The Great Texas Blackout (2021): When the Free Market Electricity Debate Began
Ed. note: The Great Texas Blackout four years ago triggered a social media debate that reconfirmed ‘classical liberal’ Lynne Kiesling as an advocate of centrally planned, highly regulated electricity. It also revealed a cadre of electricity planners who bristled at the argument that government failed, including Eric Schubert and Robert Borlick. The exchanges began a debate that led the author to write a free-market primer, Free Market Electricity, to resurrect the 1960s tradition of such names as Harold Demsetz, George Stigler, Milton Friedman, and Walter Primeaux.
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Lynne Kiesling (above) came roaring out the gate on Blackout Day February 16, 2021. But ‘the queen of power markets‘ was wrong. The Electric Reliability Commission of Texas (ERCOT) was government–and at the center of the worst electricity crisis in history. Texas was blacked out, and dozens were dying in the cold by the day. It was not market failure but analytic (expert) and government failure (see here and here).
The apologists (face in their hands) were complicit. Ironically, Kiesling’s coauthored Electricity Restructuring: The Texas Story (AEI: 2009), stated:
By facilitating decentralized coordination instead of imposing specific outcomes, the institutions designed in Texas became the most market-oriented in the country, and the most likely to be resilient and adaptive in the face of unknown and charging economic, technological, and environmental conditions. (p. 3)
In Texas, we like to say that electricity restructuring was ‘done right’…. How ERCOT addressed the challenge of “resource adequacy” and kept the lights on in Texas is the subject of chapter 4. (pp. xvi, 4)
Ouch!
ERCOT architect Eric Shubert joined Lynne on Blackout Day:
Writing as someone who has worked on ERCOT issues for two decades, lives in the Houston area, and was without power for 48 hours, the local press and Utility Dive have both highlighted that this had been an event largely caused by a natural gas shortage in Texas. Poor planning for a very rare, extreme weather event. Nothing to do with renewables vs. thermal generation or regulated vs. deregulation. Please put the ideological debates aside and give your prayers, thoughts, and help to those unfortunates in Texas who are suffering (not inconvenienced like yours truly). Thanks!
Ensuing Debate
I entered the debate at this point:
Bradley: Would quasi-governmental entity be fair? Franchised public utilities + munies + coops. The ‘boss’ of ERCOT are two government entities: PUC of Texas and the Texas Legislature. Certainly not a private institution to me….
Kiesling: Define your use of “boss”. There, I suspect, is where our perceptions diverge.
[ERCOT, as it turned out, got off the hook for lawsuits over its pricing errors via the doctrine of sovereign immunity.]
————
One hundred-and-twenty-nine comments followed, worth reviewing for the historical record.
Glen Whitman: “It sounds like ERCOT is basically a monopoly. Is that right?
Kiesling: Indeed it is. But not with the same regulatory structure that is present in traditional vertically-integrated utility regulation. Michael Giberson can probably say more about whether legal entry barriers exist to other competing wholesale power market platforms. And you want ERCOT to have a monopoly in transmission grid operation. The transmission grid is unlike the internet in that a decentralized operational architecture doesn’t really make physical sense, because electrons move at the speed of light and mistakes can kill you.
Whitman: So I’m clear on what you *don’t* think the problem is, but what *do* you think went wrong? It sounds like maybe you’re saying that the present outcome, while obviously bad ex-post, was probably efficient ex-ante because it doesn’t make sense to spend excessive resources on low-probability tail risks.
Kiesling: Well said. And I think the combination of this event with the falling cost of battery storage will lead to increased investment in storage capacity, which would attenuate a lot of the outage risk and make the overall system more resilient.
Postrel: So that’s clarifying, Lynne Kiesling–your position is that the costs of prevention exceed the benefits from preventing such rare events. (And then you think the cost of preventing them isn’t higher/will soon not be higher due to unreliable sources as a result of progress in battery technology.) Those strike me as highly contestable propositions, especially as the increasing penetration of the unreliables imposes strictly convex costs of storage.”
Kiesling: Does modularity relax convexity? I think it does. In any case, it’s an even more complicated analysis than that, because DERs do provide benefits other than energy. DERs can provide grid services like voltage and frequency regulation at the distribution level (what are called ancillary services at the bulk power level). Valuing those services in the absence of markets is of course difficult … which is why my collaborator Dave Chassin and I are working on building local markets with price-based automated dispatch for energy and for grid services.
