The Texas Power Grid and the myth of "Market Failure"

How bad governance and administrative meddling doomed the Texas grid to fail in a hundred year storm.

I’ve been waiting to comment on this subject for quite a while, gathering information and resisting the temptation to take a side or scapegoat an industry sector. In order to have a truly productive discussion about the Texas Grid failure, we need to understand a few things. I’ll assume some knowledge on your part but there was a real flurry of misinformation and bad takes during the crisis so let’s lay down the facts beforehand

1.) ERCOT manages the Texan grid, and acts as a middle man between power buyers and power sellers setting prices and managing the energy market, they also are in charge of matching supply and demand of power, and they control scheduled outages of power plants. They don’t own any generation facilities themselves.

2.) This was a truly record breaking storm. It set all time low temperature records across the United States, and many generators in many different energy sectors went offline.

3.) There was only about a week of heads up time for local officials, and to be fair to them, in terms of immediate action that could have been taken once the severity of the storm was known and during the storm, ERCOT did a good job and likely saved the entire energy grid (I’ll get to that).

4.) There was a system already in place to incentivize energy producers to build emergency capacity that would only be turned on in the event of a massive shortage. This is where ERCOT fucked it all up and what this post is about.

5.) There was next to no energy storage in the Texas grid, because large scale energy storage is expensive, and energy storage codes and regulations written to govern large scale storage were also being applied to distributed storage solutions, making attempts to promote those options infeasible due to lawmaker ineptitude.

So what went wrong during the storm? As you have probably heard/read if you were following the situation while it occurred, the cold temperatures paired with very high demand due to millions of Texans heating their poorly insulated homes put a huge amount of demand on the Texas grid. This problem doesn’t sound super serious at first, but when you consider the important factor of AC electricity needing to run at a stable frequency across the entire grid (60Hz), matching energy supply to energy demand is very difficult without deviating from that frequency.

Why do we care about the 60Hz mark? In order to allow multiple generators in multiple locations to send power along the same grid without interference, they’re all synced up to run at the exact same frequency.

*Destructive and constructive interference*

If generators were to lose sync from the rest of the grid, it could cause irreparable damage to the generator itself and any equipment that was receiving out of sync power, or it could work against other generators in destructive interference, and neither of these outcomes is good for power generation. Because of this, when any given generator gets out of frequency, it trips a breaker that turns it off and protects it from any damage.

ERCOT of course knows this, and as I said above in #3, during the week leading up to the storm, they delayed maintenance outages in many plants in order to keep as many generators online as possible so as to be able to produce enough power to meet demand while still maintaining the 60Hz frequency. However, the cold weather leading up to the storm, caused many natural gas and wind turbines to go offline. Even with all this, they were able to meet a record demand of 70,000 Megawatts the night of the storm. Despite this accomplishment (which we do need to give ERCOT credit for), demand kept increasing, until eventually, the frequency became unsustainable and generators had to be taken offline.

This record high demand combined with the ongoing storm taking out more and more power generation (mostly natural gas and wind although one nuclear plant did go offline when its water cooling reservoir froze) resulted in gas and power prices spiking, which makes sense. However, the price of natural gas had spiked more than 100X its normal value while ERCOT had put a price cap on electricity at 9000$ per Megawatt, meaning that despite there being people cold and shivering in their homes, power generators simply could not afford to make power that they could sell at only 9000$ per MW when natural gas prices were actually responding to demand and supply changes.

That’s not to say that it’s all about the natural gas industry. One of the main problems with power generation during this event was the lack of extra capacity. In this case, the same price ceiling applied, with ERCOT having failed to properly incentivize future proofing the Texas grid with extra capacity, the only incentive for the generation companies to build extra plants being the capped peak price of 9000$ per MW which they could only earn at peak demands. In essence, by setting a price ceiling, ERCOT skimped on their insurance, and failed to invest for the future, thus creating a grid situation that was too fragile to withstand a storm of this magnitude.

Having a true scarcity price model that incentivizes energy developers to build generators that can spin up in times of peak demand also favors investment into wind and solar, which normally struggle to compete in a market with such price ceilings. This has clear positive externalities for the future and should be implemented.

One last thing to address before I leave off is the viral idea that people were paying outrageously high power bills during the outage. Most energy provider companies have tiered pricing models for customers, which means they were insulated from these price shocks for the most part, and that the costs will be passed to the customers over longer time periods via contract and price revisions. Not every energy provider can afford to hold these costs for very long though, and as a result some energy providers also offer plans to provide power to their customers at wholesale rates, which when the grid doesn’t fluctuate is a very good deal and allows customers to adjust their demand for energy based on when it is most affordable. But when the price of energy hits that high water mark, the energy provider is not liable to shoulder the customers risk. This is where those crazy bills came from.

So in the end the conclusion to draw from this is not that the market failed, but rather that ERCOT failed to allow it to succeed, and that those problems have not and will not be solved by any solution other than to remove these terrible regulations that are misaligning incentives in the Texan energy market. In the next century, freak weather events, population growth, and even cyberattacks threaten our infrastructure, and if our incentives are not aligned to be able to work together to fight against them, I’m afraid we’ll see this scenario repeat itself.

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-Connor, Of All Trades.

ERCOT website with in depth analysis and info about the storm and the Texan market:

Great Video on the subject: