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Texas and the Missing Markets

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Charles Bayless's picture
Retired CEO Tucson Electric Power

Mr. Bayless is a retired Utility Executive and a lecturer on Energy Policy, Climate Change and Ocean Acidification. Until June 30, 2008 Mr. Bayless was President and Provost of the West Virginia...

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  • Mar 9, 2021

Externalities, the Texas Blackout and the Missing Markets.

The Texas Blackout exposed widespread vulnerabilities in the ERCOT Area. Power Generators of all types tripped offline. Gas, Nuclear, Coal, Wind, and Solar Units all had problems. But none of these were the fundamental cause of the Blackout. The Blackout resulted from Texas depending on a non-existent market to supply reliability.

To understand the Non-existent "Market, let's look at economic externalities. An externality is a cost or benefit affecting a third party, not a party to the original transaction, and, for which cost or benefit, no market exists. Let's look at an example.

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Consider a transaction where a buyer purchases a chemical from a manufacturer. In making the chemical, the manufacturer emits a pollutant into a river that harms a downstream individual. As there is no market for the pollutant, it is an externality, and to control the pollutant, we must either set up a market or regulate the pollutant.

The Electricity Reliability Council of Texas (ERCOT) Market is an energy market. By design, prices in the ERCOT Region were allowed to reach very high levels. Thus as load grew, supply and demand would raise energy prices and incent the construction of new generation capacity. And, in this, the market worked well.   But, if you have three cars, none of which will start, you quickly realize the difference between capacity and reliability.

To an energy market, reliability was an externality, and hence reliability was not addressed by market functions. No producer got payments for having units available during cold or hot weather; there was no Classic Supply-Demand Curves to set a price for reliability- there was no invisible hand in Texas guiding reliability.

When there is no market, the other method of addressing externalities is regulation, but Texas had no reliability regulations.  There were no regulations requiring producers to "winterize" their units. There were no regulations requiring Gas Turbines to have liquid fuel on site. There were no penalties for not running.

Not only did the ERCOT Model fail to address reliability, but the Model also had economic disincentives for reliability.

Consider a Gas Turbine Power Plant. The operator can purchase gas on the spot market or can buy "firm" gas. Firm Gas gives you higher security of supply, but it also requires you to take the gas when available. As renewable energy grows, electricity prices are dropping. Thus on many days, the difference between the electricity sales price and the cost of generating with firm gas (the "Spark Spread") is negative, and the unit does not run. If a plant does not run, the producer loses money, but buying firm gas or equipping the plant for reliability would cost even more.

In the extreme cold experienced in Texas, no gas was available for units without firm contracts. This problem, however, did not play a  large part in the Backout as even units with firm gas were curtailed as heating for Homes, buildings, etc., have a higher priority than electric generation.  

So, why did the gas system fail? Reliability was also an externality to the gas market.  Like the electric market, the gas market had no reliability market or regulations and had not prepared for severe cold. As it is impossible to build an electric system with high reliability on a gas system without reliability, the gas system's failure rapidly spread to the electric system.

To ensure Gas Turbine reliability, an operator needs to keep ten days or so of liquid fuel on site as many New England Units do. Gas Turbines are just large Jet engines, and jet engines run fine every day on liquid fuels, at  -600F, and at 40,000 feet. However, an energy market will not incentivize fuel storage as storage would raising operating costs and lower profits.

The effects of not having a reliability market or regulations were not limited to gas markets or gas units. One South Texas Nuclear Unit tripped when a pressure sensing line for a Feedwater pump failed; wind and coal units were not set up for cold weather operation, and some solar units were snow-covered.  

Had this cold weather occurred in North Dakota, it would not have been a cold wave. It would have been February. There would have been scattered outages but winterized Electric facilities would have generated power. The massive gas production in the Bakken Shale would have continued, Gas pipelines, compressors, valves would have worked, and people would have wondered when Spring would come and gone home at night to play hockey in outdoor rinks. North Dakota prepared; Texas did not. As there was no economic or legal incentive to provide cold-weather reliability, none was provided, and the units failed.

Another significant cause of the Blackouts was the lack of interconnection with other Areas. Texas has about 800 MW  of Interties with other States; California has over 20,000 MW. Texas is probably the smallest state of the contiguous forty-eight States in terms of Electric Interconnections. Alaska has no interties, giving Texas the distinction of being smaller than Rhode Island but larger than Alaska in at least one category.

