Only Free Market Reforms Can Repair the Damage of the Texas Blackouts

Well, that didn’t take long.

The same day Texas started experiencing blackouts in the midst of an unprecedented winter storm, critics started pointing to markets as the problem. Monday’s Dallas Morning News ran a Bloomberg Wire story that claimed “The extreme cold appears to have caught Texas’s highly decentralized electricity market by surprise.”

Yes, Texas has experienced significant power outages. But it is not alone. PowerOutage.us shows that Oregon, Oklahoma, Louisiana, Kentucky, and West Virginia–all with highly regulated electric grids–have also experienced significant outages. 

In addition, Texas is the southernmost state to be severely affected by this storm. Weather maps show that Texas was at the tip of the spear as the Arctic weather descended into the U.S.

Yet with more than 30% of Texas customers reported to be without power on Tuesday, a deeper investigation into the cause of the blackouts is warranted.

Wind and Solar Power Disappear

Wind turbines are a great place to start.

The Electric Reliability Commission of Texas (ERCOT), the grid operator for most of Texas, issued its first emergency alert 12:17 a.m. on Monday, February 15. Barely an hour later, ERCOT announced “there is not enough generation available to meet current demand,” and that it would “instruct utilities to begin rotating outages.”

Wind generation was the second largest source of power to the Texas grid last year, providing almost 23% of the state’s needs. Yet, according to news reports, close to half of Texas’ wind turbines were out of service Monday night because they were frozen. And the rest of them were operating at far less than capacity. Just as it does at the summer peak, wind failed to show when it was most needed.

Of course, supporters of wind energy are already out defending it. Wade Schauer with Wood Mackenzie, an energy research and consulting firm, said “The wind is not solely to blame.” Bloomberg once again joined in by writing, “Don’t point too many fingers at Texas wind turbines, because they’re not the main reason broad swaths of the state have been plunged into darkness.”

Likewise, the Texas Tribune chimed in, claiming “No, frozen wind turbines aren’t the main culprit for Texas’ power outages. Lost wind power makes up only a fraction of the reduction in power-generating capacity that has brought outages to millions of Texans across the state during a major winter storm.”

The Wall Street Journal did a great job of countering the defenders of Texas wind power:

Blame a perfect storm of bad government policies, timing and weather. Coal and nuclear are the most reliable sources of power. But competition from heavily subsidized wind power and inexpensive natural gas, combined with stricter emissions regulation, has caused coal’s share of Texas’s electricity to plunge by more than half in a decade to 18%.

Wind’s share has tripled to about 25% since 2010 and accounted for 42% of power last week before the freeze set in. About half of Texans rely on electric pumps for heating, which liberals want to mandate everywhere. But the pumps use a lot of power in frigid weather. So while wind turbines were freezing, demand for power was surging.

If anything, the WSJ understated the problem. ERCOT’s numbers show just how badly wind performed Monday morning.

On Sunday, January 31, wind dominated the Texas market. Generation topped 50% of installed capacity, and produced close to or above 40% of the total ERCOT load for much of the day:

Just a week before the outages of Monday morning, wind output was strong throughout the day—especially in the early morning hours. This was true both in terms of its capacity factor (64%) and percentage of the ERCOT load (58%):

But wind production looked entirely different on the Monday morning of the storm:

Wind was a no-show. During the critical four-hour period from 10 p.m. to 2 a.m. when ERCOT was forced to begin rolling blackouts, actual wind output averaged less than 10% of the ERCOT load. This was down from about 58% the week before. It would be hard to overstate the damage caused by wind’s unreliability Monday—or the harm its intermittency causes on a regular basis.

In one sense, though, wind’s defenders are correct when they say, “the wind is not solely to blame.” Solar energy also exposed the reliability problems of renewable energy. Where was solar, the most rapidly growing new energy source in Texas, Sunday night? Where solar is every night—off the grid, for the simple reason that the sun was not shining. Some might claim this is no big deal because solar is not designed to generate electricity at night. Exactly. Its primary design feature also proved to be its main design flaw Sunday night.

Missing Generation

The absence of wind and solar tell only part of the story of why renewables are the main factor underlying the blackouts. Over the last five years, wind and solar generation have dominated new power plants coming online in Texas. Wind generation’s output has increased by 113%, and solar’s by almost 2000%.

