Think the Texas electricity crisis can’t happen where you live? Think again. Up and down the country, electricity markets – with very different designs – have fielded warnings that the right storm, with the right conditions could cause the same chaos or worse.

Much of the blame in Texas has fallen on the Electric Reliability Council of Texas’ (ERCOT) energy-only market design which critics have long viewed as a reliability disaster in the making. Ed Hirs, an energy fellow in the Department of Economics at the University of Houston, has predicted the Texas disaster for years. “The ERCOT grid has collapsed in exactly the same manner as the old Soviet Union,” Hirs told The Houston Chronicle. “It limped along on underinvestment and neglect until it finally broke under predictable circumstances.”

In 2019, he wrote, “The Texas electricity market is rife with market manipulation and major disincentives for generators to maintain a reliable supply of power.” His concerns were dismissed, even ridiculed. For Texas’ energy-only market had become a favored vehicle for the deployment of renewable energy. Texas, after all, has more installed wind capacity than California, Iowa and Oklahoma combined. But the very circumstances that allowed heavily subsidized renewables to flourish, at the expense of baseload generators, were eroding the reliability and the resilience of the grid.

Bud Weinstein, the recently retired associate director of the Maguire Energy Institute at Southern Methodist University, has also been a long-time critic of ERCOT’s failure to properly compensate baseload generation. In the wake of this crisis, he wrote in the Dallas Morning-News, “To ensure long-term resiliency both for our power grid and our fast-growing economy, Texas needs a pricing scheme, including a capacity charge, that acknowledges the value of baseload power plants.”

Even the President and CEO of the North American Reliability Corporation was on record expressing concern at ERCOT’s continual flirtations with disaster. He told the Federal Energy Regulatory Commission (FERC) in 2019 that when most engineers look at the Texas grid, they would conclude that “there’s no way in hell they can keep the lights on. And yet they do.”

Well, maybe the engineers were right. ERCOT couldn’t keep the lights on and big changes are likely coming. A capacity market or resilience payment should be part of the answer, but they can’t be half measures that only paper over ERCOT’s endemic problems.

Even grids with capacity markets are facing serious reliability concerns. If those markets include subsidized renewable power or natural gas generation without firm supply contracts that guarantee pipeline capacity during high demand, the capacity market could well be creating a dangerous false sense of security.

Commissioner Danly Warns of Market Failure

Astoundingly, at the very moment the Texas grid was collapsing, FERC decided to close its ongoing investigation into grid resilience. Initially inspired by the rapid loss of baseload generation, and its replacement with weather-dependent renewable power, the investigation was supposed to grapple with the challenges this shift could bring and help shape markets to meet them. The investigation has been reborn under a climate-focused banner but its original intent – never answered – continues to call out for tangible solutions.

Commissioner James Danly offered a rebuke to the decision to dismiss the resilience investigation, writing, “There are any number of problems that lead to reliability failures, but I want to focus on one in particular: market failure.  The bulk power markets provide inadequate cost recovery, and thus investment, to ensure reliability.” He continued, calling out a “lack of meaningful capacity markets, and the regions that do have capacity markets often allow state-subsidized resources to suppress prices,” undermining incentives to ensure the dispatchable capacity to maintain reliability.

He also poignantly addressed the growing role of renewable power, writing, “Another increasingly serious problem is that intermittent resources largely are planned for, operated, and compensated as if they provide reliability benefits that they, in fact, are incapable of providing… The bulk power markets should treat intermittent resources as they actually perform, not as we hope them to.”

Commissioner Danly’s dissent could prove frighteningly prescient in the years ahead. The market failures he addressed aren’t theoretical. We’ve seen rolling blackouts in California because of them. In both the PJM and ISO New England markets, warnings have been slapping the side of the boat like ever-growing waves in an angry sea. They’re just the type of warnings that had been raised about the ERCOT market again and again.

Misaligned Incentives Problem

Less than two years ago, four utility executives wrote to PJM, the market organization that supplies power to 65 million Americans in 13 states and the District of Columbia, pleading for reform.  They explained that PJM’s incremental efforts to reform pricing have fallen short of the “fundamental changes that are needed to support baseload electric generator units over the long-term.” They warned that “PJM has not taken the proactive steps needed to value resiliency attributes, such as fuel security and fuel diversity, of its generating fleet.”

ISO New England, which operates the grid throughout much of the Northeast, discovered deep flaws in its own market design in an energy security report. The authors wrote of a “misaligned incentives problem” which found that what’s good for the reliability of the system, what is cost-effective and necessary to ensure system reliability, is not viable or incentivized for power producers. It’s a line that could just as easily have been written about ERCOT and the Texas grid.

The authors elaborated, writing, “In today’s environment… we do not face a capacity shortfall problem (indeed, the system is awash in capacity). We, instead, face an energy security problem due to the constraints – and uncertainties – on energy for power production.”

What they found is that the grid has too much of the wrong capacity or capacity that can’t be relied upon in a severe weather event. In fact, the report found that 30 percent of the grid’s natural gas generating fleet could be without fuel on particularly cold days—circumstances almost identical to those that forced rolling blackouts in Texas this February.

California’s rolling blackouts this summer and now the Texas grid failure aren’t anomalies. They have simply exposed market failures for the world to see and have brought new, needed attention to the immense challenges posed by moving away from fuel-secure power to heavy reliance on variable power or just-in-time fuel delivery through a constrained pipeline system.

This moment seems to scream out for caution. Yet, the transition away from fuel-secure coal power is accelerating. As Rich Nolan, the National Mining Association’s president and CEO, wrote in The Washington Times last week, “We now find ourselves in a dangerous energy no-man’s land where the energy sources that underpin energy reliability and affordability are being pushed aside before new solutions to manage the transition are available or in place.” He concluded, “Clear-eyed understanding of the realities of our grid and the limits of today’s technologies should inform the energy road ahead, not arbitrary timelines and targets.”

How many more blackouts will we have to see before electricity markets are reformed to value the reliability and security provided by properly compensated baseload power? The next crisis is coming. The right question isn’t if it will come but where.