March 14, 2021

Market Fundamentalism and Texas Grid Failure

Prabir Purkayastha

THE Texas grid failure impacted millions with no electricity and no heating in sub-zero temperatures for days. It has not only caused scores of deaths and injuries, but also economic havoc in the state. Even after two weeks of the blackouts, life is far from normal as the citizens deal with frozen and burst pipes, denying people access to safe water and causing extensive damages to the houses. More than 13 million Texans were asked to boil their water as municipal water supply services were damaged.

As one of the best-endowed states in energy terms – both fossil and renewable –it should also have been one of the best equipped to ride out of such a winter storm. That it should have performed so badly is a telling commentary on the policy failures in Texas rather than a simple tale of a natural disaster.

Texas chose a policy of extreme deregulation in 1990s and early 2000s under the malign influence of Enron, the failed energy giant from Houston. It was similar deregulation policies that California had also adopted in the 90s that led to Enron gaming the power market there and the huge spike in electricity spot prices in 2000-01 sinking two major California utilities. A host of power companies in Texas are now facing similar threats of bankruptcy.

Though Enron folded up soon after the California debacle, getting caught in multiple frauds and financial shenanigans, its baneful impact continued elsewhere. In India, it had introduced the era of Independent Power Producers (IPPs). The Dabhol project in Maharashtra, the flagship of the IPP's, nearly bankrupted the Maharashtra government, producing electricity from expensive LNG that Enron promoted in India as a "cheap" fuel. Supported initially under UPA government of Manmohan Singh, Enron secured a sovereign guarantee under the short-lived 1996 Vajpayee government. The government finally took over Dabhol, leading to international arbitration cases against India for "expropriating" foreign assets. The Indian and the Maharashtra governments, and the Indian banks lost billions of dollars "compensating" GE and Bechtel for Dabhol's equity, paying the back-up guarantees to foreign banks, and of course Indian bank loans to the Dabhol project turning into non-performing assets.

Why did Texas deregulating its electricity sector lead to the blackouts and the near-collapse of the Texas grid? Texas dismantled the existing system of regulated monopolies running integrated electricity grids that existed there earlier as well as in most parts of the world. While Texas went the furthest in this direction in the US, this philosophy – called unbundling and open access –is being pushed in a number of countries including India. The "logic" or ideology behind creating multiple players – generators, distributors, and electricity traders – is to create a so-called electricity "market" and convert electricity to a commodity like any other commodity. One of the Indian proponents of this "philosophy" called it converting electricity to a commodity like soap. Krugman in his NYT opinion piece (February 22) explains why kilowatt-hours, the measure of electricity is not like any other commodity, his example of avocados.

Apart from being a necessity, electricity is a commodity unlike avocados or soap: it cannot be stored. Therefore electricity demand and supply must balance all the time. If it does not, the grid will sink and it is a herculean task to bring it up again. The Texas grid was just about 4 minutes 37 seconds away from a catastrophic failure as the winter storm and dropping temperature took out a large number of generating plants at a time when domestic heating demand was rising. The grid had no reserve that it could bring on-line. This led the grid operator – Electric Reliability Council of Texas, ERCOT – instituting rolling blackouts. It saved the grid but also meant that more than 4 million households had no power for days. Without power, some of the gas pumping stations lost power, which in turn meant that further cut in gas supplies to power plants. This led to further loss of generation, worsening the crisis.

Texas is an odd-ball state and as a part of its ideology of exceptionalism, it is the only state that refuses to connect to the two major grids in the US. It therefore had no reserves to draw from neighbouring states to stave off the impending grid collapse.

It is this cascading effect of rising demand, combined with a sharp fall in generation, that led not only to rolling blackouts, lasting for days but also to dozens of deaths, injuries and extensive damages to property. It also affected water supply, food supplies and critical health services including the ongoing vaccination drive against Covid-19.

Why did the generating plants in Texas and the gas supplies fail during the winter storm? After all, temperatures in the northern US, Canada, northern Europe routinely see far lower winter temperatures. Texas had already faced a warning of its inability to face cold snaps in 2011 and in 2014. Experts had pointed out the need to winterise power generating and gas supply equipment to ride out such winter storms.