This growth has crowded out almost all investment in other types of more reliable and affordable generation such as natural gas and coal. Gas-fired generation is up only 3.5% during this period. In 2020, only two small combined-cycle gas units with a total capacity of 88 MW came online. Coal’s output is down 30%.

ERCOT Installed Capacity by Fuel Type (MW)

This begs the question, why would investors build new intermittent sources of generation in Texas like wind and solar that do not show up when needed? And that cannot take advantage of the higher prices during times like these?

The sole cause for this, that in normal market circumstances would be an obvious malinvestment, is renewable energy subsidies. 

From 2006 to 2019, wind and solar generators in Texas received about $19.4 billion in subsidies and benefits from taxpayers and consumers. It is estimated generators will receive another $15.9 billion over the next decade. In 2018, about 28% of renewable generators’ income comes from subsidies. Investors have flocked to these subsidies. And why shouldn’t they? Free money and subsidized transmission from the government makes for a very attractive return on investment.

On the other hand, investors have spurned investment in reliable traditional generation sources like coal and natural gas. Coal, of course, has been run out of business by the U.S. Environmental Protection Agency. Investors are spurning natural gas, however, simply from an economic perspective. Without the massive subsidies offered to wind and solar, new natural gas plants cannot compete. 

Because of market distortions created by renewable subsidies, when Texas ran low on electricity Monday night, the grid operator had nowhere to turn. Reliable natural gas plants that could have shouldered much–if not all–of the heavy load were nonexistent. Because they had not been built, thanks to the malinvestment in renewables. 

Reliability Warnings

It is important to understand that Texas did not arrive at this condition overnight. For years it has been obvious to everyone that renewables have been worsening the stability of the Texas grid.

In 2012, PUC Chair Donna Nelson explained the problems caused by renewable energy subsidies to the Texas Senate:

Federal incentives for renewable energy … have distorted the competitive wholesale market in ERCOT. Wind has been supported by a federal production tax credit that provides $22 per MWh of energy generated by a wind resource. With this substantial incentive, wind resources can actually bid negative prices into the market and still make a profit. We’ve seen a number of days with a negative clearing price in the west zone of ERCOT where most of the wind resources are installed. … The market distortions caused by renewable energy incentives are one of the primary causes I believe of our current resource adequacy issue… [T]his distortion makes it difficult for other generation types to recover their cost and discourages investment in new generation.

Then in 2017, William Hogan, Professor of Global Energy Policy at Harvard University, wrote about how wind energy distorts prices on the grid:

Approximately 16,000 MW of wind capacity in Texas thus has an incentive to operate as much as possible, even at locational prices less than zero. … Subsidized wind energy is not only increasing the frequency of negative prices in Electric Reliability Council of Texas (ERCOT), it is decreasing prices in every hour that the wind farms are generating.

In 2019, Texas state Sen. Kelly Hancock authored a bill that would have required the Public Utility Commission of Texas (PUC) to study how to deal with the problem caused by renewable energy subsidies. The Texas Senate passed the bill with strong bipartisan backing, but the bill was killed in the Texas House State Affairs Committee, chaired by current Speaker Dade Phelan, when lobbyists for renewable energy companies and environmental groups rose up in opposition.

Even without the bill, however, the PUC could have taken steps to address the harms caused by renewables. Yet, they repeatedly failed to do so. As far back as 2013 the PUC started addressing this issue. Many of the concerns about grid reliability were focused on the amount of reserve generation Texas had on hand for emergencies such as we are facing today. ERCOT has traditionally set a reserve margin target.

Originally, the target was 12.5%. As concerns about the increasing amount of unreliable wind on the grid grew, the target was increased to its current 13.75%. Through 2017, the reserve margin was generally near or even well above 12%. However, as renewable subsidies led to decreased investment in reliable generation continues, the projected summer reserve margin tumbled to 7.50% in 2018 and 8.6% in 2019.

In response to the precipitous drop in ERCOT’s reserve margin, two things occurred. 

