Ed. Note: Four years ago, Storm Uri caused Texas’s centrally planned wholesale electricity market (ERCOT) to buckle, vindicating warnings about the state’s wind/solar reliance. The mainstream media implicated natural gas instead, failing to explore the why behind the why. Rather than deregulation, Texas has chosen to add wind, solar, and batteries, while subsidizing natural gas plants to counter intermittency. This duplicated grid is now driving rates up in a state that could have relied on surplus natural gas instead.
It was not so much the story of freak weather triggering a market failure writ large. It was a classic application of the political economy of government intervention: the seen and the unseen, expert/regulatory failure, and unintended consequences.
Don Lavoie, a preeminent thinker in the field of market-versus-government planning, once warned:
If the guiding agency is less knowledgeable than the system it is trying to guide—and even worse, if its actions necessarily result in further undesired consequences in the working of that system—then what is going on is not planning at all but, rather, blind interference by some agents with the plans of others.” [1]
Planned chaos, in other words.
The failure of governmental electricity in Texas humbled many electricity design experts (including technocrat Lynne Kiesling); the Public Utility Commission of Texas (PUCT); the Electric Reliability Council of Texas (ERCOT); and the Texas Legislature. Other players at a distance were the Federal Energy Regulatory Commission (FERC), North American Electric Reliability Corporation [né Council] (NERC); and National Association of Regulatory Utility Commissioners (NARUC).
Classical liberals can tie experience to theory to identify expert/regulatory failure. This should not be surprising given that electricity is the most regulated industry in the United States next to money & banking and the national-defense contracting.
Superficial View
The ‘mainstream’ view is that an “extreme tail event” caught the private-sector firms, most in natural gas, unprepared. The regulators, in the middle for the most part, did their job. I have challenged this interpretation in detail here and here. “Renewables, representing more than one-fourth of Texas’s generating capacity,” I argued, “all but disappeared at the peak.
But there is a very important second part of the story: the tax-break-driven pricing of wind severely compromised the economics of existing and new natural gas and coal plants.
But the rare event was not a market situation begging for market reform. It was a governmental situation where the inertia of intervention resulted in more intervention: continued wind/solar, battery storage, and even talk about demand-side responses (meter technology and incentives). The experts can solve this, in other words, with a lot of studies and planning.
Enron Analogy
This reminds me of the (superficial) Enron interpretation. Enron made bad investments, tried to cover them up, and lost the confidence of the market. They went bankrupt and ‘the market worked.’ Why the massive failure? Fish rot at the head, one book concluded. But why?
With Enron (as with the Blackout), I argue that something greater was at work. It was ‘contra-capitalism,’ the pursuit of the unearned, in the form of pervasive rent-seeking, strategic deceit (’philosophical fraud,’ short of prosecutable fraud), and imprudence that Adam Smith, Samuel Smiles, Ayn Rand, and Charles Koch, among others, have warned against.
For me, at least, getting to the ‘why behind the why’ to explain a ‘systemic failure’ like Enron opened up a lot of deep thinking that tested and expanded my theory. Capitalism was not to blame for Enron considering all the warnings from our side on bad commercial behaviors, and same for electricity in Texas in February 2021.
Reinterpreting the Backout
With Texas, the surface explanation of wind and solar all but disappearing at the peak is just the beginning. (‘This was expected by planners—can’t blame them.’) It was a pervasive lack of weatherization among natural gas companies from the wellhead to the power plant. But why? Reliability is JOB 1 with electricity, and this job was outsourced to regulators working with a very (regulatory) weakened/fragmented industry. Coordination issues aplenty!
The ‘why behind the why’ gets to a lot of regulation and political/social pressure that brought the worst out of private sector parties. Think about the intended and unintended consequences of government forcing of wind power in particular. Wind’s intermittency and negative pricing (from the federal tax credit) ruined the economics of conventional power plants.
Regarding (mal)coordination, federal and state regulation has disaggregated the natural gas industry in three phases, and the same for electricity in three/four phases. There are no ‘electricity majors’ or ‘natural gas majors’ that are vertically and horizontally integrated (regulation forced the disaggregation of the industry). We needed Majors, in fact…. (The business strategy of integration (“oil majors”), by the way, was part of the answer to the “commons problem” of oil and gas production under the ‘rule of capture.’ another story.)
Electricity is different, they say. Need large control areas because of the nature of electrons. A ‘commons problem’ says Lynne Kiesling. Okay, then who do you trust? Markets or experts/regulators? And no, there is no Hayekian/ central planning solution of private resources in the electricity ‘commons’.
The experts have been working hard on market design to find that right balance between reliability and price. Texas went virtually all price (thinking that peak pricing for several weeks of the year would compensate for not having ‘capacity payments’ for standing ready to meet peak demand). But the shortage during Storm Uri sent prices to astronomical levels, which now will result in a bunch of nonpayment, lawsuits, and probably socialistic cost-spreading among all customers. Total mess—and most all of the involved regulators have resigned and have court dates.
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On Facebook, Lynne had a revealing exchange with economist Steve Postrel:
Postrel: 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.
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. 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.
It is a huge planning issue: reliability vs. price. Experts (like Kiesling) must tell the regulators what to do. NO, we cannot let the market decide because it is a “commons problem.” But I say: deregulate to let the electricity majors into the market … And short of this, at least understand the ‘coordination problem’ as an expert/regulatory failure, not market failure.
It is time for an entrepreneurial discovery process in a true market, not a contrived market under mandatory open access. Firms must be allowed to internalize the reliability function with their Grade A corporate guarantee. Lots of laws must be repealed, another story.
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[1] Don Lavoie, National Economic Planning: What is Left? (Cambridge: Ballinger Publishing Company, 1985), p. 95.
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My posts on the Great Texas Blackout:
Wind, Solar, and the Great Texas Blackout: Guilty as Charged
Renewables “Market-Failed” Natural Gas in Texas
Electricity Planning: Physical vs. Economic (an exchange with Eric Schubert)
ERCOT “worked as planned” (architect Hogan gives no quarter)
Civil Society and Natural Gas during the Great Texas Blackout
For other posts:
“U.S. Winter Outlook: Cooler North, Warmer South” (NOAA’s prediction bust)
Numbers and the Great Texas Blackout (Bill Peacock: March 4, 2021 )
ERCOT: A Central Planning Government Agency
Texas’ Renewable Fail: Remember Georgetown’s Green New Deal Too
Oklahoma’s Rolling Blackouts: Remembering Audrey McClendon’s War on Coal (Charlie Meadows: February 23, 2021)
Wind Subsidies Help Freeze Texans (Bill Peacock: February 18, 2021)
Texas Windpower: Will Negative Pricing Blow Out the Lights? (PTC vs. reliable new capacity) (Josiah Neeley: February 17, 2021)
NPR actually succeeded in killing a bunch of people in Texas during Uri with its three-decade long promotion and advocacy of the “Catastrophic/dangerous, CO2-driven anthropogenic global warming/climate change” CONJECTURE.
NPR’s continuous proselytizing of climate pseudoscience KILLED people.
No amount of attempted blameshifting, hand waving or rationalization can obscure the fact that “renewable” energy is UNRELIABLE.
NPR has blood on its hands.
As usual, NPR promulgated misinformation and wishful thinking on the anniversary of this easily avoidable disaster:
https://www.npr.org/2025/02/14/nx-s1-5289877/texas-power-grid-after-outage