The failure of unregulated free market capitalism.
https://www.sciencealert.com/how-did-texas-electricity-grid-fail-residents-so-catastrophically-an-expert-explains
How Did Texas Electricity Grid Fail Residents So Catastrophically? An Expert
Explains
Americans often take electricity for granted – until the lights go out.
The recent cold wave and storm in Texas have placed considerable focus on the
Electric Reliability Council of Texas, or ERCOT, the nonprofit corporation that
manages the flow of electricity to more than 26 million Texans.
Together, ERCOT and similar organizations manage about 60 percent of the US
power supply.
From my research on the structure of the US electricity industry, I know that
rules set by entities like ERCOT have major effects on Americans' energy
choices. The current power crunch in Texas and other affected states highlights
the delicate balancing act that's involved in providing safe, reliable
electricity service at fair, reasonable rates.
It also shows how arcane features of energy markets can have big effects at
critical moments.
Let there be light
The electric age began in 1882 when the Edison Illuminating Company sent power
over wires to 59 customers in lower Manhattan from its Pearl Street Generating
Station. Edison was America's first investor-owned electric utility – a company
that generated electricity, moved it over transmission lines and delivered it
to individual customers.
The scope and scale of electric utilities grew rapidly from those humble
beginnings, but this underlying, vertically integrated structure remained
intact for more than 100 years. Each utility had a monopoly on serving
customers in its area and reported to a public utility commission, which told
the company what rates it could charge.
Since the utilities knew more about their costs and abilities than anyone else,
the burden was on regulators to decide whether the utility was operating
efficiently. Regulators also determined whether the costs that utilities
proposed to pass on to customers – such as building new generating plants –
were just and reasonable.
The lines get tangled
Things grew complicated in 1996 when the Federal Energy Regulatory Commission
issued Order 888, allowing states to restructure their electric power
industries to promote more competition. Through the actions, or inaction, of
individual state legislatures, the US electricity market fractured.
Some states, primarily in the Southeast and the West, maintained the vertically
integrated structure. The rest of the nation moved to a market structure in
which generators compete to sell their electricity.
Regions created new independent organizations – known as independent system
operators or regional transmission organizations – to regulate the flow of
power on the grid. In these regions, generators compete to sell their
electricity, and organizations called market monitors make sure that generators
follow the rules.
This approach created power markets that prioritize generating electricity at
the lowest possible price.
(FERC)
Above: In the Southeast, Southwest and Northwest US, traditional utilities
generate electricity and deliver it to customers. Other regions, including
Texas, have moved to competitive power markets run by Independent System
Operators, or ISOs.
An imperative to keep prices low
What do these changes mean for electricity customers in regions with
competitive power markets? The companies that deliver power over wires to homes
and businesses still have to get their prices approved by regulators, but the
system works differently for the businesses that generate that power.
Generators offer their electricity, typically at a particular price each hour,
on exchanges run by market operators like ERCOT. Those operators figure out how
much electricity is needed across the regions they serve and choose the
lowest-cost bidders to supply it.
If a generating company is not selected, it loses the opportunity to sell its
electricity during that hour. And selling power is how generators create
revenue to pay for things like workers, power plants and fuel. This means that
generators have an incentive to bid as low as possible and sell as much
electricity as possible.
Generators in Texas are facing criticism now that they weren't prepared to
operate in extremely cold temperatures.
But consider the challenges facing two Texas generators that are identical in
every way, except that one decides to invest in winterization. That company
will have higher costs than its competitor and may be forced to submit
higher-priced offers in the market, potentially losing out on opportunities to
sell its electricity.
In the long run, the company that winterizes may have a more difficult time
staying in business. It would be better prepared for the conditions affecting
Texas now, but it would operate at a competitive disadvantage under more normal
conditions.
An international nonprofit regulator called the North American Reliability
Corporation conducts semi-annual reliability assessments for each North
American region, but those assessments are only as good as the assumptions
they're based on. If the assessment doesn't consider extreme events, then the
regulator can't determine whether a power system is ready for them.
After an earlier cold wave in 2011 that led to power shortages, federal
regulators identified options for winterizing the Texas power system – but
ERCOT did not require energy companies to carry them out.
Other regions might value resilience differently. For example, ISO-New England
launched a program in 2018 that compensates generators for providing extra
capacity when the system is strained.
The power of a competitive generation market is that each generator gets to
decide for itself what makes it sustainable in the long run. That's also a
weakness of the market.
What's next for Texas?
Once power is restored across Texas, state and federal policymakers will have
to address several tough questions in order to make failures like this less
likely.
First, does preparing the power system for severe storms represent value for
electricity customers? What types of events should people be protected from?
Who determines the scenarios that go into reliability assessments? Since
consumers will pay the costs, they should also benefit.
Second, how should people pay for this resiliency? Costs could be assessed
based on the number of kilowatt hours each household uses or charged as a flat
fee per customer – an approach that could benefit heavy electricity users. Or
they could be covered through new taxes.
How will decision-makers respond a year from now, when the crisis has passed
and people ask, "The weather is great and the system is doing fine, so why am I
paying more for my electricity?"
Third, how does that money that consumers pay to improve the system translate
into projects? Should it go directly to generators or into a fund that
generating companies can draw on? Who would administer the fund? Who is
ultimately responsible for implementing changes to the system and accountable
if things don't improve?
Finally, how will these changes affect the market's central goal: inducing
energy companies to provide power at the lowest cost?
Ultimately, the public pays the costs of electricity service, either through
higher rates or service interruptions during events like this week's Texas
freeze. In my view, utilities, regulators, government officials and people like
me who study them have a responsibility to ensure that people get the best
value for their money.
Theodore J. Kury, Director of Energy Studies, University of Florida.
This article is republished from The Conversation under a Creative Commons
license. Read the original article.
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