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Why the Texas electricity market failed

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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

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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)

John Quiggin
He is an Australian economist, a Professor and an Australian Research Council Laureate Fellow at the University of Queensland, and a former member of the Board of the Climate Change Authority of the Australian Government.

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