A Free-Market Energy Blog

PUC/ERCOT: A Classic Hayekian Planning Failure

By Robert Bradley Jr. -- April 11, 2021

Make no mistake: The Great Texas Blackout debacle was a failure of government planning, not the free market.

Here are some quotations in the press about a massive coordination failure of nonintegrated entities, one that could have been avoided with ‘natural gas majors’ and ‘electricity majors’ –vertically and horizontally integrated–coordinating in-house.

Some quotations serving as background for this revisionist perspective follow:

“The failure of gas and electric companies to communicate with each other–again–demonstrates how, just as Texas’ power grid is a complex web of producers, transporters, deliverers and regulators, its near-collapse last month, too, was an integrated failure spread throughout the system.”

“At the height of the ‘snowpocalypse,” social media teemed with pictures of the power have and have nots–prompting outrage that vacant downtown office buildings had electricity they didn’t need while average citizens endured teeth-chattering cold or worse.”

“But with no single elected official or bureaucrat in charge of ensuring the two industries work out an emergency plan to keep the power supply chain powered up, the push for voluntary compliance never fully materialized.”

“‘We worked on solving those problems, but our hands were tied,’ [former utility regulator Jennifer] Hubbs said. ‘It was industry who didn’t want us to force them to do these things. But it looks like they didn’t cooperate when we asked them to do it voluntarily. They need to take responsibility for that.'”

– Jay Root, Eric Dexheimer, and Jeremy Blackman, “Paperwork Blunder Left Texans in the Cold,” Houston Chronicle (March 21, 2021), pp. A1, A12.


“… years of weak oversight, preparation, communications and coordination among regulators responsible for the reliability of Texas’ natural gas supply and power grid allowed oil and gas companies to skimp on minimal safeguards that could have prevented or minimized the deadly and devastating power outages, according to industry analysts and documents.”

“Although every electricity source failed–including wind, coal, solar and nuclear–non failed as extensively as natural gas.”

“Power outages later comounded the problem, leaving gas processing facilities and pipeline pumps inoperable. Although Texas has one of the nation’s largest supply of nautral gas in storage, the lack of power limited its withdrawal, according to Enverus, and energy research firm.”

“Texas natural gas production fell by nearly half during the storm, according to the research and consulting firm IHS Markit. The ensuing power plant failures and widespread blackouts contributed to more than 40 deaths, billions of dollars of property damage and left more than 4 million Texans shivering in dark homes.”

During the winter storm, natural gas spot prices at the Houston Ship Channel hit $385 per million British thermal units, up from less than $3 per million British thermal units a couple of weeks before the storm. In other markets, natural gas prices soared above $1,000 per million British thermal units, shattering records.

Still, the prospect of massive payoffs failed to persuade most Texas natural gas producers to prepare for last month’s winter storm. That’s not surprising, energy analysts said.

Weatherizing Texas’ more than 130,000 gas wells and thousands of miles of pipelines is likely to cost billions of dollars; a single well can cost up to $34,000 to winterize, according to the 2011 FERC report. And there’s no guarantee those investments would pay off during winter storms that occur once a decade, making the risk of equipment failure worth taking.

“There’s too much uncertainty about future weather patterns,” said Jim Krane, an energy fellow at the Baker Institute for Public Policy at Rice University. “At the end of the day, the incentives in the market that were supposed to incentivize gas producers to deliver their product in all kinds of weather failed.”

The winter storm shed light on another problem: No one agency or elected official has been put in charge of shoring up Texas’ natural gas supply and electric grid.

Texas is one of two states with split regulation over electricity and gas. The Public Utility Commission oversees ERCOT and the electricity industry. The Railroad Commission oversees oil and gas.

– Paul Takahashi and Jeremy Blackman, “Regulators Knew of Freeze Risk to Natural Gas Supplies for Years, Houston Chronicle, March 14, 2021.


“How did Texas get to the point where more than half its electricity generation got knocked offline? The failure of so many power plants during the brutal winter weather that swept through Texas last month was perhaps years in the making, the result of a merchant power industry that has struggled to earn profits, satisfy Wall Street and keep the confidence of lenders and investors.”

“Lenders and investors have agreed. A major new power plant — excluding wind and solar installations — has not been built in Texas since 2017, when the Chicago company Exelon completed two 1,100- megawatt gas-fired power plants, according to the Electric Reliability Council of Texas, the state’s grid manager. One reason: financing for projects that can cost hundreds of millions of dollars has become increasingly hard to get.”

“There is a lot of uncertainty about how much profit gas plants can make year to year,” said Travis Miller, an energy and utilities equity strategist at Morningstar Securities Research. “Investors typically don’t want to finance projects when they don’t have confidence the project can produce steady cash flows.”

The companies, meanwhile, have not just slowed or stopped investing in generation. They have sold off and shut down power plants to refocus on businesses with higher profit margins, such as retail electricity. NRG, for example, launched a three-year plan in 2017 to shrink its holdings in power generation and grow its retail business.

