Should power generators be required to guarantee that they can provide a certain amount of electricity? That’s what state legislators are considering at the Texas Capitol.
A cadre of out-of-state banks and tech companies fretted in a letter to state leaders that such a mandate would “inappropriately and unfairly” impose more costs on renewable energy companies. Instead, they argue that these costs should be borne by “all the beneficiaries of those ancillary services” – i.e., consumers. But February’s blackouts from Winter Storm Uri that left over 4 million Texans shivering in the cold – and killed at least 80 – should make it clearer than ever to legislators that state residents shouldn’t have to bear the burden of the intermittency costs of wind and solar generation, which are transferred to the rest of the grid and ultimately to consumers.
There has been ample debate in Capitol circles about who’s to blame for the blackouts. Is it ERCOT? Natural gas? Renewables? The renewable lobby’s strawman claim is that wind out-performed day-ahead forecasts, but the real issue is that wind usually generates the least amount of energy when it’s needed most.
So, let’s cut through the noise: Even if every generator that was online the night of February 14 had continued operating at full tilt, we still would have seen widespread and lasting outages. Weatherization and the need for more reliable natural gas infrastructure are only part of the problem. The legislature must make real market reforms, or else we will be back asking the same questions in the near future.
Texas simply doesn’t have enough reliable electricity generators – power plants that can be counted on to produce consistently and to ramp up during peak demand. Over the last five years, the Lone Star State has prematurely retired more than 5,000 MW in natural gas and clean coal while its population and economy grew significantly. Even though renewable capacity nearly tripled over the same period, the problem remains that wind and solar can’t be counted on to provide enough electricity when needed most because their output varies with the weather, not with demand.
How did we get here? There are several explanations. One involves decades of multibillion-dollar subsidies for wind and solar, including federal subsidies, which are often 50% or more of wholesale electricity prices. These subsidies give renewables an artificial advantage and make it almost impossible for reliable power plants to remain economically competitive in an energy-only market, hence the premature retirements of reliable generating capacity.
Additionally, wind and solar benefit from a hidden subsidy, in that they don’t fully bear the intermittency costs they impose on the rest of the grid. Econ 101 predicts that if unreliable capacity is subsidized and reliable capacity penalized, you will end up with over-investment in unreliable capacity and under-investment in the capacity most needed to keep the lights on. That describes Texas to a tee. Add to that the way in which Texas has socialized the additional cost of transmission for wind and solar, and you have a market far out of balance.
Texas’s current electricity market isn’t set up to properly value reliability in the presence of large amounts of variable wind and solar generation. Scarcity pricing and limited ancillary services (the technical term for backup generation to fill in gaps during peak demand periods) are designed to account for small variations in power availability – up to about 10%. These mechanisms aren’t capable of counterbalancing the 50% or greater variability of wind and solar during peak demand periods.
Electricity prices were near zero a week before the February blackouts, and negative – meaning generators actually paid the grid to take their power – just a day after it ended. It’s very difficult to invest in a natural gas power plant that relies on brief and unpredictable periods of high prices while losing money the rest of the year.
After the blackouts, it should be clear that cheap electricity is not very valuable if it is not there when we need it. Wind and solar generators make up a third of Texas’s generating capacity but produce only a small fraction of that capacity when they’re needed the most. The only way to move the market closer to a proper equilibrium is to require unreliable wind and solar generators to improve their reliability so that it is closer to that of thermal generators.
Some legislators are proposing a “capacity market,” which would socialize the cost of improved reliability through a flat fee on consumers. This is an ill-considered and inefficient solution that arbitrarily imposes the cost of intermittency on Texans, instead of on the generators that cause it.
Texas desperately needs more reliable electricity generation; the state’s economy, population, and energy needs show no sign of slowing down. But current projections suggest that Texas will lose at least as much reliable generating capacity as it will add over the next several years.
The Texas legislature should create clear guidelines for statewide electric reliability and ensure that California-style blackouts don’t become the norm here. Targeted and efficient market reforms can begin to solve this problem if legislators and the Public Utility Commission are willing to ask the hard questions about Winter Storm Uri – and learn the proper lessons from it.
This commentary originally appeared in RealClearEnergy on April 15, 2021.