SYLVIE DOUGLIS, BYLINE: NPR.
(SOUNDBITE OF DROP ELECTRIC SONG, "WAKING UP TO THE FIRE")
DARIAN WOODS, HOST:
You might remember back in 2021 when there was this huge winter storm that hit Texas. It caused a blackout that lasted for days, and Mose Buchele from public radio station KUT in Austin was there to report on it.
MOSE BUCHELE, HOST:
Yeah, yeah, and lived through it myself. We lost power, too.
WOODS: And in a way, that's a good starting point for today's episode because there was a lot of political fallout from the blackout. And ever since, state politicians and regulators have focused more on improving the Texas power grid.
BUCHELE: Yeah, but it has not been easy. And now some are saying that a key reform that grid managers here put in place this year might have inflated energy prices by billions without any benefit for electric reliability. It has to do with something called artificial shortages on the energy market.
WOODS: This is THE INDICATOR FROM PLANET MONEY. I'm Darian Woods.
BUCHELE: And I'm Mose Buchele.
WOODS: Today's show - what we can learn from Texas on managing and perhaps mismanaging its energy market.
So today we're going to talk about the Texas power grid. But we're going to start with a little overview of how electricity is bought and sold because electricity markets are funny things.
BUCHELE: Yeah. I mean, for one thing, electricity is not something that you can go without. So you want to have enough energy available to meet maximum demand at all times, even when demand is low.
WOODS: Yeah. You want to plan for the hottest days in summer and the coldest days in winter.
BUCHELE: And today, grid managers increasingly have a variable supply of electricity. In Texas, we produce more wind power than any other state, for example. But that wind doesn't always blow. The sun doesn't always shine for solar.
WOODS: So grid managers also need to plan for ways to cover those valleys of supply dropping or to account for those peaks of demand when it's high.
BUCHELE: And that is also especially tricky in Texas because the way the Texas energy market is designed, power plants don't really get paid to sit around just to be available for that peak demand like in other places. They make money just for the power they actually sell on the grid.
WOODS: And people in favor of this say it's more efficient. You're not paying companies for electricity you don't need. But people opposed to this say it's a bad way to run a power grid.
ED HIRS: Texas gave up the safety margins of reliability.
BUCHELE: This is Ed Hirs. He's an energy economist and a lecturer at the University of Houston.
WOODS: And if you can't tell, he does not like this market.
BUCHELE: No, not at all. Ever since the state deregulated about 23 years ago, Hirs has been kind of railing against the system here. He says it gives power generators no incentive to build more plants, pushes the state towards a blackout.
HIRS: In fact, we've been teaching this very game for more than 20 years in every MBA energy trading class you can think of.
BUCHELE: So Ed has been kind of screaming into the void about this, saying the system is basically doomed to fail.
WOODS: And then that big blackout happened in 2021, and people started saying, maybe this Ed guy is onto something.
BUCHELE: Texas Monthly magazine called him the Cassandra of the Texas power grid. So...
WOODS: A bit of classical reference there.
BUCHELE: Yeah, absolutely, if you get that one. You can look it up if you don't get it. So when Ed writes something, all this is to say, people notice. They don't always agree with him, but they notice.
WOODS: So when the Texas grid operator adopted a new policy to guard against another blackout, Ed was paying attention. It was an energy reserve policy. The grid operator was going to pay more to power plants to keep power in reserve.
BUCHELE: Basically to withhold the energy to make sure it could be used in case supply on the grid got tight. You'd think Ed would like that.
HIRS: Kind of like Gene Wilder trying to breathe life into Young Frankenstein.
WOODS: No, he did not like it. And earlier this year, in June, he published an opinion piece in a relatively small newspaper called The Victoria Advocate out of Victoria, Texas, near the Gulf Coast.
BUCHELE: What did you say the title of that article was?
HIRS: "Get Ready To Pay More For Electricity."
