Electricity Markets: Contrived/Distorted vs. Real (debating the Texas Blackout)

“‘Unintended consequences of government intervention?’ Are you f***in’ kidding me? What just happened is a direct consequence of insufficient government intervention!” (Robert Borlick, energy consultant)

“No, with due respect. When the system loaded up on renewables, who would have known that low-to-negative marginal-cost pricing would have ruined the economics of baseload generators and natural gas peakers, existing and prospective. I was an adamant critic of windpower in the old days (1997) and just did not foresee this.” (Bradley, retort)

Many planners and regulators involved involved in the Great Texas Electricity Blackout have resigned or been fired. But their brethren, the experts behind the fallen PUCT/ERCOT model, are emotionally defending central planning and renewable energies by blaming the natural gas industry. “The CEOs of those gas companies should be criminally charged,” exclaims obert Borlick, below). “It wasn’t our fault … the system worked as planned,” state system architect Bill Hogan of Harvard.

It’s getting hot in Texas with a lot of lawsuits and potential criminality piling up.

I am, by default, I guess, the classical liberal voice in this debate. I see how a variety of government intervention, some obvious and some subtle, some old and some recent, set up the debacle.

Fortunately, I have been able to directly engage with my points against ‘the establishment.” Thus I can see where my opponents are coming from and learn as well. I appreciate their patience. And I hope they are thinking a bit more of the ‘why behind the why’; rather than just the ‘why.’

Here is the latest exchange between the two of us (with others) on two interpretations of the Great Blackout, supplementing an earlier post on our exchanges).

Bradley vs. Schubert

Robert Bradley: This article [by Ken Green] is a bit shallow. The ‘seen’ of absent renewable generation at the peak must be joined by the badly compromised economics of conventional generation because of low and negative pricing by highly subsidized wind and solar. [post here]

Eric Schubert: Meeting the needs of the ERCOT grid 8,760 hours a year in the 21st Century requires a pool of diverse resources. Intermittent renewables, storage, demand response, behind-the-meter generation can easily blend with traditional utility-scale generation to meet summer peak demand, as long as scarcity pricing is allowed in real-time based on reliability metrics.

Bradley: Eric: why renewables and storage, the most uneconomic choices a system could have? Renewables add no diversity value. PUCT/ERCOT failed miserably, is in chaos and political trouble, and needs to be demoted.

Schubert: All that the PUCT and ERCOT have done is follow Hayek’s advice:

“If man is not to do more harm than good in his efforts to improve the social order, he will have to learn that in this, as in all other fields where essential complexity of an organized kind prevails, he cannot acquire the full knowledge which would make mastery of the events possible. He will therefore have to use what knowledge he can achieve, not to shape the results as the craftsman shapes his handiwork, but rather to cultivate a growth by providing the appropriate environment, in the manner in which the gardener does this for his plants.”

The tools I mentioned earlier allow market participants to cultivate both resource adequacy in the long-term and reliability in real-time. The PUCT and ERCOT are not prescriptive in how market participants use them, but do provide sufficient penalties for market participants who put reliability at risk at any given moment.

I don’t understand what you mean by “true markets.” Power markets are bounded by a common pool resource (reliability). I would suggest that you review some of Elinor Ostrom’s work on the topic.

Bradley: True markets are free markets where there is not franchise protection, rate regulation, access requirements. There was never a market failure to require state public utility regulation, the Federal Power Act, the Public Utility Holding Company Act, and PURPA,. The reliability function in a true market would rest with companies, not regulators/planners.

Bradley vs. Borlick, via Pokalsky

Joseph Pokalsky: … The more information that comes out, the more it’s apparent that the fiasco isn’t to blame on the expected output of any particular generation technology or economic incentives for, but actual output due to lack of maintenance and performance standards and governance thereof for fuel and energy supply participants in ERCOT.

I was shocked to find out that a large number of operational gas producers who were curtailed of power hadn’t bothered to complete the two page form that would have prevented this, further cascading the disaster.

Robert Borlick: Shocked? That’s an understatement. The CEOs of those gas companies should be criminally charged. But, of course, they won’t.

