Two months after blackouts paralyzed Texas, most of the people who participate in the state’s 19-year-old electricity market, including producers, sellers and traders, share a similar view. The freeze wasn’t a one-off event. The state’s power market needs to change.
In a single week in February, when a cold front caused wind farms, natural-gas plants and a nuclear plant to freeze, electricity sales in Texas topped $46 billion—more than five times what the state spent on electricity in all of 2020. That exposed a major flaw in a laissez-faire power market that had not required participants to winterize their equipment.
Despite the astronomical prices, few of the major players who are supposed to make the Texas market work made money during the freeze. The promise of such a windfall was designed to be an incentive for producers to be ready to operate when electricity supplies are scarce.
Unhappy power-plant owners, retail power providers and even some traders are now threatening to reduce investment in the nation’s second most-populous state until a market many liken to a casino is stabilized.
“All eyes are on Texas, and they should be, as it relates to electricity-market reforms,” said Curt Morgan, chief executive of Vistra Corp. , the largest power generator in Texas. “If they just put a Band-Aid on a mortal wound…we’re not going to make it.”
Patrick Woodson, active in the Texas power market since its inception, saw his electricity retail firm, ATG Clean Energy Holdings Inc., crushed that week. “This market works really well most of the time,” he said. But when it fails, “it is a failure of Texas-size proportions.”
Many of those who did turn huge profits played in a different market altogether. Natural-gas suppliers were able to parlay a shortage of the fuel for power plants into a bonanza.
The biggest losers of all were Texas residents, roughly two-thirds of whom lost power. Millions were left in the dark for days, with some resorting to burning furniture in their homes to stay warm. At least 111 died of related causes, such as carbon-monoxide poisoning and hypothermia, according to the Texas Department of State Health Services, which estimates the number could still change.
Fixing the market promises to be as complex as it is costly. The challenge facing Texas Gov. Greg Abbott and state lawmakers is how to make the state’s deregulated power market more reliable, while limiting added costs that would make its electricity more expensive.
Texas operates the nation’s only pure “energy only” electricity market, one in which producers are paid just for the power they sell, not the ability to deliver whenever watts are needed. All other deregulated electricity markets in the U.S. offer power generators some form of payment for being ready to produce power, to ensure the market has sufficient capacity to reliably provide an essential resource.
For most of the past two decades, the Texas approach worked. It helped the Lone Star State keep wholesale power prices for much of the past two years at less than $30 per megawatt-hour on average, well below most other regional power markets.
But a Texas grid that valued inexpensive power over reliability failed spectacularly during February’s winter storm and frigid temperatures, leading not only to crushingly high electricity prices, but power and water shortages that virtually shut down the state’s economy and frozen pipes that caused widespread property damage.
Some are pressing for changes to the design of the market itself, structuring it to better compensate power plants that can respond quickly when demand surges. That could necessitate payments to conventional power plants to operate on standby, or a new pricing structure to help them compete against lower-cost wind and solar farms. Both options would introduce new costs into the market.
Most Texans are insulated against electricity price spikes because they pay fixed rates for power. It is likely, though, that rates will increase over the long term as retailers absorb the costs of the storm and the state considers borrowing billions of dollars to help address those companies’ financial burdens.
“I believe our system works, but we’ve got to rebalance it,” said Kelly Hancock, a Republican state senator from the Fort Worth suburbs who is chairman of the body’s Business & Commerce Committee. He said there needs to be more investment in electricity generation, such as natural-gas power plants or batteries, that can be dispatched when needed.
The sentiment is bipartisan. “We have a highly efficient but highly fragile electricity market,” said Rep. Rafael Anchia, a Democrat from Dallas. “I think the 14 million Texans who were without water and the 4.5 million who were without power…would be willing to pay a little more for reliability.”
Warren Buffett’s Berkshire Hathaway Inc. has pitched an $8.3 billion plan to backstop the Texas market by building power plants that would run only during electricity emergencies. Competitors have criticized the proposal, which would guarantee a return for the conglomerate, as anathema to Texas’ free-market power system.
Across the country, electricity markets try to strike a balance between reliability and affordability, offering a continuum of options between one pole and the other. For years, Texas has fallen squarely on the side of affordability.
Though it hadn’t fully broken down before February’s freeze, the Texas market had been straining as a rapid build-out of wind and solar farms pushed power prices to record lows and created more volatility by changing power generation patterns. The growth of renewable energy and low-cost natural gas helped keep the average price that Texans paid for retail electricity below most states, according to federal data.