BUCHELE: It was actually called "Get Ready To Pay Much More For Electricity."
HIRS: My headlines are awful.
WOODS: I think it's to the point.
BUCHELE: So what Ed was saying is that this new program that the grid operator did didn't add any more capacity to the grid. Like, this program doesn't ensure that any more power plants are going to be built. It just held some energy back. And so what he's predicting, basically, is that it was going to scramble the Texas energy market.
WOODS: Basically, he's arguing that it would create the illusion of scarcity on the market, and that would drive up the price of whatever electricity is left for people to use. And it looks like that's what's happening. The market saw a scarcity that wasn't there. Costs rose, much to the chagrin of energy buyers.
KATIE COLEMAN: I mean, we definitely had some upset clients.
BUCHELE: So this is Katie Coleman. She's a lawyer and a lobbyist that works on energy policy for industrial and manufacturing companies - think, like, big factories. Electricity is a huge part of their operating expense.
COLEMAN: Like in August, companies were just having a hard time choosing between making product and managing their energy costs.
WOODS: And this summer, they saw prices get even higher than they expected. Now, sure, it was very hot this summer and there was a ton of demand, but it looked like sometimes prices were high when there was enough supply.
BUCHELE: And you could watch this happen in real time. In Texas, there's an app that you can check to monitor the grid. Most states have these, but here in Texas, since the 2021 blackout, it's like a state pastime.
COLEMAN: You can look at this app and see we really look like we have a lot of reserves. Wire price is so high.
BUCHELE: She thinks the grid operators just put aside too much reserve energy, and that spiked the price. And once summer ended, an official report actually came out and put a number on it.
WOODS: It came from an office called the Independent Market Monitor. It's kind of like a third-party watchdog for the Texas power grid.
BUCHELE: Right. And then this report said that holding back electricity had created an artificial shortage that ended up inflating energy costs around $8 billion, with no benefit to grid reliability.
WOODS: Now, we have to say that the Texas grid operator has pushed back against this analysis.
BUCHELE: Absolutely, power grid officials that questioned the report's conclusions. And besides, you know, they argue, can you really put a price on reliability?
WOODS: But the person who serves as the Independent Market Monitor stood by her analysis, and then she suddenly resigned.
BUCHELE: Yeah. A lot of people say it was part of the political fallout from flagging this $8 billion cost.
WOODS: So where did that money go? Well, any entity that could sell electricity at those higher prices made a lot of cash. Ed Hirs says that power companies are an obvious example.
BUCHELE: And in terms of who paid it, well, that's where things get a little tricky. Obviously, those big industrial consumers that Katie represents felt the pinch. But a lot of residential consumers have not felt it yet.
WOODS: That's because unlike some big factories, residential users have fixed-rate electricity plans. Those contracts usually last 1 to 3 years. So they're not going to start paying higher prices until they start a new contract with their utility.
BUCHELE: But when that happens, those new costs will be baked in. And Ed says, watch out.
HIRS: I just re-upped my power plan two weeks ago, and it was eye-watering. I won't say eye-opening. It was eye-watering.
BUCHELE: And this whole thing has intensified a big debate in Texas over - really over what kind of market we should have. Ed says basically what he's been saying for, like, 20 years. The state should scrap its current system and go back to something closer to a traditional regulated market.
WOODS: Katie disagrees. Her companies have supported this reserve program. But she does think the state needs to review these energy programs to see if they work and if the costs are justified.
BUCHELE: And state regulators say they are planning to do just that. But in the meantime, the risk to the grid persists. Texas grid managers say if there's another really big storm this winter, there's a 1 in 7 chance of another blackout.
WOODS: All right. Something to watch out for.
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WOODS: This episode was produced by Cooper Katz McKim, with the engineering by Robert Rodriguez and Cena Loffredo. It was fact-checked by Sierra Juarez. Kate Concannon edits the show, and THE INDICATOR is a production of NPR.
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