Bradley: But the climate experts were saying warmer winters, and cost avoidance was imperative given the compromised economics from low-to-negative price wind power (and solar to an extent). The ‘unintended consequences of government intervention’ is a major theme of political economy.

Save the criminal charges. The experts, planners, and regulators are culprits, along with everyone behind the government push for windpower, from Ken Lay to George W. Bush, to Rick Perry to …..

Borlick: “Unintended consequences of government intervention?” Are you f***in’ kidding me? What just happened is a direct consequence of insufficient government intervention!

Bradley: No, with due respect. When the system loaded up on renewables, who would have known that low-to-negative marginal-cost pricing would have ruined the economics of baseload generators and natural gas peakers, existing and prospective. I was an adamant critic of windpower in the old days (1997) and just did not foresee this.

The planners always say ‘we will regulate/plan better next time.’ This failure of experts/planners/regulators is too big to sweep under the rug–and it might just be the end of the ERCOT model.

Borlick: The arrogance of Craddick when testifying was insufferable. The Texas Railroad Commission deserves to be abolished and regulation of oil and gas pipelines shifted to the PUCT.

Bradley: The PUCT needs to be abolished to get government out of the reliability business.

Borlick: Rob, I hate to be the one to apprise you but the PUCT has no role in power system reliability. In ERCOT the free market determines reliability.

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Bradley: … PUCT/ERCOT failed miserably, is in chaos and political trouble, and needs to be demoted.

Borlick: How did ERCOT or the PUCT fail? Neither was responsible for the blackouts. You know who failed? The legislature and governor, when they refused to mandate winterization of electric and natural gas assets after the 2911 winter blackout. Neither ERCOT nor the PUCT had the authority to enforce weatherization.

Renewables played a negligible role in causing the blackout.

Now regarding your comment about renewables and storage being expensive, yes they are. Even so, the have a role to play because they are emission-free. So is nuclear power but nobody will build any until a cheaper modular reactor is developed.

Bradley: I agree that if goes beyond PUCT/ERCOT to other political bodies and legislation. But this was not about an Act of God and Market Man as much as it was outsourcing the reliability function and watching an interventionist stew fail. The Texas Legislature should not be in the electricity business directly or indirectly. Natural gas and electricity Majors were needed, just as the Oil Majors.

Borlick: Rob, do you understand the role that network constraints play in power systems? There is no way that those constraints would not be violated in the “free” market you just described. The grid would go dark very quickly in the absence of a system operator (like ERCOT) to direct the traffic.

I apologize for being a bit hard on you but you need to appreciate that power systems are very complex machines. MWhs are not bushels of corn.

Bradley: Yes, I understand the need for control areas and coordination for reliability. My point is that outsourcing reliability to experts/planners/regulators and having a fractured, disintegrated industry utterly failed. We need electricity majors and natural gas majors to ensure reliability and price correctly.

This is where Hayek and Austrian economics comes into play. Cooperation, not only competition. Market prices, not regulated prices. Private property rights, not mandatory open access. Free industry structure, not enforced divestment.

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Bradley: Will you admit that negative pricing has compromised the economics of existing and prospective baseload capacity?

And on a completely different level, is CO2 a pollutant? And what does Texas wind do to cancel out world CO2 emissions? And what about the consumer costs and health effects of industrial turbines?

Borlick: 1. I agree; negative prices are dysfunctional. I have never supported the production tax credit.

2. Yes, CO2 is a pollutant by being a greenhouse gas (however fugitive methane is far worse).

3. When Texas wind produces energy it substitutes for energy that would have been produced by burning gas or coal, thereby eliminating the CO2 those fuels would have emitted. 5. What kind of turbines are you referring to? Wind? Steam? Combustion?

Bradley: You stated: “I agree; negative prices are dysfunctional. I have never supported the production tax credit.”

So there is an indirect negative effect from renewables on reliable generators. And maybe firms on the private side, margin-constrained, did not weatherize (big expense when the experts are also saying warmer winters).

This is where we diverge in our interpretations. I think the indirect effect (and a regulated, fractured industry) are important on why we had such large ‘entrepreneurial failure’. This is my ‘why behind the why’ versus your ‘why.’