No U.S. state has built as many new homes as Texas over the last decade and most of them use electric heat.
There is plenty of blame to go around for the deadly power outages in Texas last week. Much of the attention, correctly, has been focused on the supply side — from power plant outages, to freezing natural gas pipelines, to reduced wind and nuclear generation.
But in today’s blog I want to focus on electricity demand. How is it possible that Texas demand was able to reach 69 gigawatts in the winter?
To understand this you have to go back a few years. Coming out of the great recession, Texas embarked on an incredible binge of new housing construction. No U.S. state has built as many new homes as Texas over the last decade, and most of these homes use electric heat.
Go Big or Go Home
Texas leads the nation in new home construction. Between 2010 and 2019, 1.5 million new housing units were constructed in the state. Over this time period the population of Texas grew 15%, adding almost 4 million people.
To put this in perspective, this is almost twice as many new homes and twice the population growth as California, a state with over 10 million more people. Among the top-20 metropolitan areas with the most new homes in 2019, California only has a single city (Los Angeles), compared to Texas with four (Houston, Dallas, Austin, and San Antonio).
This pattern is not a coincidence. Texas approaches its housing market much like it approaches its electricity market with a heavy emphasis on the free market and minimal government regulations. An often-used index of residential land use regulations ranks Texas cities among the easiest places in the country to build new housing, while ranking California cities among the hardest.
Feeling The Electric Heat
Now combine this housing growth with a long-running historical trend toward electric heating. In 1950, less than 1% of Texas homes used electricity as their primary heating fuel. Electric heating in Texas has increased steadily since that time, reaching 8% in 1970, 40% in 1990, and 61% in 2018. Since 2010, 62% of homes built in Texas use electric heating.
Why so much electric heating? The single most important factor is low electricity prices. The average residential price for electricity in Texas is less than 12 cents per kilowatt hour, below the national average and way below states like California (19 cents), Massachusetts (22 cents), and Hawaii (32 cents).
Texas’ climate is also conducive to electric heat. During a normal year, Texas households experience fewer than 2000 heating degree days compared to, for example, over 9000 in Minnesota, so electric heating with its lower capital and installation costs is a more economical option.
Add in Historic Low Temperatures
Now take the 7 million homes in Texas with electric heating, add in record-low temperatures — in some cases reaching 100-year lows — and you get record breaking winter demand levels for electricity. Texas last week was colder than Alaska, with temperatures in Dallas hovering in the single digits.
Homes in Texas tend to be less well-insulated than homes in colder parts of the country. Yes, it gets hot in Texas, but the typical indoor/outdoor temperature differential on hot days tends to be much smaller than the typical temperature differential on cold days, so homes in colder parts of the country are insulated to a higher standard.
Consequently, a single home can easily use 5000 watts for heating. Many Texas homes use much more, but 5000 watts would be the equivalent of half of a 10KW electric furnace, or two 2500 watt baseboard heaters, or a little more than three 1500 watt portable heaters. Many homes in Texas are also being built with heat pumps. In general heat pumps are more energy-efficient than electric resistance heating — but these efficiency benefits shrink considerably during very cold weather.
7 million homes multiplied by 5000 watts yields 35 gigawatts! Normally, these units would be cycling on and off, but with polar vortex conditions most of this equipment would have been running full out. Add this to electric water heating and the rest of residential load, plus commercial and industrial, and you get to 69 gigawatts.
An Opportunity for Dynamic Pricing
Meeting this growth in electric heating is a serious challenge and it is pretty clear that the Texas market last week was not up to the task. As I said before, it seems correct that most of the attention has been focused on failed opportunities to weatherize power plants and other supply-side problems.
But there was also a missed opportunity on the demand side. 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. Economists have been advocating dynamic prices for decades, but adoption has been slow.
Case in point. 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.
Not seeing these high prices, Texas consumers had little incentive to conserve. You had a feast or famine — with millions of consumers at an all-you-can-eat buffet — while millions of others faced tragic blackouts and, essentially, an infinite price.
If everyone instead had turned their thermostats to a chilly, but manageable, 65°, this could have really helped the state manage the emergency. As Severin Borenstein pointed out after the California power outages last August, even modest adjustments to the thermostat can save a lot of electricity.
Dynamic pricing allows customers to pay lower prices throughout 99% of the year, in exchange for facing much higher prices when supply is tight. Numerous studies have documented that dynamic pricing yields substantial demand reductions (here, here, here, and here).
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.
Keep up with Energy Institute blogs, research, and events on Twitter @energyathaas.
Suggested citation: Davis, Lucas. “The Texas Power Crisis, New Home Construction, and Electric Heating” Energy Institute Blog, UC Berkeley, February 22, 2021, https://energyathaas.wordpress.com/2021/02/22/the-texas-power-crisis-new-home-construction-and-electric-heating/
Lucas Davis is the Jeffrey A. Jacobs Distinguished Professor in Business and Technology at the Haas School of Business at the University of California, Berkeley. He is a Faculty Affiliate at the Energy Institute at Haas, a coeditor at the American Economic Journal: Economic Policy, and a Research Associate at the National Bureau of Economic Research. He received a BA from Amherst College and a PhD in Economics from the University of Wisconsin. His research focuses on energy and environmental markets, and in particular, on electricity and natural gas regulation, pricing in competitive and non-competitive markets, and the economic and business impacts of environmental policy.