A Dark Lone Star
In February, an unprecedented winter storm covered the continental United States. But only one state was left in the dark for weeks. Why?
Texas' Power Grid
There are three major power grids in the United States: the Eastern Interconnection, the Western Interconnection, and Texas.
Why does Texas have its own power grid? Small plants that had appeared across Texas in the late 19th century linked themselves together, creating a power grid. In 1935, when the Federal Power Act was signed, Texas was able to avoid federal rules by managing its own power within state lines.
This means that Texas is fully responsible for powering itself. Another unique aspect about Texas is how deregulated the market is. Under George W. Bush, Texas’ power sector began deregulating in 1999. Deregulation allows customers to freely choose their electricity provider. This is different from other states, where regulated utilities have full control over power lines. The argument was that deregulation could lower prices and quality of service, and deregulation was able to garner bipartisan support.
How does this affect Texas?
Texas does not have to comply with the Federal Power Act, There is no requirement to “winterize” equipment, and because Texas seldom experiences snow storms, the vast majority of providers do not “winterize” their equipment and facilities.
When the storm hit, the lack of winterization was what led to the majority of Texas’ power grid to go offline. Every single source of energy was impacted: wind turbines, moisture in natural gas pipelines, pumps, and other equipment froze. In order to avoid total failure, ERCOT (Electric Reliability Council of Texas) forced blackouts in many areas. There were almost $50 billion in electricity sales from only a couple of weeks, equivalent to three years worth of sales.
Hedging also caused many companies to incur enormous losses. To share risks or benefits with a financial institution, many companies will hedge a percentage of their energy or output with a hedge fund or bank. Firms will enter a contract with a hedge fund or bank to sell their electricity at a set price. This storm, while damning for the firms, were very profitable for hedge funds and banks. This is because companies still have to provide electricity it has contracted to sell even when its power plant has gone offline. This hedging will drive many companies out of Texas or even to bankruptcy.
The Price Surge
Though many providers went offline, some were still generating electricity. Because the market is unregulated and incredibly inelastic, customers are not able to respond to prices—firms have a large incentive to gouge prices. The result of this was a massive price surge. Texas wholesale electric prices spiked more than 10,000%. Wholesale prices were so high, many customers switched to fixed-price plans. Companies that were able to sell electricity were able to get extremely high prices. Currently the Federal Energy Regulatory Commission is investigating this price surge, as it is possible firms were withholding power to drive up the price.
The Storm Next Time
Without surprise, this isn’t the first that this has happened. In 1997 and 2011, winter storms also left many Texans without power.
There is a call for more regulation and communication. Many are pushing ERCOT to place winterization requirements and more price protections for consumers. Companies need to be more prepared and there needs to be drastic change—this wasn't Texas’ last winter storm.
Cover: Kalifa Tamir/NYT