NRG divested some $4 billion in generating and other assets, including $1.3 billion in renewable energy, and embarked on a buying spree of retail electricity providers to become one of the nation’s biggest power retailers. In Texas, NRG probably holds at least 40 percent of the retail electricity market, following its $3.6 billion acquisition of Direct Energy in January, according to a 2018 investor presentation.

NRG began the shift from power generation as early as 2009 with its acquisition of Reliant Energy, the Houston retail electricity provider, and accelerating it after NRG lost some $6.4 billion in 2015 and $891 million in 2016.

Wall Street has embraced NRG’s decision to shrink its power generation business, pushing its stock from a low of about $11 a share in 2016 to more than $40 a share today. NRG declined to comment.

Economic conditions have challenged power generators across the country as the higher costs of coal and natural gas compete against the falling costs of wind and solar energy. Perhaps nowhere has it been as challenging as in Texas, where massive amounts of wind-generated electricity can drive wholesale prices into negative numbers — in other words, producers pay buyers to take their power.

Unlike other deregulated markets that pay generators to keep plants ready to meet peak demand — whether they operate or not — prices provide the only incentives for companies to invest in building, maintaining and upgrading power plants.

Texas regulators have responded to generators’ complaints that they were not earning enough to make these investments by raising prices, doubling the maximum to $9,000 from $4,500 about a decade ago, and, in 2019, adopting price adders that allow generators to earn more when power supplies get short.

That has made power generation largely a seasonal business in Texas, depending on a few weeks of hot weather and high prices to earn profits. The difference of several degrees in summer temperatures can mean the difference between profit and loss, analysts said.

Those risks have soured investors looking for more reliable returns and put pressure on companies to deliver earnings to shareholders rather than reinvesting them in generation, analysts said.

“It is very uncertain what return will deliver from one summer to the next,” said Steve Piper, research director at S&P Global Market Intelligence. “It’s not hard to make a case that these are better uses of the capital than putting it into the power plants where the return might not be there.”

The pressure from Wall Street to deliver returns led the Houston company Calpine, the nation’s biggest natural-gas generator of electricity, to sell itself in March 2018 to a consortium of investors led by the New Jersey private equity firm Energy Capital Partners and become a private company.

Before going private, Calpine struggled with lackluster earnings and falling stock prices. In the year before its sale, the company lost $339 million in 2017 while its stock price fell below $10 share, down from about $24 a share in 2014. Calpine declined to comment.

“It has become clear over the last 10 years or so that Wall Street has been a little less interested in companies with wholesale (power market) exposure,” Piper said. “This is certainly true for power plants within ERCOT. Their market mechanism doesn’t really deliver a reliable return to new generation.”

The rise of renewable energy has also eroded the weather-based business model on which generators have depended. The peak pricing on scorching summer afternoons in Texas occurs less frequently as wind and solar power generate more electricity to meet the soaring demand.

Last summer, the state avoided the power shortages and spiking prices of the summer of 2019 in part because Texas wind farms were able to produce more electricity during hot spells to meet the demand. Wholesale prices for 2020 topped out at $1,700 per megawatt hour on the afternoon of Aug. 15, far below the state maximum of $9,000 reached during several days the previous summer.

The expansion of solar power could further cut into the peak pricing periods on which generators have relied. Solar produces the most electricity on hot, sunny afternoons when power is needed most.

Solar still represents a tiny share of the state’s generation, but it is growing quickly. Solar generating capacity has more than doubled to nearly 6,800 megawatts since the end of 2018 and is projected to more than double again to some 15,000 megawatts by 2022.

In the last 13 years, the generation mix on Texas’ power grid has shifted toward natural gas and renewables, with wind making the greatest gains. Wind energy generates about 20 percent of the state’s electricity, up from just 2 percent in 2008, while the share for natural gas rose to 47 percent from 45 percent, according to ERCOT.

Those gains came mostly at the expense of coal, whose share of generation fell to 20 percent from 38 percent during that period, according to ERCOT.

Vistra Energy, parent company of the generator Luminant and retail electricity provider TXU, cited competition from lower-cost renewables and natural gas in 2018 when it shuttered three of the state’s largest coal plants, retiring a combined generation capacity of more than 4,000 megawatts and eliminating about 850 jobs.

Vistra, like NRG, has shifted its focus to retail electricity, which its CEO Curt Morgan described in 2019 as “the biggest opportunity” for the company’s investments. Vistra acquired retail electric companies Crius Energy and Ambit Energy in 2019 and Infinite Energy and Veterans Energy in 2020.

Analysts estimate that Vistra and NRG control about 70 percent of the Texas retail electricity market. Vistra did not respond to requests for comment.

“Marcy de Luna. “How did we get here? Winter crisis followed years of squeezes in electricity industry,” Houston Chronicle, March 14, 2021

By Marcy de Luna STAFF WRITER

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