Why the Texas electricity market failed

Update: An expanded version of this post has now been published at Inside Story

By special request from regular commenter James Wimberley (and with some suggestions from him), some thoughts on the failure of the Texas electricity market to deal with unexpected cold weather.

Texas lost power when neighboring states, which also experienced the freeze did not. This is part because it has a mostly separate electricity grid. The Texas Interconnection has been kept separate from the rest of the US grid deliberately, to ensure that it remains under Texas not Federal control. That means that Texas couldn’t draw on electricity from the major power pools, notably the Southwest Power Pool.

The reason Texas was kept separate was so that it could replaced traditional integrated electricity supply with a pool market for electricity generation, combined with competitive retailing and lightly regulated transmission and distribution. This was run by ERCOT, the Electric Reliability Council of Texas (a name with plenty of irony right now), Interestingly, Australia is a mirror image. The National Electricity Market was set up on the pretext that it was necessary to manage the National Grid, which connected systems in Eastern Australia from the 1990s onwards.

The US ought to have a single national physical grid, as most of Australia does. The benefits of interconnection increase with greater need for reliability, greater total requirements for electricity (as transport is electrified) and an increased role for time-varying generation from solar and wind. The costs of interconnection have fallen with technological progress including (over long distances) the option of high-voltage direct current (HDVC) transmission.

A lot of people have suggested that the electricity market doesn’t provide incentives for reliable supply. Others (with some overlap) have commented adversely on the fact that the price of electricity rose to $9000/MWh during the freeze (average is around $30/MWh). The correct analysis is more subtle. The idea of a pure electricity market is that the prospect of getting high prices when everyone else has shut down would provide an incentive to maintain reliable supply.

Electricity only market seen as not providing adequate incentives for reliability. But ultra-high peak prices are supposed to provide those incentives. Max of $9000/MWh too low, not too high.

Switch from vertical integration to pool market good for renewables. An inherent result of markets, or just that disruption of any system favors shift to more efficient technologies?

(I’m going to edit this bit by bit, without noting updates)

39 thoughts on “Why the Texas electricity market failed

  1. Excerpt below from the Monthly Review, Feb 01. 2019.

    “Capitalism has failed – What Next?

    Less than two decades into the twenty-first century, it is evident that capitalism has failed as a social system. The world is mired in economic stagnation, financialization, and the most extreme inequality in human history, accompanied by mass unemployment and underemployment, precariousness, poverty, hunger, wasted output and lives, and what at this point can only be called a planetary ecological “death spiral.”1 The digital revolution, the greatest technological advance of our time, has rapidly mutated from a promise of free communication and liberated production into new means of surveillance, control, and displacement of the working population. The institutions of liberal democracy are at the point of collapse, while fascism, the rear guard of the capitalist system, is again on the march, along with patriarchy, racism, imperialism, and war.

    To say that capitalism is a failed system is not, of course, to suggest that its breakdown and disintegration is imminent.2 It does, however, mean that it has passed from being a historically necessary and creative system at its inception to being a historically unnecessary and destructive one in the present century. Today, more than ever, the world is faced with the epochal choice between “the revolutionary reconstitution of society at large and the common ruin of the contending classes.”” – John Bellamy Foster, Monthly Review.

    Since J.B.F. wrote those words two years ago matters have gotten a lot worse very quickly. We have seen the egregious failure of Western neoliberal capitalism to deal with the COVID-19 pandemic: the first of many novel zoonotic diseases which will now ravage the human world due to our destruction of nature. We see also an exponential rise in disastrous climate events due to the destabilization of the climate. The climate is getting both hotter and more unstable. Extreme events are becoming more common. Couple all this with the neoliberal destruction of public wealth and shared infrastructure and we have… Texas!

    Foster cautiously wrote two years ago that the breakdown and disintegration of capitalism was not necessarily imminent despite the clear signs that capitalism is a failed system. There no longer seems to be any reason for that sort of caution. The stark choice now is indeed between “the revolutionary reconstitution of society at large” or “the common ruin of the contending classes”. The USA seems determined to choose the common ruin path. Why?

    “… when I came back, it was utterly apparent that the country had gone collectively insane.” – Chris Hedges.

  2. “What ERCOT planners got colossally wrong was the availability of their fossil fleet: gas and coal plants failed. Even a nuclear reactor tripped offline.”
    By Leonard Hyman and William Tilles for Oilprice.comhttps://wolfstreet.com/2021/02/18/whos-to-blame-for-the-texas-power-crisis/

  3. If Texas put in an interconnector across a state boundary, they then have to deal with federal laws, such as having to rate wind turbines down to -30.

