Texas’ Red-Blooded Energy Market Is on Ice

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Texas is no country for cold men. Or women. Or children.

No one owes you or your family anything; nor is it the local government’s responsibility to support you during trying times like this! Sink or swim, it’s your choice! The City and County, along with power providers or any other service owes you NOTHING! I’m sick and tired of people looking for a damn hand out! If you don’t have electricity you step up and come up with a game plan to keep your family warm and safe.

That’s part of a Tuesday morning Facebook post by Tim Boyd, mayor of the small town of Colarado City in west Texas. Or rather, the ex-mayor; later the same day, after a backlash, he announced he had resigned.

Texas’ famed aversion to government intervention is expressed in the physical infrastructure of its power grid, which is largely isolated from the rest of the U.S. to avoid federal oversight (see my colleague Tim O’Brien’s column on this). And Texas abstains from things like capacity payments to encourage new power plants, prioritizing lower prices over redundancy and relying on occasional price spikes to do the job.

And yet, as we begin thinking about the implications of the icy blackouts currently gripping the state, it’s worth remembering that even Texas' libertarian streak has its limits.

Almost a year ago, another big part of the state’s energy sector was in crisis. The combination of an OPEC+ breakdown and the Covid-19 pandemic caused oil prices to plunge into negative territory for the first time ever. Faced with this — to further overuse the term — perfect storm, Texas’ oil producers gritted their teeth and accepted the vagaries of the market with the fortitude of Job.

Pioneer Natural Resources Co. and Parsley Energy Inc. asked the three-member Texas Railroad Commission on Monday to call an emergency virtual meeting no later than April 13 and issue an order setting the “reasonable market demand for oil from Texas” for May, according to a five-page letter shared with Bloomberg News. Ryan Sitton, one of the commissioners, said earlier on Monday that the regulating body would discuss curbing oil output at its next meeting.

Pioneer and Parsley were among many oil producers in Texas calling on the state’s regulator to turn back time to the 1970s, when it oversaw a system of production quotas to support oil prices. Others opposed the proposal, and the Texas Railroad Commission rejected it (though not unanimously).

The remarkable thing was that the idea gained so much traction in the first place. And Texas found other ways to intervene on behalf of struggling oil producers, such as waiving penalties on late royalty payments and granting extensions on drilling commitments.

Though defeated, Pioneer CEO Scott Sheffield wasn’t wrong when he said “there hasn't been free trade in oil in my entire career,” given the TRC’s, and then OPEC’s, long history of prodding production and prices. The shale boom relied implicitly on the OPEC put to attract capital. And while the TRC held off prorating supply, the decision by OPEC+ to slash output shielded Texas’ oil producers from an even harsher dose of raw Darwinian capitalism last year. 

The current crisis is dealing a heavy blow to the state’s attachment to a lean, laissez faire grid. Cheaper electricity is great but, like skipping insurance payments on your home, feels like a false economy when disaster hits. BloombergNEF estimates wholesale power sales on Texas’ main grid could top $30 billion this week. 

As with last year’s prorating debate for oil, there will be a sizeable constituency echoing Colorado City’s ex-mayor and effectively saying suck it up. From this perspective, the sky-high power prices embedded in that figure of $30 billion show the market is working as intended, encouraging new generators to switch on eventually.

The obvious rejoinder is that while the market may have worked from the perspective of a certain kind of fanatical economist, it didn’t from the perspective of a certain kind of homeowner wearing three jackets and spooning cold spam from a can by candlelight. For $30 billion, Texans got partial service leaving millions of them freezing in the dark (and maybe thirsty, too).

Governor Greg Abbott’s attempt to blame this all on renewable energy — the proliferation of which helped reduce wholesale power prices in Texas to begin with — ignores the more important disruption of fossil-fuel plants. Late on Wednesday he acknowledged as much by banning the export of natural gas across state lines (how’s that for intervention?) His windy rhetoric also obscures the bigger issue: the state’s failure to effectively insure its grid against the rising risk of weather-related disruption. 

I suspect that after the immediate crisis has passed, simply blaming wind turbines won’t cut it. “Freefall is usually the end of free markets,” as Kevin Book of ClearView Energy Partners, a Washington-based research firm, puts it.

That doesn’t mean someone like Senator Ted Cruz will suddenly vote for a big, federally funded grid upgrade (even as he admitted on Twitter that his prior snark about California’s power problems was premature: “I got no defense.”) He knows the blackouts will strengthen stimulus proposals, and likely funnel dollars down to Texas, anyway.

But it should mean all sorts of interventions, ranging from mandating the winterization of generating equipment to potentially changing the power-market structure to incent more capacity or smarter demand response, get put on the table. All involve costs and tradeoffs. Yet energy has always been too important to leave to the tender mercies of the market. Even the wildcatters know that; indeed, they have frequently depended on it.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Liam Denning is a Bloomberg Opinion columnist covering energy, mining and commodities. He previously was editor of the Wall Street Journal's Heard on the Street column and wrote for the Financial Times' Lex column. He was also an investment banker.

©2021 Bloomberg L.P.

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