The Texas Power Grid and the Failure of Deregulation
By now, the early message that the electricity blackout in Texas was a failure of renewable energy has been replaced by the far more complex reality of a grid not prepared for extreme weather. Texas takes pride in its free market–fueled economic environment that provides low-cost housing, cheap electricity, and plenty of personal transportation along with low taxes. The problem is that the absence of rules and governance can come back and create harm if you happen to live on a more crowded and complex planet, like the one we have here on Earth. Climate change, pandemics, traffic jams, toxic air, polluted water and poisoned land cannot be addressed by the free market alone. The market can be used to produce needed goods and services, but the idea that markets and civilization itself can survive without rules is absurd idiocy.
Texas this past week was a case in point. The electric grid in Texas is built for efficiency, but it is not built for climate resilience. As Katherine Blunt and Russell Gold reported in the Wall Street Journal:
“A fundamental flaw in the freewheeling Texas electricity market left millions powerless and freezing in the dark this week during a historic cold snap. The core problem: Power providers can reap rewards by supplying electricity to Texas customers, but they aren’t required to do it and face no penalties for failing to deliver during a lengthy emergency. That led to the fiasco that left millions of people in the nation’s second-most-populous state without power for days. A severe storm paralyzed almost every energy source, from power plants to wind turbines, because their owners hadn’t made the investments needed to produce electricity in subfreezing temperatures. While power providers collectively failed, the companies themselves didn’t break any rules.”
The quest for efficiency and low cost led to under-investment and energy facilities poorly prepared for cold weather. Texas does better in hot weather, but climate change is altering weather patterns and extreme weather events are becoming more common. While we need to mitigate climate change and will need government-driven public policy to do that, we must also adapt to the climate change that is already underway. That need to adapt also requires a more active government presence than the ideologues running Texas want to allow.
Energy is not the only industry damaged by uncontrolled market forces. Health care is also suffering from the impact of health insurance companies on hospitals and medical care. The shortage of intensive care beds during the COVID-19 pandemic can be traced to efforts to enhance cost-effectiveness in hospitals. Extra capacity is considered waste that must be reflected in the price of care. Eliminate that capacity and costs can be reduced. Instead of paying for and storing extra personal protective equipment, hospitals utilize just-in-time supply chains to meet immediate needs. The system worked well until a pandemic hit and the supply chains could not meet dramatically increased demand.
I am not arguing against just-in-time production or global supply chains, but rather for adequate public investment in infrastructure and supplies to meet the needs of emergencies. The public interest requires rules that may inhibit unfettered markets, but if regulations are designed with care, we can retain the benefits brought by the competitive marketplace. In some instances, we won’t need regulation but instead, require public infrastructure investment. For example, a more resilient electric grid could consist of thousands of microgrids knitted together into a national smart grid. Some of the capital for rebuilding the grid could come from federal infrastructure investment- the type needed to revive the American economy. The modern grid will produce energy at lower costs, making our economy more productive. A more robust system of public health will require enhanced local virus testing, tracing and isolation capacity and biological scanning of air travelers by the TSA. Travelers can fund the TSA, but local taxes will need to pay for local public health capacity.
To resume and maintain our way of life in a complex, interconnected global economy, we will need to develop a set of rules and build the institutional capacity needed to protect us from 21st-century threats. These range from terrorism to pandemics to the impact of extreme weather events. Our ability to enjoy the benefits of modern technology requires that public management become more effective and efficient. It is time to reject the idea that government is the problem and the solution to our problems is to “starve the beast” and disinvest in the public sector. That may have been an answer to some of the issues faced by Ronald Reagan and his contemporaries in 1980, but it is completely inadequate to the issues we are facing four decades later.
Deregulation has failed. But reimposing rigid rules is unlikely to result in better outcomes. We need to develop incentives and disincentives that result in private behaviors that meet the requirements of the public interest. Some of that is pure command and control regulation. Every traffic system requires some traffic lights. But, tax credits and deductions, public investments, government-funded research and other forms of subsidies must be designed to achieve public ends rather than reward powerful interests. This will not be easy to do. We need to develop regulatory strategies that incentivize private behaviors to meet public needs. One size does not fit all, and we need to recognize that in formulating and implementing regulation.
Our ability to measure performance is far greater than it was in the middle of the 20th century. The technology of observation, communication and information has advanced dramatically and can enable more targeted and effective rules. Remote sensing can replace human inspections and some auditing functions can be automated. We need to apply ingenuity and design to more effective and flexible policies and public investments. Effective public management requires financial investment, brainpower and political will. We should use the market to meet our needs rather than worship the market as the solution to all problems.
A year of COVID-19 lockdown has demonstrated the inadequacy of what remains of our public sector. Our unwillingness to tax ourselves and invest in public sector infrastructure or organizational capacity has resulted in disease, death and trillions of dollars of economic damage. Last week in Texas, the free market in energy delivered cold and misery. For the past year, we have struggled to contain a virus that could have been isolated and eliminated with a more robust, competent system of public health. The benefits of modern technology bring costs. We need to understand those negative impacts and protect ourselves from them.
In a world where disinformation abounds and reality has become controversial, it will be a challenge to develop a more sophisticated, fact-based system of governance. A large number of Americans do not believe that our climate is changing and do not believe that COVID-19 is real. They think that Donald Trump’s reelection was stolen by nefarious forces and that the January 6th insurrection was led by Antifa. Despite these fact-free accounts, hundreds of insurrectionists are headed to courtrooms, thousands of COVID victims have died and millions of climate deniers in Texas suffered last week from the impact of climate-induced extreme weather. My hope is that Americans will accept reality and reject ideology. We need pragmatism and we need to be willing to pay the hand we are dealt. We saw signs of that in the recent election and in the poll data that indicates 70% of the country favors the Biden pandemic relief package. America’s government is a sleeping giant that seems to be slowly waking up from decades of slumber.