    “Texplainer: Why does Texas have its own power grid?

    “Basically, Texas has its own grid to avoid dealing with — you guessed it — the feds. But grid independence has been violated a few times over the years — not even counting Mexico’s help during blackouts in 2011.

    BY KATE GALBRAITH 
    FEB. 8, 2011
    UPDATED: FEB. 15, 2021

    “Why does Texas have its own electric grid?

    “Texas’ secessionist inclinations have at least one modern outlet: the electric grid. There are three grids in the Lower 48 states: the Eastern Interconnection, the Western Interconnection — and Texas.

    “This event, known as the “Midnight Connection,” set off a major legal battle that could have brought Texas under the jurisdiction of federal regulators, but it was ultimately resolved in favor of continued Texan independence..”…

    https://www.texastribune.org/2011/02/08/texplainer-why-does-texas-have-its-own-power-grid/

    Thanks Planet America.
    Watch from about 42min.
    Planet America 19 February
    https://www.abc.net.au/news/programs/planet-america/2021-02-19/planet-america-19-february/13174154

    And watch from about 33mins for America ‘s first social democrat newspaper proprietor and senator doing sensible things, get crushed by power against socialism.
    https://en.wikipedia.org/wiki/Victor_L._Berger

  4. Do people here really believe the USA can fix itself? I don’t. Their decline into social decay and environmental damage has gone too far. I could be wrong. I hope I am wrong. But I think strong signs are there that the decline is irreversible. Their denialism of objective realities is too potent and too widespread. Already the right is claiming that renewable energy is the cause of all of Texas’s woes. And a huge and very truculent demographic believes that, especially in Texas. Facts and logic mean nothing. The rich elites will brush aside facts with more money, more propaganda. The poor and the voiceless will conveniently die in slums and prisons.

  5. From The Guardian article by Maanvi Singh published on Feb 19, headlined “‘California and Texas are warnings’: blackouts show US deeply unprepared for the climate crisis”, on the Texas grid failure:

    “In a state that relies heavily on natural gas for power generation, infrastructure wasn’t equipped to withstand heavy snow and cold temperatures – wells froze, and the power outages made it impossible to pump the gas. “You need electricity to generate electricity, which really causes these disasters to escalate,” Nateghi said. And because most of the state operates its grid separately from the rest of the western region, largely to avoid federal regulations, Texas wasn’t able to easily import power from neighboring states.”

    As a suggested fix for these escalating problems:

    “To address all of these issues, scientists and advocacy groups are increasingly pushing for a decentralized power system that empowers communities to generate and store their own energy, using renewable sources – while investing in infrastructure that will allow regions to share power when disaster strikes.”
    https://www.theguardian.com/environment/2021/feb/19/power-outages-texas-california-climate-crisis

    From Ian Dunlop’s op-ed published on Feb 17, headlined “The pandemic is climate change on fast forward”, includes:

    “…Herman Daly’s observation that “the economy is a wholly-owned subsidiary of the environment, not the reverse”. And if the environment is in big trouble, as Graeme Samuel’s EPBC Review, the Intergovernmental Platform on Biodiversity and Ecosystem Services Global Assessment and the Dasgupta Review on the Economics of Biodiversity confirm, so are we.”
    https://johnmenadue.com/the-pandemic-is-climate-change-on-fast-forward/

  6. Include El Paso in the mix. They opted out of the Tx grid and did much better than the rest of the state. The also winterized as recommended years ago.

  7. Part of it also seems to be a US-wide belief that any market, no matter how badly run or stupidly designed, is always necessarily better than any possible alternative. Even if the alternative is doing without, if a market exists that is all that is required. So in Texas they have an electricity market that is even freer than other states because it’s not bound by the federal regulations… and that’s seen as a good thing.

    There’s also a lot of othering in the USA. They never really got over the British “divide and conquer” strategy as applied to themselves. So when a bunch of southerners die… well, it’s not as though they’re actually *people* the way you and me are people. Ditto northerners or whatever you want to label Californiaks as. Trump is merely the latest logical extension of that approach… and from a government-of-Texas point of view, Ted Cruz stepped up to take the blame so they don’t really have to change anything.

    The problem, as is so often the case, is that despite talk of “discount rates” and “long term assets” and so on, big expensive assets need to be built and maintained. Often the cost of replacement goes up over time rather than down, because no-one will accept the same quality and quantity of water/electricity/roads that they had when those things were built. But you can keep patching worn-out bits instead of replacing them when they reach end of life. The US has systematically refused to maintain let alone replace infrastructure, and the bills are coming due. It’s not just the Texas grid, it’s the interstate highways, the hydrological systems (rivers as well as water and sewer pipes), pretty much anything that will let you built up a maintenance deficit without immediately failing.

