Mon.
Jun 21
2021

Image: Matthew T Rader via Unsplash

Texas stands for conservative government, an enthusiastic embrace of capitalism, and a long tradition of distance from federal authorities. However, the state with the lone star is also the largest energy producer in the US. If Texas were an independent country, it would be the world’s sixth largest energy producer. This is something to be proud of.  As befits a large producer, Texas also has the highest energy consumption of all US states.   

When, after an unprecedented cold snap, electricity provision collapsed, the lights and in particular the heating stopped, and people died, the shock was immense. On the political level, however, it wasn’t sadness or a sober assessment of the situation which dominated the headlines. By now, the US has become so polarized politically that not even major catastrophes allow room for pause and reflection.  Instead, the blame game started immediately.

This was started by the Governor himself. With blackouts still persisting, he had already apprehended the culprit: renewable energy. The Washington Post (rightly) allocated four Pinocchios to his battle cry of “the windmills are frozen“, an honour so far mostly reserved for tweets of former President Trump. The New York Times and others tried (wrongly) to pass the blame back to fossil fuels.

It quickly became apparent that the cold had badly damaged all the fuels, as well as network infrastructure. There is nothing to argue about natural disasters – one would think. But now the critics of market-driven energy policies had sensed a possible change of fortunes in the air.

Twenty years ago Texas had reformed its power market. Ever since, power producers compete against each other; any divergence between electricity supply from them and electricity demand from customers is balanced by flexible prices.

This type of deregulation is widespread today. In one respect, however, liberalisation in Texas went further than elsewhere: in the Texas model the reserve capacity of the system is no longer established by an external, higher authority, for example a regulator. Instead, spare capacity is determined by the price mechanism: the rising prices which accompany any supply scarcity induce power producers to maintain a sufficient degree of spare capacity because otherwise they would miss out on possible extra profits.

By the same token, to control cost, they will restrict reserve capacity to what is necessary. All things considered, this system has led to durably lower reserve capacity, in this way contributing to cost savings and to lower electricity prices. It has worked so well that increasingly it was discussed as a role model.

In more recent times, this was chiefly as a role model for the expansion of renewable energy. Wind and solar power need flexible capacity: the bigger their share in the power market, the bigger the cost advantages of the Texas model. For this reason as well, Texas is the largest producer of wind energy in the US not only because of its geography.

The noise of a political blame game therefore threatens to drown an important insight: sensible deregulation is helpful in increasing the share of renewable energy in a durable fashion.

Christof Ruhl is a Senior Research Scholar at Columbia University and Senior Fellow at the Harvard Kennedy School. He served as Global Head of Research at the Abu Dhabi Investment Authority, Group Chief Economist and Vice President at BP and the World Bank’s Chief Economist for Russia. The following piece appeared originally in Mr. Ruhl’s LinkedIn account and was published here with permission from the author.

By Christof Rühl

Christof Rühl is a Senior Research Scholar, Columbia University and Senior Fellow, Harvard Kennedy School

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