First, generators sought to take advantage of the possibility of increased profits without any effort on their part. As the Texas Tribune reported in 2018, “Major power generators including Calpine, Exelon and NRG are asking the commission to tweak an existing formula known as the operating reserve demand curve (ORDC) to increase the amount of money they receive when demand for power escalates.” Exelon’s proposal sought to increase electricity prices by $4 billion a year.

Advertisement from Generators Seeking to Increase Subsidies

Source: Austin American-Statesman

Second, regulators panicked. Unable to control the amount of generation in Texas like regulators can in other states, regulators feared the possibility of the lights going out on their watch. Thus, commissioners at the PUC gave in to generators’ demands and intervened in the market by artificially increasing prices in the hope that generators would invest the resulting increased profits in reliable natural gas generation.

Through tweaking the ORDC, an administrative price adder that the PUC had previously adopted, the PUC increased wholesale electricity prices in 2019 by $3.6 billion. As reported by the Houston Chronicle, that money flowed straight into generators’ pockets, including renewable energy generators:

NRG Energy, one of the state’s biggest generators, reported that higher power prices in Texas contributed $213 million — or about 40 percent — of the $524 million the company earned from its generation business before taxes, interest, depreciation and amortization for the quarter ending in September. The higher prices helped convert a $72 million third-quarter loss in 2018 into a $372 million profit for the same period in 2019.

Vistra Energy of Irving, the state’s biggest power seller, reported third-quarter income from generation increased $226 million in Texas before taxes and other factors, off-setting lower generation prices in other markets.

Opposition to the PUC’s actions came from both conservative and liberal sources: “A different set of calculations provided by the Texas Public Policy Foundation–the conservative, fossil fuel-funded think tank that is fighting the proposal alongside liberal watchdog groups like Public Citizen–show the average family of four would pay $233 more for electricity per year. The foundation also points out that there would be indirect costs as businesses facing higher power prices pass their cost down to consumers” (Texas Tribune).

As has become obvious this week, there is no indication that any of this money made its way back into the market in the form of new, reliable generation. The lack of new investment in reliable generation should not be a surprise. The ORDC is not designed to address the real cause behind Texas’ reliability problem: renewable energy subsidies, which led to the investment into wind and solar generation that failed to come through when needed this week. The obvious fault in Texas’ reliance on renewables was noted by Dana Perino on Fox News Channel’s The Five, “Fingers crossed for good weather is not a sound policy.”

Though regulators at the PUC and grid managers at ERCOT must share some of the blame for what has happened, the ultimate responsibility for the loss of power this week rests in the Texas Legislature, Governor Greg Abbott, Lieutenant Governor Dan Patrick, and Speaker Dade Phelan. For years they have sat by and watched corporations with multi-billion market caps fleece Texas consumers and taxpayers while being unwilling to take on one of the left’s favorite causes, renewable energy. The greatest danger that Texans now face is the political establishment’s continued unwillingness to challenge the renewable lobby. If that happens, the result will be more of the same: increased cost of electricity and decreased reliability of the electric grid. 

Conclusion

Fortunately, there is a simple path to reform.

First, the Texas Legislature must this session eliminate all subsidies and benefits for renewables in Texas. These include the state’s renewable energy credit program, property tax abatements under Chapters 312 and 313 of the Texas Tax Code, and subsidized transmission across hundreds of miles of Texas. 

Second, the Legislature must direct the PUC to require that wind and solar operators rather than consumers bear the costs their intermittency and federal subsidies impose on the grid. Texas cannot stop renewable generators from reaping federal subsidies, but it can stop most of their harmful effects.

Third, the Legislature must end the PUC’s constant intervention in the Texas electric market. It can start by eliminating the electricity tax and other so-called “reliability adders” that do nothing more than distort market operations. On top of that, the Legislature can also eliminate price caps, restrictions on generation ownership, and archaic antitrust measures that hinder investment in the Texas market. 

In the late 1990s and early 2000s, Texas created something no state and few nations had ever accomplished before–a competitive (though still regulated) electricity market. It has functioned well over the years, providing Texans with a reliable and affordable supply of electricity. However, the fact that special interests and overzealous regulators have slowly compromised the ability of the market to meet the needs of Texans is now on full display. The Texas Legislature must act decisively this year to implement free-market reforms or the situation will only get worse.