  8. It also seems to be a US-wide belief that any market, no matter how badly run or stupidly designed, is always necessarily better than any possible alternative. Even if the alternative is doing without, if a market exists that is all that is required. So in Texas they have an electricity market that is even freer than other states because it’s not bound by the federal regulations… and that’s seen as a good thing.

    There’s also a lot of othering in the USA. They never really got over the British “divide and conquer” strategy as applied to themselves. So when a bunch of southerners die… well, it’s not as though they’re actually *people* the way you and me are people. Ditto northerners or whatever you want to label Californiaks as. Trump is merely the latest logical extension of that approach… and from a government-of-Texas point of view, Ted Cruz stepped up to take the blame so they don’t really have to change anything.

    The problem, as is so often the case, is that despite talk of “discount rates” and “long term assets” and so on, big expensive assets need to be built and maintained. Often the cost of replacement goes up over time rather than down, because no-one will accept the same quality and quantity of water/electricity/roads that they had when those things were built. But you can keep patching worn-out bits instead of replacing them when they reach end of life. The US has systematically refused to maintain let alone replace infrastructure, and the bills are coming due. It’s not just the Texas grid, it’s the interstate highways, the hydrological systems (rivers as well as water and sewer pipes), pretty much anything that will let you built up a maintenance deficit without immediately failing.

  9. It also seems to be a US-wide belief that any market, no matter how badly run or stupidly designed, is always necessarily better than any possible alternative. Even if the alternative is doing without, if a market exists that is all that is required. In Texas they have an electricity market that is even freer than other states because it’s not bound by the federal regulations… and that’s seen as a good thing.

    The problem, as is so often the case, is that despite talk of “discount rates” and “long term assets” and so on, big expensive assets need to be built and maintained. Often the cost of replacement goes up over time rather than down, because no-one will accept the same quality and quantity of water/electricity/roads that they had when those things were built. But you can keep patching worn-out bits instead of replacing them when they reach end of life. The US has systematically refused to maintain let alone replace infrastructure, and the bills are coming due. It’s not just the Texas grid, it’s the interstate highways, the hydrological systems (rivers as well as water and sewer pipes), pretty much anything that will let you built up a maintenance deficit without immediately failing.

  10. Sorry, once again wrodpress alternated between saying “you’re logged in but I’m not going to display your post” and “that’s a dupliate”, even when I restarted the browser and cleared cookies. Then when I asked wordpress to email me a login link and used that… three copies appeared.

  11. I understand that the failure arose from lack of winterization – that allowed gas control centres to freeze up, which halted supply to electricity plants. There was also the fact that maintenance on some electricity generation is done in February, and this also constrained supply. BUT – similar events in 2011 and the late 90s led to recommendations on freeze-proofing electricity infrastructure, which were ignored due to cost (and not enforced because – Texas). Such events are also predicted to occur with increasing frequency.

    This coupled with high baseload, due to COVID. BUT, again, engineers warned last July that continuing high baseload would mean difficulties in February. Again, they were ignored, because that would cost.

    Interconnection is not a panacea. It is costly (more so in the US because there’s a 600 km gap of very low demand between the east and west coasts – just like the gap between the eastern Australian states and WA), and can only move limited amounts. In the worst case, a major failure in one sector can bring down the whole grid unless rapidly isolated. Texas came close to this, with a frequency drop of near 20x tolerance.

  12. Some comments on LGM:

    “Total power capacity between East and West over the six together is just about 1.5 GW. Call it the equivalent of one big power plant.

    The dividing line runs roughly down the middle of the Great Plains. The transmission links just sort of peter out there. Any plan to do serious connection between the two grids is looking at both the big AC-DC-AC interties, but building out many hundreds of miles of HV transmission lines. The Great Plains are this great big piece of empty-and-getting-emptier in the middle of the country. Half a million square miles. Average population just under 10 people per square mile. Almost two-thirds of the counties’ population density has fallen below the 7.0 per square mile that’s the historical definition of frontier. You gotta have a really good reason to decide to move electric power across that 300-to-500 mile wide stretch.”

    NOTE: No-one is saying interconnection would not be useful – just that it would not be a commercial proposition under current arrangements.

