The Texas Power Crisis, New Home Construction, and Electric Heating
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/
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Lucas Davis View All
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.
Energy Institute Blog 
Hi,
This is an absolutely sensational blog post. I do have one additional point, however. We should not lose sight of the fact that natural gas production in Texas collapsed during the February storm. Here’s an Energy Information Administration webpage that details the collapse in natural gas production:
https://www.eia.gov/todayinenergy/detail.php?id=46896
From that webpage:
“Natural gas production in Texas fell almost 45% from 21.3 Bcf/d during the week ending February 13 to a daily low of 11.8 Bcf/d on Wednesday, February 17, according to estimates from IHS Markit.”
So just when the demand for natural gas for electric generation and heating was increasing, the supply of natural gas declined dramatically.
Best wishes,
Mark Bahner
I mean yes, a lot of Americans are living paycheck to paycheck. However that statement really has a lot of connotations, not all of them bad. I, for example, would say I live paycheck to paycheck. The fact that 50+% of my income goes into one form of savings or another is a relevant data point though. And if one of those drivers of the rising “cost of living” is utility costs, then it makes a lot of sense to invest in ways to cut costs, IE, smart house technologies.
RE: The tenant-landlord issue. Valid, but not insurmountable. Tenants can always ask a landlord to do it, and in many ways a landlord might see the value in offering it themselves to attract new tenants. Not always, but often.
“Paycheck to paycheck” is shorthand for having not reserve savings for anything other than immediate expenses and little or nothing for emergencies. If you are saving 50% of your paycheck, by definition you are not living paycheck to paycheck in the popular definition as understood politically. The colloquial connotations are always bad, never positive.
The point is that tenants can’t just ask their landlords. Often (usually) the relationships are much more complex than that. I once looked into putting a Smart AC controller on a house I was renting–the complex steps I needed to take to get permission made me not to bother (which reminds me to do that on our house now!) In this town, we are hitting resistance from both Realtors and landlords for just doing energy audits because they see these as threats to their property values. Being dismissive of real world problems doesn’t solve them.
Even a simple google search will find many definitions of “paycheck to paycheck”, and savings takes many forms, many of which really aren’t very liquid and thus can’t be easily tapped in an emergency. Anyone who saves heavily in a 401k would still likely struggle if they missed a paycheck.
Looking at the cross-tabs to the survey you linked, it appears that compared to the US Census Bureau’s data, the pollster massively oversampled households in the bottom two income deciles. I’m not sure I trust this datapoint a whole lot. And again, if one of those cost-expenditures is utilities, then it makes sense to invest in cost-savings technologies.
I’m not sure the nature of your town. Personally I’ve had no issues in the past with these kinds of things. Perhaps my situation is unique though.
Surely it’s also relevant that Texas had no statewide energy code for new housing until 1 Sep 2001 (and then adopted ASHRAE 90.1, not a very strong standard). Today’s codes can save over 30% of the energy used by those pre-code houses; best practice, at least 100%.
I’m looking for data on how much of the state’s single- and multi-family housing stock was pre-code, but many older areas manifestly have significant fractions of pre-2001 houses. An empirical comparison I just received shows that two neighboring stick-built houses in Austin, both over a century old, one retrofitted with air-tightening and insulation but the other not, differed by more than 20F˚ in their indoor temperatures by day two of the freeze. That’s the difference between inconvenient and deadly (able to freeze people and pipes). Poorly insulated or uninsulated houses are far more dangerous to occupy. They also guzzle any available electricity or gas, whichever they heat with, when they can, contributing disproportionately to shortages. Guess which income and racial groups probably live disproportionately in those decrepit old houses.
So far, my friends who are Texas energy experts have been unable to find data on the absolute or relative efficiency of the Texas housing stock, but perhaps some will turn up.
Great insight!
Houses in Texas are huge and relatively cheap. A friend of mine bought a McMansion in a Houston suburb only to find that his first month summer electricity bill was $800! After an aggressive retrofit program he was able to get it down to around $400 per month.
What is the constraint that is making dynamic prices not possible in the Texas energy market?
“What is the constraint that is making dynamic prices not possible in the Texas energy market?”
Indifference and ignorance of small retail customers combined with the unwillingness of Retail Electricity Providers to offer customers a service that the customers are not demanding. To get dynamic pricing broadly accepted in Texas will require a missionary marketing effort to educate customers but no one REP has an incentive to incur the cost of doing so and the Texas PUC is also uninterested (at least it was when I presented it to the commission almost 10 years ago). Maybe this polar vortex will be a wakeup call – but I doubt it.
Last year I was swapping sea stories with a retired Vice Admiral when he make a poignant statement. He recounted a conversation with an academic, which concluded in his saying “professor, you may well know the right answer but that is just the BEGINNING of the process of getting it implemented.”
“professor, you may well know the right answer but that is just the BEGINNING of the process of getting it implemented.”
It seems to me that finding the “right answer” requires first doing a brainstorming session of all the possible right answers. I think if such a brainstorming session was done, identifying 50+ potential right answers, dynamic pricing of electricity would not turn out to be the best “right answer” for this situation.
