Texas, the most energy-intensive state in the nation, could be facing a severe electrical shortage this summer. How could such a thing happen? Mainly, it’s the result of a long series of federal interventions that have finally left the state turning in circles about what to do next.
First, the gory details. Last summer the state was hit with a heat wave in which the temperature was over 100 degrees for almost a month. Since most cities are barely habitable without air conditioning, electrical consumption rose to record levels. Whereas the state normally consumes around 40,000 megawatts of electricity, demand rose briefly to 60,000 (1,000 MW is the size of a large coal or nuclear plant). On several days the state came within about 300 MW of a statewide brownout.
Aggravating all this was the state’s new complex of windmills with 10,000 MW of “nameplate” capacity, nearly all of which proved virtually useless during the crisis period. Windmills have the unfortunate habit of going limp during summer doldrums when the wind doesn’t blow. The state’s entire wind capacity — largest in the nation and celebrated by environmentalists all over the country — operated at less than 10 percent of capacity during the summer heat wave.
Now after another year things are not much better. Not much new capacity has been built and with the state’s economy humming, things could get much hotter. In late April, the state hit a warm spell at a time when many generators are shut down for maintenance work to prepare for the coming summer. Day-ahead prices spiked to $500 per megawatt-hour — more than ten times their usual price of around $30 per mwh-h. Yet that was just a taste of things to come. Last summer prices soared briefly to $5000 per mwh-h — prompting state regulators to take the unfortunate step of putting a cap of $3,500 on electrical prices. Although it might seem inconsequential, in fact it may be those few hours a year that makes building a new power plant worthwhile. Power plants are like The Christmas Store. They may stay open all year waiting for that one rush of business that makes their entire season. Texas has a completely deregulated market that pays power companies only for electricity delivered, not for capacity built. By taking away those few days when power companies can cash in, the regulators are making a bad situation much worse.
The root of Texas’ electrical problems goes back to the bad old days of federal price controls of natural gas and the years Texas and Louisiana spent being exploited by the rest of the nation.
It all began in the 1920s, when improved welding techniques made it possible to build pipelines to carry the methane that was regarded as a waste product of oil production to northern cities to be burned for home heating and cooking. At the time, methane was made from coal and called “town gas,” manufactured at the “gas house,” a place rough and ready that earned the St. Louis Cardinals the nickname of the “gas house gang.” Like other public services, gashouses had been granted municipal monopolies and they weren’t too happy when pipeline companies showed up from Texas selling a new product we still today call “natural gas.” So the municipally regulated gas utilities did what companies do — they pressured to have the pipelines put under regulation as well.
As you might expect, the regulation soon expanded. Northern municipalities liked the idea of being able to tell pipelines that originated in Texas what they could charge for their gas. When the New Deal arrived, the whole thing was put under the jurisdiction of the new Federal Power Commission, the forerunner of the Federal Energy Regulatory Commission. Now the power of the federal government was behind the price controls. Still, the FPC could only regulate interstate pipelines. It couldn’t tell the thousands of wildcat operations all over Texas and Louisiana what to charge for their gas. But soon northern attorneys general were at work on the problem, arguing in the courts that the entire network of dozens of pipelines and thousands of individual wells constituted a vast “monopoly.” They kept plugging away until finally in 1954 in Phillips Petroleum vs. Wisconsin the Supreme Court ruled that FERC had the power to set the price of gas at the point where it entered the pipeline. Gas prices would now be set by politics alone, with the heavily populated northern states holding the upper hand.
Soon the District of Columbia Federal Court was managing the entire gas industry, developing such concepts as the “life-of-the-field doctrine,” which said that once gas was put in interstate commerce it couldn’t be withdrawn, even if the price no longer covered its costs. Even if you went bankrupt, you were obliged to keep sending gas to northern consumers until the well expired. There was one escape route, however. If you never put gas into an interstate pipeline, you were free to sell at a market rate in your home state. And so by the early 1970s, northern homeowners were waiting up to six months to be hooked into the local gas company while utilities in Texas were generating more than half their electricity with gas — which was regarded as extremely wasteful at the time.
All this came to a head after the Arab Oil Embargo of 1974. As northern homes and businesses tried desperately to convert to gas, shortages appeared. During the frigid winter of 1977, schools and factories in Pennsylvania and Ohio were forced to close for weeks for lack of fuel. The Carter Administration, in office only a few weeks, was appalled to discover that people in the north were freezing to death while Texas was generating more than half its electricity with gas. So it proposed a simple solution — extend the price controls into Texas as well! It was at this point that bumper stickers started appearing in Texas and Louisiana proclaiming, “Let the Yankees Freeze in the Dark.”
The Reagan Administration eventually straightened all this out, deregulating the price of natural gas in 1988 and setting off a long-delayed boom in exploration. But Texas had learned its lesson — when it comes to energy, have as little to do with the rest of the country as possible. This is the reason there are very few electrical transmission lines running across the Texas border. ERCOT, the Texas grid, is almost completely isolated from the rest of the country. Having been raided for its natural gas resources for decades, the state was determined it would not be raided for electricity.
What Texas did not count on, however, was the reach of the Environmental Protection Agency, the Nuclear Regulatory Commission, and all the other federal bureaucracies that would soon arrive telling it what to do. Four years ago, TXU, the state’s largest power producer, had plans to built 11 coal plants to meet the demands of the state’s growing economy. Meeting with mounting opposition from environmental groups and the EPA, however, TXU sold out to KKR, a New York investment firm, which brought in the Natural Resources Defense Council, one of the country’s leading environmental groups, to sanction the deal. KKR immediately canceled 8 of the 11 coal projects and announced it would pursue alternative energy instead.
The situation did not seem completely lost, since in 2007 NRG Energy, another of the nation’s leading merchant energy providers, had become the first company in 30 years to file an application with the Nuclear Regulatory Commission to build two new reactors. NRG CEO David Crane openly embraced nuclear and defended it in many public forums. But getting through NRC license application procedures was a different story. As the years dragged on, CPS Energy, the municipally owned utility of San Antonio, pulled out of the project. Then one month after Fukushima, when it became obvious the NRC would be posing all kinds of new delays, NRG threw in the towel. When last seen, the company was building solar panels in the Mojave Desert, guaranteed a profit by California’s renewable portfolio mandates. “I have never seen anything that I have had to do in my 20 years in the power industry that involved less risk than these projects,” Crane told the New York Times in an interview last November. “It is just filling the desert with panels.”
And so Texas will face the heat this summer with little more going for it than it did last summer, when the state came within a few hundred megawatts of overloading the entire state grid. Calpine has promised a new 240-MW gas plant but that won’t be ready until 2014. Regulators have indicated that they may ease up on peak price limits but producers are still wary. It costs $1/2 million per MW to build new capacity with no guarantee that it can sell electricity full time. Highly subsidized windmills, which can deliver electricity practically for free when the wind blows, are constantly cutting into the profits of other generating stations.
Texas remains by far the most energy-productive state in the union. Yet constant intervention by the federal government may yet manage to turn it into one of the biggest potential energy disasters as well.