Interconnections will also help Texas achieve its' goal of attaining reliability by relying on market economics. But it also benefits consumers and producers; producers can sell into other states when prices are high elsewhere, and consumers can purchase from other states when prices are lower. Further new entrants are more likely to locate in Texas as they will have access to additional markets.

Another program that must be considered is Demand Side Management. As Amory Lovins has been pointing out for decades, it is cheaper to save a watt than generate a Watt.  These programs will produce significant savings for consumers during normal times and help prevent more extreme Demand-Side Management (Blackouts) in troubled times.

Many failures contributed to the Blackout, but they all arose from one failure; relying on non-existent markets to provide reliability. If Texans are to have reliability, they must either adopt reliability regulations or set up a reliability market.

ERCOT can set up a Reliability Market by solicitation yearly bids for reliable units. Operators will then calculate what it will take to winterize their units, keep fuel on-site, etc., submit bids,  and let the market choose the cheapest option. This market should include significant penalties for non-performance. Alternatively, Texas can adopt regulations requiring Generators to ensure adequate fuel supplies, winterize their units, etc. Of course, owners must be compensated for such services as an energy market will not compensate them.

Free Market advocates point out that, "The only known violation of the Second Law of Thermodynamics is that Water runs uphill to money." Texas showed that water could not run uphill if there is no hill (a Market)  and that ice doesn't run uphill at all. Texas can make the Free Market work, but first, it must set up the market. If it does not set up a market, then it must rely on regulations.







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Matt Chester's picture
Matt Chester on Mar 9, 2021

To an energy market, reliability was an externality, and hence reliability was not addressed by market functions.

This statement certainly makes you stop and do a double take, as any consumer would of course assume reliability is a core principle at every step of the process

Patrick McGarry's picture
Patrick McGarry on Mar 9, 2021

One of the best Energy Central articles that I have read in many years. Thank you for sharing Charles.

Bob Meinetz's picture
Bob Meinetz on Mar 9, 2021

"To an energy market, reliability was an externality, and hence reliability was not addressed by market functions."

Reliability is not an externality at all in an energy market, Charles. I think you're missing the point: when end users have no freedom of choice, a "market" only exists in a rhetorical sense. In the classical sense, there is no market in electricity.

Imagine a world where transmission carried the cables of several different power providers, allowing consumers to decide to which ones they'd connect. If Provider A was unreliable, customers would have the option to reconnect to Provider B. Provider A would either address his reliability problems, or go out of business. That's a well-functioning, classical market.

Surprisingly, such a market existed, briefly, in 1880s New York and Philadelphia. Competing coal plants on each city block offered connections to every customer. Unsurprisingly, it was a mess, a disaster. Besides the omnipresent fog of coal smoke issuing forth, there were no standards for bulbs, sockets, nor wiring. Fires were common, as was sabotage. When linemen from one company climbed transmission poles to perform repairs, it was a simple matter to snip the lines of their competitors.

It's amusing to watch economists prescribe elaborate market designs to solve problems in a market that doesn't exist. If policymakers consider access to electricity as FDR did - an essential public need, like fresh water, or sanitation - they can start by accepting the fact that electricity retailers are monopolies, and there is no functional market in electricity.  Then we can either get back to the basics of re-regulating electricity, or continue to weather an unending storm of unreliability, one only differing from the one of the 1880s in minor details.

Jim Stack's picture
Jim Stack on Mar 10, 2021

Charles I really enjoyed your examples and stories as well as your solution to the Texas power problems. You hit it right on the head in each example. Each time preparing for the COLD as other areas doo is a big Key. The interconnection is the other. The right policy and practices make that missing market appear like magic. 

QUOTE=winterized Electric facilities would have generated power.

Kent Knutson's picture
Kent Knutson on Mar 16, 2021

"Texas, the new North Dakota!" . . . Charles, great informative article.  Thanks for sharing. 

William Fortune's picture
William Fortune on Mar 16, 2021

Bayless used a lot of extra words and still didn't get to the "bottom line".

The politicians & regulators required the utility companies and others to waste lots of taxpayer/ratepayer money on the Renewable Energy SCAM, instead of "hardening" the utilities against reoccurring cold weather & allowing them to stockpile fuel.  They also set price limits/controls so the Utility Companies can't have enough money to get ready for contingencies. 