Postrel: I just don’t see how one can [get] there from here given the vast storage gaps and the expense of filling them, as outlined in the EIRP paper I linked elsewhere (and repeat below). Using market mechanisms is like rearranging deck chairs on the Titanic–you can more-efficiently allocate the misery, but you’re still screwed by the contraction of society’s production-possibility frontier.
Brick and Thernstrom (2016) on the potential for storage in a very-high renewables system: “Wind and solar output exhibit seasonal episodes of both sustained oversupply and undersupply that overwhelm any conceivable storage strategy. Battery storage technologies may have a role in managing shorter-term imbalances but are unlikely to solve the very large seasonal swings in generation output under high-penetration IR scenarios.
Pumped hydroelectric storage (PSH) is the only available technology applicable to longer-term storage; however, storing the large seasonal surpluses produced in these scenarios would require much more PSH than could be reasonably installed. While some longterm storage may be feasible, wasted surplus is unavoidable in high-IR systems, and backup conventional generation remains necessary.”
Kiesling: I bet if you asked Jesse today he’d revise that analysis, given how the economics of storage production have changed over the past 5 years. There are a lot of materials, system, and market design experimentation going on right now in this space (including a research project proposal on which I am a PI).
Postrel: If he’s associating himself with projects like this one, I suggest Jenkins go back to working with Thernstrom. This is the kind of Laputan sunshine from cucumbers stuff, replete with false precision, that Swift had fun with. (I note that this article, aside from apparent accounting blunders, never addresses the storage problem, or how it would be affected by relying on solar and wind.)
I had to chime in:
The whole storage-to-save-renewables research area with all the experts and experimentation is a big red flag to me. Not sure that ‘second best’ describes my discomfort.
And:
Reading all the comments here inspires me to note two things. First, mineral energies have much more BTUs for the buck and come with their own storage. WS Jevons nailed it in 1865: no going back to renewables (which has a 100% market share of energy forever before coal, etc). Solar has a niche off-grid that industrial wind turbines hardly have (scale). Wind is an artificial government industry with no redeeming value that I can point to.
Second, the ‘architecture’ of electricity requires central physical control, but this does not mean that government should be involved. Classical liberals have forgotten the fundamental debate over public-utility regulation–we need to reopen it. Lynne (and Mike Giberson) are our folks here. ERCOT might be a different organization than it is now under private contracting without a government club in the closet.
Kiesling: I don’t know that we need to reopen the utility regulation debate. I strongly think we need to reframe it in Ostromian terms. Yes, electric networks require central physical control, but 1. there are different institutional ways of implementing that and 2. the more we think of grid management and physical control as Ostrom-eqsue institutions for defining and enforcing use rights in a common-pool resource, the better a job we’ll do of allowing a resilient, decentralized, heterogenous network of resources to emerge through innovation.
Bradley: Imagine that the parties were instructed by government to enter into private long-term ‘exit contracts’ from state and federal regulation. What would develop? How would consumers organize? Consumer interest groups, other parties. How might ERCOT change physically or operationally? How would third-party special interests fit in? Maybe this type of article with the influences above has been written. I sort of did it with natural gas regulation (FERC really) in my essay in the Ellig/Kalt book, “New Horizons in Natural Gas Deregulation.”
Reliability, Again
Kiesling: “EXTREME TAIL EVENT. I have been relentless on that point on Twitter for four.straight.days. EXTREME TAIL EVENT. Chris Knittel has also been good on this on Twitter.”
Diane Owen: But that’s the challenge, the legacy that Martin Weitzman has left us: if these 1-in-20-year extreme tail events are happening more frequently, then that means we have fat tails but we don’t have the cognitive-epistemic framework to be able to estimate how big the tails are, because we can’t measure a system when we’re embedded in it and its changing (that’s mashing up Weitzman and Hayek). In the face of that uncertainty, how do we make sensible reliability policy? Good investment decisions?
Owen: Challenge, yes; insuperable, no. I think other utilities and industries probably have principles for dealing with infrequent but high-impact events. Ask those who build and maintain dams, or anything fragile in earthquake country. Or ask utilities who deal with infrequent but high-impact heat events.
Kiesling: Exactly. Much of what’s going on in TX right now is a consequence of engineering design + market design focused on summer peaking, so mechanical devices that aren’t designed for these temperatures are failing, contractual arrangements for natural gas supply that are fine for normal winters and hot summers are failing. Now there will be a lot of updating of priors and analyses, and I expect more investment in storage at a range of scales as it becomes cheaper.
