ERCOT: A Policy Failure Through Lack of Imagination

We don't think much about the power grid when the weather's good. That's a failure of imagination with costly consequences.
A lack of imagination caused the ERCOT grid failure. No one imagined a weeklong extreme cold spell, despite Hollywood blockbusters imagining extreme weather events and much, much worse. Neither the regulators nor the risk managers across the bulk power system thought much about the 200-page report issued in 2011 that highlighted Texas’ vulnerability to a cold-weather event. Two regulators outside of Texas, the Federal Energy Regulatory Commission (FERC) and the North American Electric Reliability Corporation (NERC), did imagine the possibility of an extreme cold spell.

Until the 2021 winter storm, Texans didn’t think much about the "behind the light switch" system called the bulk power system. Sure, the small collective of people, like me, who enjoy a plethora of acronyms and follow the day-to-day of the Public Utility Commission of Texas (PUCT) and ERCOT have thought a lot about the necessary reforms to our electric market, but not the average Texan. Texas is the second most populous state with three of the 10 largest cities in the United States. The growth of Texas shows no signs of slowing down as companies move their headquarters and operations to Texas at an exceptional pace. The reasons for Texas’ growth are well documented. Two lesser documented reasons are the independence of the ERCOT grid and the affordability of electricity.

The independence of the ERCOT grid has been generally viewed as positive. Critical infrastructure and disaster recovery services located within ERCOT would not be susceptible to a catastrophic power event on the West or East Coast. Such a power event could leave Texas as the lone shining star. ERCOT’s grid design and engineering attributes shield it from federal regulation, and the effects of — and ability to use — the West Interconnection or East Interconnection. It is an "electrical island."

The ERCOT grid was viewed as so strong that regulators and risk managers wrote off the possibility of a weeklong extreme cold spell. ERCOT was so strong that meaningful reforms after a similar, shorter 2011 cold weather event were deemed unnecessary. Yet, a decade later, the ERCOT grid was less than 5 minutes from a total failure. Power generators were 5 minutes away from needing to use so-called "black start" diesel generators to jump-start their main generators, a process ERCOT estimated would take approximately one month. But, is this one-month approximation based on the same risk models that discounted the possibility of the 2021 winter storm? Did our regulators and risk managers imagine that black start generators may need to run in the extreme cold?

Turning on our lights and heating our homes is something we’ve taken for granted. Low electric prices help companies manage the cost of producing goods and services and help promote an affordable cost of living for workers. We enjoy one of the lowest average retail rates of electricity at $0.0860/kWh according to the 2019 State Electricity Profile Data provided by the U.S. Energy Information Administration released in November 2020. Included in this rate is the expense of the $7 billion Competitive Renewable Energy Zone (CREZ) transmission line which costs ratepayers roughly $3-$5 per month. The CREZ line connects West Texas wind farms to more populous areas. Even with the CREZ charge, our rates are approximately 21% lower than Florida and 67% lower than New York. Californians pay roughly double Texas' rate on average. As a result of 2021 winter storm, retail rates on a 12-month electric contract have increased by approximately 15% or a penny. If rates do not trend back down, it will put our retail electric rates in line with Florida, Arizona, and Vermont. Other states will close the gap on Texas’ competitiveness.

Costs from the winter storm will likely exceed the $125 billion in damage inflicted by Hurricane Harvey, Texas’ costliest natural disaster. Exelon, a publicly traded power generator, has already estimated its losses may be as as high as $950 million. Vistra, the owner of TXU’s former generation assets, also lost close to $1 billion. The Brazos Electric Cooperative, the power company serving 68 counties from the Texas Panhandle to Houston, has already filed for bankruptcy listing that it owes almost $3 billion to its top creditors. Among its top creditors are ERCOT at roughly $1.8 billion and Bank of America at roughly $500 million. While it is difficult to put a price tag on creativity and imagination, we may soon be able to.

With all eyes on Texas and our electricity market, we can acknowledge the regulators and risk managers would benefit from thinking like Hollywood scriptwriters.

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During the winter storm and continuing aftermath, everyone from elected officials to average Texans weighed in on the causes of the failure of our bulk power system. A circular firing squad ensued with shots being fired back and forth and among ERCOT, PUCT, government officials, industries and households. The severity of this grid failure shined a bright light on Texas. As the total cost is tallied, ERCOT has landed in the middle of the firing squad. With all eyes on Texas and our electricity market, we can acknowledge the regulators and risk managers would benefit from thinking like Hollywood scriptwriters.

My hope is that we can now expand our imaginations and focus on the opportunity to reform ERCOT to maintain our competitive edge. One immediate solution is to create an ERCOT Resiliency Program funded by a half a penny surcharge on our electric rates. This half a penny surcharge would generate approximately $2 billion per year. Texans (and companies looking to move to Texas) could be assured the ERCOT grid will remain resilient yet affordable. Electric companies could recover costs to winterize their facilities. A study could be conducted on the necessity of weatherization for natural gas transmission lines and related infrastructure. Low-income households could be assured they will not lose electricity. All for less than the cost of a Whataburger Whatameal on the average Texans’ monthly electric bill.

Blake Jones is the managing partner of Blake Jones PLLC, a law firm representing energy and investment clients. A past chair of the Energy Bar Association’s Natural Gas Regulation Committee, he has held senior legal and compliance roles at Panda Power Funds and more recently at Hayman Capital Management LP. During his time at Panda, Panda developed, financed and operated 6 gigawatts of electric generation in the United States. Three of these facilities are in ERCOT. Jones was also one of the in-house lawyers advising Panda in a lawsuit against ERCOT. He also devotes time to Big Brothers Big Sisters, where he is a member of its Lone Star Executive Board and chairs its Dallas County Regional Board.