The Texas Energy Crisis: Has Deregulation Hurt Consumers?
May 3, 2021 for SAGE Publications: SAGE Business Cases Originals
Below is my contribution to a case study designed for graduate and post-graduate students to get a sense of how business can be effected by diverse, multidisciplinary issues. Editors later added teaching notes for professors, learning outcomes for school cirricula and abstracts for student clarity.
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*I won an Editor's Choice Award for this particular case study!
The Issue
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In the middle of February, an intense winter storm swept through Texas, nearly collapsing the state’s patchwork energy grid and leaving millions of Texans without power or water as temperatures plunged below freezing. Texas, a deeply Republican state, deregulated their electricity system decades ago, opting for a free market with the choice between fixed or fluctuating wholesale prices, which was disconnected from the rest of the country.
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Built upon the oil-and-gas industry for the past 120 years, Texans have been reluctant to adopt green energy, viewing private ownership of gas and oil companies as a matter of philosophy as much as politics. Instead of government oversight, Texas relies upon the Electric Reliability Council of Texas (ERCOT) to keep the power flowing to where it’s needed for as cheaply and reliably as possible.
Other states, like California and Maryland have similarly deregulated, allowing customers to pick from a number of power providers, but none have deregulated as severely as Texas. Not only is Texas energy entirely in the hands of private utility companies, but they are also isolated on their own grid, making it impossible for them to import power from the national grid when their own generators are failing. While other states were affected by the storm and had similar trouble with their energy generators, they were able to keep the lights on thanks to power they imported from other parts of the country.
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Many lawmakers tried to blame renewable energy for their predicament. Wind turbines, however, only make up about 20% of the total ERCOT grid and only accounted for roughly 13% of the blackouts in Texas. As with the other forms of energy in the state, these turbines were not winterized (as they are in many northern states) so the blades froze over as did gas wells and fossil fuel lines and pumps. Refineries began flaring - releasing and burning gas - during the crisis to prevent their processing units from freezing, causing massive air pollution in the process. The lack of winterization in Texas goes beyond just the power grid. Water pipes broke and burst as the state froze over and residents without power got cold more quickly because of a universal lack of insulation in Texas homes.
Why Is It News?
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After a similar storm in 2011 knocked out power, some were quick to point out the need for winterizing Texas’s electrical grid. Deregulation, however, meant there was no mandate for winterizing, and since the energy industry in Texas is based on competitive supply-and-demand pricing, companies saw little point in winterizing their equipment, as it would actually put them at a disadvantage in the free market.
While it is often believed that the free market, allowing for competition, will bring better prices for consumers, Texans are discovering that the opposite is actually the case. According to one analysis, Texas’s deregulation of the electricity market has raised the costs to consumers by $28 billion since 2004 (those with a plan from deregulated companies paid rates 13% higher than national averages while those from traditional utility plans paid rates 8% lower). The very nature of deregulation also means there are little to no protections for consumers. Texans are now grappling with price-gouging on their electricity bills, soaring up to 10,000% above their normal price.
The week-long freezing temperatures without power or clean water left dozens dead and caused over $200 billion in damages to homes and state infrastructure, rivaling the costs of Hurricanes Harvey and Ike. Experts say that the conditions, which forced people to huddle together in homes and cars to keep warm, could lead to an increase in coronavirus cases.
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The outages disproportionately affected Texans, with low-income neighborhoods and communities of color being the first without power and last to get it restored. These communities often lacked sufficient resources to be able to leave for someplace warmer, making them the hardest hit, both medically and financially, highlighting environmental and infrastructure inequalities. With climate change only making the seasons more extreme, Texas’s energy system will have to adapt quickly to survive and to help others survive.