The competitive Texas electric grid proves critics wrong again

Chris Tomlinson Oct. 2, 2019
Another blazing hot summer is another vindication of Texas’ cutting-edge electricity system.

Critics of Texas’ wholesale electricity market began the summer, as they did in 2018, fear-mongering about brownouts and blackouts. The problem, they claim, is that the primary grid operator only pays generators for the electricity they consume, does not pay for back-up generation, and relies on federal tax credits to over-build wind power.

They were wrong in 2018, and they were wrong again in 2019. Next year will be the summer of solar, and the risk will be gone.

By any estimation, the Electricity Reliability Council of Texas, best known as ERCOT, squeaked by this summer. In May, ERCOT officials looked at the expected demand and how much generation would be available and found a reserve margin of only 8.6 percent. The grid operator prefers a 13 percent reserve margin, the cushion of extra generating capacity available for times of extreme demand.

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On Aug. 12, Texans demanded a record 74,500 megawatts of electricity. Generators had less than 2,300 to spare, triggering an Energy Emergency Alert. The market then worked as intended.

The price of electricity, which averages $36 a megawatt-hour, hit the statutory limit of $9,000, inducing every available generator to put power on the grid. ERCOT and the Public Utility Commission alerted customers to the spike, encouraging them to conserve energy and their money.

Power supply and demand balanced within 30 minutes. ERCOT kept everyone’s lights on, the price of electricity dropped, and the sun went down.

ERCOT declared another emergency three days later, this time due to unexpected generator outages. But again, the price spiked with no brownouts or blackouts, and the squeeze was resolved within two hours.

The average consumer missed out on the drama. They didn’t hear about the Energy Emergency Alerts, and most saw no change in the rate they pay for electricity, only a rise in their consumption.

Retail electricity providers, municipal utilities and electric co-ops shield most consumers by promising fixed rates throughout the year. They assume the risk of price spikes, and trade futures contracts to hedge their risk.

Consumers will benefit, though, from the tight market, because high prices and low reserve margins encourage generators to build and improve their powerplants. More generation will lead to more competition and eventually lower prices for consumers.

The proof is in ERCOT’s Resource Capacity Charts, which shows what generators plan to install over the next few years. Based on the number of signed and financed projects in the pipeline, Texas is going to have plenty of juice.

ERCOT will add at least 4,000 megawatts of West Texas solar power by next summer, which will produce electricity during the hottest hours on the sunniest days. Power companies have proposed adding another 3,000 megawatts by 2021.

Wind energy is not as dependable on a hot August day as solar, but generators will be adding at least another 5,000 megawatts in 2020 and potentially another 1,000 in 2021. Investment in wind energy drops after 2021 as federal tax credits phase out for new projects.

Only a few hundred megawatts of new natural gas power generation is expected in ERCOT over the next two years. Much of this new capacity will be small, natural gas generators that enable big businesses to cost-effectively go off the grid when prices spike—another smart response to market signals.

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Wind power will likely exceed coal-fired power in Texas next year. But most of the new generation will come from solar as prices for panels drop.

ERCOT’s overall reserve margin will rise to 10.5 percent in 2020 and 15.2 percent in 2021. The added cushion should end $9,000 a megawatt-hour pricing, except when power plants fail unexpectedly.

Texas is a global leader in perfecting competitive electricity markets. Many grids still operate old-fashioned utilities, where the government sets the prices and guarantees a private operator a profit. Other U.S. grids pay generators to remain on standby, which drives up consumer prices.

Our competitive market, though, makes people uncomfortable with its low average prices. Executives complain low prices force them to shut down old, inefficient plants. Consumers get upset when prices spike in the summer, signaling that more supply is needed.

Competitive markets, though, encourage the construction of the right kind of generation in the right places at the right time for the right price. Market-based capitalism made America great, and we should celebrate when it works.

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