    And a useful overview of Texas issues: https://www.lawyersgunsmoneyblog.com/2021/02/lone-star-catastrophe#comment-5271648712

  13. JQ: thanks for the shout-out!

    A few anecdata. Good2go beat me to it on El Paso.
    – Some Texas households were mis-sold insanely risky supply contracts at the volatile whole sale spot rate, which of course spiked, landing some with bills for thousands of dollars for a few days’ supply.
    – Robert Reich claims that rich neighbourhoods were given priority over poor ones for the planned outages.
    – Why did the water supply fail? Any sane grid manager would give this top priority, along with hospitals.
    – Britain (the island) has roughly twice the population of Texas. It currently has 4.7 GW of HVDC interconnection capacity, over six seafloor cables to France, the Netherlands, Belgium and both parts of Ireland, which has its own integrated grid.. Two more are under construction to Norway and Denmark. Subsea cables are obviously much more expensive than the short land ones needed to hook up Texas.
    – Australia should be thinking hard about an HVDC link to Western Australia. Reliability is worth paying for.

    The dog that didn’t bark in he night is the good performance of he other regional ISOs. They are steadily moving towards competitive generation markets (eg PJM in the Northeast). Being regional adds a layer of protection for the engineers from political interference.

    There is no escaping the need in any economic system for professional independence and character in essential technical jobs. You can design safequards that make this more likely, that’s all

    One of my grandfathers was a senior official in the old Indian Civil Service at the end of the Raj. He rose to be Auditor-General, which I believe included oversight of the finances of the princely states. He was a very able but not very nice man, obstinate and domineering. That’s exactly what you needed in that job, not niceness and diplomacy. Somehow I don’t think that’s how ERCOT has been staffed.

  14. PS: A secondary argument for Texas to rejoin the United States is storage. A grid with heavy reliance on wind and solar needs more storage, especially if you hope to phase out fossil gas generation. The cheapest form of bulk electrical storage is pumped hydro. Texas is flat and has negligible potential for this. On the other hand, there are myriads of suitable hills and mountains in the Rockies, Appalachia and the Ozarks. Ergo, Texas needs interconnectors to firm its plentiful wind and solar resources.

    This is a minor addition to the main case, as Texas has the autarkic option of buying lots of batteries instead, at a price. See also oilfield geothermal, under development: https://eavor.com/about/technology

  15. James Wimberley,
    ICYMI, the global pumped hydro atlas may be of interest. ANU has identified 616,000 potential sites around the world.

    “We found about 616,000 potentially feasible PHES sites with storage potential of about 23 million Gigawatt-hours (GWh) by using geographic information system (GIS) analysis. This is about one hundred times greater than required to support a 100% global renewable electricity system. Brownfield sites (existing reservoirs, old mining sites) will be included in a future analysis.”
    http://re100.eng.anu.edu.au/global/

    Per ARENA commissioned study in 2018:

    “There are multiple affordable options for firm dispatchable renewable electricity generation over all timescales at one and a half to two times the cost of variable renewable energy (VRE) when used regularly.”
    https://arena.gov.au/knowledge-bank/comparison-of-dispatchable-renewable-electricity-options/

  16. It is easier, and in some ways proximally more practical, to concentrate on micro and meso phenomena, rather than the macro phenomena. However, in the end it is the entire tsunami which must be understood, not the latest eddy at the current limit of its destructive surge. Capitalism is the tsunami swamping and destroying the world. What’s happening in Texas is a symptom of a much bigger problem. The US is a failing state. It is a failing state because it is a radically extreme capitalist state; the condition we call neoliberal capitalism.

    The measures required to save and reconstruct the USA fall into that zone which most influential Americans and their red-neck populist supporters would call socialism or communism. This is even though measures of a simply more Keynesian, social democratic and mixed economy nature would be sufficient, most likely, to save the USA. But even these measures will be called Socialism and execrated by the above mentioned groups. The US is now applying “The better dead than red” philosophy to themselves. They would rather die than save themselves with a bit of democratic socialism. More precisely, the elites and the rednecks would rather see others die than change themselves. First nature comes for the others. Then it comes for the oppressors.

  17. Many people in Texas were charged $9 US per kilowatt-hour for residential electricity. This is defeating the purpose of having an electricity grid, which is to be a useful servant for the people of Texas, not a capricious demon.

  18. James, I’m afraid pumped storage isn’t the cheapest bulk storage here. If you look at our proposed Snowy 2 scheme you’ll see it’s crazy expensive, even before accounting for cost overruns. The cost per kilowatt of power capacity is enough to make a grown woman cry, and they’re usually more sensible than grown men.

  19. Re Texas, cold front and climate change, commentators I’ve seen heard read in the past week have gone with ‘we will wait and see’ regarding climate change.  

