JUST BAD GOVERNANCE:

May 2022 was already hot in Texas. The state's troubles increased with capacity shortages as six generation plants went offline. In one instance, ERCOT had asked a plant to stay online to meet demand instead of shutting down for scheduled maintenance. It went offline the next day. 

The problem with capacity in Texas would be familiar to anyone who knows you shouldn't put all your eggs in one basket. Wind and solar generation have a place, but the wind does not always blow in west Texas. Delivering the power might be another issue. Thus, to assure grid stability, flexible generation capacity is located near cities. That simply hasn't happened. No new combined-cycle gas-fired generation has been added to the fuel mix. And, as energy expert Ed Hirs has stated, some of that capacity is old and has not been maintained.

During the California crisis, capacity shortages arose from unplanned outages, too. Hot temperatures, high demand, and capacity shortages (whether manufactured or legitimate) led to Summer shortages in 2000. One component of those shortages was that hydroelectric power dried up. That fall saw more shortages, caused due to plants taken offline for maintenance and emissions reasons. Eventually, high wholesale prices also caused another problem: As Pacific Gas & Electric and Southern California Edison suddenly realized that their income was exceeded by their costs of supplying power, each company made public statements threatening to declare bankruptcy and claim insolvency. Gas suppliers, out-of-state generators, and marketers began to refuse to sell to these utilities because of concerns that the utilities might file for bankruptcy. 

Then came some very tight spreads between supply and demand this summer, causing ERCOT to ask for consumers to up their thermostats and curtail load. In part, the plea came as the backbone of the ERCOT grid, wind and solar, had diminished capacity. The response was mixed: Consumers responded out of fear of outages, but there was hostility and frustration at the fragility of the grid. As energy expert Ed Hirs states, "This has got to be extremely frustrating for the consumer, because as we look out, we see prices really really high and ERCOT telling us to use much less at a time when we need it most." Demand reached record highs.

California, too, pled for demand responsiveness. But it wasn't until Californians felt the price increases in their pocketbooks that demand shrunk by 14 percent. Before that, California had guaranteed that its residents would receive a 10 percent reduction in their electricity bills. 

The promise that a deregulated market would lead to lower prices is full of assumptions. The first assumption is that the regulated price was inefficiently above cost. Thus, the price had nowhere to go but down. Second, it assumes a static market once the "rules of the game" of competition are instilled. However, those rules will change outcomes as incentives change. Third, it presumes market responses that may not be there: For example, capacity additions would be the natural result of price increases, not the quiet enjoyment of monopoly power.

For ERCOT, there is no help. ERCOT outright refuses to be subject to Federal regulation, and therefore refuses any serious levels of interconnection with the rest of the US. There have been arguments that other markets nearby would be unable to help, even if they were interconnected.

California had help during its energy crisis, but that help quickly dried up. Historically, California had been a net importer from neighboring states. However, due to the increased electricity demand and decreased supply due to low rainfall in the Western Interconnect, neighboring states have had less energy to sell to energy-starved California. Thus, California was unable to obtain resources from outside the state and was unwilling to build resources inside the state. 

Sadly, it seems that if ERCOT has learned anything, it is merely how to repeat the mistakes of California. ERCOT refuses to import power to avoid Federal oversight. The only other options for Texas are increased generation within the state, reductions in demand, and to some degree, transmission to decrease congestion.

Here, ERCOT again follows California. Generators in California (many owned by Texas companies) learned that less capacity means higher prices. That means there is no incentive to build generation in Texas, or increase the reliability of existing plants. This incentive structure creates scarcity. As Californians can tell you, scarcity that creates unbridled market power leads to disaster.

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