“By facilitating decentralized coordination instead of imposing specific outcomes, the institutions designed in Texas became the most market-oriented in the country, and the most likely to be resilient and adaptive in the face of unknown and charging economic, technological, and environmental conditions.”
– Lynne Kiesling and Andrew Kleit, eds. Electricity Restructuring: The Texas Story (AEI: 2009), p. 3.
The Texas electricity debacle of February 2021 stands as the greatest failure in the history of the power industry–if not any other industry in America. Hundreds dead and many tens of billions of dollars in unnecessary expense led one system architect, Robert Borlick, to lament:
I have to admit, the ERCOT blackouts have shaken me. The amount of physical damage and human suffering they caused is astounding. Obviously, the ‘market’ failed to provide the service reliability that customers expected and deserved.
The Electric Reliability Council of Texas (ERCOT) and the Public Utility Commission of Texas (PUCT) were at the center. Yet their regulatory regime was lauded as the model for the United States by an intellectual elite, who formulated and endorsed a central-planning scheme for the wholesale power market predicated on mandatory open-access rules for transmission (see the post yesterday).
Enter Lynne Kiesling and Andrew Kleit, eds. Electricity Restructuring: The Texas Story, published by the American Enterprise Institute in 2009. Consider these conclusions from the book:
The ERCOT [Texas] market has created a sustainable wholesale and retail market structure, an accomplishment beyond that of other U.S. electricity markets. (p. xv)
The [Texas retail choice] legislation [in 1999] is an example of careful, thoughtful, and practical design resulting in a resilient and adaptive institution. (p. 154)
In Texas, we like to say that electricity restructuring was ‘done right’. (p. xvi)
How ERCOT addressed the challenge of “resource adequacy” and kept the lights on in Texas is the subject of chapter 4. (p. 4)
A few more years of operation will provide the empirical basis for further evaluation of the effectiveness of Texas’s approach to addressing the complex issue of resource adequacy. (p. 93)
True scholarship meets the test of time. Not so with Electricity Restructuring: The Texas Story as a paean to a new governmental paradigm for electricity. The book is neoclassical economics gone awry, central planning gone wrong. It affirms a classical liberal approach to electricity in a negative way.
The book is full of bromides for what appears to be free, coordinated markets: “‘Bottom-up’ market approaches” … “competitive electricity markets” … “competitive electricity deregulation” … “decentralized coordination” … “harnessing private knowledge” … “consumer choice” … “market oriented”….
But there are also a number of red flags: “market rules” … “underlying electricity market design” … “transparent rules” … “open market” … “competing forms of market design” … “market monitoring” … “thoughtful regulation” … “zonal wholesale market design rater than nodal design preferred by academics” … “sustainable wholesale and retail market structure” … “market power mitigation regime” … “legal provider of last resort” … “energy-only resource adequacy mechanism” … “stricter compliance standards” ….
But tucked away is this interesting admission:
… the Texas electricity program was not, strictly speaking, “deregulation,” but one of the most lengthy, complex, and comprehensive restructuring projects ever undertaken in any deregulated industry in the United States. (xiii)
True deregulation and a free market? Hardly.
The Texas grid today is wounded. Capacity/flow problems and price spikes are a threat. More intervention is being implemented to correct the problems of prior intervention–such as ‘stay-in-service’ orders to power generators from regulators to postpone maintenance to avoid (postpone?) day-to-day shortages.
A total rethink of mandatory open access and wholesale power planning is called for. Electricity Restructuring: The Texas Story is a case study of the perils of intervention by an intellectual planning elite that the public should heed.
Appendix: Some Second Thoughts
The Texas debacle, the subject of many posts here, first brought denial and blame on the wrong subjects. But with time, the “energy only” pricing model of the above book came to be reconsidered. Stated Lynne Kiesling in mid-2021: “(oops!) There is now a need to revise the scarcity pricing framework in the light of recent events, and to reflect ever-changing market conditions.”
Robert Borlick added:
I have stated earlier that the ERCOT market’s reliance on scarcity pricing did not foresee an environment with high penetration of zero-marginal cost resources. Back in 2005 I generically simulated an energy-only market to demonstrate how scarcity pricing would work. I never anticipated the mass introduction of renewables at that time.
Wind and solar, in fact, did blow up the planning model. The indirect effect of the unreliables was greater than just not showing up when most needed. When wind and solar are operating normally, to be precise, they hurt reliability by ruining the economics of the reliables. Renewables, in this sense, ‘market failed’ natural gas (and coal).
But the above experts hid the blame. To blame wind and solar is politically incorrect. As I have found out in many social media exchanges (see below), the group is very much in the camp of climate alarmism and forced energy transformation.