The Texas Power Crisis

A recent article regarding the February 2021 Texas electricity crisis of makes some interesting points about Texas that are pertinent to California. The article is “The Texas Power Crisis, New Home Construction, and Electric Heating,” 2/22/2021, by Lucas Davis, a Professor at the Haas School of Business, UC Berkeley,

Professor Davis points out that Texas has massively increased new home construction in recent decades and electric heating increased massively as well, because TX has low electricity prices and their (usually) mild winters are a good fit for heat pumps. In retrospect, building electrification exposed customers to risks that became apparent only under extreme conditions, when prices spiked and heat pumps lost efficiency advantages in a polar vortex. CA regulators currently are specifically encouraging building electrification. To me, building electrification reduces system diversification which inherently increases risk, by putting more eggs in the electricity-powered basket and fewer in the natural gas-powered basket.


As stated by Professor Davis, “Texas has retail choice for electricity, but the overwhelming majority of Texas customers face electricity prices that are too static, too inflexible, and don’t respond to market conditions. … While wholesale prices in the Texas market climbed last week to $9,000/MWh, the overwhelming majority of electricity customers in Texas continued to pay retail prices close to $120/MWh, barely 1/100th of the true marginal cost.” That sounds a bit like what happened in 2001 in CA, when the IOUs committed to sell power at fixed rates but were unhedged and bought only at spot rates. In TX, retail providers may have made a similar mistake.

Professor Davis advocates for increased used of dynamic pricing. “Dynamic pricing allows customers to pay lower prices throughout 99% of the year, in exchange for facing much higher prices when supply is tight.….You may have read about households who paid enormous electricity bills last week. 29,000 out of Texas’ 11+ million customers buy their electricity from Griddy, a retailer that charges customers wholesale prices for a monthly fee of $9.99/month. This is a very extreme version of dynamic pricing. The evidence shows that you don’t need such extreme price changes to encourage conservation. Moreover, it is straightforward to incorporate hedging into retail contracts to protect customers from these outcomes. With 28GW of forced outages in Texas last week, it is unlikely that dynamic prices alone could have closed the gap between demand and supply. But dynamic pricing is the fastest and cheapest way to build flexibility into the market, and can play an important role moving forward.”

To me, dynamic pricing and accompanying hedges can only be accomplished in a practical way in CA through Direct Access. DA is the only way to match individual customers, or similarly-situated groups of customers, with their risk preferences. Investor Owned Utilities and Community Choice Aggregators are  too bureaucratic to provide such price offerings. It is true that TX customers and retail providers may not have appreciated fully the risks of price spikes. They likely will not make that mistake again. Most of the problems in TX last week were physical in nature – freezing gas wells and windmills and the like. I expect that customer choice may be blamed for some of what happened in TX, by those who always want a top-down solution to every energy problem. Professor Davis does not blame customer choice. He implicitly shows how customer choice can be part of the solution.

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