    Texas event underlines, “the need of adaptation and risk-reduction strategies at the local and regional levels.”(^LL)

    More than you need to know.

    Carbon Brief, 2021 re Barents-Kara Sea region and the East Siberian-Chukchi Sea, Micheal Mann & Rosby Waves.
    ****

    “Q&A: How is Arctic warming linked to the ‘polar vortex’ and other extreme weather?

    …” what those theories look like, and how the evidence measures up.
    [Links to theories]”..?

    …” Some scientists have taken this a step further to propose that warm periods in specific areas of the Arctic can affect particular parts of the mid-latitudes. For example, a 2015 Nature Geoscience study found that warmer-than-average temperatures over the Barents-Kara Sea region and the East Siberian-Chukchi Sea region tend to lead to cold winters across East Asia and North America, respectively.

    “The theory seems counterintuitive – particularly the idea of more extreme cold winters in a warmer climate. But it is important to note that while one country or continent might see a short-term blast of very cold conditions, the world as a whole is still warming.

    “The map below shows how temperatures on 31 January 2019 across the world compare to the long-term average.”
    https://www.carbonbrief.org/qa-how-is-arctic-warming-linked-to-polar-vortext-other-extreme-weather
    ****

    (^LL)
    Published: 08 January 2021
    “Spatial variations in the warming trend and the transition to more severe weather in midlatitudes

    …” Arctic amplification (AA) causes increases in external radiative forcing to produce faster increases in near-surface temperatures in Northern Hemisphere (NH) high-latitudes than elsewhere7. Although not completely understood, local and remote processes are known to be contributors, e.g., sea ice melting, reduction in albedo, clouds, downward longwave radiation, heat and moisture transport from tropical convection14.

    …”Hence, our observation-based analysis indicates a clear spatial and temporal inter-dependence in the global warming. The divergent warming trends can have profound impacts on the weather of near and remote locations. Changes in anthropogenic forcing can have unexpected impacts on climate and weather even if international mitigation efforts are successful, underlying the need of adaptation and risk-reduction strategies at the local and regional levels.”
    https://www.nature.com/articles/s41598-020-80701-7
    ****

    I hope Michael Mann provides an update relative to Texas event, re Rosby Waves and Planetary Wave Resonance as they “strongly suggests that anthropogenic warming is impacting the zonal mean temperature profile in a manner conducive to wave resonance and a consequent increase in persistent weather extremes in the boreal summer” … using this paper:-

    “Influence of Anthropogenic Climate Change on Planetary Wave Resonance and Extreme Weather Events

    Michael E. Mann, Stefan Rahmstorf, […], and Dim Coumou

    “Abstract
    … Persistent episodes of extreme weather in the Northern Hemisphere summer have been shown to be associated with the presence of high-amplitude quasi-stationary atmospheric Rossby waves 

    … ” The underlying mechanistic relationship involves the phenomenon of quasi-resonant amplification (QRA) of synoptic-scale waves with that wavenumber range becoming trapped within an effective mid-latitude atmospheric waveguide. Recent work suggests an increase in recent decades in the occurrence of QRA-favorable conditions and associated extreme weather, possibly linked to amplified Arctic warming and thus a climate change influence. Here, we isolate a specific fingerprint in the zonal mean surface temperature profile that is associated with QRA-favorable conditions. State-of-the-art (“CMIP5”) historical climate model simulations subject to anthropogenic forcing display an increase in the projection of this fingerprint that is mirrored in multiple observational surface temperature datasets. Both the models and observations suggest this signal has only recently emerged from the background noise of natural variability.

    “In summary, our analysis of both historical model simulations and observational surface temperature data, strongly suggests that anthropogenic warming is impacting the zonal mean temperature profile in a manner conducive to wave resonance and a consequent increase in persistent weather extremes in the boreal summer. Combined with other additional proposed mechanisms for climate change impacts on extreme weather, this adds to the weight of evidence for a human influence on the occurrence of devastating events such as the 2003 European heat wave, the 2010 Pakistan flood and Russian heat wave, the 2011 Texas heat wave and recent floods in Europe.
    https://www.ncbi.nlm.nih.gov/pmc/articles/PMC5366916/#!po=3.90625
    ****

    https://en.wikipedia.org/wiki/Rossby_wave

    A Video – plenty more…
    Rossby waves and extreme weatherhttps://m.youtube.com/watch?v=MzW5Isbv2A0

  20. Texas electricity demand has exceeded supply since Feb 13 – see Art Berman’s recent tweet (including graph of Texas supply & demand from Jan 22 to Feb 20):

    “”During the crisis” is when there was a crisis–not enough power to meet demand. We are still in the crisis based on latest data.”