Recently Bloomberg Green noted that Renewable Energy is "The Snake That Eats It's Own Tail".

Politicians may be some of the dumbest people on the planet, although look and see who elects them.  The voters won't elect politicians that are smarter then the voters themselves & the voters love politicians that tell the biggest lies.  Politicians tell the Little People that the government/regulators are going to keep the Utility Companies from raising prices because Free Market Capitalism is a rip-off.

Another issue:  saving energy won't allow the Utility Companies to have excess capacity.   As soon as the Little People/politicians discover that there is excess capacity Utility Companies will be required to get rid of it.

And people have been convinced that fossil fuel plants need to be shut down, so it's likely that there will always be a shortage of electricity, unless or until people get woke to the fact that they have been fooled.

Politicians have fooled people for more than 50 years, regarding Clean Energy.  Clean/ carbon free, economical, "in your back yard" safe, walk-away safe, safety safe, 24/7/366 operational energy plants were developed and tested in the 1960's.  Politicians have blocked their development & bureaucrats want more job saving years & billions of $$$ to approve them.   In the meantime, that U.S. taxpayer funded technology has been made available to the World & soon ThorCon in Indonesia will start manufacturing those power plants.   Other countries will likely stop research & start manufacturing.  I estimate that together they can manufacture 35  500-600 MW plants PER YEAR.   ThorCon alone can do 20 per year.


Peter Farley's picture
Peter Farley on Mar 17, 2021

Oh to be such a fount of all knowledge. Let's say they do manufacture 200 x 500MW units per year, they still won't produce as much energy as new wind and solar installed this year will do. Even if they halve current costs they will still be at least 50% more expensive than wind/solar/hydro/flexible demand and storage.

There are still considerable material technology issues to be overcome to make a molten salt reactor reliable over 40 years and significant logistical and security issues in changing over the modules and transporting them back to a refueling site

If Thorcon's first commercial plant is operating cost effectively by 2031 I will donate $1,000 to your nominated charity.

William Fortune's picture
William Fortune on Mar 18, 2021

Ned Ford, a long time National advocate for wind/solar has made similar claims about the wonders of Renewable Energy but has failed to show any calculations to support his claims.

There are many people like you that are not technically qualified and make statements anyway.

I will pass your comments onto Terrestrial Energy, Terra Power and ThorCon for their comments.

Peter Farley's picture
Peter Farley on Mar 17, 2021

The question is which is more effective. Capacity markets have tended to keep electricity prices and emissions high  with lots of old inefficient plants surviving on capacity payments instead of retiring gracefully.

On the other hand for example, keeping 10 days of liquid fuel on site for gas turbines seems excessive even in the recent storm, so regulation may well end up costing much more than is needed to solve the problem. 

Even with the current market arrangements, any generator who did have a winterised plant would have made a ton of money during the crisis, so one would imagine that at least some of the existing generators will make efforts to keep their plants winterised for future eventualities. For example a 30 turbine wind farm would probably cost $2-3m to winterise. During the storm it would have made almost $25m  a pretty good incentive, even if these events only occur once every 7-8 years


Matt Chester's picture
Matt Chester on Mar 17, 2021

For example a 30 turbine wind farm would probably cost $2-3m to winterise. During the storm it would have made almost $25m  a pretty good incentive, even if these events only occur once every 7-8 year

If that's the cost/benefit that these generators run, then of course it would make sense-- but is 7-8 years really how often this would happen? Even if this type of winter weather is a once in a decade event, it seems like the events from February were more than just the winter weather but the cacophonous perfect storm of failures in multiple different systems that ended up pushing different energy sources off the grid, happening at a time when other sources were already shut down for maintenance, etc. Ideally, market systems would prevent a situation where the revenue gained in this type of event would reach such heights again

Bob Meinetz's picture
Bob Meinetz on Mar 18, 2021

"Even with the current market arrangements, any generator who did have a winterised plant would have made a ton of money during the crisisj,..."

I have to laugh when I see renewables supporters describing how developers can make "a ton of money during the crisis", i.e., how they can profit on others' misery.

Where do you think that money comes from? Is electricity coming from pretty windmills and solar panels worth $9/kWh, or is the only goal of solar and wind developers to gouge ratepayers during a crisis?

I guess we should accept that as an admission renewables are not cheaper than nuclear, or coal, or gas, anything else, and that they aren't a value at any price.

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