NRRI, the National Regulatory Research Institute, an arm of the National Association of Regulatory Utility Commissioners, finds a series of regulatory failures that exacerbated the Texas grid collapse.
The work by NRRI economists Carl Pechman and Elliott Nethercut concludes, echoing earlier analyses of failures of the Texas regulatory system: “The Texas [Public Utilities Commission] and other relevant agencies, the [Electric Reliability Council of Texas], its stakeholders, the Texas legislature, and those harmed by this event need to understand details of how this catastrophic failure occurred. The lessons from this catastrophe must form the basis for future investments, policies, regulations, and market rules designed to ensure that this will never happen again.”
What went wrong?
*Did generators have an “obligation to perform.” No, says NRRI. “The ERCOT market is based on a Hayekian philosophy — that price provides all of the information necessary to ensure efficient availability, dispatch, maintenance, and investment in generation and generator performance.” But that doesn’t hold in the Texas case. The NRRI study asks, “An empirical question is whether the increase in the market price cap has resulted in an improvement in generation performance, or investment in plant winterization?”
*How did ERCOT and the PUC respond to the emergency.” Not well, says NRRI. When the event began, wholesale electricity prices spiked to unknown levels [$9000/MW], and ERCOT notified the PUC. “ERCOT’s request and the Commission’s response are highly unusual and raise issues about whether market design processes were prepared for the potential outcomes resulting from prolonged system stress.” The report says, “The PUC’s emergency order that enabled generators to bid $9,000/MWh on its own motion, demonstrates that maintaining scarcity prices was its highest priority.” That was not in the interests of the customers who were being clobbered in the event.
*Was “market power” by energy providers demonstrated? Yes, says the NRRI report, noting that the unregulated Texas wholesale electric market, “unlike markets regulated by the Federal Energy Regulatory Commission (FERC), does not require prices to be just and reasonable, thereby limiting the regulatory tools for adjusting prices.” So it appears likely that market dominators in the market exercised power to control prices, including firms in the natural gas market.
*Did ERCOT’s market monitor miss the weather impact? The Texas market monitor, Potomac Economics, didn’t evaluate the possible impacts of severe weather, although the implications of a severe freeze, historically, should have been known, given the history of Texas weather. The report said, “The impact of freezes on generation was a known risk that not only resulted in significant economic and customer harm during the freeze of 2011, but also caused over a thousand MW of capacity to trip due to freezing weather events in 2014, 2016, 2017, and 2018.”
What to do?
*How about a capacity market, to lock in generating ability to face future shortages? While ERCOT has a sort of handicapped capacity market, the NRRI says that ERCOT “needs to examine new market mechanisms, specifically those structures that focus not only on remunerating generator performance, but also on protecting customers.”
*Texas needs to re-evaluate its market structure. “The process of revising the ERCOT market would be enhanced by the participation of the Texas PUC staff and commissioners.”
*Connect the national grid. The NRRI report said that “increasing ERCOT interconnections would generally increase the available resource pool, which could provide significant reliability and resilience benefits.”
–Kennedy Maize