Since 2011, when Texas experienced a short, severe frost, state officials knew the system was radically unstable in extreme weather. The architects of the system knew it too, no matter what they say now.
AUSTIN – William Hogan of Harvard Kennedy School is credited with designing the Texas energy market. Now that Texans have froze and their water pipes have burst, he apparently said the state’s energy market has worked as designed.
Hogan is right, which says a lot about how some economists think.
For years, electric companies were a stable and monotonous business. To counteract the effects of the monopoly, utility commissions set and stabilized prices, and companies obtained a rate of return on their investment that (in principle) was sufficient to cover construction, maintenance, and a fair profit.
But economists complained: the utilities had an incentive to over-invest. The bigger their operations and the higher their total costs, the more they could get from rate regulators.
Electricity is the standard product par excellence; Each electrical discharge is exactly the same as the other. Texas had a closed electrical grid, isolated from interstate commerce and thus exempt from federal regulations. What better place, what better product, to demonstrate the virtues of a competitive and unregulated system?
So it was that economists proposed a free market: let generating companies compete to provide electricity to consumers through a common electrical grid. The terms and price would be governed by freely chosen contracts. Competition would maximize efficiency and prices would reflect fuel costs and the lowest possible profit margin.
The role of the state government would be to manage the common electricity grid linking producers with consumers. In times of scarcity, prices could go up, but those who didn’t want to pay could lower their switches.
In 2002, during the administration of Rick Perry (later President Donald Trump’s Secretary of Energy), Texas deregulated its electricity system and established a free market, run by a non-profit organization called the Electric Reliability Council of Texas (ERCOT). ), with approximately 70 suppliers. While a few cities – including Austin – maintained their old public electricity service, they were also associated with the state system.
The problem is that the demand for electricity is inelastic: it does not respond much to price, but it does respond to the weather. In times of extreme heat or cold, the demand becomes even more inelastic. And, unlike what happens in a common market, the supply must match the demand every minute of every day. If you don’t, the whole system may fail.
The Texas system had three vulnerabilities. First, the fierce competition to offer energy in the cheapest possible way meant that the machinery, wells, meters, the network of pipelines for supplies and the mills were not insulated against the extreme cold – unusual but not unknown here; second, while wholesale prices could fluctuate freely, retail prices depended on the contract that the user had signed, and third, prices would increase more at times when energy demand was greatest, and would not fall.
The new system worked much of the time. Prices rose and fell. Users who did not sign long-term contracts faced some risk. One supplier, called Griddy, had a special model: for a subscription of $ 9.99 per month, one could receive electricity at the wholesale price. Much of the time, the price was cheap.
But people don’t need electricity “much of the time”; you need it all the time. And, at least in 2011, when Texas experienced a short, severe frost, state officials knew the system was radically unstable in extreme weather. The architects of the system knew it too, no matter what they say now.
But Texas politicians did nothing. Texas energy providers, a rich source of campaign donations for elected office candidates, refused to be required to invest in unnecessary HVAC much of the time. In 2020, even voluntary inspections were suspended, due to Covid-19.
Then came the big freeze of 2021. The water vapor in natural gas froze in wells, pipes and generating plants. Unheated windmills stopped working, but they were only a small part of the story. Since the Texas grid is disconnected from the rest of the country, no reserves could be imported, and considering the cold everywhere, no reserves would have been available anyway. In the early hours of February 15, demand so exceeded supply that the entire network was apparently on the brink of collapse.
While this was happening, the pricing mechanism completely failed. Wholesale prices increased a hundredfold – but contract retail prices didn’t increase that much, except for Griddy users, who started getting bills for thousands of dollars a day. Demand increased while supply collapsed.
ERCOT was forced to shut off the power, which could have been tolerable had it happened on an ongoing basis in neighborhoods across the state. But that was impossible: Hospitals, fire stations and other critical facilities, or high-rise apartments that rely on elevators, cannot be turned off. So the lights stayed on in some areas, and off – for days – in others.
The freezing of the water was the next phase of the calamity. The pipes burst and the water supply could not meet the demand. Across Texas, water pressure dropped or failed. Hospitals could not generate steam, and therefore heat, and some had to be evicted. All of this, Hogan tells us precisely, was in accordance with the design.
Power is returning to Texas; water supplies will take a few more days. Food is scarce and repairing damaged homes will take months. Millions of Texans have suffered from a design, invented by economists, and favored by a myth, that worked for the fossil fuel industry and the politicians it finances. One of those politicians, US Senator Ted Cruz, acted in perfect harmony with the free market logic of the system by vanishing to Cancun.
Perry says Texans are prepared to sacrifice ourselves to avoid the curse of socialism. But if socialism means entrusting technical matters of life and death to engineers and others who know what they are doing, and not to ideologues, hobbyists, and consultants, then many cold-shivering Texans might prefer that curse to which we are living right now. .
The author
James K. Galbraith, former executive director of the United States Congressional Joint Economic Committee, is professor of government and president of government / business relations at the Lyndon B. Johnson School of Public Affairs at the University of Texas at Austin. He is the author of of Inequality: What Everyone Needs to Know and Welcome to the Poisoned Chalice: The Destruction of Greece and the Future of Europe.
Copyright: Project Syndicate, 2020
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