Christopher Lingle: Perhaps the question is NOT about private provision versus public provision … I remember reading that an accidental win by environmentalists came from a change in the legislation, perhaps during deregulation of the Texas electricity market … the gist was to require purchases from lowest-cost providers, a sensible economic concern … but of course, during normal times or sunny days that might be wind or power … that “beat the best” requirement supported already subsidized providers while putting a burden on conventional suppliers … if this leads to fewer conventional sources, there would likely be shortages during exceptional moments, like now … perhaps this shows there are high costs of short-sighted environmentalism … ???
Cost of Outages
Branko Terzic: Lynne, Aren’t there EPRI and other studies around showing that keeping extra reserve around is cheaper than the cost of outages?
Kiesling: I’m sure there are. But, honestly, engineering studies make assumptions about value of lost load that are not grounded in a solid understanding of consumer demand or the economic welfare/utility of reliability. Differently-situated consumers have different values of reliability, and people who value it highly and have the financial means install backups, from the small UPS battery in the house for the internet router and firewall to the gas-fired whole-house backup generator. This insight is also the foundation of demand response, but demand response requires allowing retail contracts where consumers can respond to price signals (ideally with their responses automated). Texas has all of these, BUT not enough to respond to such an extreme tail event.
Nat Treadway: Branko Dusan Terzic How much extra reserve? What types? Who pays? Will it work when it’s 10 degrees? Icy? 110 degrees? Withstand a cat 5 hurricane? Tornado? Flood? Earthquake? Fires? … Lynne Kiesling mentions the distributed solutions because the less costly solutions lie there, within people’s homes. DR is not well implemented. TX needs additional reforms to make its retail elec. market even more competitive. Market reform is an ongoing process, but the PUC of Texas is not working hard enough on it.
Bradley: Lynne: Let me ask you this directly. Why are economists like yourself working on ‘efficient designs’ or ‘market conforming’ designs for electricity? Answer: electricity is a thoroughly politicized industry where the technocrats are in charge. A ‘Hayekian’ or ‘classical liberal’ must revolt against ERCOT, PUCs, FERC, etc. to say: electricity needs to be run by entrepreneurs, not ‘experts’.
Kiesling: You and I have similar objectives, different strategies, and vastly different tactics. Also, as Michael Munger would say, you are a destinationist and I am a directionalist — I take the history and the institutional path dependence into account, and have had some considerable success by working within the system to move it in a more market-oriented direction. My regulator education work is, I flatter myself, helping to change mental maps, which is slow work but does contribute to change. My transactive energy work is very much an effort to incorporate Hayekian epistemology into the architecture and market design (yes, design is necessary) in the electric system.
Munger (to Bradley): Is it your claim then that ALL regimes, ranging from the Soviet Union in 1934 to the electricity utility in Florida in 2021 are IDENTICAL, in terms of their levels of repression? That’s a remarkable claim. You reveal your own authoritarian tendencies in giving other people orders about what they “must” do. It’s not that you think other people should do things; they MUST. Would you kill them if they don’t, or just put them in jail? A neo-Stalinist is scary, even if he is wearing a Hayek t-shirt!
Bradley: I take your criticism, Michael, but it is too harsh. I am frustrated that fundamental questions about initial regulation and climate alarmism/forced energy transformation are givens and not in the mainstream academic debate.
I have been in conferences with Lynne where these questions seem to be off the table. That is frustrating. Regarding getting regulators going in the right direction, I’m in the C3/C4 world and have disagreements with other libertarians about applauding the unprecedented energy/environment gains made by Trump, for example.
I’m all for incremental change and process reform in the right direction. I would end with this: in working to improve the edges, a classical liberal should imagine what a free-market world would look like and work backwards.
Destination back, not only status quo forward. And mention, just mention, what regulatory ‘exit contracts’ would look like. There is virtually no work being done, as far as I know, in the ‘Why Regulate Utilities?’ domain of many decades ago.
————————
Schubert: Grid reliability is or very comparable to a common pool resource where centralized dispatch in real time is needed to keep the lights on. As such, the ERCOT market and grid are governed in an overlapping three-tier pyramid that matches what Elinor Ostrom described as optimal for governing common pool resources. Lynne makes a similar point below.
