The story of Texas’ odd electrical grid goes back to World War II, when FDR’s rural electrification program was pushing out power grids everywhere. That’s when a group of Texas utilities created a system that touched most every part of the state, but barely brushed up against any non-Texan power systems. That was further codified in the 1970s, when the Electric Reliability Council of Texas (ERCOT) took charge and began tinkering with a formula that would “incentivize” electricity providers in Texas to keep up with demand.
What ERCOT created was a system where electrical prices can float based on momentary spikes in demand. Prices can soar to several dollars per kilowatt/hour when the grid is hard pressed, or literally be in negative territory when the demand fails to meet the base level of generation by the system. When consumers in Texas buy electricity, they don’t see these wild swings in their bills. That’s because individual consumers in Texas don’t really buy electricity. They buy a sort of “electricity insurance,” one in which providers contract to provide them power at a fixed or semi-fixed price. That price is, of course, designed to be well above the median cost of power on ERCOT’s self-contained electricity market. Electricity insurance, like medial insurance, creates another level at which there’s an opportunity for profit.
In more modern times, with trades moving just as fast as the electricity comes down the line, the size of the price spikes can be enormous. On Monday, the Houston Chronicle reported that electricity in Texas approached $9,000 per megawatt/hour. At that rate, the average home in the United States would rack up a monthly bill of around $96,000. So … that’s quite high. If any of this—a purposely constrained statewide market, free floating prices subject to wild changes, and consumers left facing blackouts and unpredictable prices—rings a little bell at the back of your head, there’s also this: Enron got its start dabbling in these markets from its Houston, Texas, headquarters in the 1980s.
The reason people in Texas are currently experiencing the collapse of a badly overloaded system, leading to extended outages lasting for hours, is simply because that’s the way the system is designed to work. The incentive in Texas is to provide for exactly as much power as is needed, and not one hamster-wheel-driven watt more. Because in a system that never reached 100% of capacity, power would always be cheap. It’s fighting over the difference between 99.9% demand and 100.1% demand that drives the system and generates profits.
So how did wind come into it? That’s also because of profits. Texas doesn’t have over 10,700 wind turbines generating power for its grid because rural Texans decided they liked the look, or because there was a sudden inspiration to “go green.” Texas has wind power because wind power is so insanely cheap. It’s so cheap that producing power from wind turbines is less than the cost of operating a coal-fired power plant. That’s not the cost of building the plant. Someone could build coal plants for free, hand them over to the utilities, and just running them would still cost more than going out and buying the wind turbines to replace them.
Texas has wind power, because in a market highly incentivized to find the cheapest solution, wind power came out on top. With the rapidly falling prices, solar is also starting to form a bigger part of the picture in Texas, but for the moment the other big player in that state is the same as it is in most states—natural gas.
The introduction of fracking led to a burst (pun intended) of gas on the market. Previously, more limited supplies of natural gas, and the speed with which producing fields played out, created a price for gas that swing through long oscillations, falling far below, then rising above, the price of its main competitor at the time, coal. But with fracking, gas was suddenly abundant and cheap. Building natural gas power plants is also relatively cheap. Unlike coal plants, which for a number of reasons work best when absolutely enormous (and carrying a price tag that’s, at least, several hundred million), natural gas power can start small and grow. The incremental nature of gas power, and the high efficiency of combined cycle production, saw gas displace coal across the nation with a rapidity that shocked most energy experts—and bankrupted coal producers.
What Texas has now is a system that’s composed of gas, wind, a lingering set of older coal plants, and a modest amount of nuclear. All of it just enough to provide power when Texas hits those hot summer days when every AC in Dallas goes to “high cool.”
So, what went wrong on Monday? It wasn’t “frozen turbines,” no matter what Fox News says. Again, wind is more than keeping up with its share of the projected load. Yes, there are certainly some turbines out—but with over 10,000 of the things, there are always some out. This also doesn’t seem like a great day to climb a 300’ tower to work on something in a high wind because … brrrr. But that’s not the issue.
Part of the issue comes down to that other item at the top of Texas’ power mix—natural gas. In cold weather, natural gas is in demand because it can be used directly for home heating. That’s driving up not just the price of gas, but also limiting its availability. That’s because the system of pipelines that carry the gas around is also built to match a certain level of demand. Pipelines are expensive. Companies don’t build them “just in case.” High prices and limited availability mean that Texas gas plants are underperforming.
It appears that coal plants are doing the same. It’s not clear exactly why that would be. (Though, as someone who spent 30+ years in the industry, I have some suspicions, starting with this: Did Texas utilities pay the extra fee that coal companies want to treat the coal with antifreeze so that it comes out of train cars more readily in extreme weather? I think not.)
But the biggest thing wrong with the electrical system in Texas is there’s simply not enough of it. The way the system was designed placed all the incentives at finding the ragged edge of consumption and staying there. As demand has increased, more capacity has been added, but only enough to keep things at that ragged edge. Because that’s the most profitable point for everyone in this pocket-market and insurance scheme. Make too much power, and you end up with stories like this one from 2015, where energy prices in Texas were negative for hours.
The ragged edge is usually found in the summertime, when the outside in Texas is 100 and every Texan wants the inside temperature to be 70. So the system is designed to overcome that 30 degree difference. Right now, people are trying to make their homes 70, and the temperature is 10. There’s just not enough power out there to make it so. Making it worse is that homes in Texas are generally designed around the idea of keeping heat out, rather than holding it in.
Put it all together, and Texas’ system simply buckled on Monday. Demand far exceeded supply, prices went through the roof, and the grid itself failed to a phenomenal degree as the big-boy equivalent of breakers tripped everywhere. If Texas had robust connections to power grids in other states, it might grab some juice from neighbors that were less battered by the cold wave. But it doesn’t. That was also part of ERCOT’s design.
So what will happen after this cold streak is past? Probably not much. Producers could add additional capacity—and if they do, that capacity will almost certainly come in the form of the wind power that’s still, by far, the cheapest. But don’t expect much. Because if they power too quickly, then there will be plenty of electricity next summer when those ACs go on. And where’s the profit in that?
Also, Fox will blame it on wind power, and continue to have expert guests like Rick Perry, who spent Monday complaining that America needs to rely more on “compact fusion reactors.” Maybe we could also get some dilithium crystals. I hear they’re good.
Meanwhile, wind power and Democratic presidents will be the things that help Texas out of this hole they’ve created for themselves.