Twelve months after the Texas power crisis and we’ve already forgotten the key lesson.
One year ago record-breaking cold weather was bearing down on Texas. Surging electricity demand and supply outages led to one of the worst blackouts in U.S. history, 4+ million households went without electricity for as long as a week, and several hundred people died.
But I’ve been surprised to not to see more written about the most obvious solution. One of Texas’ big problems is that it’s electricity grid is not integrated with the rest of the United States. Fix that, and a whole lot of Texas’ energy problems go away, making electricity more reliable, cheaper, and greener.
Power outages impose enormous societal costs. For example, it wasn’t long after the blackouts began in Texas that people were dying of carbon monoxide poisoning from trying to keep warm using their barbecues and natural gas powered stoves. And as bad as it was, it could have been much worse. The Texas grid was close to suffering a catastrophic failure that could have left Texans in the dark for months.
If Texas had been able to import electricity from other states, this would have helped keep the lights on. Severe weather does not affect the entire country in the same way, so we can provide backup power for each other. We help you, you help us.
Increased reliability is one of the big benefits from integrating markets. Unforeseen events happen – demand can spike unexpectedly, power plants outages can occur. Electricity reliability requires having enough redundancy in the system to be able to ride out those shocks.
Integration is particularly important for electricity because storing electricity is so expensive. If it were easy and cheap to store electricity, electricity could be pulled in and out of storage in response to price changes and you would not see such large price fluctuations within hours or days. It would be much easier for a state like Texas to go it alone.
Gains From Trade
In addition to increased reliability, market integration creates economic value by connecting buyers and sellers. During February 2021, the average wholesale price of electricity in Texas was $1,485/MWh. Meanwhile, prices outside of Texas were *twenty times* (20x!) lower. During February 2021, the average wholesale price in MISO was $60/MWh, and the average price in PJM was $40/MWh.
Generators outside Texas would have been thrilled to sell electricity to Texas for even a fraction of the ERCOT price. This is a remarkable price difference, like being able to buy gasoline for $3/gallon, and then sell it for $900/gallon.
If Texas could import large quantities of electricity from other states, you would not have seen this huge price differential. This is how free trade works. When I have excess, I sell to you. When you have excess, you sell to me. We are both made better off.
This is not just about extreme events. Yes, better integration is particularly valuable during the winter heating peaks and summer air conditioning peaks, but market integration creates economic value every hour of the day, every day of the year.
Yes, electricity transmission is expensive to build. I’m sure readers will also weigh in to explain the legal, technical, and political barriers which I’ve glossed over and further increase the cost of market integration. But previous studies find that the benefits exceed the costs. My colleague Jim Bushnell and coauthors find that a national grid could yield hundreds of billions of dollars in net benefits and NREL’s Interconnections Seam Study finds that the benefits would exceed the costs by a ratio of two to one.
Not only does market integration make electricity more reliable and cheaper, but it also tends to make it more green.
Integrated markets are more efficient. That is, there is more production by generators with low marginal cost – and less production by generators with high marginal cost. Thus market integration is not inherently green or brown. In some cases, it can mean more generation by large coal plants with low marginal cost.
However, in most cases, integration tends to be good for the environment. As my colleague Meredith Fowlie has written about, better market integration makes it easier to incorporate renewables into the grid. After all, wind and solar generate electricity at near zero marginal cost, so they tend to benefit from great market access.
Wind and solar are intermittent and unpredictable, so having a larger effective market also helps to smooth out these fluctuations and, for example, make it less necessary to curtail renewables during periods of low net demand.
Look, I get it. Texas’ energy “independence” has long been a source of pride for many Texans. As former governor Rick Perry put it, “Texans would be without electricity for longer than three days to keep the federal government out of their business.”
But it is time to reassess the costs and benefits. Each year there are more renewables on the grid, both in and out of Texas, more people adopt electric heating and cooling, and extreme weather events become more common. Sometimes the most obvious solution is also the best.
Keep up with Energy Institute blogs, research, and events on Twitter @energyathaas.
Suggested citation: Davis, Lucas. “The Most Obvious Way to Avoid Another Texas Blackout” Energy Institute Blog, UC Berkeley, January 31, 2022, https://energyathaas.wordpress.com/2022/01/31/the-most-obvious-way-to-avoid-another-texas-blackout/
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.