Alternatives to Texas energy model have problems, too

See The Texas Freeze by Katherine Blunt and Russell Gold of The WSJ. Excerpts:

"“The premises of that paradigm have changed,” said Bernard McNamee, a former Federal Energy Regulatory Commission member who is now a partner at law firm McGuireWoods LLP. Renewable-energy sources cannot be turned on and off like a power plant, making it harder to ensure sufficient supply at any one time. “That’s why public policy makers and electricity officials need to address some of the shortcomings.”

William Hogan, an energy economist at Harvard University who helped design the Texas market, said this week’s blackouts weren’t indicative of a major design flaw, but rather inevitable imperfections stemming from extraordinary weather challenges.

“I don’t know of any market design that exists anywhere that would have anticipated and have been prepared for something of this scope and scale,” he said."

"In Texas, the system has largely worked during the sweltering summer months, when air conditioners are blasting."

"Within the competitive Texas power market, there is a strong incentive for generators to keep costs down to recoup their investments. The rapid buildout of wind and solar power, which are now among the cheapest sources of electricity, have pushed prices even lower in recent years, making it more difficult for gas and coal plants to compete.

For plant owners, that presents a paradox: Should they add to their capital costs by preparing for severe cold snaps that occur only occasionally, or skip the preparation and risk tripping offline, missing out on high prices and exacerbating a potential supply shortage?

“With everything there is a trade-off,” said Ari Peskoe, director of the Electricity Law Initiative at Harvard Law School. “More resilience is potentially more expensive, but electricity is an essential service. These are hard decisions.”

Texas deregulated its power market at a time when policy makers across the country were considering ways to reduce electricity costs by modernizing the utility model. For most of the 20th century, utilities were vertically integrated, controlling every aspect of electricity supply from generation to delivery.

That remains the model through much of the Southeast, where utilities remain responsible for grid reliability. State regulators oversee their investments in power plants and grid improvements and allow them to recoup costs through customers. That has sometimes resulted in cost overruns that drive up the price of electricity.

Other market designs have emerged elsewhere. PJM Interconnection, an electricity market serving 13 states from Virginia to Illinois, runs a “capacity market” meant to ensure enough power is available to meet peak demand three years in the future. It is an insurance policy against uncertainty and extremes. Power producers who promise to show up are paid for that commitment, and penalized if they fail to deliver.

Critics of that model say it is more expensive than others because it pays for power that might never be needed. And PJM has fewer wind and solar farms in its territory than some other markets, making it easier to contract for resources that can fire up on demand. Gas plants can start up on demand, but wind and solar production depends on weather, time of day and storage.

Texas has what is known as an “energy only” market. Producers are paid only for the power they generate. If they were paid to be on standby for all weather conditions, that would encourage investments to ensure they are ready to go, electricity-market veterans say.

Regardless of the model, all power markets face a common challenge: how to prepare for the possibility of extreme events that are statistically unlikely and difficult to predict."