Texas’ big payoff: How a competitive market made the state a runaway leader in electricity

To help understand why Texas’ power failed so miserably last year, start with why Texas’ electricity market has been such a roaring success.

In 1995, Gov. George W. Bush recruited Pat Wood III to lead the Public Utility Commission and help Texas design a deregulated electricity market with the aim of freeing customers from monopoly control.

Airline deregulation had revolutionized air travel in the U.S., making it cheaper and easier for millions to fly. Bush wanted Wood to think differently about infrastructure and use it to boost the economy. Wood recounted a conversation with the former governor at a May panel discussion in Austin.

“Y’all might think you have a lot of other jobs as a regulator,” Wood told the audience, channeling Bush. “But first and foremost, your job is to create a foundation for the state of rich economic development.”

As Bush might say, “Mission accomplished.”

Over the past several decades, the Texas economy has been among the strongest performers in the world. Many factors have contributed to its success, including rich natural resources, a central location in the booming Sun Belt and a pro-business approach to governing that’s light on regulation and the public safety net.

Deregulating the electricity market — and letting consumers and businesses shop for the best deals — fit right into Texas’ brand. The state attracted billions in private investment in new power plants, including renewables, and countless innovations in the retail market.

And there’s no disputing the results: Texas’ growth in net electricity generation has increased at five times the rate of the rest of the U.S. — and prices got more competitive here.

From 2001 to 2020, Texas’ cumulative gain in electricity generation was 27%, according to data from the U.S. Energy Information Administration. Excluding Texas, U.S. net generation increased 5% over the same time.

In the early years of dereg, leaders took reliability for granted and focused on attracting more generation and stoking competition in the retail market. They were confident electricity rates would fall over time, and that’s what happened.

Last year’s epic storm put everything in a new light. Power plants and natural gas suppliers were not hardened for such frigid conditions, and when they froze up, there were massive outages on ERCOT, the grid serving most of the state. About 4.5 million customers lost power, many for days, and at least 246 died.

The blackouts led to an overhaul of leadership at ERCOT and the PUC, along with new laws and regulation.

While Texas’ competitive market has been “remarkably successful,” said Michael Jewell, a longtime Austin energy lawyer, some lawmakers asked whether the competitive approach should be abandoned in favor of a more regulated model.

“And the answer, again and again, was no — this was not a market design problem, it was an operational problem,” Jewell said.

Texas’ abundant, cheap power also has been effective in attracting manufacturing — no small feat when so many U.S. companies moved production abroad. From 2014 to 2020, Texas added over 162,000 industrial customers, more than doubling in number, federal data shows. The rest of the U.S., excluding Texas, had a slight decline in industrial customers.

Over the same time, generation for industry rose 5.8% in Texas while declining 3.2% for the rest of the country. Texas’ electricity growth “allowed a lot of industrial operations to come back to the United States,” Jewell said.

The Texas market encouraged homeowners and renters to shop around, and retailers eventually offered dozens of consumer plans. Some had 100% renewable energy, free nights and weekends, and variable rates based on commodity indexes.

It took a while for prices to fall because the cost of natural gas, the dominant fuel in Texas electricity generation, was rising in the early years. When the fracking revolution took off and exploration companies unlocked huge stores of natural gas and oil, the cost of gas began a long decline, and electric rates followed.

Texas’ dereg experiment wasn’t aimed at merely boosting generation and lowering prices, said Wood, who later became chairman of the Federal Energy Regulatory Commission, known as FERC. It also was about planting the seeds of innovation, whether in retail products or the development of renewable energy.

The state twice set minimum goals for renewables, and generators quickly blew past them. So the state that easily leads the nation in oil and gas production also easily leads in wind power and is rapidly adding solar and storage batteries.

An energy transition is underway and Texas is positioned to lead, Bruce Bullock said at a recent event hosted by the North Dallas Chamber of Commerce.

“Because of our marketplace, because of our rich resources — both renewable and fossil fuels — we have a laboratory in this state,” said Bullock, director of the Maguire Energy Institute at Southern Methodist University. “And we have the ability to do things that other areas can’t and won’t be able to do.”

The rapid growth in renewable energy has helped drive down the cost of electricity and reduce emissions. Last year, wind accounted for about a quarter of generating capacity on ERCOT, and solar added another 4 percentage points.

That’s good for the environment but added to grid vulnerability in last year’s storm. Two-thirds of ERCOT outages stemmed from icing and freezing on just four types of power plant components, according to a November report from FERC. Nearly half of those were ice on wind blades, which affected 190 units, FERC said.

Last year, Texas and California had power outages, and both are heavily invested in renewables, said Curt Morgan, CEO of Vistra Corp., the state’s largest power generator. While Vistra has made a big push into green energy, he said the two states put other priorities ahead of reliability — and that’s a red flag.

In Texas, “We were letting cost and economics get in front of reliability,” Morgan said at a May panel discussion in Austin. “And in California, they were allowing the emissions to get in front of reliability.

“In the electric sector,” he added, if “you allow reliability to suffer, you’re going to have rolling blackouts.”

Related articles about Texas’ near-failure of the grid

What’s different about the Texas grid now? Regulators are on the beat, enforcing new laws

Why worry about the grid? Natural gas isn’t fixed yet and last year’s fallout will hit consumers

Texas power plants are ready for the cold as long as the gas keeps flowing

How Vistra, Atmos Energy and Energy Transfer are moving forward from Texas’ epic winter storm

Sticker shock: Electricity prices jump 17% in Dallas-Fort Worth, with more hikes likely