Okay, folks, the kids are back in school, so in their honor we are all going to do a word problem!
Bob Rich lives in a sprawling subdivision of large, single-family homes. Bob has a pool and a hot tub and outdoor lights he keeps on all night. Bob’s four children have loads of electronic gadgetry, plus a habit of leaving windows open when the air conditioner is blasting. Needless to say, the Rich family uses a lot of electricity. But Bob doesn’t worry too much about his utility bill. It’s really not that much compared to all the other bills he pays; and fortunately, his wife is a hedge fund lawyer so he can afford it.
John Poore, on the other hand, lives in a small apartment and uses as little electricity as possible to save money. He works a low-wage job, and his best efforts to attract a wealthy spouse have not yet panned out. John uses air conditioning only on the hottest summer days. He switched out his incandescent lightbulbs for LEDs, caulked the cracks around his windows where air leaked in, and when his old refrigerator broke, he replaced it with an EnergyStar model.
Bob and John are both customers of Shenandoah Valley Electric Cooperative, in western Virginia. SVEC says its costs are going up, so it has been “adjusting” its rates. What would you expect the effects to be?
A) Bob’s bills go up more than John’s.
B) Both Bob and John’s bills go up by the same amount.
C) John’s bills go up more than Bob’s (and Bob’s might even go down).
You probably already figured out it’s a trick question. We’re dealing with a Virginia utility, so the answer can’t be (A) regardless of that being the obvious and rational answer.
Indeed, answer (A) is how most utilities operate: Every customer pays a small fixed fee, typically under $10, and the rest of the bill is determined by how much electricity the customer uses. People who use a lot of electricity pay the most. They are usually better able to afford it, but if they don’t like the size of their bills, they can turn off the lights in empty rooms, change their thermostat setting, invest in energy efficiency, or put solar panels on the roof. Conserving energy and adding renewable energy happen to be public policy priorities, so the incentives are aligned with the behavior society wants to encourage.
But SVEC notes that a lot of its costs aren’t dependent on how much electricity customers use; it has wires to maintain and so forth, plus it recently “invested” in a beautiful and spacious new headquarters that it sworewouldn’t mean rate increases (but, well, you know how that goes). SVEC says Bob and John benefit equally from all these investments, and wants their bills to reflect that. Early last year SVEC “adjusted” its rate structure to increase the fixed customer fee from $13 to $25 and decrease the rate per kilowatt-hour of electricity used. If you chose answer (C), you were correct!
This year, to raise more revenue, SVEC proposes to increase everybody’s fixed fee again, this time to $30. For customers who don’t use much electricity, that fixed fee could become the biggest charge on the bill, and one that can’t ever be reduced by any amount of energy conservation, efficiency or solar panels. They may also wonder whether $30 is just a stop on the way to even higher fixed fees that will further undercut their energy-saving investments.
SVEC didn’t need anyone’s approval when it almost doubled the fixed fee last year. But this year, the State Corporation Commission has to approve the additional changes, so customers finally have a chance to challenge them. Utilities around the state are watching what the SCC does. If SVEC gets approval to shift more of its costs away from customers who use a lot of electricity and onto those who use the least, other utilities will see that as a green light to do the same.
Utilities prefer fixed charges because they provide revenue certainty; left to their own devices, they will move as much of their revenue into the fixed-cost category and increase fixed charges as high as they can. Unfortunately, doing so creates an incentive for utilities to spend as much as possible on infrastructure costs that can be recovered through fixed rates. That will raise costs for everyone and produce a further perverse incentive for the utility to encourage energy consumption (and waste) in order to make maximum use of the infrastructure.
This isn’t the result anyone should want, and especially a nonprofit electric cooperative. More affluent, high-use customers will benefit from lower rates per kilowatt-hour, while low-income customers will be less able to control their bills, an inequity that flies in the face of Virginia’s efforts to limit the energy burden on low-income residents. And customers who are considering investing in energy efficiency or solar will find they are looking at a longer payback time, discouraging the energy-saving measures that Virginia strives to promote.
The SCC is holding a hearing today to consider SVEC’s proposed rate increase. The commission should reject SVEC’s efforts to raise fixed charges for customers and send the utility back to the rate-drawing board.
It is never fun to see our fellow Americans suffer, whether it’s from pandemic diseases or weather disasters. Our hearts go out to the residents of Texas who suffered without electricity and heat for days, some of them also without safe drinking water, and a few of them even dying from exposure, fires or carbon monoxide poisoning as they tried to keep warm.
On the other hand, picking apart the preposterous excuses from Texas leaders seeking to avoid responsibility for the fully preventable power outages and the misery that accompanied them—well, that’s another matter. And it’s made so much easier by those leaders’ insistence on trying to score political points instead of admitting that at least some of the blame rests on their shoulders.
Take Governor Greg Abbott, who went on Fox News to blame liberals for the debacle. Ignoring his state’s failure to plan for climate change and invest in power grid winterization, he told talk show host Sean Hannity the problem was actually the portion of the state’s electricity supply that comes from wind and solar. “This shows how the Green New Deal would be a deadly deal for the United States of America. Our wind and our solar got shut down, and they were collectively more than 10 percent of our power grid, and that thrust Texas into a situation where it was lacking power on a statewide basis.”
