Deregulation and Texas Disaster

Texas is known to be the country’s leading state in energy production. Its deregulated electric system is independent of the national grid and from federal reach. The state’s power infrastructure model is proven to be a “devastating liability” during the recent snowstorm when 4.5 million people experienced the largest blackout in US history. While the free-market power grid worked well in terms of lowering power costs, electrical power utilities did not ensure risk mitigation steps necessary to combat natural disasters. Texas could have prevented the extent of this crisis, had it learned from previous events (ice storm in 2011) and taken essential measures. Under regulation, a state would be required to ensure weatherization of power plants and electric utility equipment, and the maintenance of a reserve margin in times of peak power demand.

Electricity Deregulation in Texas

  • Texas experienced record low temperatures this month with ice and snowstorms, leading to the state’s massive energy crisis. The state’s electric grid lost all control of the power supply leaving over 4.5 million people without electricity and no means for effective backup. According to policy and energy experts, this power crisis stems from deregulating electric utility companies and isolating the state from federal oversight.
  • The near-collapse of Texas’ electric grid has been traced back to the legislation passed in 1999 that allowed the state to deregulate its electrical system and handed over the control to a “market-based patchwork of private generators, transmission companies, and energy retailers”. The state’s deregulated electric system was formed with “few safeguards and even fewer enforced rules”. An energy fellow from the University of Houston, Ed Hirs, compared deregulation with “abolishing the speed limit on an interstate highway”.
  • As a result of the deregulation decision on the state’s electrical system, Texas began operating a state-wide grid that is not connected with any major national power grid that generally covers the other 47 states in the US. Thus, by isolating its power grid from its neighboring states showed that during a crisis, Texas would not be able to attain any external power supply.
  • Deregulating the state’s electric system indicates that significant rules for power generation and supply were not controlled by law, but by energy competitors. The Electric Reliability Council of Texas (ERCOT) is governed by the Public Utility Commission and was established to oversee the wholesale market. However, it is found that both these agencies are usually held unaccountable as compared to regulatory units in other states.
  • The energy companies in Texas have refused to ensure the capacity of a reserve margin of power above that of expected electric demand. Texas received prior signs of warnings over the past few decades with varying levels of power plants being shut down due to low temperatures and storms, leading to blackouts in 1989, 2003, and 2011. According to CNBC, ERCOT has a reserve margin in place to cater to peak power demands, however, due to the unregulated market, companies refuse to meet the cost.
  • Federal authorities warned Texas, after a snowstorm hit the state exactly a decade ago (February 2011), that its electrical system infrastructure was lacking winterization protection. Pipelines did not have proper insulation and vital equipment had no heaters to keep them from freezing over. There were also instances when the system would periodically experience trouble with adequate energy transmission due to equipment failures.
  • The deregulation of state utilities meant that any and all investments needed to mitigate risks and protect operations under extreme conditions were entirely up to the corporate sector over the past two decades. It is to be noted that there are no technical obstacles in weatherizing power plants, as such plants operate efficiently in Canada, Alaska, and Siberia. However, corporate executives failed to make the necessary changes in Texas, thanks to the wide latitude offered by the deregulation of the power market.
  • According to an article published by Salon, deregulation of the state’s power system has led to a less predictable consumer base that’s harder to serve in terms of demand. Deregulation also led state officials to fly blind during the crisis since they had no proper access to information. This is largely because Texas’ utilities are owned and operated by private units and are not required to adhere to public reporting.
  • After years of being warned to make essential regulatory changes in the state’s electric system for necessary risk management, Texas’ Governor, Greg Abbott, announced that “he would ask the Legislature to mandate the winterization of power plants across the state — and to ensure the necessary funding for it”.

Regulation could have helped divert the current power crisis from happening

  • Electrical regulation is intended to recompense for natural instances that take place when an area is served by a single electrical provider. It also ensures low costs while safeguarding the public and offering fair treatment to people.
  • Another safety measure that could have shown stronger results when the storm hit is interstate power-sharing networks. With regulations in place, Texas should have linked its electric grid with those of its neighbors. By doing so, it would have the means to bridge the gap between supply and demand for consumers during an event of a natural disaster.
  • In the 1999 legislation, Texas officials decided that utilities would no longer need to maintain a reserve margin against any surges in demand. In comparison, other states made it essential to have supply buffers at 15% and over.
  • After the 2011 ice storm that hit Texas, regulators and lawmakers investigated the state’s natural gas and electric infrastructure and determined how they could “withstand punishingly deep and extended winter freezes”. Some important recommendations provided by the experts included the winterization of electric equipment and natural-gas pipelines, and the set-up of reserve power generating capability in times of demand surge and instances when providers go offline.
  • Under regulatory schemes of the electric market, some states in the US have ensured the protection of their power infrastructure from harsh weather conditions by imposing weatherization requirements on their generators and other equipment. Many states’ policies allow for “electricity generators to be paid to hold power in reserve in case it’s needed”.
  • According to CNBC, experts say that going forward, with appropriate weatherizing of equipment and increasing reserve power margins, Texas will be able to prevent a similar power crisis.
Glenn is the Lead Operations Research Analyst at The Digital Momentum with experience in research, statistical data analysis and interview techniques. A holder of degree in Economics. A true specialist in quantitative and qualitative research.

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