So why were these warnings not heeded? This is where deregulation comes in. The argument of the market fundamentalists is that if we build the right market incentives, this would automatically take care of all problems. The reality showed that this is not what happens. As the incentive is to increase the price when electricity is scarce and reduce it when it is low, it provides a perverse incentive to create scarcity to drive up the prices. This is what led to Enron gaming the market in the 2000-01 California debacle. In the Texas case, even when the prices were raised by the Public Utilities Commission (PUC) and the grid operator ERCOT to its highest level of $9,000 per Mwhr – 300-400 times of the normal price – the plants were simply not capable of delivering additional electricity. Their equipment had frozen as had that of the gas suppliers. Even a nuclear plant, one out of four supplying powers in Texas had tripped due to equipment failure under the low temperatures.

A rational calculation would show that markets cannot solve problems of this kind. Unless regulation forces gas and power utilities to build safety measures to protect against a collective failure of the grid, each individual entity will maximise its profits and not invest in preventing a collective failure. Just as we do not build market incentives for improving traffic safety, we cannot ensure the reliability of energy supply through rules of the market. We need hard traffic rules for safety of the people on the highways and policing to see that they are followed. Just as we need hard rules for safety of the electricity grid and their implementation.

As the price of electricity was pegged at $9,000 per Mwhr as opposed to the normal $22 per Mwhr, the power companies and electricity traders made a total of $45 billion windfall profits during the five days of the Texas freeze. This includes major Wall Street players who made hundreds of millions by hedging power contracts in Texas.

With the variable price of electricity ratcheted up to $9,000 per MWhr, a large number of consumers face ruinous bills. A 20-25 per cent of Texas consumers have a variable price contracts with their suppliers. They are seeing their life savings being lost to a few days of intermittent power they received during the Texas grid near collapse. Though the Texas regulator PUC has stated that ERCOT let the price stay at its highest for 33 hours more than required causing an avoidable loss of $16 billion to consumers, it has refused to give the consumers any relief.

In the alternate truth-free universe that we are now entering, there was an attempt by the proponents of the market fundamentalists to blame unreliable green power during the winter storm. As ERCOT officials clarified, the primary cause of the rolling blackouts was due to the state's natural gas providers. An estimated 45 gigawatts, largely powered by natural gas, stopped supplies during the Texas freeze. This was more than half of ERCOT's winter generating capacity. Not that this stopped the gas and oil lobby among the Texas Republican establishment from blaming wind and solar for the blackouts. As Upton Sinclair said, "It is difficult to get a man to understand something, when his salary depends on his not understanding it." Salary, or in this case, election funds!

The conventional wisdom in the media has been that Texas has one of the cheapest electricity rates due to deregulation. This claim is not true. While 85 per cent of the Texas consumers had their regulatory regime dismantled, 15 per cent continued with traditional regulated utilities. According to Wall Street Journal, (February 24) its "deregulated residential consumers paid $28 billion more for their power since 2004” than the customers of the state's traditional utilities.

For Indians, as in other parts of the world, there is something to learn from the earlier California or the current Texas debacles. Indian political establishment, either the UPA or the BJP-NDA, have been following the Enron school of energy economics of breaking up the integrated grid, and advocating "open access". A new breed of power traders, who neither produce, distribute, nor transmit power, will buy and sell power more efficiently to us. This is the fairy tale that we are being sold. The reality of the Texas market shows that the consumers paid more for their electricity in the deregulated market, and in a crisis, were bankrupted by contracts that they did not understand.

Harvard Kennedy School's William Hogan, the economist who designed the Texas power market said in his interview to the media on the Texas mess that the Texas power market behaved as designed. As James Galbraith, the economist and a professor at the University of Austin Texas wrote (Project Syndicate: February 22), this is indeed true: Texas froze by design! Unfortunately for the market fundamentalists in Texas, electricity obeyed the laws of nature, not that of the market!