No one in Abbott’s echo chamber pointed out that a) solar actually did just fine, b) states like Iowa and South Dakota, with much worse winter weather, rely much more heavily on wind power than Texas does, yet there are no stories about their turbines seizing up and their grids collapsing, and c) if a shortage of ten percent shuts your grid down, you have way more problems than you can blame on the Green New Deal. In fact, the biggest factor in the grid failure was some 28,000 megawatts of coal, nuclear and gas power that went offline, as the Electric Reliability Council of Texas reported.
And then there was Ted Cruz. I’m not referring to the farce of his skipping out on the post-storm misery to fly to Cancun, then pinning it on his daughters before high-tailing it home to make a show of handing out relief supplies. That incident just reminds us that no matter how deep our divisions, Americans can always find unity in our collective loathing of Ted Cruz.
No, in this case I want to point to a pair of tweets from Cruz, almost exactly two years apart. February 13, 2019: “Success of TX energy is no accident: it was built over many years on principles of free enterprise & low regulation w more jobs & opportunities as the constant goal. We work to export this recipe for success t more & more states so that all Americans enjoy the same prosperity.”
And here he is on February 22 of this year, reacting to news that free enterprise and low regulation had produced $5,000 electric bills for some customers in the aftermath of the storm: “This is WRONG. No power company should get a windfall because of a natural disaster, and Texans shouldn’t get hammered by ridiculous rate increases for last week’s energy debacle. State and local regulators should act swiftly to prevent this injustice.”
Luckily for us, lots of other people have been more interested in understanding what happened and preventing it from happening again than in trying to duck blame and score political points. The real story, it turns out, is simple at its core: “low regulation” meant the Texas grid and power providers did not adequately prepare for winter storms that climate change is making worse than they used to be. And because the Texas grid is cut off from the rest of the country (a feature, not a bug, to cowboy politicians), when the crisis hit there was no way to import power from other states that were better prepared.
Let’s take a closer look at what went wrong, how it could have been avoided, and what lessons it offers for the rest of us.
The setup: an isolated grid with “free enterprise and low regulation”
The grid that serves Texas is uniquely isolated, which also gives it a unique vulnerability. The Electric Reliability Council of Texas serves most of the state, and no other states. Texans are proud of that (or were before this month), because it means there is no role for federal regulators like FERC. It also means that when power ran out, ERCOT couldn’t just import it from parts of the country with a surplus. Of course, states near Texas also suffered in the storm, so there may not have been a lot of surplus power to be had. It is worth noting, though, that the border city of El Paso fared better than the rest of Texas because it is not part of ERCOT but part of a larger regional transmission organization (RTO) serving several southwestern states.
Another feature of ERCOT is the low regulation that Ted Cruz celebrated. ERCOT keeps it simple for power generators. They get paid for the power they produce. Other RTOs have what is called a “capacity market” to reward generating plants just for being available to run when called on, and they penalize participants who fail to perform. ERCOT does neither. With a reserve capacity of only about ten percent and no way to guarantee generators would be available when needed, ERCOT had set itself up for trouble.
If generators had faced penalties for nonperformance, they could have—and almost certainly would have—spent the money needed to prepare their facilities for colder-than-usual weather. Winterization is a normal cost of doing business for a power provider in a northern state, but Texas winters are usually warm enough not to require it. If you won’t be penalized for not winterizing, you have little incentive to do it when you’re competing on cost with other power sellers.
ERCOT was vulnerable for another reason. Demand for power in Texas is usually higher in summer, with air conditioners running, than it is in the state’s typically mild winters, so ERCOT plans for that. But in cold weather, gas-fired power plants face competition for fuel, when some of the gas supply goes for heating buildings. This month, when gas wells and pipelines also froze up, there simply wasn’t enough fuel to go around. ERCOT’s overreliance on gas proved to be a liability much greater than the smaller amount of renewable energy on the grid.
The last important feature of the Texas system is retail competition. Electricity customers in ERCOT can choose among dozens of power providers. Some providers keep rates constant; others offer a variable rate that just passes through the wholesale cost of power, with only a small monthly fee added. When wholesale rates are low, the consumer saves money on a plan like that. But regulators didn’t insist on any safeguard to protect customers against the possibility of wholesale prices spiking to astronomical levels due to a power shortage. That’s exactly what happened in the aftermath of this month’s storm.
That $5,000 power bill Cruz criticized? That’s unfettered free-market supply-and-demand at work. It’s a feature, not a bug. If you don’t like that feature, Senator Cruz, maybe low regulation isn’t for you. Helping consumers avoid power bills in the thousands of dollars would have been easy, but it would have required a little bit of regulation.
The storm; or how nature takes no interest in political posturing
Well before this storm hit, ERCOT was fully aware of the vulnerabilities of its particular brand of laissez-faire operations. Ten years ago, in the wake of another winter storm, Texas operators were warned of the dire consequences that could ensue if they did not require generators to winterize operations.