After hurricane Katrina, I conducted a mini-brainstorming session myself of the possible answers to hurricane storm surge. Neither building sea walls nor “natural” measures like restoring seemed to be the best “right answer.” Performing that process resulted in what I think was a fundamental insight:
For rare events that can occur anywhere in the world, the best “right answer” is portable, temporary solutions, rather than fixed, permanent solutions.
It appears that the February 2021 cold snap in Texas was a 1-in-50+ year event. Further, it appears to me that the most important problem was the drop of 45 percent in natural gas production in Texas, right when natural gas was needed most. So it seems to me the best “right answer” is to develop a portable, temporary fix to make sure that a drop-off in natural gas production during a cold spell can never happen again.
I’d be very happy to discuss this issue, particularly with people involved in natural gas production in Texas, via email or some other forum (since portable, temporary fixes that assure that natural gas production in Texas never drops during cold spells is off-topic for this blog post). My email address is my last name and first name (all one word) at Gmail.
The better question is whether dynamic retail pricing is a solution in search of a problem? We haven’t seen tremendous savings from relying on energy-only, or even capacity/energy, markets to date. When I saw press releases extolling the annual savings from the CAISO’s EIM of a couple hundred million dollars, I thought that’s a lot of hoopla over saving about 1% a year in a $20B+ market. Studies 20 years ago found similar “efficiency” savings.
This seems to be more about diverting attention away from the real problem. The real reason that California’s electricity rates rates are higher than Texas’ is not that its auction market is less efficient–it’s that California’s utilities have made a series of bad portfolio management decisions and they have not been held accountable in any way. Up to now Texas has been willing to let its utilities and generators go bankrupt which makes them more judicious in their decisions. (We’ll see if that continues, but that’s a different matter.)
This situation reminds me of a comment Paul Portney, then RFF president, made in a seminar 25 years ago. Applying economic tools to managing solid waste was the rage at the moment. Portney observed that there was 100 million tons of waste and disposal costs were about $30/ton at the time, so this was a $3B problem. In a multi-trillion dollar economy, why were we spending so much time on such a trivial problem?
We can get almost all of the savings that we need from demand side responses through TOU pricing and demand response programs. Looking at the Statewide Pilot Program we could see that critical peak period pricing adding only a small amount beyond the TOU effects. If we focused instead on maximizing our gains from what we can easily manage and don’t have to row upstream to achieve.
I sent this note to Lucas and he suggested that I post it here. The specifics are that industrial demand in Texas has impacted the grid as well, consuming vast quantities of power in the Permian Basin as well as along the Gulf Coast. Take a look and see the complete demand picture.
Lucas,
I just read your article citing the large growth of the residential [new homes] energy demand in Texas. While I appreciate your insight, I suggest that you missed another significant demand sector, industrial. With the addition of numerous LNG export facilities along the Gulf Coast, specifically Freeport LNG and Cheniere at Corpus Christi, these alone are likely a huge demand sink for electricity. If I recall, each liquefaction unit has enormous motors, thus a multi train liquefaction facility could consume nearly an entire power plant I believe.
Additionally, all of the Permian Basin production is serviced by electrical compression and processing such that the wind generated power, likely does not really leave the region. Many of these producing sites have onsite gas cleanup, drying and compression to pump the natural gas into pipelines, thus consuming electricity as opposed to having onsite generation to meet these needs. Significant expansions on transmission lines were made to move the wind generated electricity to other parts of the state, yet I suggest that local demand growth from these upstream units has consumed much of that.
In closing your hypothesis is not complete about Texas electrical demand growth without considering these other sources of demand. Lastly there have been significant expansion of petrochemical facilities over the past 6 years and as these are net consumers, as opposed to electricity producers adding more demand. Please look further to bolster your analysis of the Texas electrical supply and demand for a more robust perspective.
Is it realistic to assume that the average consumer will, in a situation where his/her lower rungs of Maslow’s pyramid feel threatened (as they would during a polar vortex event with extreme temperatures) have the rational capacity to go around their house and turn thermostats down to 65F? That seems a LOT to ask. This isone of those situations where the nice theory of “homo economicus” completely falls apart. If we design our systems to expect average consumers to act highly rationally in a highly emotional event, those systems will fail and fail society.
There’s a place for free markets; and there’s a place for rational regulation. Power, heat, water don’t lend themselves to free markets that subject customers who expect to pay $100 a month for utilities to $10,000 bills.
There is very little price elasticity when you are freezing in the dark! Given the situation in Texas last week this discussion seems like you are arranging the deck chairs on the Titanic. The lesson to my mind is the one mentioned above, diversity. Homes with natural gas in Texas had heat from their gas fireplace, had hot water and were able to cook on their gas stove. Natural gas infrastructure is “weather hardened” since it is distributed via underground pipelines. Our above-ground electricity infrastructure will always be prone to failure due to high winds and other weather anomalies, even more so if the grid is highly dependent on wind or solar. . Do we really want to put all our eggs in one basket?