The Economist: How to fix it

Now that things are getting closer to normal after the extreme weather and blackouts, attention has rightly and rapidly turned to actions to ensure that we never have a repeat.

One thing that has emerged is the need for a base level of generation capacity available at all times. The amount could be set to provide grid stability during periods of extremely high demand, with adequate winterization to ensure availability.

In the Texas market, power generators only earn revenue when they sell power (as opposed to traditional regulation where they are also paid based on maintaining available capacity). Once wind turbines are installed, operating them is essentially free. At times, wind farms can generate sufficient electricity to send prices plummeting (or even negative). (For those into the esoteric, prices in a competitive market are determined by the marginal cost of the last unit; on a nice spring day, wind often supplies all that we need.) 

Texas should consider creating a “capacity market” (I seem to recall saying that 20 years ago). This base load would need to be fueled by conventional fuels. Legislation or a regulatory authority could set the level of base capacity, and firms could be compensated for keeping it available. These costs would be passed along to consumers, likely in the form of higher electricity rates. Better winterizing could also be required, which is also not free. You can think of it much like an insurance policy. You pay for it, hope you never need it, but are glad it’s there when you do.

Past weather events triggered rolling blackouts, and best practices for winterization were developed. However, there is no effective enforcement mechanism and, hence, little incentive for generators to incur the additional costs. It would be useful to examine the adequacy of mechanisms for assuring compliance.

Moreover, generators in Texas often purchase interruptible natural gas supplies, meaning that they get a reduced price, but may be interrupted when supply is scarce. This practice reduces costs in normal times but creates problems during severe storms that winterization alone will not solve (something like flying standby to your daughter’s wedding on a holiday weekend). This area is also worthy of examination.

Another issue that arose was that the compressors that facilitate the natural gas supply are generally powered by electricity, yet they were not prioritized. Thus, the lack of electricity hampered the ability to generate more. That should be an easy fix.

The recent, near-catastrophic failures illustrate a need for changes. The rational approach involves ensuring adequacy of generation fueled by diverse means. With the right incentives, the market approach should continue to provide its many benefits while assuring that the lights (and heat) stay on. Stay safe! 

Dr. M. Ray Perryman is President and Chief Executive Officer of The Perryman Group (www.perrymangroup.com), which has served the needs of over 2,500 clients over the past four decades.