  21. Moz “The US has systematically refused to maintain let alone replace infrastructure,”

    The comparison with China is stark in this regard. China bounding into the 21st C and USA decaying back into the 19th.

    Because most American’s only view American media, they are probably blissfully unaware how far behind they are, but they still want to MAGA.

  22. JQ in Inside Story ‘The first part of the problem is that most of Texas is not connected to the rest of the US power grid. ”

    With due respect, I think this is the first part:-Texas we warned definitively in 2011. Swe report at end.

    Via excellent AGW thread prompted by Texas event.

    “And the Sudden Stratospheric Warming (SSW) event has after a month+ yielded or previewed the long, strong -AO until the + phase change earlier this week. The background tropics is a flavor of La Niña. February 2021 is so far anomalously cool relative to previous months/years.”

    “30 years of warnings to winterize Texas power plants, yet they still froze. Will Austin finally require it?”

    “The 2011 review quotes a state review of the 1989 storm: “The near complete loss of the ERCOT grid brings an awareness that, even in Texas, plant operators must prepare for cold weather emergencies …This awareness of and attention to cold weather problems must be continued.”

    “The 2011 report continues: “Texas has now had that second event, and the answer is clearly that the corrective actions were not adequate, or were not maintained. Generators were not required to institute cold weather preparedness, and efforts in that regard lapsed with the passage of time. It is also possible that new ownership or new plant personnel lacked the historical perspective to make these efforts a priority, at least in the absence of externally imposed requirements.”

    “This week, history repeated itself.”…

    https://www.wfaa.com/mobile/article/news/local/investigates/30-years-of-warnings-to-winterize-texas-power-plants-yet-they-still-froze-will-austin-finally-require-it/

    Report :

    Click to access 08-16-11-report.pdf

  23. Me Mea culpa:- “With due respect, I think this is the first part:-Texas was warned definitively in 2011. Swe report at end.”

    Better:
    With all due respect, that may be the first part, but Texas was definitively warned re cold proofing in 2011, so if report followed and cold proofing done minimal (assumed) disruptions, intercinnectors or not. A snafu.

    (I agree James, not on mobile, and edit function )

  24. I feel like it is unlikely that allowing higher peak prices would have helped very much. Making good returns on weatherisation equipment once every 50 years is a pretty risky investment. And expecting every single player in this industry to price climate tail risks is problematic.

    And the gas distribution lines and gas extraction lines failed. How is that price signal meant to propagate back up the gas network to the wells? What do you do about the natural monopolies on the transmission grid? When people are buying and selling wells, are they meant to be pricing in the added value of weatherised wells?

    An uncapped maximum price would act as an incentive to prepare for bad weather, and since the extra capital cost to properly weatherise everything is probably only a percent or two, shouldn’t raise average prices that much. But trying to get people to chase after extremely risky returns that comprise 1% of the market value is probably not going to work that well.

    The cost just to figure out how to price this stuff up and produce contracts that assign the risk effectively down the chain could be higher than the return. Small players especially are not going to bother.

    In a world of perfect information, cost-free transactions, and the ability to bundle a vast number of uncorrelated risky assets into a single decent investment, maybe. Real world, not so much.

    Which is why the normal solution is just regulation (or at least a capacity market). Empirical evidence suggests that this actually works, but energy-only markets don’t seem to have a great track-record.

  25. Geoff Miell’s post of FEBRUARY 22, 2021 AT 12:32 PM, contains a time series diagram of ‘excess demand’, posted by Art Berman. This diagram is very useful to relate Ben McMillan’s point to what I would say belongs to mainstream Economics, even though it is not discussed much in the applied area.

    Within the conceptual framework of ‘markets allocating resources’, I’d say the Texas electricity market failed because the market is incomplete in the sense of Arrow-Debreu. That is, the relevant future markets for state contingent commodities [fn1] do not exist. Therefore it is impossible to have ‘price signals’ at the right time for constructing extreme cold weather production technologies in Texas, even though these technologies exist (Canada, Norway ….). In Ben McMillan’s description: “Making good returns on weatherisation equipment once every 50 years is a pretty risky investment. And expecting every single player in this industry to price climate tail risks is problematic.” The ‘market’ fails to do its job to coordinate the decisions of decentralised decision makers, via price signals, irrespective of the degree or otherwise of competitive behaviour,

    As can be seen on the diagram posted by Art Berman, as long as the daily excess demand is small, the spot prices (and futures contracts) can clear the electricity market, given the existing technologies. However, there are no price signals for investment decisions involving physical capital. The incompleteness of the market involves investment decisions in physical capital. This is a severe case of market failure. This case belongs to the class of market failures to which anthropogenic global warming, the destruction of biodiversity and degradation of land and water belong. To what extent increased competition (more competitors) magnifies the consequences of this type of market failure is a moot point but one worthwhile looking into.

