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Opinion

It’s time to stop pointing fingers and take steps to make the Texas grid more reliable

Some changes to the wholesale market could allow Texans to pay a bit more for better reliability.

This op-ed is part of a series published by The Dallas Morning News Opinion section to explore ideas and policies for strengthening electric reliability. Find the full series here: Keeping the Lights On.

The withering winter weather and associated power outages across Texas left millions without electricity for days (including some of my kids and grandkids). It was the most extensive and will likely to be the most expensive storm in Texas history.

The resulting suffering, distress and frustration have rightly triggered a demand for answers that our political leaders of all stripes have been eager to provide, often contradicting themselves from one day to the next. I have heard that it was the fault of the Electric Reliability Council of Texas, wind turbines, climate change, the failure to integrate with the national grid, the Green New Deal (which doesn’t exist), conventional power plants, the competitive electric market, natural gas producers, pipelines and just about everything else (except, of course, anyone whose first name is “The Honorable”).

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The “why” is obviously multifaceted. At the core, Texas generally experiences broiling summers, not brutal winters. Homes, factories, offices and power generation facilities are designed to expel heat, not retain it. Our infrastructure is geared toward dealing with extreme summers. When the historic freeze led to record winter power demand, our systems were not up to the task.

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The blame game is both misplaced and unproductive. To fault wind energy and frozen turbines ignores the benefits of the power source not only in the form of zero emissions, but also in lower electricity prices for much of the year.

Similarly, to vilify conventional generation is not helpful. Until storage technology makes notable advances, other power sources are essential. In fact, most experts maintain that renewable power should be fully backed up by traditional resources because of its instability. Texas does not have a strong mechanism to assure such reserves, but that problem can be fixed.

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There were also issues with the natural gas supply chain. Power generators competed for fuel with the 35% of Texas homes that use natural gas directly for heat, and some gas wells and pipelines were shuttered by the cold. The important thing, however, is that these problems are not inherent to the power sources. Turbines, conventional power plants, gas wells and pipelines routinely function under frigid conditions elsewhere. We have a systemic issue that needs to be addressed.

With regard to the grid, Texas, not surprisingly, has resisted federal oversight since the 1930s, and ERCOT has been around for 50 years. There are pros and cons to the go-it-alone approach. The immediate negative effect is that the national grid could have readily provided excess power from other parts of the country to meet our needs.

Conversely, there are benefits to being able to craft policies that best suit the unique characteristics of Texas, and we clearly have more than sufficient energy resources to provide for our power requirements many times over. The key point is that the desire to avoid federal regulation does not absolve the responsibility to maintain a sustainable grid. As noted, the recent failures identified some issues that need to be examined.

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It has also been suggested that the blackouts demonstrate that the Texas market for electric power has failed and must be fundamentally revamped. That assessment is incorrect. At my firm, we have analyzed the benefits of competition in the electricity market on multiple occasions over the past decade. It has consistently brought lower prices and greater consumer choice.

Markets are remarkable mechanisms to organize economic activity, but they are not perfect. In particular, they must function within a framework of laws and regulations, and they operate through incentives. If you get the incentives wrong, things break down. As an obvious example, the mortgage crisis and the Great Recession were largely due to strong short-term incentives to make and securitize substandard loans.

It’s somewhat akin to the bumpers placed in the gutters at bowling alleys for children. You want the wide-open alley to encourage efficiency, innovation and other benefits of competition, but also safeguards to avoid undesirable outcomes.

As noted, the winterization of our resources was not sufficient to deal with the recent situation. Weather events in 1989 and 2011 triggered rolling blackouts and fostered an evaluation of this same issue. ERCOT developed best practices, and generators must annually certify that they have completed winterization. However, there is no effective enforcement mechanism and, hence, no incentive for power generators to incur the extra maintenance costs. As the Legislature grapples with this matter, it would be useful to examine the adequacy of the standards and the mechanism for assuring compliance.

Obviously, these more rigorous requirements will impose additional costs on generators, which will ultimately be paid by electric consumers. (I will spare you the arcane explanations involving elasticities of supply and demand; most of us would be willing to pay a little more to reduce the risk of repeating recent events.) This inquiry might well conclude that we need less stringent requirements than, say, Minnesota, but we need to create a mechanism to assure that an appropriate level of protection is achieved.

On a related note, generators in Texas often purchase interruptible natural gas supplies. That is, generators get a reduced price for natural gas by agreeing that the fuel supply may be interrupted when supply is scarce. This practice reduces costs in normal times, but creates problems during severe storms that winterization alone will not solve. It is equivalent to flying standby to your daughter’s wedding. This area is also worthy of examination.

In addition, the situation illustrated the potential need for a base level of generation capacity available at all times. The level could be set to ensure grid stability in the face of extremely high demand and, again, would likely be less than those maintained by our northern neighbors. As with winterization, the creation of normally idle capacity will involve costs to customers.

In Texas, power generators earn revenue only when they sell power (as opposed to other states where generators are paid to maintain available capacity). For a company considering an investment in new generation facilities, the project must be financially viable. No one will build and maintain an idle plant unless compensated to do so. An answer to this shortcoming within a market system is to identify and incentivize an appropriate base level of reliable generation capacity needed to avoid excessive and extended blackouts. Stated differently, Texas may need a capacity market as well as an energy market.

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Legislation could set the level of base capacity (or enable regulators to do so), and firms could be compensated for maintaining reserve power. The larger the base load target, the greater the incremental cost. We should not be excessive, but we must be realistic and prudent.

In a similar vein, Texas might consider permitting additional investments in natural gas infrastructure such as pipelines. The additional capacity could bring the state’s resources to other markets in normal times but be available locally when needed. There is a well-established process to accomplish this objective.

The recent failure of one of the most energy-rich places in the world to provide for the basic power requirements of millions of its citizens is tragic, harmful, and, quite frankly, embarrassing. The same thing happened in 2011 on a smaller scale, but in the midst of hosting a Super Bowl.

The last round brought much discussion, but little meaningful action. The solution does not lie in the rhetoric of assigning blame to a smorgasbord of available culprits. It lies in systematic and thoughtful consideration of the shortcomings that have been revealed and the implementation of rational policies to address them.

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By making appropriate modifications to the framework, we can assure that our competitive electric market continues to drive innovation, efficiency and savings while avoiding the type of calamity that recently occurred. If we fail, we may once again find ourselves in the gutter. This is a time for rationality over rhetoric.

Ray Perryman is an economist in Waco. He wrote this column for The Dallas Morning News.

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