Texas regulations failed electricity customers

In February 2021, Texas had unusually cold weather, resulting in an electric energy supply crisis. Millions of customers were without power for up to four days, during the coldest days of the year. Retail prices went up dramatically, and some customers received monthly bills for more than ten thousand dollars. Initial news reports assigned the blame for both the reliability issues and the costs to Texas utilities increasing the amount of renewable energy on its grid.

What really happened in the Texas electric market? What was the affect of the increased use of intermittent renewable power sources? What should Washington do, and what is Washington doing, to avoid similar reliability issues and price spikes in the future?

Explaining this will take more than one column. Let’s start with the huge retail electric bills.

For any commodity in a well-functioning free market, supply and demand balance at a market-clearing price. When a system upset occurs that suddenly changes either supply or demand, a new market-clearing price has to be established that reflects that change. When supply and demand balance again, the price stabilizes.

Usually, a sudden rapid increase in price is caused by a short-term, unexpected shortage of supply. In such cases, the price of a commodity goes up until demand goes down and the market clears again at a new, higher price. That’s what happened in Texas.

However, electricity is a unique commodity. It’s generated as it is used. There are very few ways to store electricity and draw down an inventory during a short-term crisis. If supply falls suddenly, prices can rise 100-fold.

And, electric customers usually don’t know about price changes immediately. A consumer who sees higher orange juice prices in a store after a Florida freeze can choose not to buy orange juice. Electric consumers don’t know that the electricity for space heaters and refrigerators suddenly costs a hundred times as much as it did two hours ago. The electric bill won’t arrive for days, or weeks.

Furthermore, most consumers don’t understand how to react to an electric price signal even if they could receive one. Even if they did understand it and were willing to act, there are few mechanisms through which utilities can offer delivery of electricity to some customers willing to pay a higher price while cutting off service, or reducing service, to others.

In most locations, utility regulations are set up to require utilities to have a maximum retail price. Utilities, in turn, set up backup power and load management programs to react immediately to supply crisis situations. If they guess wrong, the utility owners might absorb financial losses. Even when they don’t, short-term costs are factored into years’ worth of future bills. End consumers don’t see giant bills immediately.

Texas has unusual regulations. Consumers can choose their electric utility even if they are in another utility’s historic service territory. Some retail utilities had offered contracts that passed live pricing on to the consumer. Most consumers are not aware that other contract offers’ higher prices included the costs associated with mitigating price spikes, and are not aware that electric price spikes can be so dramatic. Some consumers signed up for such contracts, and got lower prices for a few years – till they suddenly got ten thousand-dollar invoices.