    The Texas case also shows the interconnectedness of technologies and how severe market failure in one ‘industry’ has severe flow on effects in other ‘industries’. No electricity entails no functioning domestic gas heaters and no gas distribution and no flowing water … and then flooded houses, to name a few. (I understand even a nuclear power plant stopped working for some time.)

    I understand the Texan government did not make use of a second or third or fourth best insurance option by deciding not to diversify a little bit of risk by joining one or the other of the 2 US electricity networks. (Robinson Crusoe’s life on a film screen just doesn’t neatly translate into reality, does it?)

    [fn1] A state contingent future market is not the same as having financial securities called futures contracts.

  26. Ben McMillan (Re your comment at FEBRUARY 22, 2021 AT 6:19 PM),
    You state: “Making good returns on weatherisation equipment once every 50 years is a pretty risky investment.”

    Except it’s NOT “once every 50 years”. KT2 (at FEBRUARY 22, 2021 AT 3:55 PM) refers to a report into outages in Feb 1-5, 2011 that includes (on page 7):

    “The arctic cold front that descended on the Southwest during the first week of February 2011 was unusually severe in terms of temperature, wind, and duration of the event. In many cities in the Southwest, temperatures remained below freezing for four days, and winds gusted in places to 30 mph or more. The geographic area hit was also extensive, complicating efforts to obtain power and natural gas from neighboring regions.

    The storm, however, was not without precedent. There were prior severe cold weather events in the Southwest in 1983, 1989, 2003, 2006, 2008, and 2010. The worst of these was in 1989, the prior event most comparable to 2011. That year marked the first time ERCOT resorted to system-wide rolling blackouts to prevent more widespread customer outages. In all of those prior years, the natural gas delivery system experienced production declines; however, curtailments to natural gas customers in the region were essentially limited to the years 1989 and 2003.”

    You state: “But trying to get people to chase after extremely risky returns that comprise 1% of the market value is probably not going to work that well.”

    That’s why governments need to legislate/regulate critical systems (like energy) where there are lower probability events that have highly disruptive consequences for people and society – where many people suffer and/or die.

    It seems to me that ERCOT and the Texas governance have not learnt from history.

  27. “It seems to me that ERCOT and the Texas governance have not learnt from history”

    nor learnt from exactly that part of economic theory which deals with the conditions under which that what is promoted (competitive private ownership economies) makes sense in the language of mathematics and, due to the methodology and language used, allows a comparison of the theoretical conditions with the empirical conditions.

    Obviously, it is nonsense to rely on ‘the price mechanism to allocate resources’ when crucial prices are not available because the relevant markets are missing (‘the market is incomplete’).

    So, Geoff Mill’s conclusion, “That’s why governments need to legislate/regulate critical systems (like energy) where there are lower probability events that have highly disruptive consequences for people and society – where many people suffer and/or die.” makes sense to me.

  28. Fareed Zakaria, host of CNN’s GPS on Sundays in the US, interviewed climate scientist Professor Katharine Hayhoe on Sunday (Feb 21), on what does Texas’s massive power outage have to do with climate change? See the tweet below with embedded video, duration 5:48.

    Professor Hayhoe says (from time interval 4:03):

    “Well, the way I look at it, is as if we humans have been driving down a pretty straight road – like the roads we have here in west Texas – looking only in our rear view mirror. We have designed our infrastructure, our building codes, our energy supply, our water allocations; we’ve designed almost every aspect of our lives, based on conditions that we’ve experienced in our past: The drought of record, the hundred year flood zone, the average temperature, so you know what type of air conditioner or heater or how much insulation you need. But today, climate is changing faster than any other time in the history of human civilization on this planet. We are already on the curve. Our wheels are already on the rumble strip. And that’s why one of the most important things any city, any state, any country can do, is to prepare for the impacts of climate change that we can no longer avoid. And that’s what I do. I work with a lot of cities including Houston in Texas, to help them see how their extreme heat in summer, their heavy precipitation and their flood risk will increase, so they can prepare for those impacts. But the other side of the coin, is that we actually control the steepness of a future curve. How? Our carbon emissions determine how much climate will change in the future. And the United States has officially rejoined the Paris Agreement, and that means that every country in the world is in on cutting their carbon emissions, to keep warming below the level that really would signal danger, not for the planet, but for human civilization. That’s what’s at risk.”

