The Lone Star Freezes to a White Dwarf

Partha Chakraborty-
Partha Chakraborty

Partha Chakraborty is an Indian-born immigrant; a naturalized US Citizen since 2018. Educated in India and at Cornell University, Partha is currently an entrepreneur in water technologies, Blockchain, and wealth management in the US and in India. The views expressed are his own.

Last week this time was Valentine’s Day. Social media updates from my friends in The Lone Star state were gushing about the soft white on the ground. Mercury had dipped to high 20’s in places where 100+ days can last for weeks. Snow on the ground gave lovebirds, and families, an excuse to go out and lob crumbling balls of fun after months of rather drab life indoors.

Crumbling and temporary it surely was. The same feeds now bemoan broken pipes, days went without hot food, nights spent shivering under a shared blanket, snaking lines for water at communal facilities.

Elsewhere in the state, disaster struck wide. Just as the reality of frigid water was setting in, utility infrastructure started to fail. By end of Tuesday, power available for use by customers of ERCOT – Electricity Reliability Council of Texas, the agency that manages the electricity grid for ninety percent of Texas – was barely two-thirds of the projected demand. Power generated by natural gas plants was cut by a third. Windmills stopped whirring; generation dropped to near zero. Ditto for solar power. A nuclear power plant was shut down as the water supply froze. Even coal-fired plants dropped by a fifth. All of these was happening when demand for a power shot up, as a population unaccustomed to the cold cranked up the heating.

The demand-supply imbalance on an isolated grid forced blackouts on twenty-nine million residents of the state, millions went without power, some for over seventy-two hours at a stretch. People fired up gas stoves and furniture to stay warm, leading to carbon-monoxide poisoning and death. Early Tuesday morning three children and a grandma in a household died in a housefire brought about by fireplace burning unconstrained as the family tried to huddle in front. A veteran died when he tried reaching spare oxygen inside his truck as the one inside his house, requiring a power supply, failed. Vulnerable literally froze to death on the streets of big cities. Over sixty deaths were attributed to power failure already, and the count is on.

As the state warms up, a second catastrophe rears its head. Half the population, over fourteen million of them, lack proper water supply and are under boiled water watch. Municipal water facilities have opened up so people can drive up and carry water back, leading to lines at times a mile long. Hospitals were not spared either. Larger ones are typically armed with back-up power supply, rural ones are left to fend for themselves, dialysis centers are closed as they need copious supply of water.  Medical professionals, already wary and exhausted after months long pandemic, were facing a new surge in ER amidst threadbare electric supply and water shortage, only to return home to utter darkness, bitter cold and no water. Even if you survived the freeze, a look at your electricity bill might make you realize that your pains are just starting. A veteran senior was charged USD 16,752 – more than 50 times his normal – draining his bank account of meager earnings from Social Security. A very large number of customers will see their daily charge rise to over USD 100 even when they barely had electricity for a few hours.

Full accounting of deaths from the episode is expected to reach hundreds. Financial loss from breakdown, not counting opportunity loss, is already over USD 30 billion.

The failure happened by design. You read that right.

The Wall Street Journal carried a succinct summary on Friday. “The core problem: Power providers can reap rewards by supplying electricity to Texas customers, but they aren’t required to do it and face no penalties for failing to deliver during a lengthy emergency.” William Hogan, a Professor at Harvard’s Kennedy School, designed the market structure for Texas when it deregulated. Last week he offered that the “high prices reflected the market performing as it was designed”. “As you get closer and closer to the bare minimum, these prices get higher and higher, which is what you want.” Bill Magness, CEO of ERCOT, elaborated on the thought process: “High peak prices provide the incentive for producers to keep operating in all weather. Generators that can’t produce power when it is most needed risk missing out on windfalls.” Lure / Loss of the windfall in extreme weather events was supposed to be the financial incentive that motivated power generators humming through them.

Put yourself in the shoes of a CEO at a Texas power generator. If you spend millions in capital expenditure to winterize your capacity or build up a baseload in excess of demand in normal peak times, you may be able to serve during these extreme weather events, expected no more than two or three days a year.  However, you will carry the cost. In a game-theoretic set-up, a tenuous equilibrium occurs when all (or most) generators incur the same added expense – collectively foregoing some of year-round profits as they push the supply curve, in the hopes that profits generated from a temporary distortion in the demand curve will make up for it. A more stable equilibrium solution is when no player incurs the cost, everybody shutting down their plants for a few days. If you modify the game with an explicit cost, a penalty for their failure to keep up production in extreme weather events, you will have stable equilibrium where all players incur the capex thereby having a win-win outcome.

This game played out as expected. About a tenth of the state not covered by ERCOT, including El Paso, had facilities winterized as required; the Polar Vortex had barely any impact, a winter wonderland. For the rest, nine-tenths of the state, the outcome was brutal. Windmills stopped in Texas but continued production everywhere else. Natural gas plants reduced production in Texas, ramped up everywhere else.

Texas started operating its own grid way back in the early 20th century. In 1999, Texas embarked on a revolutionary experiment in a market-based system of generators, transmission companies, and energy retailers – a system explicitly short on regulation and long on the promise of cheap electricity for all. Glut of natural gas and abundant wind energy did deliver on the promise for the most part, but it reinforced, and exacerbated, a culture lack of safeguards in the absence of enforcement. Case in point was 2011 where the state had a similar winter event on a smaller scale. Players were advised, not required, to winterize their facilities. Few did, a fact made very apparent last week.

A well-functioning market can enforce avoidance of failure in extreme events. Aircraft manufacturers routinely embed backup of backup of a system already designed to last. Texas electricity market proved to be not one. If there is a textbook example for failure of an unregulated utility, Texas is one.

Regulation with a light touch the answer. Ad-hoc penalization post-failure will drive specific players to bankruptcy, in the extreme, a suboptimal outcome for all. Regulating certain standards for each player will make producers internalize the cost, and customers will adapt, resulting in a minimal deadweight loss to the system. Nobody claims zero economic cost from regulation, but decision-makers will be forced to trade-off between economic cost and cost to quality of life. Under a no-regulation paradigm, the scale always tilts against human cost.

History suggests Texas can repeat its mistake but this time may be different. Finding neat scapegoats so close to 2022 state elections is a big ask especially when the Republican Party has been in the Governor’s mansion since 1995, continuously. People who are most affected this time around, economically vulnerable and people of color, have realized the power of the poll-booth in other states, including Georgia. Texas idiosyncrasies, including their devotion to masters of fossil fuel, are already frayed in a down market for oil and the pandemic.

Stars freeze to a white dwarf over time. The Lone Star State lies cut down to size as it lay covered in white powder, frozen. But I am hopeful as the State crawls back to normalcy. Its problems go far deeper than irresponsible behavior by a few mayors, former governors, or even a sitting US Senator. I do not expect a panacea to emerge from the rubbles of these blackouts. I do not expect it to join the national grid. I do predict the arc of history to bend to a justifiable solution with reasonable regulations and accountability.

I will raise a glass of whiskey to that thought.