The answer to the Texas grid problem is more free markets, not less

The outages are indication of an imperfect system, so let’s fix the market

By Bruce Bullock and Robert Lawson. 

"The lights are back on and the heat restored in Texas. Pundits, politicians, the media and many so-called experts are playing the blame game in everything from Tweets to tense statements before legislative hearings.

Unfortunately, very few of the accounts paint an accurate picture of the role free markets have played in meeting Texas’ growing need for affordable power that its citizens and businesses thrive on while emitting some of the lowest emissions in the country.

The power disruptions are evidence of an imperfect system. We both sat in the cold and dark for several days along with the rest of our fellow Texas residents, and we have the plumbers’ bills to remind us of the personal cost of losing power. But market-based incentives can address the problems more efficiently and rapidly than many of the top-down, regulatory prescriptions we see being proposed.

Texas began a deliberate and measured approach to electric power reform in 1995 culminating in what we call “deregulation” of wholesale and retail power markets in 2007, with transmission and distribution remaining a regulated industry overseen by the state’s Public Utility Commission. The Electric Reliability Council of Texas was created not as a regulatory agency but rather as a planning and operations agency much like an air traffic control system. Today, ERCOT is responsible for directing 90% of the state’s electrical load.

Contrary to national media reports, data from the state’s Public Utility Commission and the Association of Electric Companies in Texas clearly shows that ratepayers in Texas enjoy lower rates than prior to deregulation. When adjusted for inflation, the lowest fixed-price contracts available this past fall were approximately 50% less than December 2001, prior to the deregulation. Formal academic studies have confirmed this fact.
 
Texas’ population has doubled since 1980 from roughly 14 million to 28 million, along with the migration of a significant number of businesses and the expansion of the state’s manufacturing base. These dynamics have resulted in significant increases in the state’s electric load. A regulated system requires endless arguments with state bureaucrats over capacity needs and rates, and inevitably involves long delays that our fast-growing state cannot afford.

Market-based incentives have and will continue to address many of the problems that surfaced. The current system relies on rising prices during peak periods to encourage power providers to build and maintain enough capacity. Texas’ market compensates generators for generating electricity only, not for investing in capacity to generate.

The Texas Legislature and Public Utility Commission should put in place capacity markets, or so-called forward markets, to provide incentives and long-term price signals to generators to stimulate investment in generation capacity. These forward markets operate much like existing current-day and day-ahead markets but have a three-year horizon. Mid-Atlantic and Midwestern states served by the PJM system operator have a capacity market and were among the very few regions that had excess capacity during this storm.

Policymakers should also make use of the state’s vast smart meter system. Dynamic pricing works most of the time on the supply side, but it can also work on the demand side. Blackouts are a sledgehammer tool to reduce demand. Dynamic pricing combined with the state’s smart meter system could be more of a surgeon’s knife.

For example, ERCOT should be given the authority to institute retail price surcharges during emergencies announcing these price changes to customers via email and text messages. This would not be a radical price, but a level that would encourage conservation. Rather than relying on the goodwill of people to reduce power use, consumers would be incentivized to reduce consumption, say by running the heat but not doing laundry or using the oven.

Even modest 10% to 20% reductions in usage would have prevented much of the hardships we all endured during the storm. Further, during peak periods, consumers should be allowed to sell their conserved capacity back to the grid. In the hot summer months, a family may decide to power down and go see a ball game or spend a day at an amusement park and could be paid for not consuming power.

Electricity is central to modern life and the reliability and resiliency of the grid is not optional, but neither is affordable power for Texas’ growing number of consumer and business customers. Market-based mechanisms have historically proven to be better allocators of resources than regulators. We believe it’s important for Texas to maintain, and expand, its reliance on markets so we don’t freeze in the dark again.

Bruce Bullock is director of the Maguire Energy Institute at Southern Methodist University’s Cox School of Business.

Robert Lawson is an economics professor and director of the Bridwell Institute for Economic Freedom at SMU’s Cox School of Business."