Why is the Texas grid in such bad shape?

A lesson in free markets and the failure of our elected leaders

Headline from 2021

The Texas grid, run by ERCOT, has had a rough few years. In 2021, winter storm Uri blacked out much of the state for several days. About a week ago, Hurricane Beryl knocked out power to millions of Houstonians, and a week later, hundreds of thousands of Houstonians still hadn’t had their power restored.

It might seem that these two events are completely different — one was a winter storm that caused a blackout by knocking out the natural gas supply, while the other one is a hurricane that knocked out the power distribution system.

Headline from 2024. Some things don’t change.

But the root cause of these two incidents is actually the same. To understand what’s going on, you need to realize that keeping the power on is incredibly valuable to society and, when the power goes out, the damages are enormous. The Uri blackout cost well north of $100 billion. I have yet to see an estimate of the cost of Hurricane Beryl, but I’m guessing it’s also going to be eye popping.

But here’s the key fact: these costs are not paid by energy companies. When the power went out during Uri and pipes froze and burst, the energy companies didn’t pay those costs. Homeowners and insurance companies did. When the power outage caused Texans to freeze to death, the energy company didn’t pay, society did. Energy companies aren’t paying the expenses from Beryl, either.

Link

Thus, power outages actually cost energy corporations very little money — maybe a few days’ revenue. Hardening energy infrastructure, on the other hand, is very expensive and entirely paid for by the energy corporations. This cuts into their profits and stock price.

Put slightly differently: Energy corporations pay the full cost of hardening infrastructure but capture only a small fraction of the benefits. Most of the benefits flow to society in the form of avoided burst pipes, avoided loss of income, avoided health impacts.

So why in the world would a corporation spend money hardening the energy system? The answer is there’s no reason. The net result is that the rational thing for corporations is to underinvest in making the grid resilient to extreme weather.

This is a market failure just like the carbon dioxide problem: There’s no incentive for emitters to reduce emissions because they pay the full costs of the emissions reductions but capture only a small fraction of the benefits of avoiding the impacts of climate change. In such a case, the rational thing for a profit-seeker is to keep emitting carbon dioxide.

Texas is open for business pushing costs onto consumers!

The only solution is for the Texas State government to come in and force companies to invest in hardening the grid. Texas politicians understand that people demand action, which is why we heard Lt. Gov. Dan Patrick say that the government will fix the grid after the Uri blackout:

We’re going to get to the bottom of this and find out what the hell happened, and we’re going to fix it.

And Gov. Greg Abbott sent a letter to the Public Utility Commission of Texas ordering an investigation into CenterPoint and deliver a report on its findings by Dec. 1.

“Maybe they have too large of an area for them to be able to manage adequately,” Abbott said. “It’s time to reevaluate whether or not CenterPoint should have such a large territory.”

But this will promise of action is entirely performative. When the cameras are rolling, they express outrage and promise action. Once the cameras are off, the outrage fades, and nothing changes.

History confirms this. After a big December 1989 blackout caused by lack of winterization of the energy system, fixes were promised. Those were never implemented and another blackout occurred in Winter 2011. A subsequent report laid out steps to make the grid more robust. Those were never implemented, so we had another blackout in 2021.

After the 2021 blackout, a natural gas billionaire made huge campaign contributions to prominent politicians and, lo and behold, nothing was done to make natural gas providers harden their infrastructure. If we had another Uri tomorrow¹, we could once again see widespread blackouts.

The same will happen over the next few months with respect to the Beryl blackout: After the outrage theater dies down, nothing will be done.

This is one of the reasons, by the way, why Texas is so popular with corporations. They are never held accountable for pushing their costs onto society, as long as the people who pay the costs are the poor and middle class.

“Come to Texas and push your costs onto the poor and middle class!”

Ultimately, the problem is that Texas politicians legislate on behalf of corporations and not the citizens of Texas. Until that changes, episodes like Uri and Beryl are certain to continue.

Update: It has been pointed out that CenterPoint could have asked for a rate increase to pay for hardening the electrical distribution system. It’s not clear why that did not do it — did they not recognize the risk? Or was there political pressure to not raise electricity costs?

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1. Unlikely since it’s July