Maybe you’ve heard of the crazy winter storm that happened in Texas a couple weeks ago. If you have, then you also know how it left millions to face below-freezing temperatures without electricity. Some of the “lucky” few who did have electricity currently face utility bills in the thousands. Four of ERCOT’s board members resigned last week over intense criticism of their poor management of the crisis.
Everyone on Twitter’s pretty upset about it, and for good reason. But how much can we actually understand about why this happened? What is ERCOT and why are they at fault? Most importantly: how can we prevent something like this from happening again?
Here’s the short answer: Texas’s deregulated energy market disincentivizes electricity providers from ensuring consistent and reliable production. If that explanation’s not enough to satisfy you (it wasn’t for me), then read on.
Deregulation of the electricity market
Let’s start with a short history lesson. Back in 1999, Texas decided to deregulate its electricity market. The goal was to make the market more competitive: more firms could enter the market and try to provide the lowest energy prices to entice consumers. The laws of supply and demand would ensure that the equilibrium price would maximize consumer and producer surplus — basically ensure mutual satisfaction for everyone. Simple economics, right?
Not really.
Instead of giving consumers the “power to choose,” the new pricing plans created confusion and stress. A lack of transparency made it difficult for customers to actually discern what electricity plan suited them best while other consumers who tried switching electricity providers ended up with worse plans.
In the end, the deregulated electricity markets cost Texans more than traditional utilities would have — $28 billion more, to be exact.
That wasn’t the only consequence. In competitive markets, firms looking to maximize profits will cut costs and sacrifice quality. What does “quality” look like in terms of electricity?
It looks like not winterizing power plants to withstand harsh weather conditions in the event of a freak storm. It looks like not investing in generators that can make up for lost energy production. A lack of regulation from Texas’ unique energy grid allowed utilities to consider profit over reliance.
It seems pretty clear that Texas’ energy markets need a redesign — they’re making electricity more expensive and unreliable for consumers. But what comes next?
New energy market models
The Electric Reliability Council of Texas (ERCOT) is responsible for managing the energy markets in Texas. Currently, they follow a wholesale market model, as most energy grids around the world do.
Think about it. Are you going to walk to work just because the gas price is 10 cents more expensive today? Doubtful.
Electricity providers can’t just shut off power plants when there’s a drop in demand either. They just keep pumping out electricity and hope that someone will bid on it. As a result, the electricity market is in constant flux and relies heavily on real-time forecasting.
These are all the result of the wholesale market model, where energy is bought and sold hours before it’s actually used. This encourages power plants to only produce what is needed to avoid the possibility of any surplus, typically considered a loss to the company.
In times of huge energy demand, though, a surplus of electricity can actually gain back millions of dollars for a company in a matter of days, or even hours. If a utility can provide electricity when no one else can, they can make a huge profit that could be worth all the lost money in previous months.
It’s still debatable how cost-effective this might be, though, but a different energy market model could provide an incentive. Capacity energy markets purchase energy months in advance of their actual production/consumption. Such a market can provide power plants with financial reassurance; it guarantees some form of compensation ensuring that profits are comparable to those in wholesale energy markets. Consequently, consumers benefit from a more reliable energy supply.
The economics of this sort of approach are still debatable, but it’s gaining traction. Expect to hear more about it in the future.
Better demand response
We may also see AI and IoT technology pave the way for smart demand response. Startups like Myst AI are using machine learning techniques to better predict consumption and production in the energy grids. Innowatts is doing something similar and leveraging smart meter data in their approach while other companies like AFRY are incorporating real-time weather information in their work. These can help utilities better predict anomalous events and manage responses.
Curious about the specifics? I gave a presentation on the potential for better consumption forecasting with AI. Check it out here.
In past cases of rolling blackouts in California, for example, governments paid citizens to consume less energy and lessen the pressure on the energy grid. It can even save the government money by reducing the need for energy providers to buy energy from alternative producers facing the same problems. A similar initiative in the future could see machine learning models zero in on communities that would be disproportionately more or less affected by disasters, and decide where it would be most cost-efficient and ethical to make these calls.
Summary
- Two decades ago, Texas deregulated its energy markets.
- Instead of decreasing prices, consumers ended up paying more for their electricity.
- Energy providers prioritized cutting costs over reliance.
- Recent winter storms left millions of people without electricity.
- Capacity markets could incentivize energy providers to prioritize reliable production.
- New technology could enable better demand response in the future.
Thanks for reading! If you enjoyed this article, you might be interested in my other article on energy storage. Feel free to connect with me on LinkedIn or follow my newsletter. Look out for more articles about emerging technologies, especially those at the intersection of artificial intelligence and energy.