  29. Note that Texas tripled the cap on electricity prices in 2012:

    https://www.texastribune.org/2012/10/25/texas-regulators-act-texas-electricity-prices/

    So given that tripling the cap wasn’t enough, you have to wonder how much difference further increases would make. Also, it now has uncapped prices completely:

    https://spectrumlocalnews.com/tx/san-antonio/news/2021/02/16/state-agency-s-failure-may-cause-electricity-rates-to-rise

    The problem is, the higher the cap goes, the more the additional rewards are concentrated in low-probability tail events. Who knows how big those tails are, especially given that climate change is modifying the underlying distribution.

  30. Ronald: Snowy 2, at A$5.1 bn for 2 GW of peak capacity, is an expensive project. The Tâmega pumped hydro complex, being built in Portugal, has a budget of €1.5bn = A$2.3bn, with 880 MW of pumped capacity and an additional 258 MW of flow hydro. This makes the cost comparison problematic, but Tâmega looks about a third cheaper. It’s being put up by evil grasping capitalist Iberdrola, so they may be watching the pennies more closely. Mind you, Snowy 2 has a very long storage capacity – two weeks. That’s unusually high. It may be better to rely on gas storage in salt caverns and mothballed gas turbines for the long-period reserve.

  31. Weatherproofing AND city redesign? Interesting

    Humanity has a lot of decisions and work to do, to be ready for the future. Oh, the future is actually now.

    “City Sizes May Affect Blackout Probabilities

    July 31, 2020
    • Physics 13, 122

    “The probabilities of electricity blackouts may be influenced by the sizes of cities more than by the details of power grids.

    “A cascade of failures may then spread through the network like an avalanche. The power-law statistics mean that very large events, while more rare than small ones, occur much more often than would be expected if blackouts were governed by the normal or “Gaussian” statistics of random, independent events. A distribution with this feature is said to be “heavy-tailed.”

    “In one popular class of models, the analogy with avalanches is literal: the cascade resembles the way a few tumbling rocks can collide with others to trigger a landslide, in a process described by a theory called self-organized criticality [2]. But such models don’t take into account the physical processes that produce breakdowns in electricity grids.

    “Mathematician Bert Zwart of the Dutch National Research Institute for Mathematics and Computer Science (CWI) and his colleagues have now proposed another explanation. They point out that city sizes in any region tend also to have a power-law size distribution, and they say that this distribution might create the same statistics for electricity blackouts.”…
    https://physics.aps.org/articles/v13/122

    Via…

  32. James, I’m glad to hear pumped hydro costs aren’t as off the scale in other countries as they are in Australia. Unfortunately for the financials of Snowy 2, its high energy storage is not very valuable here as we have the option of bunging some more solar panels on roofs and/or whacking up some more wind turbines at relatively low cost.

  33. Texas – worse than I thought.

    “Texas Republicans Prioritized Nonsense Over Winterizing The Energy Grid

    “Barring special sessions, the Texas legislature meets only once every two years for five months, so Patrick’s priorities can crowd out other goals. That the archconservative, who presides over the state Senate, thought this issue merited the legislature’s limited bandwidth in the midst of a pandemic and widespread unemployment tells you everything you need to know about him. 

    “Instead, Republicans, who have controlled every statewide office and both houses of the legislature since 2003, have prioritized social battles like Patrick’s national anthem crusade. In their zeal, they’ve often neglected ho-hum tasks like winterizing the energy grid, against the advice they themselves commissioned. That lack of interest is the backdrop against which some 4 million Texans lost power at the height of the crisis, while many more were left without drinkable water and dozens died.”…

    “In perhaps the most emblematic episode of Texas Republicans’ tendency to elevate phantom problems over real ones, legislators finished the 2017 session without taking action on a must-pass sunset bill to keep several state agencies from shutting down. (In Texas, the legislature must periodically vote to perpetuate most state agencies or they get abolished.) This happened not because legislators thought state agencies shouldn’t stay open, but because Patrick had a more urgent project: He wanted to pass a law forcing Texans to use the public restroom of the gender on their birth certificate.”

    “But Republican leaders still struggle to shake the old habit of tilting at windmills. In an interview with Fox News last week, Abbott cited the Texas power debacle as reason to condemn the Green New Deal”…
    https://huffingtonpost.com.au/entry/texas-republicans-priorities-energy-grid_n_60353af4c5b6cc8bbf3eda06

  34. JQ – your recommendation at the end of your Inside Story article is much too sensible to ever be implemented 🙂

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