Record cold temperatures plunged Texas into a power crisis last week, with millions in the state losing power. The failure demonstrates the vulnerability of power grids to shifting weather patterns that come with climate change. However, the situation in Texas was made more complex by the fact that it is the only state in the country with its own power grid, the Electric Reliability Council of Texas (two other grids, the Eastern Interconnection and Western Interconnection, cover the rest of the United States). To understand what was behind the power failure, we spoke with Bill Hogan, Raymond Plank Research Professor of Global Energy Policy. In 2013, Hogan helped Texas system operators with their current market design. He is also the research director of the Harvard Electricity Policy Group and an expert on energy markets and electricity market design.

 

Q: You’ve been called the architect of the Texas system. Can you describe the role you played in creating it?

Efficient electricity market design requires a particular blend of engineering and economics. After an initial false start, the Texas market design embraced the fundamentals that I and others had written about for years, going back to the work of Fred Schweppe and his colleagues at MIT in the 1980s. In 2013 I worked directly with the Texas system operators on a major innovation in their market design to provide better pricing under increasing scarcity conditions. This scarcity pricing framework has been important in the intervening years and was a major reason for the high prices during the recent crisis. This crisis situation was unprecedented, but the market design coupled with the swift action of the system operator helped prevent an even worse catastrophe.

 

Q: How did you determine your design choices for this system?

The market design adapts the economic fundamentals of textbook supply and demand with the arcane details of the flow of power on a transmission network. There are a few critical features. First, there must be central coordination by the system operator to accept power bids and offers and find the so-called “economic dispatch.” In effect, this is a very large auction being updated every few minutes. Second, in the presence of ubiquitous transmission constraints the market-clearing power prices can differ at every location in the system due to the differential effects on the constraints. Third, in times of scarcity it becomes especially important to price operating reserves to reflect the current conditions on the grid in order to provide incentives to increase supply or lower demand. Finally, these foundations make it possible for market participants who wish to hedge their prices to enter into bilateral hedging contracts, which can be quite valuable for those who take advantage of the opportunity.

 

Q: And what alternatives might one consider when designing a system like this, especially in light of unusual climate patterns?

The fundamentals of the market design, as summarized here, are both robust and will be of increasing importance with expanded reliance on intermittent energy sources such as renewables. There is no easy way to avoid the fundamentals. And there will always be tradeoffs about how much to spend in advance to protect against extreme conditions. After this decision is made, if conditions are more extreme than anticipated, then the best line of defense is to invoke rotating blackouts and apply pricing that reflects the severity of the situation. This is what happened in Texas, and the actions by the system operator prevented the catastrophe of a complete collapse of the grid, for everyone, and for a much longer period to restore service.

Bill Hogan headshot.

“The rules are complex, but Texas has weak transmission ties to the rest of the North American grid and is subject to the jurisdiction of the Texas regulators, but (largely) not to the Federal Energy Regulatory Commission.”

Bill Hogan

Q: Broadly speaking, why is the Texas energy grid struggling?

The widespread winter storm produced low temperatures across the region. This is an unusual event, much worse than the worst case that was considered in recent prior planning. The result was loss of power plants, loss of natural gas supply, felled power transmission lines, damaged gas pipelines, damage to water systems, and so on, across the board. There was a loss of more than 50 percent of generation capacity at the same moment as electric power demand surged above the predicted peak forecast.

Power systems are designed to share across the transmission grid in order to provide nearly instantaneous support to one part when another location is in trouble. When the problem is large enough or everywhere is in trouble, the same instantaneous response can propagate the damage and produce a total system failure. The standard policy is to institute controlled “rolling blackouts” that disconnect some load to prevent complete system collapse. This was the response in Texas, and it accomplished this important objective of preventing an even worse catastrophe. In addition, the rules produced much higher prices and provided a powerful incentive to reduce remaining demand and get the generating plants back online. All this was necessary under the circumstances.

 

Q: How would you answer critics of the exorbitant energy bills that some customers are now receiving?

The pain is severe, for both those facing the higher bills and even more for those who lost their power. The high bills go to two different groups. First, those energy intermediaries that sold hedging contracts received an agreed upon price that has probably been higher than market conditions until the crisis, and they are like any insurance provider who is responsible for making good on the promise of the contract price. Second, the minority of customers who chose not to hedge and enjoyed lower prices until the crisis, and who also chose to continue consuming electricity even when others were being curtailed, now face the higher bills. The curtailed customers who were selected for the rolling blackouts were by definition not consuming power and would not see higher bills for the curtailed period, although some probably would have preferred to pay and not be curtailed.

 

Q: Why is Texas the only state with its own power grid?

There is a long history here of the state wanting full control over its own destiny. The rules are complex, but Texas has weak transmission ties to the rest of the North American grid and is subject to the jurisdiction of the Texas regulators but (largely) not to the Federal Energy Regulatory Commission. Even the limited ties were not much help in the current crisis because other areas were also in rolling blackout conditions on a smaller scale and they did not have excess power to willingly share with Texas.

 

Q: What measure might have made Texas’ energy grid less vulnerable, and how can Texas avoid another crisis like this in the future?

As in the past, there will be a full post-mortem analysis. However, it is hard to conceive of a planning mechanism that would have provided full protection against an event that was much worse than the worst case envisioned. And as some important figures in the region have already said, the costs of such protection paid every year might be seen as too high a cost to pay to avoid such a rare outcome. 

 

Q: What role, if any, does the use of renewable energy play in this crisis? And what role can it play in solving it?

Renewable energy was part of the Texas energy supply. Some of it still worked, and some wind turbines were frozen or solar panels were covered in snow and unable to help. But the discussion about renewable energy is a distraction given the scale and scope of the current problem. The discussion for the future with increased renewable energy should await the post-mortem. The design of the system with increasing renewables was an active focus of policy discussion before this event, and this discussion will be continuing.

 

Q: What lessons can we learn from this event?

There will be many further analyses to provide guidance for the future. It will be important to avoid jumping to conclusions and learning the wrong lessons.

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