Bradley: This is the mandatory open-access world in a sea of other regulation. Another approach is where horizontally/vertically integrated companies (power majors?) internalize the ‘commons.” The ‘commons’ can be a regulatory construct. Non-market planning is not avoided by EO’s description in the present setup; tough questions about pricing and reliability remain. Without public-utility regulation and federal regulations, if something results near the three-tier pyramid structure, that would say a lot for what we have today. But I believe the industry structure would be very different in a free-market world.
———————-
Kiesling then gets into a discussion about what the “right” reserve margin is. And she lets wind and solar off the hook for the failure of thermal generation.
Steven Postrel “ERCOT is overcommitted to solar and wind, runs lower reserve margins than is prudent, and this cold snap knocked out over half the wind turbines on the grid (as well as some natural gas flows) leaving the state facing blackouts.” Better?
Kiesling No, still not true.
Postrel Which part(s) do you deem false?
Lynne Kiesling 1. overcommitted to solar and wind — no, ERCOT’s supply stack is heavy in natural gas. 2. lower reserve margins than is prudent — no, unless you think TX electricity consumers should pay the costs of 100% reliability in the face of a 1-in-20-year extreme tail event. 3. they lost 4 GW of wind and 26 GW of natural gas capacity, so the wind capacity loss was small compared to the natural gas plants that couldn’t generate.
Steven Postrel1. According to the data I’ve seen, ERCOT consistently plans for lower reserve margins than other grids. ERCOT now planning for 15-20%, but that’s still lower than surrounding grids. I don’t see how “heavy in natural gas” is in conflict with “overcommitted to wind and solar.” Texas has the highest commitment to wind power of any state in the union, and the percentage is expected to rise. https://www.eenews.net/stories/10618398393. They lost a higher percentage of wind power than of natural gas power in this freeze. (Perhaps that wouldn’t happen in the future; I’m not sure how easy it is to winterize wind turbines vs. natural gas infrastructure.) But the implication is that if they now had more gas power and less wind power, the crunch would have been less severe.Steven Postrel1. According to the data I’ve seen, ERCOT consistently plans for lower reserve margins than other grids. ERCOT now planning for 15-20%, but that’s still lower than surrounding grids: https://www.eia.gov/todayinenergy/detail.php?id=39892… See More
Kiesling: Reserve margin: In contrast to your interpretation, I would argue that other RTOs (PJM in particular) have excessive reserve margins relative to supply requirements and relative to the ability of demand to respond to higher prices. Other RTOs (PJM in particular) are governed by generators, who clearly have an incentive to have higher than needed reserve margins. Again I say to you: what do you think the cost is of a reserve margin to achieve 100% reliability during a 1-in-20-year extreme tail event??????
Postrel: As I noted on your other post, the decision to just accept blackouts like these (in extreme freezes) as the cost of doing business cannot be ruled out as the optimal policy, given the cost of incremental reliability…. As I noted on your other post, the decision to just accept blackouts like these (in extreme freezes) as the cost of doing business cannot be ruled out as the optimal policy, given the cost of incremental reliability. Presumably, this would be a good subject for cost-benefit analysis with reference to the degree of public risk-aversion. But the “excess” reserves in other places, if adequate to mitigate the consequences currently being felt in Texas, don’t seem so burdensome as to be obviously superoptimal.
Appendix: Second Thoughts
I received a lot of criticism from the ERCOT bunch. (“‘Unintended consequences of government intervention?’ Are you f***in’ kidding me?,” stated Robert Borlick. “What just happened is a direct consequence of insufficient government intervention!”
But pangs of conscience would settle in.
“Arranging deck chairs on the Titanic if no capacity market.” (Joe Pokalsky)
“(oops!) There is now a need to revise the scarcity pricing framework in the light of recent events, and to reflect ever-changing market conditions.” (Lynne Kiesling, June 30, 2021)
“I have stated earlier that the ERCOT market’s reliance on scarcity pricing did not foresee an environment with high penetration of zero-marginal cost resources. Back in 2005 I generically simulated an energy-only market to demonstrate how scarcity pricing would work. I never anticipated the mass introduction of renewables at that time.” ( – Robert Borlick)
You may be right. I have stated earlier that the ERCOT market’s reliance on scarcity pricing did not foresee an environment with high penetration of zero-marginal cost resources. Back in 2005 I generically simulated an energy-only market to demonstrate how scarcity pricing would work. I never anticipated the mass introduction of renewables at that time. ( – Robert Borlick)
The post The Great Texas Blackout (2021): When the Free Market Electricity Debate Began appeared first on Master Resource.
Source: https://www.masterresource.org/texas-blackout-2021/free-market-electricity-debate-2021/
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