The $1 billion class-action lawsuit filed against the Texas wholesale electricity retailer Griddy Energy is triggering questions about who is to blame for the state’s mid-winter blackout. The core question, though, is whether restructuring Texas’ electricity markets in the early 2000s exacerbated the crisis.
Four million homes and businesses have been impacted. While the massive utility bills are linked to the “deregulation” of electricity markets there, that restructuring plan is not the main culprit. Indeed, the primary tenant of competition is to get electricity suppliers to offer superior services at better services.
Electricity is an essential commodity, however, leading many analysts to say that it should not be not subject to market whims. Prices can gyrate and that can leave unwitting customers in a bind. And Texas 2021 is Exhibit A. In the Griddy Energy suit, for example, the plaintiffs argue that their bill rose to $9,340 during the week of the storm — well above their $250 monthly average.
Griddy is the immediate target of the suit. But it is just part of the broader supply chain that reaches up to the Electric Reliability Council of Texas (ERCOT), which orders electricity supplies and then schedules those deliveries over the wires. Griddy wrote that it, too, will fight alongside its customers to learn why electricity prices soared so high — from $50 a megawatt-hour to $9,000 an hour.
“Before ‘deregulation,’ Texas was the 21st most expensive state and now it is 43rd,” Pat Wood, former Chairman of the Federal Energy Regulatory Commission and the Texas Public Utility Commission said. “The competitive market has provided value”— comments Wood made during a United States Energy Association webcast where this reporter was a panelist. There is still a lot of regulation and customer protection. There was sloppy coordination of people in the driving seat.”
Since 2002, the consumers could choose their so-called retail electric provider (REP), which purchases its power from competing generators. They are required to provide pricing information, contract terms and emission levels. Transmission and distribution are still provided by the local utility. Millions of Texas’ customers chose competitive suppliers. Others opted for the regulated rate.
The Wall Street Journal reported that customers in Texas who selected the competitive plans paid 13% more than the national average between 2004 and 2019. Customers choosing the regulated plan, conversely, paid 8% less during that same time frame.
To be clear, the amount of energy demanded by Texans during those five days in mid-February exceeded what the state plans for on its hottest summer days. The winter storm is the state’s third-worst in more than a century, causing gas production and delivery to grind to a halt. The snowmelt and freezing temperatures caused the coal to become brick-like and unable to be fed into boilers. And wind turbines also shuttered. Altogether, 58 electric generators were out of commission.
“It was a total systemic failure in terms of reliability and affordability,” Clinton Vance, chair of Denton’s U.S. energy practice, told the audience as it relates to the Great Texas Outage. “Millions went without heat and some without water. ERCOT went close to a cataclysmic shutdown of its system … There has to be a political solution. The regulatory and market solutions have failed. Heads (must) roll.”
After the California and Enron debacle in the early 2000s, the commitment to free electricity markets waned. Back then, state regulators had poorly crafted the rules while electricity markets were going haywire. Energy marketers, meantime, swooped in for the kill — some of whom broke the law and went to prison for it. But Texas was different, all brought to light because of uncommon weather: energy supply chains dried up while the state’s grid and regulatory structure prevented it from getting other regions’ fuel supplies.
About 16 states in all have restructured their electricity sectors. Most focus on wholesale markets — the selling of energy to large industrial users. Some, like Texas, apply it to smaller retail markets like homes and businesses. ERCOT’s job is to forecast the load and to meet the expected demand, calling on the generators to produce before directing those electrons over the transmission lines.
Customers choosing competitive suppliers will in theory make their homes more energy-efficient and use demand response signals to reduce their bills. In this case, however, the price spikes lasted days and prompted the $9,000 per megawatt-hour regulatory limit. Normally, rates may temporarily spike but customers equipped with the technology to automatically cut their usage can resist. In this case, the rates remained high for days, causing ERCOT to bill for hundreds of millions — a cost that must ultimately be amortized over years and potentially paid by taxpayers, says Clinton Vance.
Former FERC Commission Wood says that while ERCOT could have done a better job forecasting load requirements, it did the best it could with the hand that it was dealt. In other words, severe weather conditions caused generators to go offline, especially those using natural gas — a fuel that provides 43% of the state’s electricity. He likened the system operator’s role to that of an air traffic controller, who ensures that planes land safely and that everyone survives.
“They are heroes and did what they were supposed to do,” Wood says, in reference to the system operators. “They did well with what they had.”
He had positive things to say about Calpine Corp.
So what is to be expected going forward? Renewables will make up a much bigger share of the electricity portfolio. And if decarbonization goals are to be realized, those numbers would have to jump as much as 10-fold, says Daniel Brooks, vice president of integrated grid systems for EPRI, at the webinar. Given the intermittent nature of wind and solar, it will require greater resiliency efforts — and much better modeling and forecasting than what Texas just demonstrated.
What that means is more focus will be paid to improving energy efficiency, he adds, as well as decentralizing the electricity production and delivery systems: the use of onsite solar power that is stored in batteries and that is delivered by microgrids will need to expand — a key lesson from Superstorm Sandy in 2012. It will also mean weatherizing every form of energy generation and delivery so that whole supply chains don’t freeze up, literally and figuratively.
“Extreme weather events are impacting the grids,” says Brooks. “Look at what climate scientists are trying to tell us.”
Like a lot of other states, Texas can no longer gamble that the next once-in-a-century winter storm will happen after we all die. The time to prepare is now — not to shelve such plans once memories fade. Investigators will get to the root causes of the state’s massive outage. And in doing so, they will take a look at the restructuring of its electricity markets, which led to skyrocketing prices and desperate customers.
While competitive markets are an easy target for the prolonged blackout, the underlying reasons fare more complex — tied to climate change, poor planning and aging infrastructure. That’s a burden that falls on Texas’ elected leadership and one that it has long ignored.