But, they didn’t, and this chart from the U.S. Energy Information Agency shows what happened to generation as a result. Before the storm, you can see natural gas and coal plants running less when high winds produce plenty of cheaper wind power, then cranking up when wind speeds drop. As the week goes on, power supply from natural gas plants increases to meet higher demand from colder weather, while other generation holds steady. Then suddenly you see every category of energy resource except solar drop in output, as critical components of some generating units freeze up and the units fall offline, while fuel supplies also dwindle. Some wind generation falls off, but so does coal, nuclear, and—especially—natural gas, just as they are all needed most.
The storm was, to be sure, one of the worst winter storms ERCOT had ever faced. And the situation could have been worse. If operators had not proactively cut power to customers, demand in excess of supply would have damaged grid infrastructure so severely that large swaths of the population would have been without power for weeks or months. (Let us now praise faceless bureaucrats, for they just saved Texas.)
So it was bad, and could have been worse. Why didn’t Texas prepare for it, even after being warned? I have one theory. People who cling to simplistic notions that global warming “should” produce only warmer winters have a tiresome habit of pointing to cold weather as evidence that climate change isn’t real, but I think they also take secret comfort in the idea that if the planet is warming, extreme cold weather events will become less common, with less need to prepare for them. If your political philosophy requires you to see regulation as an evil, your own willful misunderstanding of climate science might provide all the excuse you’re looking for not to act.
Could it happen here?
Bad weather can happen anywhere, and it’s always safer not to gloat. That said, several features distinguish ERCOT from PJM, and Texas from Virginia. As noted before, PJM has a capacity market that rewards even otherwise-uneconomic generators for hanging around being ready to produce at short notice, and those generators are penalized if they don’t perform when needed. As a result, we are much less likely to see the kind of power shortage and price spikes that Texans experienced. (Not that PJM is without flaws. Its capacity market unnecessarily discriminates against wind and solar, its policies are making the integration of renewable energy harder than it ought to be, and it has incentivized such an oversupply of gas generation that consumers are paying higher prices for the inefficiency. But that’s another story.)
Virginia also features monopoly power companies rather than retail choice. There is plenty of disagreement as to whether that is good or bad for consumers. The monopoly model requires strong regulation to ensure captive consumers aren’t being overcharged, and are being offered the products they want—like renewable energy. Critics (and I’m among them) have argued that Virginia isn’t doing enough on this front.
On the other hand, the retail choice model depends on consumers being well informed, and also requires regulators to scrutinize the tactics of power providers and punish the ones who take advantage of unwary consumers. So, ironically, a deregulated electricity market requires strong regulation to protect participants. Strong regulation could have prevented Texas providers from offering residential customers a tariff based on wholesale prices, with risks that residents couldn’t easily understand or mitigate against.
Texas was also more vulnerable to disruption because power generators were not required to winterize their plants or penalized for not doing so. Sure, a winterized plant would have turned a hefty profit in this storm, but in a more average winter, the extra cost would not have paid off. The option not to winterize isn’t a good one in PJM. As a result, when the power does go out in PJM, the problem is inevitably in the delivery infrastructure, not the generation.
Virginia’s system of vertically-integrated utilities means our utilities own their electric generation as well as the power lines. They can charge customers for building and maintaining those generating facilities, so they have less incentive to skimp on weatherization. That increases the reliability of those facilities. But even if several power plants in Virginia were to fail all at once, we could still draw power from more than 1,200 facilities across PJM, or even from the larger Eastern Interconnection. By design, Texas does not have that option.
One distinction between ERCOT and PJM that doesn’t make a difference, in spite of Governor Abbott’s claims, is the greater percentage of wind in ERCOT than in PJM. Wind actually makes up 23% of generation in ERCOT, more than perhaps Abbott wanted to admit, given that most of it came online under his watch. In PJM, wind makes up only about 3%. If Abbott were correct that wind turbines can’t handle winter weather, that would be a reason for more northern grids like PJM to avoid wind. But of course, Abbott’s claim is political wishful thinking divorced from reality. Wind turbines operate just fine in the much colder winters of Iowa, the Dakotas, Canada—heck, even in the frigid and stormy North Sea, where offshore wind ramps up production in winter.
As for solar, you could see from the chart that it was not affected by the cold weather. Texas residents who were lucky enough to have both rooftop solar and batteries spent the aftermath of the storm bragging about never losing power. That’s a compelling argument not just for more solar in the generation mix, but for more distributed generation in particular, including solar microgrids and resilience hubs to help communities weather future storms.
In the wake of this month’s storm, the independent Electric Power Research Institute (EPRI) analyzed what went wrong and issued recommendations for Texas grid operators. Among the unsurprising recommendations: ERCOT should do better planning for resource adequacy and increase its interconnections to other power systems so it does not have to go it alone.
I would add one more recommendation: keep your ideology out of it. You can’t deliver reliable power that is also reasonably priced without robust regulation. If leaders refuse to learn from this winter, they’ll simply set up Mother Nature for another opportunity to mess with Texas.
A version of this article appeared in the Virginia Mercury on February 25, 2021.