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Texas freeze and collapse of free market mechanism
Read more on - Polity | Economy | Schemes | S&T | Environment
- The story of Texas: As the US state of Texas grew, the cult of the free market took control of the state’s government. Electricity is the ultimate standard product, so went the theory. Texas had a self-enclosed grid, cut off from interstate commerce and hence exempt from federal regulations. This was the place to prove the virtues of a competitive, deregulated system. But 2021's cold wave led to the crash of the grid in a horrifying manner.
- How it worked: Under New Deal-style regulations, electric utilities got a rate-of-return on their investment, governed by a utility commission that set and stabilized prices. It was (in principle) enough to cover construction and maintenance and a fair profit, not so much as to amount to monopoly profits; utilities were a stable but dull business.
- Soon, economists feared that over-investment to extract more could happen, and hence let generating companies compete to deliver power to the consumer through the common electrical grid.
- Freely chosen contracts would govern the terms and the price. Competition would assure lean-and-mean efficiency and low prices most of the time.
- The role of the state would be minimal, just to manage the common grid, through which power flows from the producer to the consumer.
- In times of shortage, prices might rise, but then the market would decide; those who did not wish to pay could always flip their switches off.
- Theory and practice: It was a perfect textbook setup, with supply on one side, demand on the other, and a neutral manager in between. But there were problems. One was that demand for electricity is inelastic - it doesn’t respond much to price, but it does respond to changes in the weather, and at such times, of heat or cold, the demand becomes even more inelastic. Another was that in an ordinary market, there can be some play in the relationship between supply and demand. If even a fishmonger does not sell his catch, he can, at the end of the day, cut his price – or even freeze the haddock for the following day. Electricity isn’t like that. Supply has to exactly equal demand every single minute of every single day. If it doesn’t, the entire system can fail.
- Three problems: This system had three vulnerabilities.
- First, it created an incentive for cut-throat competition, to provide power in the cheapest possible way, which meant with machinery, wells, meters, pipes, and also windmills that were not insulated against extreme cold (Texas never had cold waves!)
- Second, it left prices free to fluctuate.
- Third, it assured that when prices rose the most, that would be at exactly those moments when the demand for power was the greatest.
- The 2011 warning: Texas’s leaders knew as of 2011, when the state went through a short, severe freeze, that the system was radically unstable in extreme weather. But they did nothing, as to do something, they would have had to regulate the system. And they didn’t want to. Providers were campaign funders, after all.
- 2021 shocker: Then came the deep freeze of 2021. Demand shot up, and supply went down. Natural gas froze up at the wells, in the pipes, and at the generating plants. "Unweatherized windmills" also went off-line, a small part of the energy story. Since Texas is disconnected from the rest of USA, no reserves could be imported, and given the cold everywhere, there would have been none available anyway. Soon, demand so outstripped supply that the entire Texas grid came within minutes of a huge collapse.
- Collapse of price mechanis: The price mechanism failed completely. Wholesale prices rose a hundred-fold – but retail prices, under contract, did not, except for the unlucky customers of one provider, who got hit with bills for thousands of dollars each day. ERCOT (the regulator) was therefore forced to cut power, which might have been tolerable, had it happened on a rolling basis across neighborhoods throughout the state. But this was impossible: you can’t cut power to hospitals, fire stations, and other critical facilities, or for that matter to high-rise downtown apartments reliant on elevators. So lights stayed on in some areas, and they stayed off – for days on end – in others.
- Trouble: When lights go off and the heat goes down, water freezes and that was the next phase of the calamity. For when water freezes, pipes burst, and when pipes burst the water supply cannot keep up with the demand. Hospitals without water cannot generate steam, and therefore heat; and some of them are being evacuated.
- What next: In the aftermath of this debacle, Texas will have to return to New Deal-style municipal socialism. Socialism is government, in technical matters, by engineers and others who know their stuff and not by ideologues who do not. In the USSR, despite all its other flaws and the Russian cold, the power and the heat did stay on. Even in the worst of the post-Soviet free-market collapse the Moscow metro had never stopped.
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