some wind turbines appear to have not been winterized. Why other facilities appear to have not taken the necessary steps to ensure assets worked when customers needed them the most. Because in a deregulated market, one where one company generates power, another delivers it, and another sells it, there’s little incentive not to cut corners. After all, who’s really to blame?

There is no doubt that Texas officials will work hard to get to the bottom of exactly why millions in Texas were left in the cold. And they should. But the disaster in Texas is also an opportunity for policy makers across the U.S. to learn, too. Texas has seen higher prices and lower reliability since it abandoned the regulated electricity model. Following the same path is a losing move for customers.