It’s Been One Year Since the Texas Energy Crisis; Here’s How to Prevent Another One

One year ago, a severe cold front moved into Texas causing costly and fatal statewide blackouts. Much of the debate after the blackouts focused on the failure of state officials to plan for an adequate supply of reliable energy. Lost in the discourse about electricity supply was a discussion about the role of demand.

As the sun went down on Valentine’s Day 2021, sub-freezing temperatures across Texas sent demand for electricity in the state to an all-time winter high. Requests for conservation from Texas grid managers had little effect and, facing power plant outages from the cold and unable to keep up with demand, managers ordered blackouts to prevent physical damage to the system.

The average retail price of electricity in Texas is 8.4 cents per kilowatt hour (kWh). On the morning of February 15, the spot price reached more than $20 per kWh. Those prices are eventually passed on to consumers in the form of higher average rates in the future. At that moment, however, consumers with low fixed rates had little incentive to reduce the amount of electricity they used. One utility executive told me that some customers used two weeks’ worth of electricity in a single day. And why not? When the temperature is 12 degrees and energy is relatively cheap, the decision to keep the heat on is fairly obvious. Millions of people making that same decision contributed to the blackouts that cut power for everyone.

Immediately after the Texas blackouts, some blamed the unreliability of wind power, which fell by half as the cold front moved in. Others highlighted the failure of the natural gas supply because power generators were unable to receive enough fuel to meet the need.

Whatever the cause of a specific shortage, consumers are still largely at the mercy of government planners who set the rules for electricity markets and supply requirements. When planners inevitably get it wrong, as they did in Texas and California, consumers pay the price.

Ultimately, any system that relies on planning for extreme weather events or other disruptions is likely to fail. Increasing reserves for extremely unlikely events is expensive — buying a backup generator for your home may be sensible but buying a second generator to back up the first one is probably not. The same is true with excess electricity reserves.

When prices skyrocket during a crisis, the results can be ugly. The New York Times reported that some Texas customers using demand pricing received bills for thousands of dollars after the energy crisis. Such stories, understandably, give demand-pricing a bad name. In Texas, Octopus retroactively capped electricity rates at 12.2 cents per kWh during the crisis to ensure their customers wouldn’t face similar sticker shock. Dynamic price structures can include consumer protection to avoid the high-end extremes some faced in Texas.

As Michael Lee of Octopus told me, utilities like his have an important role to play in preparing for the financial impact of energy shortages. “We have access to financial markets in a way customers don’t,” he says. Utilities can diversify their investments and revenue streams to inoculate themselves, and their customers, for extreme events. Additionally, dynamic pricing plans can cap price spikes at three or five times the average rate as is done in the U.K. to protect consumers from getting crazy energy bills.

Even in Texas’s deregulated market, only a tiny percentage of consumers use dynamic pricing. Yet providing price signals to residential and commercial customers is a critical part of avoiding future disruptions. Even shaving a few percentage points off demand would have made a difference. Reducing demand by just 10 percent on February 14 would have kept it at a manageable level. In an energy emergency, the total amount of available supply is essentially static, but demand can be dynamic, providing the needed flexibility in a crisis, making the system more resilient.

Consumer price signals will be increasingly important as the amount of intermittent energy, like wind and solar, increases. As prices increased leading up to the blackouts, Octopus told me that customers with solar panels reduced their energy use so they could sell the excess power. These are precisely the kinds of incentives that will need to be expanded to match consumer demand to intermittent generation. In Texas, customers who shift demand from the early evening to midday, when there is a large supply of solar power, can benefit from low electricity prices.

Many express legitimate frustrations at the increase of unreliable energy sources that make reliable planning more difficult. I share these frustrations because much of what is subsidized – uncertain, renewable sources – increases the risk of blackouts and are often an expensive way to reduce CO2 emissions. No matter the makeup of the future energy mix, however, giving consumers more control and incentives to adjust quickly to fluctuating prices makes sense.

Rather than relying on more centralized planning, we should expand the market for electricity conservation. Providing tools and incentives for individuals to reduce electricity use during periods of high demand is the best and most efficient tool we have to avoid future catastrophic blackouts.

Todd Myers is the Director of the Center for the Environment at Washington Policy Center.